The Money Capital Constraint and Decisions in the Firm

  • Douglas Vickers


It is a significant distinguishing feature of the revolution in economic thought that Keynes accomplished — though it has not been maintained in clear perspective in the context of the neo-classical counterrevolution – that economic decisions and performances are generally constrained by the availability of money and its flow through the economy. Against the ’real’ economics of the classical system and its assumedly effective analytical dichotomisation, and against the recrudescence of the primacy of the ’real’ in the neo-classical-monetarist-supply side revival, Keynes reminds us that in a sagging economy


Factor Capacity Equity Capital Debt Financing Financial Leverage Business Risk 
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  1. 1.
    J. M. Keynes, ’The Ex-Ante Theory of the Rate of Interest’, Econo-rnic Journal, December 1937. See also the insightful arguments in Paul Davidson, Money and the Real World (New York: Wiley, 2nd ed., 1978), Ch. 16, and J. A. Kregel, ’Constraints on the Expansion of Output and Employment: Real or Monetary?’, Journal of Post Keynesian Economics, Winter, 1984–85.Google Scholar
  2. 2.
    See Kenneth E. Boulding, A Reconstruction of Economics (New York: Wiley, 1950).Google Scholar
  3. 3.
    op. cit., p. 34. See also Boulding’s Economic Analysis (New York: Harper & Row, 4th ed., [1st ed., 1941]), Vol. 1, p. 305).Google Scholar
  4. 4.
    See Douglas Vickers, Financial Markets in the Capitalist Process (Philadelphia: University of Pennsylvania Press, 1978) and the sante author’s Money Capital in the Theory of the Firm, 1986. See also the exchange of comments in Douglas Vickers. ’The Uncertainty about Uncertainty’ and N. Weiss, `Capital Markets, Output, and the De-mand for Inputs under Uncertainty’, in Eastern Economic Journal, January-March, 1984.Google Scholar
  5. 5.
    L. M. Lachmann, Capital and Its Structure (London: G. Bell, London School of Economics Reprint, 1956), p. 36).Google Scholar
  6. 6.
    On the question of the money capital availability constraint, see the early but neglected paper by Oskar Lange, ’The Place of Interest in the Theory of Production’, Review of Economic Studies, June, 1936. See also A. Gabor and I. F. Pearce, ’A New Approach to the Theory of the Firm’, Oxford Economic Papers, October, 1952, and ’The Place of Money Capital in the Theory of Production’, Quarterly Journal of Economics, November, 1958, and Douglas Vickers, The Theory of the Firm: Production, Capital, and Finance (New York: McGraw-Hill, 1968), and ’The Cost of Capital and the Structure of the Firm’, Journal of Finance, March, 1970.Google Scholar
  7. 7.
    The model in this chapter is derived from that first introduced in Douglas Vickers, The Theory of tiie Firm: Production, Capital, and Finance and expanded in `The Cost of Capital and the Structure of the Firm’. The argument has been reproduced in Stephen J. Turnovsky, ’Financial Structure and the Theory of Production’, Journal of Finance, December, 1970, and has been discussed extensively in James B. Herendeen, The Economics of the Corporate Economy (New York: Dunellen, 1975), p. 97f. Sidney Weintraub observed that the direction or argument we are now employing ’detect(ed) a soft spot in the conventional theory of the firm ...(and) ... developed ideas which constitute an indispensable niicrofoundation consistent with the post-Keynesian theory of money’. See Sidney Weintraub, Modern Econo-mic Thought (Philadelphia: University of Pennsylvania Press, 1977), p. 182).Google Scholar
  8. 8.
    In setting aside initially the question of uncertainty we are by-passing the problem of the prospective instability of the functional relations we have in view. The question of stability, of course, is as pressing in economic analysis as the perception of the general nature of the relations themselves. Keynes’s work on the macroeconomic scheme of things, for example, has frequently been misunderstood because of a failure to perceive that he was interested essentially in the instability of his functional relations, in what Shackle called, for example, their kaleidic change and not simply in their posited form. Our present method of procedure and analysis is Keynesian in that sense. See G. L. S. Shackle, Keynesian Kaleidics (Edinburgh: Edinburgh Uni-versity Press, 1974), J. A. Kregel, ’Economic Methodology in the Face of Uncertainty: The Modelling Methods of Keynes and Post-Keynesians’, Economic Journal, 1976, and Paul Davidson and J. A. Kregel, ’Keynes’s Paradigm: A Theoretical Framework for Monetary Analysis’, in E. J. Nell, ed., Growth, Profits and Property (Cambridge: Cambridge University Press, 1980).Google Scholar
  9. 9.
    A substantial literature exists on the money capital market conditions that determine the equilibrium prices and yields of financial assets, and thereby the effective costs of money capital to firms on the demand side of the financial market. Much of the discussion in this literature surrounds the specification and explanatory competence of the Sharpe-Lintner-Mossin capital asset pricing model. See the extensive exposition and critique in Richard Brealey and Stewart Myers, Prin-ciples of Corporate Finance (New York: McGraw-Hill, 2nd ed., 1984) and Douglas Vickers, Financial Markets in the Capitalist Process. Google Scholar
  10. 10.
    These problems, which cannot be discussed fully in this paper, are examined in Douglas Vickers, The Theory of the Firm: Production, Capital, and Finance. Google Scholar
  11. 11.
    See the fuller discussion in ibid. Google Scholar
  12. 12.
    lbid., and Douglas Vickers, ’Realism and Relevance in the Cost of Money Capital’, Oxford Economic Papers, June, 1978.Google Scholar
  13. 13.
    These suggested functional forms are employed in Stephen Turnovsky, op. cit. Google Scholar
  14. 14.
    See ibid. Google Scholar
  15. 15.
    For fuller comments see the extensive work of G. L. S. Shackle, notably his Decision, Order, and Time in Human Affairs (Cambridge: Cambridge University Press, 2nd ed., 1969) and Epistemics & Econo-mics (Cambridge University Press, 1972), and Douglas Vickers, ’Real Time and the Choice-Decision Point’, Journal of Post-Keynesian Economics, Summer, 1981, ’The Uncertainty about Uncertainty’, Eastern Economic Journal, January-March, 1984, and ’On Relational Structures and Non-Equilibrium in Economic Theory’, Eastern Econo-tnic Journal, Summer, 1985.Google Scholar
  16. 16.
    See G. L. S. Shackle, op. cit. Google Scholar
  17. 17.
    Sidney Weintraub, Modern Economic Thought (Philadelphia: Uni-versity of Pennsylvania Press, 1977), p. 4. See also John Hicks, Causality of Economics (New York: Basic Books, 1979).Google Scholar

Copyright information

© J. A. Kregel 1989

Authors and Affiliations

  • Douglas Vickers

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