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Profits, Interest, and Investment,And Other Essays on the Theory of Industrial Fluctuations, by Friedrich A

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Profits, Interest, and Investment,And Other Essays on the Theory of Industrial Fluctuations, by Friedrich A Reprints of Economic Classics PROFITS, INTEREST AND INVESTMENT Also by FRIEDRICH AUGUST VON HAYEK Reprints of Economic Classics MONETARY NATIONALISM AND INTERNATIONAL STABILITY MONETARY THEORY AND THE TRADE CYCLE PRICES AND. PRODUCTION COLLECTIVIST ECONOMIC PLANNING. Critical Studies on the Possibilities of Socialism. Edited, with an Introduction and Concluding Essay, by F. A. Hayek. JOHN STUART MILL AND HARRIET TAYLOR. Their Friendship and Subsequent Marriage. ROADS To FREEDOM. Essays in Honor of Friedrich A .. von Hayek. Edited by Erich Streissler. PROFITS, INTEREST AND INVESTMENT AND OTHER ESSAYS ON THE THEORY OF INDUSTRIAL FLUCTUATIONS BY FRIEDRICH A. VON HAYEK 'Tooke Professor of Economic Science and Statistk.r in the University of London AUGUSTUS M. KELLEY • PUBLISHERS CLIFTON I975 First Edition 1939 (London: George Routledge & Sons Ltd.) Reprinted 1969 & 1975 by Augustus M. Kelley Publishers Clifton Netw Jersey 07012 By Arrangement wz'th ROUTLEDGE AND KEGAN PAUL, LTD. Library of Congress Cataloged. The original printing of this title as follows: Hayek, Friedrich August von, 1899- Profits, interest, and investment,and other essays on the theory of industrial fluctuations, by Friedrich A. von Hayek. New York, A. M. Kelley [19691 viii, 266 p. illus. 20 em. Reprint of the 1939 ed. 1. Business cycles-Addresses, essays, lectures. I. Title. HB3711.H365 1969 338.54 76-76355 ISBN 0-678-00794-2 MARC PRINTED IN THE UNITED STATES OF AMERICA by SENTRY PRESS, NEW YORK, N. Y. 10013 Bound by A. HOROWITZ & SON, CLIFTON, N. J. CONTENTS PREFACE vii I. PROFITS, INTEREST AND INVESTMENT (1939) 3 I. Introduction. PART I. 2. The Ricardo Effect-3. The operation of the Ricardo Effect in the later stages of the boom­ 4. The rate of profit and the rate of interest-50 The role ofexpectations-6. The two factors in theoperation of the acceleration principle-7. The structure of capitalistic production-8. The effect ofa rise of profits on the demand for different kinds of investment goods-g. The role of raw material prices-Io. The decline of investment-II. Depression and revival. PART II. 12. Factors governing the revival of invest­ ment-I3. Inflationary and non-inflationary increases of money incomes-I4. Different forms of investment distinguished according to the rate at which they will contribute to the flow of consumers' gOOdS-I5. The ciemand for, and the supply of consumer's goods during "to.le upswing-l6. The anomaly of the cumulative proceSS--I7. The short run ceiling of stable employ­ ment-I8. The .. equilibrium" rate of profit and interest-I9. Possibilities of mitigating fluctuations­ 20. The negative role of the rate of interest-2I. Can the rate of interest be made effective? II. INVESTMENT THAT RAISES THE DEMAND FOR 73 CAPITAL (1937) I. The relative significance of the amount of invest­ ment and of the form that it takes-2... Completing investments" and the rate of interest-3. Causes of an urgent demand for funds for completing investments. v vi CONTENTS III. THE MAINTENANCE OF CAPITAL (1935) 83 I. The nature and significance of the problem- 2. Professor Pigou's treatment-3. The rationale of maintaining capital intact-4. The action of the capitalist with perfect foresight-5. Obsolescence and anticipated risks-6. The reaction of the capitalist on unforeseen changes-7. The imp()~sibility of an objective standard with different degrees of foresight -8. "Saving" and " investing- "-9. Capital accounting and monetary policy. IV. PRICE EXPECTATIONS, ~IO:NETARY DISTUR- BANCES AND ~ALINVESTMENTS(1933) 135 v. SAVING (1933) 157 VI. THE PRESENT STATE AND I~lMEDIATE PROS­ PECTS OF THE STUDY OF INDUSTRIAL FLUCTUATIONS (1933) 171 VII. A NOTE ON THE DEVELOPMENT OF THE DOCTRINE OF It FORCED SAVING" (1932). 183 APPENDIX: THE "PARADOX" OF SAVING (1929) 199 INDEX 265 PREFACE THE essays collected in this volume are a selection from the various attempts made in the course of the past ten years to improve and develop the outline of a theory of industrial fluctuations contained in tWb small books on Monetary 7'heory and the ]'rade Cycle and Prices and Productio)1.. The first and longest of these essays, which has not previously appea;ed, may perhaps be regarded as a revised version of the central argument of the latter book, but treated from a different angle and on somewhat different assumptions. The others, which have been published at various dates and in various places, deal with different special aspects of thesame problem. I haveon the whole refrained from revising these earlier essays, except onsome minorpoints of exposition or by inserting a few additional footnotes. Several essays which might have found a place in this collection I have deliberately omitted for a variety of reasons: some, including my discussion of Mr. Keynes' Treatise 01'1, Money, because they deal with views no longer held by their author; others, especially an article on the consumption of capital published in a German periodical, because I now realise that part of its theoretical argument was definitely confused; and yet others because they have either been incorpor- vii viii PREFACE ated in substance in, or bodily added as an appendix to, the second edition of Prices and Production (1935). The essays reproduced here are arranged in inverse chronological order. It is inevitable with a collection of this kind that at least some of the earlier essays are in certain respects out of date and perhaps a word of apology is neededfor reprintingthemnow. Buttheycan· tain points which I still feel are of some importance and since I do not yet feel ready to give a systematic exposition of the whole of this complex subject, to place these various attempts side by side within the covers of cne volume is the best I can do to do justice to the many aspects of it. The last essay in particular, written fully ten years ago and thus antedating Prices and Production, has been added only as an appendix. Although I do not now subscribe to all it contains, it still appears to be read, and as it was in a sense the beginning of a continuous development of thought" it perhaps deserves to be made available in a more convenient form. For permission to republish the various essay included in this volume I am indebted to The Macmillan Company of New York and the Editors of the Review of Economic Statistics, the Quarterly Journal Of E eonomies, the l\Yationalokonomisk T idsskrift, and Eeonomiea. F. A. von Hayek. London School of Economics and Political Science. May, 1939. I PROFITS, INTEREST AND INVESTMENT I. Introd'ttct-ion. In this essay an attempt will be made to restate two crucial points of the explanation of crises and depressions which the author has tried to develop on earlier occasi.ons. In the first part I hope to show why under certain conditions, contrary to a widely held opinion, an increase in the demand for consumers' goods will tend to decrease rather than to increas,e the demand for investment goods. In the. second' part it will be shown why these conditions will regularly arise as a consequence of the conditions prevailing at the beginning of a recovery from a depression. The main point on which this"revised version differs from my earlier treatments of the same problem is that I believe now that it is, properly speaking, a rate of profit rather than a rate of interest in the strict sense which is the dominating factor in this connection. In particular it seems that the mechanism through which an increase in the demand for consumers' goods may lower the investment demand-schedule (and consequently employment) involves an increase in a rate of profit which is distinct from, and may move independently of,. the money rate of interest, although it is often confused with the latter and indeed performs 3 4 PROFITS, INTEREST AND INVEST~IEN1" many of the functions commonly attributed to it. " It will be argued here that it is this rate of profit ~ which " orthodox" economists, consciously or uncon­ ~ sciously, often had in mind when they spoke of the rate of interest equalising saving and investment, or of the rate of interest depending on the scarcity of real capital. It will be argued further that this rate of profit is in many respects much more effective and fundamental than the rate of interest. And while it is easy to understand why economists who were brought up to think mainly in ({ real" terms should refer to this rate of profit as the rate of interest, there can be no doubt that this practice has caused a great deal of confusion and that a more careful separation of.the two concepts is necessary.1 A second correction of a similar nature concerns the inadequate distinction I had formerly drawn between the movements of money wages and the movement of real wages. Although the argument of Prices and Production clearly implied a fall of real wages during the later stages of the boom (as is shown particularly by the discussion of the increasing" price margins" 1 The classical econoII,lists were by no means unaware of the fact that the relationship between the rate of profit and the rate of interest properly speaking presented a problem. One of the earliest questions proposed for discussion at .the Political Economy Club (by G. W. Norman on February 4th, 1822) was II Is there any necessary connection between the rate of Profit and the rate of Interest?" (Political Economy Club, 1\1inutes of Proceedings, etc.• Vol. VI. 1921, p. 11.) The confusion only began when economists. probably because of the special associations attached to the word profit since Marx, began to shun this term and to use interest instead.
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