Institutional Conditions

Capital has to be kept scarce enough in the long term to have a marginal efficiency at least equal to the interest rate for a period equal to the life of the capital.

A wealthy society with so much capital has its marginal efficiency at zero.

• It would be negative with any additional investment.
• Yet it will have a monetary system that has negligible costs of storage and safe custody.
• This will lead to interest rates not being negative.
• This will, at full employment, will make the people save.

Entrepreneurs will necessarily make losses if they continue to offer employment on a scale which will use the whole stock of capital.

The stock of capital and employment will thus shrink until the society becomes so impoverished as to reduce the aggregate of saving to zero.

Thus equilibrium, under laissez-faire, will be one where employment is low enough and the standard of life sufficiently miserable to bring savings to zero.

The only alternative position of equilibrium is to have a stock of capital sufficiently great to have a marginal efficiency of zero.

• This means that wealth is available to satiate the aggregate desire to save and invest even with full employment, in times when no interest revenue is obtainable.

But it is unlikely that the propensity to save under full employment becomes satisfied just at the point where capital reaches the level where its marginal efficiency is zero.

• If this happens, it will probably take effect when the interest rate is vanishing and during the gradual decline of interest rate*.

In fact, however, institutional and psychological factors set a limit much above zero to the practicable decline in interest rates.

In particular, the costs of bringing borrowers and lenders together and uncertainty as to the future interest rates will set a lower limit as high as 2% or 2.5% on long term.

If this proves correct, the awkward possibilities of an increasing stock of wealth, when the interest rate is at bottom, may soon become real. At this point, the aggregate desire to accumulate wealth will not likely be satiated before the interest rate has reached its minimum level.

The post-war UK and US experiences had an accumulation of wealth so large that its marginal efficiency fell more rapidly than the interest rate can fall under laissez faire. This accumulation interfered with employment and the standard of life.

It follows that the poorer society can enjoy a higher standard of life than a wealthier one. The poorer society will then have the same problem after it becomes rich, under laissez faire where the propensity to consume and the rate of investment are not deliberately controlled in the social interest.

Under full employment, the interest rate cannot fall as fast as the fall of the marginal efficiency of capital and the savings at that interest rate.

Millionaires find their satisfaction in building mighty mansions. Digging holes in the ground* paid by savings will increase employment and the real national dividend of useful goods and services.

Let us assume that:

• the interest rate is made consistent with the rate of investment of full employment
• State action balances to provide growth of capital equipment is saturated without burdening the standard of life of the present generation

This should bring down the marginal efficiency of capital in equilibrium approximately to zero within a single generation. Progress would then result only from changes in technique, taste, population and institutions.

If I am right in imagining it to be easy to make capital-goods so abundant that the marginal efficiency of capital is zero, this would be the most sensible way of gradually getting rid of many of the objectionable features of capitalism*.

For a little reflection will show what enormous social changes would result from a gradual disappearance of a rate of return on accumulated wealth.

A man would still be free to accumulate his earned income for spending it later. But his accumulation would not grow.

The rentier would disappear. There would still be room for enterprise and skill*.