Advertisement

The Inevitable Dependence of Investment on Expected Demand: Implications for Neoclassical Macroeconomics

  • Fabio Petri
Chapter

Abstract

The purpose of this chapter is to draw attention to a weakness, so far unnoticed, of the neoclassical argument in support of Say’s Law—that is, of the thesis that investment is determined by savings,1 and that therefore aggregate demand poses no obstacle to selling at cost- covering prices the aggregate supply of goods whatever the forces determining the latter. The neoclassical argument, relying upon an assumed negative interest elasticity of investment derived from the demand-for-capital function, neglects the problems with the marginalist or neoclassical conception of capital: as pointed out by the late Pierangelo Garegnani (1983, 1990), the discovery of reverse capital deepening undermines the foundations of Say’s Law, because it undermines the belief in a negative interest elasticity of the demand for (value) capital, but then also the belief in a negative interest elasticity of aggregate investment; Garegnani concluded that the ‘neoclassical synthesis’ criticism of Keynes could not be accepted, and that aggregate demand had to be considered the determinant of employment and growth not only in the short period but also in the long run. In Petri (2004, ch. 7) I reinforced Garegnani’s contention by showing that the attempts, after Keynes, to derive a negative interest elasticity of investment without relying on the traditional neoclassical conception of capital are all indefensible.2

Keywords

Real Wage Capital Good Aggregate Demand Full Employment Dynamic Stochastic General Equilibrium 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.

Preview

Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.

References

  1. Alchian, A. A. (1955) ‘The Rate of Interest, Fisher’s Rate of Return over Costs and Keynes’s Internal Rate of Return’, American Economic Review, 45 (December): 938–43.Google Scholar
  2. Dornbusch, R. and Fischer, S. (1984) Macroeconomics, 3rd edn (New York: McGraw-Hill).Google Scholar
  3. Garegnani, P. (1983) ‘Notes on Consumption, Investment and Effective Demand’, in J. Eatwell and M. Milgate (eds), Keynes’s Economics and the Theory of Value and Distribution (New York: Oxford University Press)Google Scholar
  4. Garegnani, P. (1990) ‘Quantity of Capital’, in J. Eatwell, M. Milgate and P. Newman (eds), The New Palgrave: Capital Theory (London: Macmillan).Google Scholar
  5. Hahn, F. H. (1981) ‘Review of M. Beenstock “A neoclassical analysis of macroeconomic policy” (Cambridge University Press, 1980)’, Economic Journal, (December): 1036–9.Google Scholar
  6. Hayek, F. A. (1932) ‘Money and capital: a reply’, Economic Journal, 42: 237–49.CrossRefGoogle Scholar
  7. Hicks, J. R. (1932) The Theory of Wages (London: Macmillan).Google Scholar
  8. Jorgenson, D. V. (1963), ‘Capital theory and investment behavior’, American Economic Review, 53(2), (May): 247–59.Google Scholar
  9. Katzner, D. W. (2006) An Introduction to the Economic Theory of Market Behavior. Microeconomics from a Walrasian Perspective (Cheltenham, UK: Edward Elgar).Google Scholar
  10. Petri, E (1991) ‘Hicks’s recantation of the temporary equilibrium method’, Review of Political Economy, 3(3): 268–88.CrossRefGoogle Scholar
  11. Petri, F. (1999) ‘Professor Hahn on the neo-Ricardian criticism of neoclassical economics’, in G. Mongiovi and F. Petri (eds), Value, Distribution and Capital: Essays in Honour of Pierangelo Garegnani (London: Routledge): pp. 19–68.Google Scholar
  12. Petri, F. (2003) ‘Should the Theory of Endogenous Growth be based on Say’s Law and the Full Employment of Resources?’, in N. Salvadori (ed.), The Theory of Economic Growth: A ‘Classical’ Perspective (Cheltenham, UK and Northampton, MA, USA: Edward Elgar): pp. 139–60.Google Scholar
  13. Petri, F. (2004) General Equilibrium, Capital and Macroeconomics (Cheltenham: Edward Elgar).Google Scholar
  14. Petri, F. (2011a) ‘On the Likelihood and Relevance of Reswitching and Reverse Capital Deepening’, in N. Salvadori and C. Gehrke (eds), Keynes, Sraffa and the Criticism of Neoclassical Theory. Essays in Honour of Heinz Kurz (Abingdon and New York: Routledge): pp. 380–418.Google Scholar
  15. Petri, F. (2011b) ‘On the Recent Debate on Capital Theory and General Equilibrium’, in V. Caspari (ed.), The Evolution of Economic Theory. Essays in Honour of Bertram Schefold (Abingdon and New York: Routledge), ch. 4: pp. 55–99.Google Scholar

Copyright information

© contributors 2013

Authors and Affiliations

  • Fabio Petri

There are no affiliations available

Personalised recommendations