Notes on Finance, Risk and Investment Spending

Edward J. Nell

Chapter 2 in Money, Credit and Prices in Keynesian Perspective, 1989, pp 16-47 from Palgrave Macmillan

Abstract: Abstract Ordinary macroeconomics presents three essentially incompatible theories of investment spending, each corresponding to a separate branch of the subject. When dealing with short-run questions, investment is held to depend on the level of income and the rate of interest, in accordance with the marginal efficiency calculation. It is this function which enters into the construction of the celebrated IS curve. But when the matter of the cycle is broached, investment is suddenly seen to depend not on the level, but on the rate of change of income, appropriately lagged, while the influence of the interest rate quietly evaporates. The crucial parameters are the saving ratio, the capital— output ratio, and the time lags. However, the cycle cannot really be studied without consideration of the trend, which, of course, depends on investment. So to explain the trend we have a third theory of investment. The form of the function is the same, with the same parameters — the saving and capital-output ratios, and time lags — but now the parameters must assume different values. For one range of values will produce cycles, while another is required for exponential growth. So the textbook explanations of growth and the cycle are inconsistent with one another. They both draw on the accelerator mechanism, but they assume different ranges of values for the parameters.

Keywords: Interest Rate; Investment Decision; Capitalist Consumption; Investment Project; Share Price (search for similar items in EconPapers)
Date: 1989
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DOI: 10.1007/978-1-349-20117-4_2

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