ABSTRACT
John Maynard Keynes argued that, in the interwar era, the site of decision-making about capital investment in effect shifted from the investing corporation itself to the stock market. He said that the stock market had become an “insane” “gambling casino” in the post-war period dominated by short-term speculators. In order to achieve his objectives, Keynes had to create a theory of the dynamics of the era’s casino stock markets. Keynes’s assumption that managers are forced or induced to obey stock market signals when making capital investment decisions was not consistent with the facts in the era of the “managerial firm,” while it was broadly consistent with manager–shareholder relations after the 1970s. Capital investment depends on the marginal efficiency of capital, which depends on the stock market and on the long-term interest rate. Stock prices depend in part on short-term interest rates on margin borrowing by speculators.
