The Geometrical Representation of Complementarity F. A.v. Hayek F. A.v. Hayek London Search for other works by this author on: Oxford Academic Google Scholar The Review of Economic Studies, Volume 10, Issue 2, Summer 1943, Pages 122–125, https://doi.org/10.2307/2967429 Published: 01 July 1943

IN THIS paper some of the implications of the approach to the problem of interest in a capitalist economy will be examined. A discussion directed toward interest may seem an anachronism at a time when, in discussion of the recent past, the present, and the future, the determination of the size of the national income has assumed a position of central importance, and instruments for increasing income are available which are admittedly more potent than manipulations of interest rates. But the magnitude of interest rates may have an important bearing on the extent to which private enterprise, and in particular private investment, will occupy the stage in the future. Although conditions are conceivable under which the interest burden of the national debt would not hamper private enterprise, it seems improbable that they will be realized, and I think it can be safely assumed that changes in the interest cost of the national debt will have a significant effect on the rate of private investment. Further, although Dr. Tinbergen I has found that long-term interest rates have had but a moderate effect on investment in the past and have been overshadowed in importance by profit fluctuations in the case of industry and by the shortage and abundance of houses in the case of residential building, it may well be that if a stable national income is achieved in the future, interest rates may be a factor of prime importance in determining the rate of private investment. We need not dwell for long on the question whether interest is a monetary phenomenon in the sense that to assume the absence of money is to assume away one essential determinant of interest. That question has been conclusively answered in the affirmative by the work of Professor Schumpeter and of Lord Keynes.2 Professor Schumpeter has shown that uncertainty is inherent in the process of capitalistic development; that profits are the prizes of the few who plunge successfully into the unknown; and that if the future were certain not only would the genius of the entrepreneur not be required, but existing profits would be encroached upon and finally disappear. Furthermore, in order to exploit their opportunities, entrepreneurs require command over money which enables them to obtain resources for investment either by raiding the current flow of production or by increasing it. Lord Keynes' analysis complements Professor Schumpeter's on the supply side: in order to take advantage of unforeseeable possibilities of profit or to guard against unforeseeable risks, people desire to hold liquid resources, and will surrender them only if they receive sufficient compensation in the form of interest. Since uncertainty is an ever present phenomenonif all else were assumed away, the uncertainty of human mortality 3 would remain liquidity preference is an essential ingredient of any economic situation, and therefore of any valid theory of interest. To assume the absence of money as a store of effectively, uncertainty must be assumed away, since, as Keynes has shown, people will use substitute stores of value if deprived of dollars. And if uncertainty is absent, we are confronted with Schumpeter's compelling argument that, under those conditions, there is no room for the phenomenon of interest. Since interest is a monetary phenomenon in the sense of the last paragraph, it follows that there must be some relation between the rate of interest and the quantity of money, and that, within limits, permanent effects on interest and output can be produced by changes in the quantity of money. The determination of these effects will be the subject of the following sections. Section II will follow the argument of the General Theory, but will, I hope, escape the stigma of vain repetition by suggesting some improvements of Keynes' model and by

Scope of the discussion, 450. — I. The capital budget in a non-cyclical society: direct budgetary effects, 452; distributional effects, 459. — II. The capital budget in the business cycle: fiscal flexibility, 461; psychological considerations, 464. — Conclusions, 465.

Four different schools now to be found among economists, 398. — Assumptions made here, 399. — Conflicting views where the total demand for houses is inelastic, 400. — Brown's position substantially correct, 401. — But the "partial equilibrium" approach is open to certain objections, 404. — Separability of the tax into a tax on site value and a tax on building value, 405. — Houses in different locations not quantities of a single commodity but different competing commodities, 409. — Summary of conclusions, 411. — Mathematical appendix, 412.

U NTIL now, much of dynamical economic analysis has been concerned with the business cycle. This may seem so natural as to be hardly worthy of explicit comment. Nevertheless, it was not inevitable; and if in the future the business cycle, as we have known it, should undergo extreme modifications, a need for dynamical analysis in connection with many economic problems would still exist. Thus, we should still need a theory of the path by which a given market approaches its equilibrium position, not for sake of the theory alone, but for the information that such knowledge throws upon the direction of displacement of the new equilibrium position as well.' In comparatively recent times, significant advances have been made in analytical dynamics. A rigorous differentiation between statics and stationariness, between dynamics and history, is now possible. The present essay attempts, first, to elucidate the nature of these concepts and to contrast them with some other prevalent usages of the terms; and, second, by means of the concepts to go back to analyze the very important notion of the circular flowo. In doing so, I am not attempting to improve upon what I consider a logically consistent argument, but rather am endeavoring to amplify the discussion at critical points where confusion has arisen.

Method of investigation, 242. — Movement between factories, 245. — Effect of inter-factory movement on wages, 248. — Persistence of wage differentials: factors affecting wage practices, 254; non-competitive hiring practices, 257. — Lack of competition among workers, 259; influence of family and friends, 260; absence of effective vocational guidance, 261; weakness of financial incentives, 261. — Summary, 262.

Abstract This article talks about some reports, which has been published in the April 1943 issue of the accounting journal "The Accounting Review." As to committees, it seemed advisable to appoint territorial membership solicitors to use a printed statement of Association objectives in a persistent campaign. Opinion at the meeting of May 8, 1943 was favorable to attempting some research looking toward a statement of cost accounting principles to be formulated by a special committee. Other research projects, if any such appear, can be given to other special committees to study. After some experimentation along these lines for a while, it would be necessary to decide whether research should be continued by special committees, by designated standing committees, or by research directors. Other matters of Association policy will probably need to be studied later also, when orderly legislation is once more possible. The established election procedure could not be followed in 1942, and emergency action was taken as reported in "The Accounting Review," for January and April, 1943.