&
ch .22 NOTES ON THE TRADE CYCLE 321
which is expected, even in conditions of full employ-ment, to earn in the course of its life more than its re-placement cost. It is only the latter state of affairs whichis one of over-investment, strictly speaking, in the sensethat any further investment would be a sheer waste ofresources. 1 Moreover, even if over-investment in thissense was a normal characteristic of the boom, theremedy would not lie in clapping on a high rate ofinterest which would probably deter some useful in-vestments and might further diminish the propensityto consume, but in taking drastic steps, by redistribut-ing incomes or otherwise, to stimulate the propensityto consume.
According to my analysis, however, it is only in theformer sense that the boom can be said to be char-acterised by over-investment. The situation, which Iam indicating as typical, is not one in which capital isso abundant that the community as a whole has noreasonable use for any more, but where investment isbeing made in conditions which are unstable and cannotendure, because it is prompted by expectations whichare destined to disappointment.
It may, of course, be the case—indeed it is likelyto be—that the illusions of the boom cause particulartypes of capital-assets to be produced in such excessiveabundance that some part of the output is, on any cri-terion, a waste of resources;—which sometimes happens,we may add, even when there is no boom. It leads, thatis to say, to misdirected investment. But over and abovethis it is an essential characteristic of the boom that in-vestments which will in fact yield, say, 2 per cent, inconditions of full employment are made in the expecta-tion of a yield of, say, 6 per cent., and are valued accord-ingly. When the disillusion comes, this expectation is
1 On certain assumptions, however, as to the distribution of the propensityto consume through time, investment which yielded a negative return mightbe advantageous in the sense that, for the community as a whole, it wouldmaximise satisfaction.
Y