Keynes’s concept of the marginal efficiency of capital is vital to understanding why businesses decide to invest. He defines the marginal efficiency of capital as the rate of discount that makes the present value of an asset’s expected future returns exactly equal its current supply price, or the cost of producing a new unit of that asset. Investing in new capital will continue until the marginal efficiency of capital aligns with the prevailing interest rate.

Keynes emphasizes that this marginal efficiency depends on expectations about future yields and potential changes in production costs. Factors like new technology or anticipated shifts in wage levels can shift the investment demand schedule by altering projected returns. Unlike a purely static idea of capital returns, the notion of marginal efficiency captures the forward-looking nature of investing. He also draws attention to borrower’s risk versus lender’s risk, explaining how uncertainty over whether returns will materialize can depress overall investment appetite. Finally, Keynes underlines the role of expectations, noting that investment hinges more on forecasts of future profitability than on present yields alone. This dynamic view of how capital decisions link today’s economy with tomorrow’s conditions is core to his broader argument.