322 THE GENERAL THEORY OF EMPLOYMENT bk. vi

replaced by a contrary “error of pessimism”, with theresult that the investments, which would in fact yield 2per cent, in conditions of full employment, are expectedto yield less than nothing; and the resulting collapse ofnew investment then leads to a state of unemploymentin which the investments, which would have yielded2 per cent, in conditions of full employment, in factyield less than nothing. We reach a condition wherethere is a shortage of houses, but where neverthelessno one can afford to live in the houses that there are.

Thus the remedy for the boom is not a higher rateof interest but a lower rate of interest! 1 For that mayenable the so-called boom to last. The right remedyfor the trade cycle is not to be found in abolishingbooms and thus keeping us permanently in a semi-slump; but in abolishing slumps and thus keeping uspermanently in a quasi-boom.

The boom which is destined to end in a slump iscaused, therefore, by the combination of a rate ofinterest, which in a correct state of expectation wouldbe too high for full employment, with a misguided stateof expectation which, so long as it lasts, prevents thisrate of interest from being in fact deterrent. A boomis a situation in which over-optimism triumphs overa rate of interest which, in a cooler light, would beseen to be excessive.

Except during the war, I doubt if we have anyrecent experience of a boom so strong that it led to fullemployment. In the United States employment wasvery satisfactory in 1928-29 on normal standards; butI have seen no evidence of a shortage of labour, except,perhaps, in the case of a few groups of highly specialisedworkers. Some “bottle-necks” were reached, but out-put as a whole was still capable of further expansion.

1 See below (p. 327) for some arguments which can be urged on theother side. For, if we are precluded from making large changes in ourpresent methods, I should agree that to raise the rate of interest during aboom may be, in conceivable circumstances, the lesser evil.