Reinvestment and the rate of interest

The classical theory of investment, as exemplified in the work of Keynes, considers that, ceteris paribus, a fall in the rate of interest brings about an increase in total investment. This may be true for net investment but it is not obvious for reinvestment. Unless it is true for both net investment and reinvestment, there does not exist an unequivocal guide for policy. A change in the rate of interest operates on reinvestment by bringing nearer or postponing the abandonment and premature abandonment of existing capital. An increase in the interest rate tends to increase in general the abandonment of existing capital and also the premature abandonment of those capital goods which are to be replaced by goods of intermediate durability. But though the decision to abandon is hastened by the increase in the interest rate, this does not automatically swell the flow of reinvestment. It may or may not. This, however, introduces a range of indeterminacy in the effect of a change in the interest rate on the flow of total investment which calls for further study.