The purpose of this article is to state a prop¬osition which underlies the modern "mon¬etary over-investment theories" of the trade cycle in a form in which, as far as I know, it has never before been expressed but which seems to make this particular proposition so obvious as to put its logical correctness beyond dispute. This, of course, does not necessarily mean that the theories which rely largely on this proposi¬tion provide an adequate account of all or any trade cycles. But it should do something to show the inadequacies of those current theories which completely disregard the effect in ques¬tion. It should, moreover, clear up some of the confusion and misunderstandings which have made it so difficult to come to an agreement on the purely analytical points involved.
It will surprise nobody to find the source of this confusion in the ambiguity of the term capital. In static analysis, the term capital re¬fers equally to the aggregate value of all capital goods and to their 'quantity,' measured in terms of cost (or in some other way). But this is of little significance because in equilibrium these two magnitudes must necessarily coincide. In the analysis of dynamic phenomena, however, this ambiguity becomes exceedingly dangerous. In particular, the static proposition that an increase in the quantity of capital will bring about a fall in its marginal productivity (which for the purposes of this article I shall call the rate of interest), when taken over into economic dynamics and applied to the quantity of capital goods, may become quite definitely erroneous.
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