The focus in this chapter is on the role of capital in production and the relationship between demand, short-run marginal cost, and investment. The point of departure is the simple truism, noted in Chapter 1, that current demand has to be served from current capacity, which is fixed. Current production decisions, accordingly, involve the choice of how much of current capacity is to be utilized. This depends upon expectations of current demands in relation to current short-run avoidable costs of production. Current investment decisions, in contrast, depend upon demands expected in the future in relation to the expected short-run avoidable costs of operating the capacity which is expected to be available for serving those demands.
KeywordsInvestment Decision Planning Horizon Current Period Natural Rate Capital Expenditure
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- 2.I am not aware that fluid capital has ever previously been viewed as a ‘factor’ in current production, but it is clearly an important element. Production requires the purchase (and therefore the finance) of material inputs and labor, payments of rent, etc. Some of the classical economists (Ricardo, in particular) viewed capital as providing advances on production, but it is not clear that the fund involved was seen as separate from the stock of produced means of production. In any event, it is clear that production can falter from a lack of `finance’ for goods-in-process. Indeed, one can imagine a circumstance in which so much of the pool of fluid capital goes into the construction of the capacity to produce that not enough remains to finance current production. Plants stand idle, because there’s no fluid capital to finance their operation. For an analysis of how taking into account the need to finance current production can cause the investment function to slope upward, see Appendix 2.Google Scholar
- 3.Davidson (1978) refers to this price as the forward flow-supply price.Google Scholar
- 4.Cf. Keynes (1936, p. 136, passim). Google Scholar
- 5.Cf., the loose relationship between investment and the rate of interest in the surveys of investment decisions in the U.K. undertaken in the late 1930s. See Hall and Hitch (1939).Google Scholar
- 6.Since we are dealing with an increase in demand, we can (at least for the moment) ignore (II.Google Scholar
- 7.The circumstances under which this contingency can arise are described in Appendix 2.Google Scholar
- 8.Cf. Keynes discussion of the `finance’ motive for holding money [Keynes (1937b)].Google Scholar
- 9.This case also illustrates how investment can occur in the absence of current saving.Google Scholar