Shackle’s journal article develops a public guarantee scheme intended to stimulate private investment by limiting the entrepreneur’s exposure to ruin. Its two sections connect a theory of decision under uncertainty with an institutional proposal: the first explains why imagined success may fail to overcome fear of catastrophic loss; the second asks how a public Board could change that balance without extinguishing private initiative. Against the background of wartime economic direction and Keynes’s proposal for governmental control over aggregate investment, Shackle presents a deliberately limited intervention. It is not offered as an adequate substitute for stronger measures affecting consumption or investment, but as a possible contribution to employment compatible with substantial economic liberty.
The theoretical argument begins with the choice between preserving cash and committing it to equipment. Temporarily excluding lending at fixed interest, Shackle treats investment as an exchange of security for an uncertain future, experienced immediately through anticipation. Holding cash protects the entrepreneur against loss, but also closes off the prospect of exceptional success. Investment releases both hope and apprehension. The decision therefore concerns more than a comparison of calculable monetary returns: it concerns whether the imagined gain compensates for contemplating a loss that might destroy the capacity to undertake further ventures.
Shackle first considers an investment with two possible outcomes, then extends the argument to a continuous range. Outcomes differ both in desirability and in the “potential surprise” attached to their occurrence. Some seem impossible and receive no attention; others could occur without surprise. Within this latter range, he proposes a selective concentration:
I suggest, therefore, that when he contemplates this inner range of outcomes each of which carries no potential surprise, the entrepreneur does in fact concentrate his attention exclusively on the best and the worst hypotheses in this range.
These extremes are not rigidly confined to outcomes carrying no surprise. An especially attractive gain, or alarming loss, may command attention despite some potential surprise, until its increasing implausibility weakens its psychological force. The conceptual move is to explain investment through competing focal possibilities rather than an average of all possible returns. Shackle then translates those possibilities into valuations of equipment: discounted future net earnings under favourable and unfavourable assumptions, compared with construction cost. His policy addresses the discouraging extreme by putting a floor beneath the entrepreneur’s possible recovery.
Section II specifies the machinery. An entrepreneur would submit certified construction costs, while independent experts estimated the equipment’s maximum reasonable useful life. Both initial cost and annual net earnings would be accumulated at compound interest using the current yield on consols. At any point during that estimated life, the entrepreneur could surrender the plant to the Board and receive a payment bringing cumulative earnings up to a guaranteed percentage of accumulated cost. The guarantee would remain below full reimbursement. In return, successful participants would surrender a fixed percentage of their eventual surplus over accumulated cost.
The object is not to eliminate loss, but to make its outer limit tolerable while preserving enough prospective gain to encourage action. Higher protection could activate more projects, yet the corresponding levy on success might discourage others. The most effective combination would have to be discovered experimentally, and changing economic conditions would prevent any permanent calibration:
Thus the best that we can hope to do is to pursue indefinitely the elusive "ideal" values of X and Y, sometimes making errors on one side and sometimes on the other.
Here X denotes the guaranteed percentage and Y the percentage taken from gains. Shackle also recognises that protection changes the ventures undertaken, making past profitability an insufficient guide to the scheme’s finances. Conversely, additional investment could increase aggregate sales through the multiplier and improve the profitability of equipment already operating. Financial viability thus depends partly on the scheme’s own effects.
The guarantee would rise with the frequency of recent surrenders, within previously announced bounds. This rule serves both selection and stabilisation. When failures are isolated, they are more likely to reflect poor entrepreneurial judgment; when widespread, cyclical misfortune may be destroying the capital of capable entrepreneurs. Greater protection during a slump would preserve their ability to invest without equally sheltering every individual mistake. High-guarantee payments would also carry an obligation to reinvest a proportion promptly. Shackle accordingly proposes balancing the Board’s budget over a trade cycle, allowing boom receipts to offset depression deficits. A further benefit would arise through credit: a guaranteed recovery value could support larger loans against a given amount of entrepreneurial capital.
The concluding qualifications expose real costs. Immediate surrender rights are essential to freeing entrepreneurs for fresh projects. Yet the Board would be legally barred from operating surrendered plants, which would be disposed of as scrap or piecemeal rather than as going concerns. Shackle accepts the possible destruction of still-useful equipment if it sufficiently opens investment outlets. He also insists that a self-supporting redistribution cannot directly increase entrepreneurs’ collective profitability; its promise lies in reducing disabling fear at a comparatively modest charge on gains.
Experiment alone can show whether the scheme would have any success in inducing extra investment.
That qualification governs the article’s final contrast with lower interest rates. For adventurous projects, Shackle argues, a marginal change in financing cost may matter less than whether failure means a survivable setback or permanent exclusion from enterprise.
But if we can give him a guarantee against absolute disaster, we may enormously embolden him in the view he takes of specific investment-opportunities.
The article’s significance lies in this connection between subjective uncertainty and institutional design: investment policy can work by changing the consequences of failure, not merely by raising expected returns.
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