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 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.
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 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.