Capitalist Finance and the Pricing of Capital Assets

Abstract

Uncertainty most directly affects the performance of a capitalist economy by affecting the financial structure, as exemplified by the interrelated portfolios of the various units. By its very nature, a portfolio, which consists of assets owned or controlled and liabilities put out to achieve this ownership and control, involves the existence of decision units in a present position which reflects current and past views about the prospects of particular units, as well as of the economy. Keynes discusses how financial relations affect demand in Book Four of The General Theory, “The Inducement to Invest.” Unfortunately, his discussion of finance and portfolios, and how they relate to the pricing of capital assets and the pace of investment, is muddled. This is so partly because he chose to suppress the price of capital assets in his statement of his liquidity-preference function. Instead of explicitly introducing both the price of capital assets and the terms on money loans in his discussion of portfolios, he phrased his argument in terms of interest rates. Furthermore, in a key discussion of the determination of the relative price of different capital and financial assets, Keynes retrogressed from the cyclical perspective dominant in the rest of the book to an equilibrium-growth perspective. As a result of these flaws, the full power of his reasoning was obscured and lost to the interpretive work that followed.