Table Of ContentEditors' Preface to Macmillan Studies in Economics
The rapid growth of academic literature in the field of econom
ics has posed serious problems for both students and teachers
of the subject. The latter find it difficult to keep pace with
more than a few areas of their subject, so that an inevitable
trend towards specialism emerges. The student quickly loses
perspective as the maze of theories and models grows and the
discipline accommodates an increasing amount of quantitative
techniques.
'Macmillan Studies in Economics' is a new series which
sets out to provide the student with short, reasonably critical
surveys of the developments within the various specialist
areas of theoretical and applied economics. At the same time,
the studies aim to form an integrated series so that, seen as a
whole, they supply a balanced overview of the subject of
economics. The emphasis in each study is upon recent work,
but each topic will generally be placed in a historical context
so that the reader may see the logical development of thought
through time. Selected bibliographies are provided to guide
readers to more extensive works. Each study aims at a brief
treatment of the salient problems in order to avoid clouding
the issues in detailed argument. Nonetheless, the texts are
largely self-contained, and presume only that the student
has some knowledge of elementary micro-economics and macro
economics.
Mathematical exposition has been adopted only where
necessary. Some recent developments in economics are not
readily comprehensible without some mathematics and statis
tics, and quantitative approaches also serve to shorten what
would otherwise be lengthy and involved arguments. Where
authors have found it necessary to introduce mathematical
techniques, these techniques have been kept to a minimum.
The emphasis is upon the economics, and not upon the quan
titative methods. Later studies in the series will provide
analyses of the links between quantitative methods, in particu
lar econometrics, and economic analysis.
MACMILLAN STUDIES IN ECONOMICS
General Editors: D. c. ROWAN and G. R. FISHER
Executive Editor: D. W. PEARCE
Published
John Burton: WAGE INFLATION
Miles Fleming: MONETARY THEORY
C. J. Hawkins and D. W. Pearce: CAPITAL INVESTMENT APPRAISAL
David F. Heathfield: PRODUCTION FUNCTIONS
Dudley Jackson: POVERTY
P. N. Junankar: INVESTMENT: THEORIES AND EVIDENCE
J. E. King: LABOUR ECONOMICS
J. A. Kregel: THE THEORY OF ECONOMIC GROWTH
D. W. Pearce: COST-BENEFIT ANALYSIS
Maurice Peston: PUBLIC GOODS AND THE PUBLIC SECTOR
David Robertson: INTERNATIONAL TRADE POLICY
G. K. Shaw: FISCAL POLICY
R. Shone: THE PURE THEORY OF INTERNATIONAL TRADE
FrankJ. B. Stilwell: REGIONAL ECONOMIC POLICY
Peter A. Victor: ECONOMICS OF POLLUTION
Grahame WaIshe: INTERNATIONAL MONETARY REFORM
Forthcoming
E. R. Chang: PRINCIPLES OF ECONOMIC ACCOUNTING
G. Denton: ECONOMICS OF INDICATIVE PLANNING
N. Gibson: MONETARY POLICY
C.J. Hawkins: THEORY OF THE FIRM
G. McKenzie: MONETARY THEORY OF INTERNATIONAL TRADE
D. Mayston: THE POSSmILITY OF SOCIAL CHOICE
B. Morgan: MONETARISM VERSUS KEYNESIANISM
S. K. Nath: WELFARE ECONOMICS
A. Peaker: BRITISH ECONOMIC GROWTH SINCE 1945
F. Pennance: HOUSING ECONOMICS
Charles K. Rowley: ANTI-TRUST AND ECONOMIC EFFICIENCY
C. Sharp: TRANSPORT ECONOMICS
P. Simmons: DEMAND THEORY
M. Stabler: AGRICULTURAL ECONOMICS
John Vaizey: THE ECONOMICS OF EDUCATION
R. E. Weintraub: GENERAL EQ.UILmRIUM THEORY
J. Wiseman: PRICING PROBLEMS OF THE NATIONALISED INDUSTRIES
Investment:
Theories and Evidence
P. N.JUNANKAR
Lecturer in Economics, University ojE ssex
Macmillan Education
ISBN 978-0-333-12702-5 ISBN 978-1-349-01238-1 (eBook)
DOI 10.1007/978-1-349-01238-1
@ P. N. Junankar 1972
All rights reserved. No part of this publication may be reproduced or
transmitted, in any form or by any means, without permission.
First published 1972 by
THE MACMILLAN PRESS LTD
London and Basingstoke
Associated companies in New Tork Toronto
Dublin Melbourne Johannesburg and Madras
SBN 333 12702 1
The paperback edition of this book is sold subject to the condition that it shall
not, by way of trade or otherwise, be lent, re-sold, hired out, or otherwise
circulated without the publisher's prior consent in any form of binding or
cover other than that in which it is published and without a similar condi
tion including this condition being imposed on the subsequent purchaser.
Contents
Preface and Acknowledgements 9
1 Introduction 11
Concepts 11
Preview 15
Format for analysis 19
2 The Keynesian Approach 20
The demand for capital 20
From capital to investment 23
3 The Post-Keynesian Approach 28
The naive accelerator 28
The flexible accelerator 32
Profit/liquidity theories 36
4 The Neo-Keynesian Approach 38
Adjustment costs 39
A simple model 39
Some caveats and some extensions 43
Appendix to Chapter 4 47
5 The Neoclassical Approach 52
Assumptions 52
The model: version I 53
The model: version 2 59
An appraisal 61
6 The Real World (Estimated Investment
Functions) 62
Distributed lags 62
Empirical results 65
7 Conclusions 71
Notation 73
Bibliography 75
Preface and Acknowledgements
The theory of investment behaviour is still in a state of flux.
On the one hand it is dependent on the theory of capitall
(which is a controversial field which I shall try to avoid) and
on the other hand it is related to the theory of growth and
technical change. Recent work on investment has led to some
exciting developments in the dynamic aspects of microecono
mic theory as well as in the theory and estimation of distributed
lags.
I shall, in this short survey, look at the theories which have
been put forward to explain private investment in a capitalist
economy. I shall also limit the survey by ignoring investment
in inventories and in housing. The emphasis will lie on the
more recent theoretical work, since much of the empirical
literature is made rapidly obsolescent by new developments. I
shall assume that students are familar with the chapters on
investment in the usual undergraduate textbooks.
I should like to thank Professors A. B. Atkinson, C. J. Bliss,
F. P. R. Brechling, D. Hamermesh, and Messrs J. Cameron
and T. Russell for helpful comments. I am alone responsible
for sins of omission and commission. I would also like to thank
Miss Jill Adlington for doing an excellent job in typing the
manuscript.
Interested students should look at Capital and Growth, edited
1
by Harcourt and Laing [27].
Introduction
I
In this introduction we shall discuss some of the crucial
concepts involved in analysing macro investment functions.
We will suggest some critical distinctions which must be kept
in mind while reading this survey. We will then give a brief
preview of the subject as it now stands, and finally suggest a
convenient framework to study the various theories of invest·
ment.
CONCEPTS
A distinction we will continually stress in this survey is the one
between stocks and flows. Economic variables usually have a
'dimension' attached to them; for example Mr X has on the
first of the month a bank balance of£ 100 or Mr Y has an income
of £5000 per year. In the first case the variable money holding
has the dimension (units) 'pounds sterling', while in the second
case the variable income has the dimension 'pounds sterling per
year'. There are some examples of 'pure numbers' (i.e. dimen·
sionless variables or parameters); for example a price elasticity
of 1·5 is independent of the units in which the demand function
was expressed.
Stocks are measured at a point in time, as in 'firm A had five
cars worth £5000 on 1 January 1971'. Stocks have the dimen·
sion 'pounds sterling' and there is no time dimension. On the
other hand flows have a time dimension, as in 'an income of
£5000 per year'. Examples of stocks are capital stock, bank
balances and gold and dollar reserves held by the Bank of
England. Examples of flows are income, consumption and
investment. It is important to remember that ratios of stocks to
11
flows also have a time dimension, for example capital-output
ratios and the velocity of circulation of money depend on the
time unit chosen for the flows.
When we refer to capital stock we mean real durable
producer goods held by the firms, we do not mean financial
capital like bonds or equities. Investment is addition, over some
time period, to the real capital stock. In other words capital
is a stock and investment is a flow. An analogy may be of use.
Picture a tank of water which contains say 100 gallons of
water in it. Assume that a pipe leading into it adds 10 gallons
an hour and that, because of evaporation, the tank loses 5
gallons an hour. At the end of one hour the tank now has 105
gallons. We can call 100 gallons the 'initial capital stock',
105 gallons the 'terminal capital stock', 10 gallons per hour
is the 'gross investment' and 5 gallons per hour is the loss
through 'depreciation'. Net investment is the increase in capital
stock over the relevant time period, in this case it is (105 -100)
gallons per hour.! Note that in this example we have defined
net investment to be the difference between gross investment and
depreciation.
There are several problems involved in measuring aggregate
capital stock: do we measure it in value terms or physical
terms? If we measure it in physical terms we cannot add a
lathe and a tractor so we could either simply make out a list
(an inventory) of all the durable producer goods and treat
capital as a vector (tractors, lathes, furnaces, ...) , or use the
amount of labour embodied in the capital goods and say
capital stock is equivalent to 100 man-days of labour. To
measure capital in value terms we need to find some index
which is independent of relative prices and distribution.
Cambridge economists have argued very strongly that it
is impossible to measure capital in value terms in a way that is
independent of the rate of interest and wages.2 For the pur-
l If K, and ](,-1 are the capital stocks at the ends of periods t
and t-l then net investment 1,= /::.Ktf t:,.t=K,-K'_l. In contin
uous time as /::.1-+0, I=dKfdt.
This is a very controversial field. To get a taste of the controversy
2
read the two introductory essays in Harcourt and Laing [27].
12
poses of this survey I shall sidestep this controversy and assume
that we can measure capital in value terms.
Anotherimportant distinction to be drawn is between planned
(or desired, or ex ante) magnitudes and realised (or ex post)
magnitudes. Demand curves show us the planned amounts
people want to buy at various prices. The amount which is
actually bought and sold (realised demand) depends on the
supply curve or the amount offered for sale by a seller. In
Fig. 1 we illustrate a perfectly competitive industry (say,
Price 5
per unit
Pl----!------'')(.
o
Peanuts per
unit time
(flow)
FIG. I
peanuts). The equilibrium price is P and at that price planned
and realised demand are equal to each other and to planned
and realised supply. At prices above P, planned and realised
demand are equal to one another but not equal to planned
supply, e.g. at PI demand plans are realised but supply plans
Q.2 are greater than realised sales Q.l'
Another distinction to be drawn is between expected and
actual variables. 1 Firms usually plan on the basis of their ex·
pectations about what prices will be in the future or what they
This is similar to the distinction between planned and realised
1
but differs because we have (some) control over planned variables
but no control over expected variables.
13
