Keynes’ Theory of Investment: The Separation of Management and Ownership and the Instability of Finance
Introduction
It is often stated that, in fact, Keynes’ General Theory does not have a theory of investment, or that (at least) there is no explicit investment function in the book. The latter statement is certainly true, but it is hard to agree with the former, particularly when Keynes devotes a whole book in the General Theory to the inducement to invest.
Prof. Patinkin has drawn attention to the peculiarity that Keynes did indeed include an explicit investment function of the form I = f ( r, E) ( where E expresses the “state of long term expectations”) in an earlier draft of the General Theory, but then omitted this from the final version af the book (Patinkin, 1976, JMK, XIII, pp. 440–42).
Another oddity in Keynes’ treatment of investment in the General Theory is that Chapter 12, concerning the state of long term expectations, is presented “on a different level of abstraction from most of the book” (General Theory, p. 149). There is no doubt, however, that the state of long term expectations plays a major role in affecting “the marginal efficiency of capital”, which is the key concept of investment in Keynes’ analysis.
In our interpretation of Keynes theory of investment, we shall give special emphasis to the influence of modern financial markets on investment activity. The development of organized markets for debts and equities was an outcome of the separation af management and ownership in capitalist firms which took place in most industrial economies in the nineteenth century; this also led to the separation of the investment decision into two parts: the decision to acquire physical capital goods, which is taken by the manager of the firm, and the decision to finance investment. Especially, we argue that Keynes considered wealth owners’ speculative behaviour in financial markets to have a significant disequilibriating effect upon investment and output.
Our intention here is to show that it is through it’s influence on the state of long term expectations that wealth owners’ speculative activity exercises it’s effect on investment in the formal analysis of the General Theory. To do this, we shall utilize Keynes’ investment function from the 1934 draft to overcome the difficulties mentioned in the beginning.
- ISSN: 0357-9603
- ISBN: 951-9281-62-2
