144 THE GENERAL THEORY OF EMPLOYMENT BK. IV

ence which renders the marginal efficiency of capital sub-ject to the somewhat violent fluctuations which are theexplanation of the Trade Cycle. In Chapter 22 belowwe shall show that the succession of Boom and Slumpcan be described and analysed in terms of the fluctuationsof the marginal efficiency of capital relatively to the rateof interest.

IV

Two types of risk affect the volume of investmentwhich have not commonly been distinguished, butwhich it is important to distinguish. The first is theentrepreneur’s or borrower’s risk and arises out ofdoubts in his own mind as to the probability of hisactually earning the prospective yield for which hehopes. If a man is venturing his own money, this isthe only risk which is relevant.

But where a system of borrowing and lendingexists, by which I mean the granting of loans with amargin of real or personal security, a second type ofrisk is relevant which we may call the lender’s risk.This may be due either to moral hazard, i.e. voluntarydefault or other means of escape, possibly lawful, fromthe fulfilment of the obligation, or to the possible in-sufficiency of the margin of security, i.e. involuntarydefault due to the disappointment of expectation. Athird source of risk might be added, namely, a possibleadverse change in the value of the monetary standardwhich renders a money-loan to this extent less securethan a real asset; though all or most of this should bealready reflected, and therefore absorbed, in the priceof durable real assets.

Now the first type of risk is, in a sense, a real socialcost, though susceptible to diminution by averagingas well as by an increased accuracy of foresight. Thesecond, however, is a pure addition to the cost of invest-ment which would not exist if the borrower and lenderwere the same person. Moreover, it involves in part