The Competitiveness of Nations in a Global Knowledge-Based Economy
John Maynard Keynes
The General Theory of Employment, Interest and
Money
Macmillan, London, © [1936] 1967, 147-164.
CHAPTER 12
THE STATE OF LONG-TERM
EXPECTATION
Prospective Yield
WE
have seen in the previous chapter that the scale of investment depends on the relation between the rate of interest and the schedule of the marginal efficiency of capital corresponding to different scales of current investment, whilst the marginal efficiency of capital depends on the relation between the supply price of a capital-asset and its prospective yield. In this chapter we shall consider in more detail some of the factors which determine the prospective yield of an asset.The considerations upon which expectations of
prospective yields are based are partly existing facts which we can assume to be
known more or less for certain, and partly future events which can only be
forecasted with more or less confidence. Amongst the first may be mentioned the
existing stock of various types of capital-assets and of capital-assets in
general and the strength of the existing consumers’ demand for goods which
require for their efficient production a relatively larger assistance from
capital. Amongst the latter are
future changes in the type and quantity of the stock of capital-assets and in
the tastes of the consumer, the strength of effective demand from time to time
during the life of the investment under consideration, and the changes in the
wage-unit in terms of money which may occur during its life. We may sum up the state of psychological
expectation which covers the
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latter as being the state of long-term
expectation; -as distinguished from the short-term expectation upon the
basis of which a producer estimates what he will get for a product when it is
finished if he decides to begin producing it to-day with the existing plant,
which we examined in Chapter 5.
State of Confidence
It would be foolish, in forming our expectations, to attach great weight to
matters which are very uncertain. [1] It is reasonable, therefore, to be guided
to a considerable degree by the facts about which we feel somewhat confident,
even though they may be less decisively relevant to the issue than other facts
about which our knowledge is vague and scanty. For this reason the facts of the existing
situation enter, in a sense disproportionately, into the formation of our
long-term expectations; our usual practice being to take the existing situation
and to project it into the future, modified only to the extent that we have more
or less definite reasons for expecting a change.
The state of long-term expectation, upon which our
decisions are based, does not solely depend, therefore, on the most probable
forecast we can make. It also
depends on the confidence with which we make this forecast - on how
highly we rate the likelihood of our best forecast turning out quite wrong.
If we expect large changes but are
very uncertain as to what precise form these changes will take, then our
confidence will be weak.
The state of confidence, as they term it, is a matter to which practical men always pay the closest and most anxious attention. But economists have not analysed it carefully and have been content, as a rule, to discuss
1. By “very uncertain” I do not mean the same thing as “very improbable”. Cf. my Treatise on Probability, chap. 6, on The Weight of Arguments”.
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it in general terms. In particular it has not been made clear
that its relevance to economic problems comes in through its important influence
on the schedule of the marginal efficiency of capital. There are not two separate factors
affecting the rate of investment, namely, the schedule of the marginal
efficiency of capital and the state of confidence. The state of confidence is relevant
because it is one of the major factors determining the former, which is the same
thing as the investment demand-schedule.
There is, however, not much to be said about the state
of confidence a priori. Our
conclusions must mainly depend upon the actual observation of markets and
business psychology. This is the
reason why the ensuing digression is on a different level of abstraction from
most of this book.
For convenience of exposition we shall assume in the
following discussion of the state of confidence that there are no changes in the
rate of interest; and we shall write, throughout the following sections, as if
changes in the values of investments were solely due to changes in the
expectation of their prospective yields and not at all to changes in the rate of
interest at which these prospective yields are capitalised. The effect of changes in the rate of
interest is, however, easily superimposed on the effect of changes in the state
of confidence.
Market Valuation vs.
Yield
The outstanding fact is the extreme precariousness of
the basis of knowledge on which our estimates of prospective yield have to be
made. Our knowledge of the factors
which will govern the yield of an investment some years hence is usually very
slight and often negligible. If we
speak frankly, we have to admit that our basis of knowledge for estimating the
yield ten years hence of a railway, a copper mine, a textile factory, the
goodwill of a patent medicine, an Atlantic
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liner, a building in the City of London amounts to
little and sometimes to nothing; or even five years hence. In fact, those who seriously attempt to
make any such estimate are often so much in the minority that their behaviour
does not govern the market.
In former times, when enterprises were mainly owned by
those who undertook them or by their friends and associates, investment depended
on a sufficient supply of individuals of sanguine temperament and constructive
impulses who embarked on business as a way of life, not really relying on a
precise calculation of prospective profit. The affair was partly a lottery, though
with the ultimate result largely governed by whether the abilities and character
of the managers were above or below the average. Some would fail and some would succeed.
But even after the event no one
would know whether the average results in terms of the sums invested had
exceeded, equalled or fallen short of the prevailing rate of interest; though,
if we exclude the exploitation of natural resources and monopolies, it is
probable that the actual average results of investments, even during periods of
progress and prosperity, have disappointed the hopes which prompted them. Business men play a mixed game of skill
and chance, the average results of which to the players are not known by those
who take a hand. If human nature
felt no temptation to take a chance, no satisfaction (profit apart) in
constructing a factory, a railway, a mine or a farm, there might not be much
investment merely as a result of cold calculation.
Decisions to invest in private business of the
old-fashioned type were, however, decisions largely irrevocable, not only for
the community as a whole, but also for the individual. With the separation between ownership and
management which prevails to-day and with the development of organised
investment markets, a new factor of great importance has entered in, which
sometimes facilitates investment but sometimes adds
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greatly to the instability of the system. In the absence of security markets, there is no object in frequently attempting to revalue an investment to which we are committed. But the Stock Exchange revalues many investments every day and the revaluations give a frequent opportunity to the individual (though not to the community as a whole) to revise his commitments. It is as though a farmer, having tapped his barometer after breakfast, could decide to remove his capital from the farming business between 10 and 11
in the morning and reconsider whether he should return to it later in the week. But the daily revaluations of the Stock Exchange, though they are primarily made to facilitate transfers of old investments between one individual and another, inevitably exert a decisive influence on the rate of current investment. For there is no sense in building up a new enterprise at a cost greater than that at which a similar existing enterprise can be purchased; whilst there is an inducement to spend on a new project what may seem an extravagant sum, if it can be floated off on the Stock Exchange at an immediate profit. [1] Thus certain classes of investment are governed by the average expectation of those who deal on the Stock Exchange as revealed in the price of shares, rather than by the genuine expectations of the professional entrepreneur. [2] How then are these highly significant daily, even hourly, revaluations of existing investments carried out in practice?1. In my Treatise on Money (vol. ii.
p.195) I pointed out that when a company’s shares are quoted very high so
that it can raise more capital by issuing more shares on favourable terms, this
has the same effect as if it could borrow at a low rate of interest. I should now describe this by saying that
a high quotation for existing equities involves an increase in the marginal
efficiency of the corresponding type of capital and therefore has the same
effect (since investment depends on a comparison between the marginal efficiency
of capital and the rate of interest) as a fall in the rate of
interest.
2. This does not apply, of course, to classes of
enterprise which are not readily marketable or to which no negotiable instrument
closely corresponds. The categories
falling within this exception were formerly extensive. But measured as a proportion of the total
value of new investment they are rapidly declining in
importance.
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Conventional Expectations
In practice we have tacitly agreed, as a rule, to fall back on what is, in truth, a convention. The essence of this convention - though it does not, of course, work out quite so simply - lies in assuming that the existing state of affairs
will continue indefinitely, except in so far as we have specific reasons to expect a change. This does not mean that we really believe that the existing state of affairs will continue indefinitely. We know from extensive experience that this is most unlikely. The actual results of an investment over a long term of years very seldom agree with the initial expectation. Nor can we rationalise our behaviour by arguing that to a man in a state of ignorance errors in either direction are equally probable, so that there remains a mean actuarial expectation based on equi-probabilities. For it can easily be shown that the assumption of arithmetically equal probabilities based on a state of ignorance leads to absurdities. We are assuming, in effect, that the existing market valuation, however arrived at, is uniquely correct in relation to our existing knowledge of the facts which will influence the yield of the investment, and that it will only change in proportion to changes in this knowledge; though, philosophically speaking, it cannot be uniquely correct, since our existing knowledge does not provide a sufficient basis for a calculated mathematical expectation. In point of fact, all sorts of considerations enter into the market valuation which are in no way relevant to the prospective yield.Nevertheless the above conventional method of
calculation will be compatible with a considerable measure of continuity and
stability in our affairs, so long as we can rely on the maintenance of the
convention.
For if there exist organised investment markets and if
we can rely on the maintenance of the convention, an investor can legitimately
encourage himself with the
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idea that the only risk he runs is that of a genuine
change in the news over the near future, as to the likelihood of which he
can attempt to form his own judgment, and which is unlikely to be very large.
For, assuming that the convention
holds good, it is only these changes which can affect the value of his
investment, and he need not lose his sleep merely because he has not any notion
what his investment will be worth ten years hence. Thus investment becomes reasonably “safe”
for the individual investor over short periods, and hence over a succession of
short periods however many, if he can fairly rely on there being no breakdown in
the convention and on his therefore having an opportunity to revise his judgment
and change his investment, before there has been time for much to happen. Investments which are “fixed” for the
community are thus made “liquid” for the individual.
It has been, I am sure, on the basis of some such
procedure as this that our leading investment markets have been developed. But it is not surprising that a
convention, in an absolute view of things so arbitrary, should have its weak
points. It is its precariousness
which creates no small part of our contemporary problem of securing sufficient
investment.
Precariousness of
Confidence
Some of the factors which accentuate this precariousness
may be briefly mentioned.
(1)
As a result of the gradual increase in the proportion of the equity in the community’s aggregate capital investment which is owned by persons who do not manage and have no special knowledge of the circumstances, either actual or prospective, of the business in question, the element of real knowledge in the valuation of investments by those who own them or contemplate purchasing them has seriously declined.(2) Day-to-day fluctuations in the profits of
existing
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investments, which are obviously of an ephemeral and
non-significant character, tend to have an altogether excessive, and even an
absurd, influence on the market. It
is said, for example, that the shares of American companies which manufacture
ice tend to sell at a higher price in summer when their profits are seasonally
high than in winter when no one wants ice. The recurrence of a bank-holiday may
raise the market valuation of the British railway system by several million
pounds.
(3)
A conventional valuation which is established as the outcome of the mass psychology of a large number of ignorant individuals is liable to change violently as the result of a sudden fluctuation of opinion due to factors which do not really make much difference to the prospective yield; since there will be no strong roots of conviction to hold it steady. In abnormal times in particular, when the hypothesis of an indefinite continuance of the existing state of affairs is less plausible than usual even though there are no express grounds to anticipate a definite change, the market will be subject to waves of optimistic and pessimistic sentiment, which are unreasoning and yet in a sense legitimate where no solid basis exists for a reasonable calculation.(4)
But there is one feature in particular which deserves our attention. It might have been supposed that competition between expert professionals, possessing judgment and knowledge beyond that of the average private investor, would correct the vagaries of the ignorant individual left to himself. It happens, however, that the energies and skill of the professional investor and speculator are mainly occupied otherwise. For most of these persons are, in fact, largely concerned, not with making superior long-term forecasts of the probable yield of an investment over its whole life, but with foreseeing changes in the conventional basis of valuation a short time ahead of the general public. They are concerned, not with what an investment is154
really worth to a man who buys it “for keeps”, but with what the market will value it at, under the influence of mass psychology, three months or a year hence. Moreover, this behaviour is not the outcome of a wrong-headed propensity. It is an inevitable result of an investment market organised along the lines described. For it is not sensible to pay 25
for an investment of which you believe the prospective yield to justify a value of 30, if you also believe that the market will value it at 20 three months hence.Thus the professional investor is forced to concern
himself with the anticipation of impending changes, in the news or in the
atmosphere, of the kind by which experience shows that the mass psychology of
the market is most influenced. This
is the inevitable result of investment markets organised with a view to
so-called “liquidity”. Of the
maxims of orthodox finance none, surely, is more anti-social than the fetish of
liquidity, the doctrine that it is a positive virtue on the part of investment
institutions to concentrate their resources upon the holding of “liquid”
securities. It forgets that there
is no such thing as liquidity of investment for the community as a whole. The social object of skilled investment
should be to defeat the dark forces of time and ignorance which envelop our
future. The actual, private object
of the most skilled investment to-day is “to beat the gun”, as the Americans so
well express it, to outwit the crowd, and to pass the bad, or depreciating,
half-crown to the other fellow.
This battle of wits to anticipate the basis of
conventional valuation a few months hence, rather than the prospective yield of
an investment over a long term of years, does not even require gulls amongst the
public to feed the maws of the professional; - it can be played by professionals
amongst themselves. Nor is it
necessary that anyone should keep his simple faith in the conventional basis of
valuation having any genuine long-term validity. For it is, so to speak, a game of
Snap,
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of Old Maid, of Musical Chairs - a pastime in which he
is victor who says Snap neither too soon nor too late, who passes the Old
Maid to his neighbour before the game is over, who secures a chair for himself
when the music stops. These games
can be played with zest and enjoyment, though all the players know that it is
the Old Maid which is circulating, or that when the music stops some of the
players will find themselves unseated.
Or, to change the metaphor slightly, professional
investment may be likened to those newspaper competitions in which the
competitors have to pick out the six prettiest faces from a hundred photographs,
the prize being awarded to the competitor whose choice most nearly corresponds
to the average preferences of the competitors as a whole; so that each
competitor has to pick, not those faces which he himself finds prettiest, but
those which he thinks likeliest to catch the fancy of the other competitors, all
of whom are looking at the problem from the same point of view. It is not a case of choosing those which,
to the best of one’s judgment, are really the prettiest, nor even those which
average opinion genuinely thinks the prettiest. We have reached the third degree where we
devote our intelligences to anticipating what average opinion expects the
average opinion to be. And there
are some, I believe, who practise the fourth, fifth and higher
degrees.
If the reader interjects that there must surely be large
profits to be gained from the other players in the long run by a skilled
individual who, unperturbed by the prevailing pastime, continues to purchase
investments on the best genuine long-term expectations he can frame, he must be
answered, first of all, that there are, indeed, such serious-minded individuals
and that it makes a vast difference to an investment market whether or not they
predominate in their influence over the game-players. But we must also add that there
are
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several factors which jeopardise the predominance of
such individuals in modern investment markets. Investment based on genuine long-term
expectation is so difficult to-day as to be scarcely practicable. He who attempts it must surely lead much
more laborious days and run greater risks than he who tries to guess better than
the crowd how the crowd will behave; and, given equal intelligence, he may make
more disastrous mistakes. There is
no clear evidence from experience that the investment policy which is socially
advantageous coincides with that which is most profitable. It needs more intelligence to
defeat the forces of time and our ignorance of the future than to beat the gun.
Moreover, life is not long enough;
- human nature desires quick results, there is a peculiar zest in making money
quickly, and remoter gains are discounted by the average man at a very high
rate. The game of professional
investment is intolerably boring and over-exacting to anyone who is entirely
exempt from the gambling instinct; whilst he who has it must pay to this
propensity the appropriate toll.
Furthermore, an investor who proposes to ignore near-term market
fluctuations needs greater resources for safety and must not operate on so large
a scale, if at all, with borrowed money - a further reason for the higher return
from the pastime to a given stock of intelligence and resources. Finally it is the long-term investor, he
who most promotes the public interest, who will in practice come in for most
criticism, wherever investment funds are managed by committees or boards or
banks. [1] For it is in
the essence of his behaviour that he should be eccentric, unconventional and
rash in the eyes of average opinion. If he is successful, that will only
confirm the general belief in his rashness; and if
1. The practice, usually considered prudent, by
which an investment trust or an insurance office frequently calculates not only
the income from its investment portfolio but also its capital valuation in the
market, may also tend to direct too much attention to short-term fluctuations in
the latter.
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in the short run he is unsuccessful, which is very
likely, he will not receive much mercy. Worldly wisdom teaches that it is better
for reputation to fail conventionally than to succeed
unconventionally.
(5) So far we have had chiefly in mind the state of
confidence of the speculator or speculative investor himself and may have seemed
to be tacitly assuming that, if he himself is satisfied with the prospects, he
has unlimited command over money at the market rate of interest. This is, of course, not the case. Thus we must also take account of the
other facet of the state of confidence, namely, the confidence of the lending
institutions towards those who seek to borrow from them, sometimes described as
the state of credit. A collapse in
the price of equities, which has had disastrous reactions on the marginal
efficiency of capital, may have been due to the weakening either of speculative
confidence or of the state of credit. But whereas the weakening of either is
enough to cause a collapse, recovery requires the revival of both. For whilst the weakening of credit is
sufficient to bring about a collapse, its strengthening, though a necessary
condition of recovery, is not a sufficient condition.
Speculation vs.
Enterprise
These considerations should not lie beyond the purview
of the economist. But they must be
relegated to their right perspective. If I may be allowed to appropriate the
term speculation for the activity of forecasting the psychology of the
market, and the term enterprise for the activity of forecasting the
prospective yield of assets over their whole life, it is by no means always the
case that speculation predominates over enterprise. As the organisation of investment markets
improves, the risk of the predominance of speculation does, however, increase.
In one of the greatest investment
markets in the world, namely, New York, the
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influence of speculation (in the above sense) is
enormous. Even outside the field of
finance, Americans are apt to be unduly interested in discovering what average
opinion believes average opinion to be; and this national weakness finds its
nemesis in the stock market. It is
rare, one is told, for an American to invest, as many Englishmen still do, “for
income”; and he will not readily purchase an investment except in the hope of
capital appreciation. This is only
another way of saying that, when he purchases an investment, the American is
attaching his hopes, not so much to its prospective yield, as to a favourable
change in the conventional basis of valuation, i.e. that he is, in the
above sense, a speculator. Speculators may do no harm as bubbles on
a steady stream of enterprise. But
the position is serious when enterprise becomes the bubble on a whirlpool of
speculation. When the capital
development of a country becomes a by-product of the activities of a casino, the
job is likely to be ill-done. The
measure of success attained by Wall Street, regarded as an institution of which
the proper social purpose is to direct new investment into the most profitable
channels in terms of future yield, cannot be claimed as one of the outstanding
triumphs of laissez-faire capitalism - which is not surprising, if I am
right in thinking that the best brains of Wall Street have been in fact directed
towards a different object.
These tendencies are a scarcely avoidable outcome of our
having successfully organised “liquid” investment markets. It is usually agreed that casinos should,
in the public interest, be inaccessible and expensive. And perhaps the same is true of Stock
Exchanges. That the sins of the
London Stock Exchange are less than those of Wall Street may be due, not so much
to differences in national character, as to the fact that to the average
Englishman Throgmorton Street is, compared with Wall Street to the average
American, inaccessible and very expensive. The jobber’s “turn”, the
high
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brokerage charges and the heavy transfer tax payable to the Exchequer, which
attend dealings on the London Stock Exchange, sufficiently diminish the
liquidity of the market (although the practice of fortnightly accounts operates
the other way) to rule out a large proportion of the transactions characteristic
of Wall Street. [1] The introduction of a substantial
Government transfer tax on all transactions might prove the most serviceable
reform available, with a view to mitigating the predominance of speculation over
enterprise in the United States.
The spectacle of modern investment markets has sometimes
moved me towards the conclusion that to make the purchase of an investment
permanent and indissoluble, like marriage, except by reason of death or other
grave cause, might be a useful remedy for our contemporary evils. For this would force the investor to
direct his mind to the long-term prospects and to those only. But a little consideration of this
expedient brings us up against a dilemma, and shows us how the liquidity of
investment markets often facilitates, though it sometimes impedes, the course of
new investment. For the fact that
each individual investor flatters himself that his commitment is “liquid”
(though this cannot be true for all investors collectively) calms his nerves and
makes him much more willing to run a risk. If individual purchases of investments
were rendered illiquid, this might seriously impede new investment, so long as
alternative ways in which to hold his savings are available to the
individual. This is the dilemma.
So long as it is open to the
individual to employ his wealth in hoarding or lending money, the
alternative of purchasing actual capital assets cannot be rendered sufficiently
attractive (especially to the man who does
1. It is said that, when Wall Street is active, at least
a half of the purchases or sales of investments are entered upon with an
intention on the part of the speculator to reverse them the same day.
This is often true of the
commodity exchanges also.
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not manage the capital assets and knows very little
about them), except by organising markets wherein these assets can be easily
realised for money.
The only radical cure for the crises of confidence which
afflict the economic life of the modern world would be to allow the individual
no choice between consuming his income and ordering the production of the
specific capital-asset which, even though it be on precarious evidence,
impresses him as the most promising investment available to him. It might be that, at times when he was
more than usually assailed by doubts concerning the future, he would turn in his
perplexity towards more consumption and less new investment. But that would avoid the disastrous,
cumulative and far-reaching repercussions of its being open to him, when thus
assailed by doubts, to spend his income neither on the one nor on the
other.
Those who have emphasised the social dangers of the
hoarding of money have, of course, had something similar to the above in mind.
But they have overlooked the
possibility that the phenomenon can occur without any change, or at least any
commensurate change, in the hoarding of money.
Spontaneous Optimism & Animal
Spirits
Even apart from the instability due to speculation,
there is the instability due to the characteristic of human nature that a large
proportion of our positive activities depend on spontaneous optimism rather than
on a mathematical expectation, whether moral or hedonistic or economic. Most, probably, of our decisions to do
something positive, the full consequences of which will be drawn out over many
days to come, can only be taken as a result of animal spirits - of a spontaneous
urge to action rather than inaction, and not as the outcome of a weighted
average of quantitative benefits multiplied by quantitative probabilities. Enterprise
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only pretends to itself to be mainly actuated by the
statements in its own prospectus, however candid and sincere. Only a little more than an expedition to
the South Pole, is it based on an exact calculation of benefits to come. Thus if the animal spirits are dimmed and
the spontaneous optimism falters, leaving us to depend on nothing but a
mathematical expectation, enterprise will fade and die; - though fears of loss
may have a basis no more reasonable than hopes of profit had
before.
It is safe to say that enterprise which depends on hopes
stretching into the future benefits the community as a whole. But individual initiative will only be
adequate when reasonable calculation is supplemented and supported by animal
spirits, so that the thought of ultimate loss which often overtakes pioneers, as
experience undoubtedly tells us and them, is put aside as a healthy man puts
aside the expectation of death.
This means, unfortunately, not only that slumps and
depressions are exaggerated in degree, but that economic prosperity is
excessively dependent on a political and social atmosphere which is congenial to
the average business man. If the
fear of a Labour Government or a New Deal depresses enterprise, this need not be
the result either of a reasonable calculation or of a plot with political
intent; - it is the mere consequence of upsetting the delicate balance of
spontaneous optimism. In estimating
the prospects of investment, we must have regard, therefore, to the nerves and
hysteria and even the digestions and reactions to the weather of those upon
whose spontaneous activity it largely depends.
We should not conclude from this that everything depends
on waves of irrational psychology. On the contrary, the state of long-term
expectation is often steady, and, even when it is not, the other factors exert
their compensating effects. We are
merely reminding ourselves that human decisions affecting the future, whether
personal or political or economic, cannot
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depend on strict mathematical expectation, since the
basis for making such calculations does not exist; and that it is our innate
urge to activity which makes the wheels go round, our rational selves choosing
between the alternatives as best we are able, calculating where we can, but
often falling back for our motive on whim or sentiment or
chance.
Mitigating Ignorance of the
Future
There are, moreover, certain important factors which
somewhat mitigate in practice the effects of our ignorance of the future. Owing to the operation of compound
interest combined with the likelihood of obsolescence with the passage of time,
there are many individual investments of which the prospective yield is
legitimately dominated by the returns of the comparatively near future. In the case of the most important class
of very long-term investments, namely buildings, the risk can be frequently
transferred from the investor to the occupier, or at least shared between them,
by means of long-term contracts, the risk being outweighed in the mind of the
occupier by the advantages of continuity and security of tenure. In the case of another important class of
long-term investments, namely public utilities, a substantial proportion of the
prospective yield is practically guaranteed by monopoly privileges coupled with
the right to charge such rates as will provide a certain stipulated margin.
Finally there is a growing class of
investments entered upon by, or at the risk of, public authorities, which are
frankly influenced in making the investment by a general presumption of there
being prospective social advantages from the investment, whatever its commercial
yield may prove to be within a wide range, and without seeking to be satisfied
that the mathematical expectation of the yield is at least equal to the current
rate of interest, - though the rate which the public
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authority has to pay may still play a decisive part in
determining the scale of investment operations which it can
afford.
Thus after giving full weight to the importance of the
influence of short-period changes in the state of long-term expectation as
distinct from changes in the rate of interest, we are still entitled to return
to the latter as exercising, at any rate, in normal circumstances, a great,
though not a decisive, influence on the rate of investment. Only experience, however, can show how
far management of the rate of interest is capable of continuously stimulating
the appropriate volume of investment.
For my own part I am now somewhat sceptical of the
success of a merely monetary policy directed towards influencing the rate of
interest. I expect to see the
State, which is in a position to calculate the marginal efficiency of
capital-goods on long views and on the basis of the general social advantage,
taking an ever greater responsibility for directly organising investment; since
it seems likely that the fluctuations in the market estimation of the marginal
efficiency of different types of capital, calculated on the principles I have
described above, will be too great to be offset by any practicable changes in
the rate of interest.
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