ABSTRACT

Keynes believed that, unlike consumption expenditure, investment spending was not a function of current disposable income. Investment is forward-looking, and concerns the prospective yield relative to the current supply price. Since the future is unknowable, changes in investment spending are determined by changes in investor expectations about prospective yields. This in turn depends on expected future receipts and the present and future cost of finance. In order to emphasize the evanescent, unquantifiable and unknowable nature of investor long-term expectations, Keynes in a felicitous phrase termed them ‘animal spirits.’ In his vision changes in ‘animal spirits’ behind investment spending were the driver of cyclical changes in AD and AS (see Keynes, 1936, chapters 11 and 12).