CH. 22

NOTES ON THE TRADE CYCLE

3i7

authority. But, in fact, this is not usually the case;and it is not so easy to revive the marginal efficiency ofcapital, determined, as it is, by the uncontrollable anddisobedient psychology of the business world. It is thereturn of confidence, to speak in ordinary language,which is so insusceptible to control in an economy ofindividualistic capitalism. This is the aspect of theslump which bankers and business men have been rightin emphasising, and which the economists who haveput their faith in a “purely monetary” remedy haveunderestimated.

This brings me to my point. The explanation ofthe time-element in the trade cycle, of the fact that aninterval of time of a particular order of magnitude mustusually elapse before recovery begins, is to be soughtin the influences which govern the recovery of themarginal efficiency of capital. There are reasons, givenfirstly by the length of life of durable assets in relationto the normal rate of growth in a given epoch, andsecondly by the carrying-costs of surplus stocks, whythe duration of the downward movement should havean order of magnitude which is not fortuitous, whichdoes not fluctuate between, say, one year this time andten years next time, but which shows some regularityof habit between, let us say, three and five years.

Let us recur to what happens at the crisis. So longas the boom was continuing, much of the new invest-ment showed a not unsatisfactory current yield. Thedisillusion comes because doubts suddenlyarise concern-ing the reliability of the prospective yield, perhapsbecause the current yield shows signs of falling off,as the stock of newly produced durable goods steadilyincreases. If current costs of production are thought tobe higher than they will be later on, that will be a furtherreason for a fall in the marginal efficiency of capital.Once doubt begins it spreads rapidly. Thus at the out-set of the slump there is probably much capital of whichthe marginal efficiency has become negligible or even