A Comment on Mr. Kalecki's `Principle of Increasing Risk

IN the November, 1937, issue of this Journal, Mr. Kalecki endeavours to explain the r6le of increasing risk as a determinant of the size of the single entrepreneur's investment. He argues that the principle of increasing risk is alone sufficient to define the size of the enterprise, and that the two more commonly cited limiting factors-increasing dis-economies of scale and imperfect competition-are either unnecessary for the purpose or of negligible importance. The principle, as formulated, is simply that the marginal risk to the entrepreneur rises as the size of his investment increases. Thus, even though the marginal efficiency of capital and the rate of interest on capital be assumed constant over an indefinite range, the rising risk curve will limit the size of investment. Two reasons are given for this behaviour of risk: (a) the larger the investment the more the wealth position of the entrepreneur is endangered in the event the business is unsuccessful; and (b) the danger and costs of illiquidity: since specific capital goods are illiquid on short notice, a sudden need for liquid capital can be satisfied only by selling the assets at a loss, or borrowing at higher than market rates. Our purpose is to comment briefly on the validity and significance of the principle. i. Let us first examine the stated reasons why the marginal return for risk should increase with the size of the investment. For the entrepreneur the risk is in part determined by the legal form of the enterprise. Mr. Kalecki restricts his analysis to the case of the single entrepreneur who presumably operates as a single proprietor with unlimited liability. The entrepreneur may apply varying proportions of his total wealth within the business. The remainder, we assume, is held in cash or other investments. The whole of his wealth, however, may be commanded for

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