ABSTRACT
The stand ard ISLM macroeconomic model has as one of its build ing blocks a negat ively sloped rela tion between invest ment and the interest rate [13]. The valid ity of this invest ment func tion has been ques tioned by Haavelmo. Derivations have been sugges ted by Lerner, Clower, and Witte which recog nize that unsoph ist ic ated refer ences to the prop er ties of a wellbehaved produc tion func tion are not suffi cient grounds for deriv ing this stand ard invest ment func tion. Foley and Sidrauski have recently presen ted a soph isti c ated version of the ISLM appar atus which is less clearly depend ent upon an assump tion that such a negat ively sloped invest ment func tion exists. Jorgenson in his various writ ings derives invest ment as the result of a time consum ing process by which units go from an initial to a desired stock of capital; the desired stock is inversely related to the interest rate. These various formu la tions of invest ment theory are defi cient as repre
sent a tions or critiques of Keynesian ideas [17, 18]. They never come to grips with the Keynes’ view as to the essen tial finan cial and spec u lat ive char ac ter
of private asset holding and invest ment in a modern capit al ist economy. In this view assets are held because they are expec ted to gener ate cash flows. These cash flows can take either the form of annu it ies-dated receipts of cash-or of payment for title to the asset. The annu it ies for finan cial assets are stated in the contract, the annu it ies for real assets depend upon the results of the asset being used in produc tion. The stand ard productionfunctionrelated model of real assets and invest
ment only considers the cash that an asset or an invest ment will gener ate as it is used in produc tion. That such an asset might also be sold-or hypo thec ated-to gener ate cash is ignored. Whereas bankers may be concerned about the liquid ity of their assets, in stand ard theory an ordin ary busi ness firm invest ing in real capital presum ably is not. A slogan eer ing way of looking at Keynesian theory is to assert that all units are like banks, i.e. a bank has to stand ready to pay cash as depos its are with drawn; an ordin ary firm or house hold has to be prepared to pay cash due to its liab il it ies even though its avail able cash receipts vary due to demand and cost changes. This banker perspect ive of Keynesian theory means that it is relev ant only
to capit al ist econom ies and how relev ant it is depends upon the finan cial soph ist ic a tion and complex ity of the economy. It is unlike neoclassical econom ics which is the econom ics of an abstract economy. The char ac ter ist ics and evol u tion of insti tu tions are embod ied in Keynesian model build ing. Whereas the cash flow from oper a tions and the cash flow from contract
fulfill ment are repet it ive phenom ena so that ideas about frequency distri bu tions can be derived from obser va tions, for many assets-espe cially durable real capital-obtain ing cash flows by sale or hypo thec a tion is a “rare” and “unusual” phenomenon which usually occurs in special circum stances. Because of this, ideas about the relev ant prob ab il it ies are vague and impre cise and subject to sharp changes. The spec u lat ive demand for money-the spec u lat ive impact upon the pricing of real assets-is related to the use of assets for acquir ing cash by sale. When one devel ops a new theory, as Keynes did, one has some things in
mind that are not explained in a satis fact ory manner by the exist ing or stand ard theory. These poorly explained obser va tions are an anomaly from the perspect ive of the stand ard theory, they are what is expec ted from the alter nat ive theory. The anomaly of the nine teen thirties for stand ard economic theory was the great depres sion and its quite obvious finan cial attrib utes (Fisher). Keynes construc ted an invest ment theory of the busi ness cycle and a finan cial theory of invest ment. The stand ard present a tions of Keynes, follow ing
the lead of Hicks, atten u ated the finan cial and the cyclical traits of Keynesian theory (Ackley), although when Hicks turned to busi ness cycle theory he found it neces sary to rein tro duce, albeit in an arti fi cial manner, finan cial char ac ter ist ics [14]. Duesenberry, Turvey, Leijonhufvud and BrainardTobin all reflect attempts to resur rect the finan cial aspects of Keynesian theory. It is import ant to note that on the whole the econo met ric fore cast ing
models abstract from finan cial consid er a tions. Even in the most “monet ary” of the econo met ric models-the F.R.B.M.I.T. model-the liab il ity struc ture and the vari able value placed upon liquid ity do not appear. One purpose of the research of which this expos i tion is a part is to develop an enriched macroeconomic model which does a better job of integ rat ing the finan cial and the real aspects of American Capitalism.1
