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A TREATISE ON MONEY

BK. Ill

which they offer to the Factors of Production at agiven rate of remuneration—upwards or downwards,according as such profits are positive or negative.Thus W x and therefore P will be in a condition ofdisequilibrium, which will continue so long as profits(whether Q x or Q 2 ) have not returned to zero.

Thus the conditions for the equilibrium of thepurchasing power of money require that the Bank-ing System should so regulate its rate of lendingthat the value of Investment is equal to Savings;for otherwise entrepreneurs will, under the influenceof positive or negative profits, be both willing inthemselves and at the same time influenced by theabundance or scarcity of the bank-credit at theirdisposal, to increase or diminish (as the case maybe) the average rate of remuneration W x whichthey offer to the factors of production. But theconditions for equilibrium also require that the costof new Investment should be equal to savings ; forotherwise producers of consumption-goods will beendeavouring, under the influence of profits or losses,to alter their scale of output.

In equilibrium, therefore, both the value and thecost of current investment must be equal to the amountof current savings, and profits must be zero ; and insuch circumstances the Purchasing Power of Moneyand the price-level of output as a whole will bothcorrespond to the money-rate of efficiency earnings ofthe Factors of Production ( i.e. P = II = W x ).

The reader will appreciate that the condition ofzero-profits means that aggregate profits are zero.For a stability of the price-level as a whole is perfectlycompatible with the profits of particular entrepreneursor particular classes of entrepreneurs being positiveor negative, just as it is compatible with the prices ofparticular commodities rising or falling.

Thus, the long-period or equilibrium norm of thePurchasing Power of Money is given by the money-rate