BK. IV APPENDIX TO CHAPTER 14 193

greater fall than in the price of producers’ goods; hence, accord-ing to the above reasoning, it means a reduction in the rate ofinterest which will stimulate investment. But, of course, alowering of the marginal efficiency of particular capital assets,and hence a lowering of the schedule of the marginal efficiencyof capital in general, has exactly the opposite effect to what theabove argument assumes. For investment is stimulated eitherby a raising of the schedule of the marginal efficiency or by alowering of the rate of interest. As a result of confusing themarginal efficiency of capital with the rate of interest, Professorvon Mises and his disciples have got their conclusions exactlythe wrong way round. A good example of a confusion alongthese lines is given by the following passage by Professor AlvinHansen;1 “It has been suggested by some economists that thenet effect of reduced spending will be a lower price level of con-sumers’ goods than would otherwise have been the case, andthat, in consequence, the stimulus to investment in fixed capitalwould thereby tend to be minimised. This view is, however,incorrect and is based on a confusion of the effect on capitalformation of (1) higher or lower prices of consumers’ goods, and(2) a change in the rate of interest. It is true that in consequenceof the decreased spending and increased saving, consumers’ priceswould be low relative to the prices of producers’ goods. Butthis, in effect, means a lower rate of interest, and a lower rateof interest stimulates an expansion of capital investment in fieldswhich at higher rates would be unprofitable.”

1 Economic Reconstruction, p. 233.

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