ABSTRACT
Introduction The theory of investment lies at the center of an integrated heterodox macro model.1 Yet, heterodox theories of investment have not advanced beyond sim plistic expressions of the investment function. In particular, Keynesian invest ment functions have focused on capacity utilization as the primary determinant of investment, while Marxian approaches have concentrated on the profit rate. These simplistic theories are inadequate for understanding the complex macro economic dynamics of the capitalist growth process in the era of the Neoliberal regime. Thus, the purpose of this chapter is to extend the basic theory of invest ment in order to better explain the macro dynamics of the global economy. Based on the work of Crotty (1993) and Crotty and Goldstein (1992a, 1992b, 1992c), I develop a microfoundation for the firm’s investment decision. This theory integrates both Keynesian and Marxian insights in order to produce a more flexible and realistic investment function. In particular, the theory further incorporates the external financing of investment based upon uncertain future profit flows, the irreversibility of investment, and the coercive role of competi tion on investment. The investment function is extended to depend on the profit rate, long-term and short-term heuristics for the firm’s financial robustness and the intensity of competition. The interaction of these factors fundamentally alters the nature of the investment function, particularly the typical role assigned to capacity utilization.2 This chapter is organized in the following manner. In the first section, I present an overview of the model. This is followed by sections on the details of the model, the optimal investment strategy, and a constrained version of the model that highlights the crucial Marxian competition effect. The final section elaborates how the theory is useful for understanding the macro dynamics of the Neoliberal regime.
