Showing papers by "Frank H. Knight published in 1934"

Capital, Time, and the Interest Rate

Abstract: ed is indefinitely long, there is the further fact that the accumulation of capital immediately involves effects which change the conditions of accumulation. It is needful to mention specifically only one of these: accumulation and investment must increase the real income of society (if not of the savers, then of others), which will make saving easier, and there is no reason, a priori, why this change alone might not counteract the effect of the reduced incentive to save in the form of a progressively lower rate. Other changes are of course involved which would work in the same direction, and in fact it is an almost purely arbitrary assumption that a reduction in the rate of interest will result in a -lower rate of accumulation, even if everything else were absolutely unchanged. Historically, new " demand for capital " has opened up rapidly enough to prevent any general fall in the interest rate. The primary fact, oversight of which vitiates most discussion of the theory of interest, is that the only situation of which we have any knowledge in capitalistic society is one in which total investment is growing at a fairly rapid rate; the only time when this is not clearly true is when conditions are dominated by war or the economic disorganisation called " crisis," so that the ordinary price relations and controls are inoperative. The heart of a correct theory of interest is the fact, corresponding more or less to infinite " elasticity of demand for capital," that the investment market is capable of absorbing savings at the maximum rate at which they are forthcoming, with only a very gradual decline of the rate of return through time, other things equal, and the further fact that changes which do occur in the " other things " (partly in consequence of the growth of capital, but effects in a " historical," not an economic sense) actually prevent any general decline. With opportunity to invest to an indefinite extent and at a practically unvarying rate constantly open, no one will pay more or take less for any sort of loan than the rate obtainable by investment at the margin of capital growth.' The false impression that this quasi-elasticity is fairly limited may be accounted for by failure to consider a theoretical limitation on the notion of an instantaneous market rate already alluded to. It is true that the market cannot instantly adjust itself to rapid, unanticipated changes in the rate of flow of savings into the market without changes in the rate. This is purely a matter of planning and uncertainty and the effect of imperfect foresight. It requires time to plan for investment, and at any moment investment (actual construction of income-bearing goods) is being carried on at a fairly definite rate. If savings suddenly begin to come into the market much more rapidly than the rate planned for (whether correctly or not) by entrepreneurs and promoters in the aggregate, a temporary " glut " and fall in the rate will follow naturally. And, conversely, if the flow of savil-gs is too slow to carry out the plans actually in course of execution, a sort of distress demand will send the 1 This would be true with little qualification even in a retrograde society, but that is not in point here. This content downloaded from 157.55.39.92 on Wed, 22 Jun 2016 06:52:44 UTC All use subject to http://about.jstor.org/terms 286 ECONOMICA [AUGUST rate upward. Such facts as these undoubtedly enter into Professor von Hayek's confusion regarding the relation between the length of the production process and the analysis of the business cycle. But under no conditions is there a valid basis for arguing that either more investment, of itself, or more rapid investment, need be associated, either with investment in more durable instruments, or with a lengtlhening of the construction period. The University of Chicago. This content downloaded from 157.55.39.92 on Wed, 22 Jun 2016 06:52:44 UTC All use subject to http://about.jstor.org/terms

"The Common Sense of Political Economy" (Wicksteed Reprinted)

Abstract: ALL students of economics are placed deeply in debt to the LonA4 don School of Economics, to Professor Robbins individually, ?& vand to the publishers by the bringing-out of this work. In it are included not only the \"Common Sense\" but, in addition, all of Wicksteed's economic writings of importance except the Co-ordination of the Laws of Distribution, which has also been reprinted, but under separate covers, in the London School series of reprints. These other papers fill nearly two hundred pages of the second volume. The two volumes are offered for sale separately, the first, with an admirable introduction by Professor Robbins, containing Book I of the \"Common Sense,\" which makes Wicksteed's general statement of his system available in convenient bulk for use in elementary classes. The reviewer has some doubts as to whether there will be any great demand for the work for this purpose in the United States, where the elaborate illustrations in the barbarous system of pounds, shillings, and pence will form a considerable obstacle to the undergraduate mind. And there are deeper reasons which will be obvious from the following more critical comments on Wicksteed's work.

Social Science and the Political Trend

Abstract: This is not a “political” discussion. Our concern is solely with the study of political phenomena, the possibility of knowledge and understanding, and incidentally, the prospect that knowledge may result in changing and improving the phenomena themselves. No criticism, or even critique, of any political personage or method or act is to be read in to the argument. To say this emphatically at the outset is in order because to talk about political phenomena at all, even with a purely descriptive intent, one has to use terms which have what the late Professor Veblen called “honorific” implications (and this includes the “dishonorific”). But the question whether men as scientists can understand the behaviour of men as statesmen and citizens is closely connected with the question how far the latter's behaviour is itself of an in telligent or understanding sort; and such issues are hard to discuss in purely descriptive terms.