CH. 12 LONG-TERM EXPECTATION 149

it in general terms. In particular it has not been madeclear that its relevance to economic problems comes inthrough its important influence on the schedule ofthe marginal efficiency of capital. There are not twoseparate factors affecting the rate of investment,namely, the schedule of the marginal efficiency ofcapital and the state of confidence. The state ofconfidence is relevant because it is one of the majorfactors determining the former, which is the samething as the investment demand-schedule.

There is, however, not much to be said about thestate of confidence a -priori. Our conclusions mustmainly depend upon the actual observation of marketsand business psychology. This is the reason why theensuing digression is on a different level of abstractionfrom most of this book.

For convenience of exposition we shall assume inthe following discussion of the state of confidence thatthere are no changes in the rate of interest; and weshall write, throughout the following sections, as ifchanges in the values of investments were solely dueto changes in the expectation of their prospectiveyields and not at all to changes in the rate of interest atwhich these prospective yields are capitalised. Theeffect of changes in the rate of interest is, however,easily superimposed on the effect of changes in the stateof confidence.

III

The outstanding fact is the extreme precariousnessof the basis of knowledge on which our estimates ofprospective yield have to be made. Our knowledge ofthe factors which will govern the yield of an investmentsome years hence is usually very slight and oftennegligible. If we speak frankly, we have to admitthat our basis of knowledge for estimating the yieldten years hence of a railway, a copper mine, a textilefactory, the goodwill of a patent medicine, an Atlantic