Expectations and the Meaning of Institutions: Essays in Economics

By Don Lavoie; Ludwig Lachmann | Go to book overview

9

INVESTMENT REPERCUSSIONS [1948]

INTRODUCTION

The modern theory of investment, set forth by Lord Keynes in the 'General Theory', has had its many triumphs these last twelve years, but it still has a number of gaps. Conceiving of investment as simple growth of a stock of homogeneous capital, it is illequipped to cope with situations in which the immobility of heterogeneous capital resources imposes a strain on the economic system. In particular, it can tell us little about the 'inducement to invest' in a world where scarcity of some capital resources co-exists with abundance of others.

At closer inspection, the theory of investment contains a microeconomic element, the theory of the investment decision, and a macro-economic element, exemplified in the multiplier. The former, modelled on the theory of the firm and on the analogy of the making of output decisions, explains how the individual investor arrives at his investment decision. The latter studies interrelations between aggregate investment and other aggregate magnitudes, like consumption, incomes, and employment. The link between the two elements is provided by simple 'adding up'. The marginal efficiency schedule for the economic system as a whole is found as the sum of all the individual schedules in precisely the same way as the supply schedule of an industry is found as the sum of the supply schedules of individual firms. This, of course, is possible only where the individual schedules are determined independently of each other, that is to say under perfect competition; or, if under imperfect or monopolistic competition, then at least where individual schedules do not impinge upon each other. But under oligopoly such schedules can have no independent existence.

-131-

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