CH. 12 LONG-TERM EXPECTATION 151

greatly to the instability of the system. In the absenceof security markets, there is no object in frequentlyattempting to revalue an investment to which we arecommitted. But the Stock Exchange revalues manyinvestments every day and the revaluations give afrequent opportunity to the individual( though not tothe community as a whole) to revise his commitments.It is as though a farmer, having tapped his barometerafter breakfast, could decide to remove his capital fromthe farming business between 10 and 11 in the morningand reconsider whether he should return to it later inthe week. But the daily revaluations of the StockExchange, though they are primarily made to facilitatetransfers of old investments between one individual andanother, inevitably exert a decisive influence on the rateof current investment. For there is no sense in build-ing up a new enterprise at a cost greater than that atwhich a similar existing enterprise can be purchased;whilst there is an inducement to spend on a newproject what may seem an extravagant sum, if it canbe floated off on the Stock Exchange at an immediateprofit.1 Thus certain classes of investment are governedby the average expectation of those who deal on theStock Exchange as revealed in the price of shares,rather than by the genuine expectations of the pro-fessional entrepreneur.2 How then are these highlysignificant daily, even hourly, revaluations of existinginvestments carried out in practice?

1 In my Treatise on Money(vol. ii. p. 195) I pointed out that when acompany's shares are quoted very high so that it can raise more capital byissuing more shares on favourable terms, this has the same effect as if it couldborrow at a low rate of interest. I should now describe this by saying thata high quotation for existing equities involves an increase in the marginalefficiency of the corresponding type of capital and therefore has the sameeffect(since investment depends on a comparison between the marginalefficiency of capital and the rate of interest) as a fall in the rate of interest.

2 This does not apply, of course, to classes of enterprise which are notreadily marketable or to which no negotiable instrument closely corresponds.The categories falling within this exception were formerly extensive. Butmeasured as a proportion of the total value of new investment they arerapidly declining in importance.