CH. 22

NOTES ON THE TRADE CYCLE

3i5

cycle. My only purpose here is to link them up withthe preceding theory.

11

I can best introduce what I have to say by beginningwith the later stages of the boom and the onset of the“crisis”.

We have seen above that the marginal efficiency ofcapital 1 depends, not only on the existing abundance orscarcity of capital-goods and the current cost of pro-duction of capital-goods, but also on current expecta-tions as to the future yield of capital-goods. In the caseof durable assets it is, therefore, natural and reasonablethat expectations of the future should play a dominantpart in determining the scale on which new investmentis deemed advisable. But, as we have seen, the basisfor such expectations is very precarious. Being basedon shifting and unreliable evidence, they are subject tosudden and violent changes.

Now, we have been accustomed in explaining the“crisis” to lay stress on the rising tendency of the rateof interest under the influence of the increased demandfor money both for trade and speculative purposes.At times this factor may certainly play an aggravatingand, occasionally perhaps, an initiating part. But Isuggest that a more typical, and often the predominant,explanation of the crisis is, not primarily a rise in therate of interest, but a sudden collapse in the marginalefficiency of capital.

The later stages of the boom are characterised byoptimistic expectations as to the future yield of capital-goods sufficiently strong to offset their growing abun-dance and their rising costs of production and, probably,a rise in the rate of interest also. It is of the nature of

1 It is often convenient in contexts where there is no room for misunder-standing to write “the marginal efficiency of capital”, where “the scheduleof the marginal efficiency of capital” is meant.