The Inducement to Invest — A Theory of Investment

Abstract

This chapter considers the theory of aggregate fixed investment spending that Keynes incorporates into his General Theory model. Having rejected Say’s law Keynes begins by formulating an analysis of investment demand from the viewpoint of entrepreneurs. He introduces the marginal efficiency of capital schedule (or investment demand curve) that sets out the terms on which entrepreneurs demand funds in order to initiate investment projects. The marginal efficiency is largely dependent on the state of long-term expectation which is derived in ways outlined in the previous chapter. As durable capital equipment links the economic present to the future, the marginal efficiency capital schedule is the primary channel by which expectations of the future influence present day spending decisions in the General Theory model.