Psychology Dictionary of ArgumentsHome
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| Marginal Efficiency of Capital: Marginal Efficiency of Capital (MEC) in economics refers to the expected rate of return on an additional unit of investment. It compares potential profits from new capital to its cost, guiding investment decisions. MEC decreases as more capital is used, reflecting diminishing returns._____________Annotation: The above characterizations of concepts are neither definitions nor exhausting presentations of problems related to them. Instead, they are intended to give a short introduction to the contributions below. – Lexicon of Arguments. | |||
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John Maynard Keynes on Marginal Efficiency of Capital - Dictionary of Arguments
Kurz I 109 Def Marginal Efficiency of Capital/Keynes/Kurz: „I define the marginal efficiency of capital as being equal to that rate of discount which would make the present value of the series of annuities given by the returns expected from the capital-asset during its life just equal to its supply price.“ (CWK 7, p. 135)(1). Keynes goes on to argue that the various projects may be ordered according to their marginal efficiencies and then suggests to aggregate them, “so as to provide a schedule relating the rate of aggregate investment to the corresponding marginal efficiency of capital in general which that rate of investment will establish” (CWK 7, p. 136)(1). This he calls the “investment demand schedule,” which he confronts with the current rate of interest. He concludes: “the rate of investment will be pushed to the point on the investment demand-schedule where the marginal efficiency of capital in general is equal to the market rate of return” (CWK 7, pp. 136-137)(1). Problems/VsKeynes: Keynes rests his argument on the dubious partial equilibrium method: he assumes that the schedule and the money rate of interest are independent of one another. Yet, if one was to depend on the other, or if they were interdependent, the argument in its present form would break down. Several commentators, including Pasinetti (1974)(2), have emphasized that Keynes’s argument consists of an adaptation of the classical doctrine of extensive diminishing returns to the theory of investment. This doctrine (see, e.g., Kurz 1978)(3) typically assumes that the different qualities of land can be brought into an order of fertility, with the first quality exhibiting the lowest unit costs of production of, say, corn; the second quality, the second lowest unit costs; and so on. In competitive conditions, with a rise in “effectual demand” (Adam Smith), the different qualities of land will be taken into cultivation according to this order. The different qualities of land can also be ranked according to the rent they yield per acre; this ranking is known as the order of rentability. It has Kurz I 110 commonly been assumed that both orders are independent of income distribution and that they coincide. SraffaVsKeynes: In the late 1920s, Sraffa showed that this is true only in exceedingly special cases. In general, both orders depend on the rate of interest and do not coincide (see also Kurz and Salvadori 1995, chap. 10)(4). >Investments/Keynes. Kurz I 116 SraffaVsKeynes: Next Keynes brings in the marginal efficiency of capital and compares it with the rate of interest. Sraffa comments: “‘Marginal efficiency’ and ‘the’ rate of interest are obscure: the former is not defined in this context and the latter has two definitions on p. 227.”(5) It is at any rate misleading what Keynes says, because the rate of interest of an object, whose actual price exceeds cost of production, is according to the definition given on pp. 222–223(5) (relatively) high, not low. Keynes then expounds his view in terms of the three-assets example. Since in equilibrium the own rates, expressed in the same numeraire, must be equal, one gets the following result: with the own rate of money being constant, “it follows that a1 and a2 must be rising. In other words, the present money-price of every commodity other than money tends to fall relatively to its expected future price” (p. 228)(5). Sraffa comments that exactly the opposite follows: “this will lower, not raise, their rates of interest.” Sraffa/Kurz: Keynes simply got it wrong. 1. Keynes, J. M. (1971–1989). The Collected Writings of John Maynard Keynes, D. Moggridge (ed.), London: Macmillan. 2. Pasinetti, L. L. (1974). Growth and Income Distribution. Essays in Economic Theory, Cambridge: Cambridge University Press. 3. Kurz, H. D. (1978). “Rent Theory in a Multisectoral Model,” Oxford Economic Papers, 30, 16-37. 4. Kurz, H. D. and Salvadori, N. (1995). Theory of Production. A Long-period Analysis, Cambridge: Cambridge University Press. (Paperback edn 1997.) 5. Sraffa, P. (1932). “Dr. Hayek on Money and Capital,” Economic Journal, 42, 42-53. Kurz, Heinz D. „Keynes, Sraffa, and the latter’s “secret skepticism“. In: Kurz, Heinz; Salvadori, Neri 2015. Revisiting Classical Economics: Studies in Long-Period Analysis (Routledge Studies in the History of Economics). London, UK: Routledge._____________Explanation of symbols: Roman numerals indicate the source, arabic numerals indicate the page number. The corresponding books are indicated on the right hand side. ((s)…): Comment by the sender of the contribution. Translations: Dictionary of Arguments The note [Concept/Author], [Author1]Vs[Author2] or [Author]Vs[term] resp. "problem:"/"solution:", "old:"/"new:" and "thesis:" is an addition from the Dictionary of Arguments. If a German edition is specified, the page numbers refer to this edition. |
EconKeyn I John Maynard Keynes The Economic Consequences of the Peace New York 1920 Kurz I Heinz D. Kurz Neri Salvadori Revisiting Classical Economics: Studies in Long-Period Analysis (Routledge Studies in the History of Economics). Routledge. London 2015 |
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