Investment that Raises the Demand for Capital

“Investment that Raises the Demand for Capital.” Review of Economic Statistics 19 (November 1937).


“The purpose of this article is to state a proposition which underlies the modern “monetary 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 proposition 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 question. 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 refers 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.”

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