• Home
• About Us
• Product
• Management
• Development
• Resource
• Contact Us

The Relative Significance of the amount of investment

The assumption that an increase in the quan¬tity of capital goods will necessarily decrease the return to be expected on further investment is generally treated as obvious. It is, therefore, desirable to state the actual relations between the two magnitudes in a form which may, per¬haps, sound somewhat paradoxical. The main thesis of this article will be that the effect which the current production of capital goods will have on the future demand for investible funds will depend not so much on the quantity of capital goods produced, as on the kind of capital goods which are produced or on the particular forms which current investment takes, and that an increase in the current output of capital goods will frequently have the effect not of lowering but of raising the future demand for investible funds, and thereby the rate of interest. Each separate step of the argument which leads to this conclusion is a familiar and obvious proposition. The first main point is that most investment is undertaken in the expectation that further investment, for which the equip¬ment that formed the object of the first invest¬ment will be needed, will take place at a later date. This may be expressed by saying that current investment will be guided by the expectation that investment will continue at a certain rate for some time to come, or that the rate of interest will stay at a certain figure. The success of current investment will depend upon this expectation being fulfilled. Most individual acts of investment must be regarded, therefore, as mere links in a chain which has to be com¬pleted if its parts are to serve the function for which they were intended, even though the chain consists of separate and successive acts of different entrepreneurs. The manufacturer of any kind of machines who increases his plant can do so only in the expectation that the users of these machines will at some later time be willing to install additional machines, and that these machines may be wanted only if some¬body else will later be willing to invest in their products, etc. etc.
The first investment of such a chain, therefore, will be undertaken only if it is expected that in each link of this chain a certain rate of interest can be earned. But this does not mean that, once this investment has been made, the process of further investments will not be continued if conditions change in an unfavorable direction, if, for example, the rate of interest at which money can be borrowed rises. If the invest¬ments already made are irrevocably committed to the particular purpose, this provides a mar¬gin within which the total profits to be expected on the whole chain of successive investments may fall without affecting the profitability of the further investments still needed to complete the process. For if the fixed capital already created is specific to the particular purpose, it will, of course, be used even if the return covers little more than the cost of using it (but not inter¬est and amortization); and since the owners of this fixed capital will find it in their interest to use it so long as they get only a little more than mere operating cost, nearly the whole amount which it was originally expected would be earned as interest and amortization becomes available, as it were, as a premium on investment in the later stages of the process. The amount, by which entrepreneurs in these later stages need to pay less for the products of the earlier stages, because the equipment there is already in existence, thus becomes available for expenditure on the completion of the proc¬ess. And the greater the amount of investment which has already been made compared with that which is still required to utilize the equip¬ment already in existence, the greater will be the rate of interest which can advantageously be borne in raising capital for these investments completing the chain.

Featured Articles