192 THE GENERAL THEORY OF EMPLOYMENT BK. IV

It is worth adding that the concluding sentences of thequotation suggest that Ricardo was overlooking the possiblechanges in the marginal efficiency of capital according to theamount invested. But this again can be interpreted as anotherexample of his greater internal consistency compared with hissuccessors. For if the quantity of employment and the psycho-logical propensities of the community are taken as given, thereis in fact only one possible rate of accumulation of capital and,consequently, only one possible value for the marginal efficiencyof capital. Ricardo offers us the supreme intellectual achieve-ment, unattainable by weaker spirits, of adopting a hypotheticalworld remote from experience as though it were the world ofexperience and then living in it consistently. With most ofhis successors common sense cannot help breaking in—withinjury to their logical consistency.

III

A peculiar theory of the rate of interest has been propoundedby Professor von Mises and adopted from him by ProfessorHayek and also, I think, by Professor Robbins; namely, thatchanges in the rate of interest can be identified with changes inthe relative price levels of consumption-goods and capital-goods .1It is not clear how this conclusion is reached. But the argu-ment seems to run as follows. By a somewhat drastic simplifica-tion the marginal efficiency of capital is taken as measured by theratio of the supply price of new consumers’ goods to the supplyprice of new producers’ goods .2 This is then identified withthe rate of interest. The fact is called to notice that a fall inthe rate of interest is favourable to investment. Ergo, a fallin the ratio of the price of consumers’ goods to the price of pro-ducers’ goods is favourable to investment.

By this means a link is established between increased savingby an individual and increased aggregate investment. For it iscommon ground that increased individual saving will cause afall in the price of consumers’ goods, and, quite possibly, a

1 The Theory of Money and Credit, p. 339 et passim, particularly p. 363.

2 If we are in long-period equilibrium, special assumptions might bedevised on which this could be justified. But when the prices in questionare the prices prevailing in slump conditions, the simplification of supposingthat the entrepreneur will, in forming his expectations, assume these pricesto be permanent, is certain to be misleading. Moreover, if he does, the pricesof the existing stock of producers’ goods will fall in the same proportion asthe prices of consumers’ goods.