A sudden collapse of the marginal efficiency of capital
starts the cycle.
would have to consider if it adopted the microeconomic approach to price control in a competitive industry, namely, the allocation of investment between firms in the industry, a policy which Keynes perhaps foresaw when he wrote: 'I expect to see the State, which is in a position to calculate the marginal efficiency of capital
on long views and on the basis of the general social advantage, taking an even greater responsibility for directly organising investment' (Keynes 1936: 164).
While Keynes supported deficit spending, he knew that the cause of recession lay in more fundamental factors affecting investment, which in turn were affected by interest rates: 'the succession of boom and slump can be described and analysed in terms of the fluctuations of the marginal efficiency of capital
relatively to the rate of interest' (p144).
Second, when calculating the marginal efficiency of capital
probability distributions come into play.
For it now seems clear that the disquisitions of the schoolmen were directed towards the elucidation of a formula which should allow the schedule of marginal efficiency of capital
to be high, whilst using rule and custom and the moral law to keep down the rate of interest.
The independent determinants of the level of employment, therefore, are the propensity to consume and the inducement to invest, which is the relationship between the marginal efficiency of capital
and the interest rate.
Engelhardt attempts to show that Keynes's Marginal Efficiency of Capital
(MEC) and the Net Present Value (NPV) always give identical rankings if factor prices are flexible.
In Keynes" analysis the independent variables are the rate of interest, the marginal efficiency of capital
and the marginal propensity to consume.
Increased confidence about future economic performance will raise the qs on capital while lowering the subjective values assigned to liquid positions (hence, the l falls), so that the marginal efficiency of capital
rises relative to that of assets that get much of their return from I.
Recovery might be generated if the rate of interest were to decline at a speed "sufficiently rapid" to bring it below the currently low marginal efficiency of capital
Fuller (2013) compared the Keynesian Marginal Efficiency of Capital
approach with the Austrian Net Present Value approach.
Indeed, Ricardo's distinction between the bank rate and the profit rate may fairly be considered a precursor of Wicksell's distinction between the natural and the money rates of interest as well as Keynes' distinction between the marginal efficiency of capital
and the rate of interest in financial markets.