CH. 13
205
What are its secondary effects ? The fall in theattractiveness of fixed capital at the existing pricewill make it impossible for producers of capital-goodsto market their output on terms as satisfactory asbefore in relation to their cost of production and willbe followed, therefore, by a fall in the output of suchgoods. At the same time, any increase of saving mustmean a diminution in the flow of income directedtowards the purchase of liquid consumption-goods andwill be followed, therefore, by a fall of P.
Only if the rise in the rate of interest coincides witha reduction in the rate of saving for other reasonswill this not be the case ; i.e. if the change in themarket-rate coincides with a change in the natural-rate. For the natural-rate is the rate which balancesthe resultant effect of a change in the prospectiveyield of capital-goods and a change in the rate ofsaving, in such a manner that the change in the price-level of investment-goods, due to the combined effectof changes in their prospective yield and in the rate ofinterest, is equal and opposite to the change in the price-level of liquid consumption-goods, due to the changein the volume of saving, each price-level being weightedin proportion to the output of the goods to which itrelates ; so that the price-level of output as a wholeremains unchanged.
Thus a change in the natural-rate of interest will beaccompanied by a temporary upset both of P and ofP', though in opposite directions ; but profits as awhole will remain at zero, the gains of one categoryof producers being balanced by the losses of the other.Thus there will be a direct and double stimulus toshift the character of output from the one categoryto the other, and, when this has been effected, bothP and P' will return to their previous positions ofequilibrium without there having been any occasionto disturb the average rate of earnings (though theprocess of transfer may have required a temporary