ABSTRACT

A sloganeering way of looking at Keynesian theory is to assert that all units are like banks that are a bank has to stand ready to pay cash as deposits are withdrawn. The money and capital market determine on what terms such deficits are to be financed and such surpluses are to be utilized. Thus, at a deeper level the Keynesian theory of investment has to include a model of the behavior and evolution of money and capital markets. The non-Keynesian theory of asset valuation concentrates only on the first class of cash flows. Cash payment commitments include both the repayment of principal as well as the payment of interest. Stock market valuations do enter into various investment functions primarily as an element in the cost of capital, where cost of capital is defined as financing terms. The stock market valuation is the only way in which the equity investment in a firm can be measured.