CHAPTER 12

THE STATE OF LONG-TERM EXPECTATION

I

We have seen in the previous chapter that the scale ofinvestment depends on the relation between the rateof interest and the schedule of the marginal efficiencyof capital corresponding to different scales of currentinvestment, whilst the marginal efficiency of capitaldepends on the relation between the supply price ofa capital- asset and its prospective yield. In this chap-ter we shall consider in more detail some of the factorswhich determine the prospective yield of an asset.

The considerations upon which expectations ofprospective yields are based are partly existing factswhich we can assume to be known more or less forcertain, and partly future events which can only beforecasted with more or less confidence. Amongst thefirst may be mentioned the existing stock of varioustypes of capital- assets and of capital- assets in generaland the strength of the existing consumers' demand forgoods which require for their efficient production arelatively larger assistance from capital. Amongst thelatter are future changes in the type and quantity of thestock of capital- assets and in the tastes of the consumer,the strength of effective demand from time to timeduring the life of the investment under consideration,and the changes in the wage-unit in terms of moneywhich may occur during its life. We may sum up thestate of psychological expectation which covers the

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