184 THE GENERAL THEORY OF EMPLOYMENT BK. IV

efficiency of capital and the rate of interest. Thesedeterminants are, indeed, themselves complex andeach is capable of being affected by prospectivechanges in the others. But they remain independentin the sense that their values cannot be inferred fromone another. The traditional analysis has been awarethat saving depends on income but it has overlookedthe fact that income depends on investment, in suchfashion that, when investment changes, income mustnecessarily change in just that degree which is neces-sary to make the change in saving equal to the changein investment.

Nor are those theories more successful whichattempt to make the rate of interest depend on “themarginal efficiency of capital”. It is true that inequilibrium the rate of interest will be equal to themarginal efficiency of capital, since it will be profitableto increase (or decrease) the current scale of investmentuntil the point of equality has been reached. But tomake this into a theory of the rate of interest or toderive the rate of interest from it involves a circularargument, as Marshall discovered after he had gothalf-way into giving an account of the rate of interestalong these lines.1 For the “marginal efficiency ofcapital” partly depends on the scale of current invest-ment, and we must already know the rate of interestbefore we can calculate what this scale will be. Thesignificant conclusion is that the output of new invest-ment will be pushed to the point at which the marginalefficiency of capital becomes equal to the rate of interest;and what the schedule of the marginal efficiency ofcapital tells us, is, not what the rate of interest is, butthe point to which the output of new investment will bepushed, given the rate of interest.

The reader will readily appreciate that the problemhere under discussion is a matter of the most funda-mental theoretical significance and of overwhelming

1 See the Appendix to this Chapter.