Abstract
In this chapter, the author tackles the problems of finance and the determination of investment. Mainstream theories and opinions on finance and investment are examined and shown to rely on a loanable funds model together with an ‘Efficient Markets Hypothesis’ vision of capital markets that engage in optimal resource allocation. The alternative ‘liquidity preference’ theory of financial markets and ‘animal spirits’ theory of investment are then explored in detail. Simple models are then constructed in order to explain finance and investment using these concepts. The question as to what determines interest rates is raised and answered, and the mainstream neoclassical conception of a ‘natural rate of interest’ discussed. Finally, the implications of the chapter for the famous ISLM macroeconomic model are examined.
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Pilkington, P. (2016). Finance and Investment. In: The Reformation in Economics. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-319-40757-9_9
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DOI: https://doi.org/10.1007/978-3-319-40757-9_9
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