Post Keynesian analyses of investment

Abstract

The neo-classical and other orthodox theories of investment outlined so far are based upon the assumption that fixed investors are well-informed profit maximizers. Investors behave in mechanical ways and a number of assumptions are used to describe human behaviour: i.e. that people form rational expectations, that uncertainty is measurable and that macroeconomic relationships can be described by aggregating the microeconomic behaviour of firms and individuals. This aggregation process is based upon an assumption of ‘methodological individualism’: the assumption that the macroeconomy can be described atomistically by describing its constituent microeconomic parts. These simplifying assumptions allow the creation of a logically coherent theory that can be analyzed mathematically and is relatively easy to understand — being based essentially on the insight that people balance marginal benefits and marginal costs. However, orthodox theories are criticized by Post Keynesian theorists because they do not seem to fit well with observations of real-world investor behaviour. Post Keynesians argue that a completely different approach to investment theory is needed if investor behaviour is to be properly understood. In this chapter, some Post Keynesian theories of investment are outlined. Following Keynes, Post Keynesians incorporate quite different understandings of human behaviour because they do not believe that investors are rational profit maximizers. The influence of uncertainty is always central but, again, it is not treated in the same way as described in Chapter 9. Overall, Post Keynesians argue that uncertainty about the future is inherently unmeasurable and this means that psychological forces, for example, animal spirits and herd instincts, will have strong influences on investment activity.