|Investment Finance in Economic Development
Book by Routledge, 1995
Every work in social science, theoretical or empirical, begins with a pre-scientific view of the subject under analysis. In our case, this view has been greatly influenced by Keynes's famous metaphor about the relation between investment and finance:
The spectacle of modern investment markets has sometimes moved me towards the conclusion that to make the purchase of an investment permanent and indissoluble, like a marriage, except by reason of death or other grave cause, might be a useful remedy for our contemporary evils. For this would force the investor to direct his mind to the long-term prospects and to those only. But a little consideration of this expedient brings us up against a dilemma, and shows us how the liquidity of investment markets often facilitates, though it sometimes impedes, the course of new investment. For the fact that each individual investor flatters himself that his commitment is 'liquid' (though this cannot be true for all investors collectively) calms his nerves and makes him more willing to run a risk. If individual purchases of investments were rendered illiquid, this might seriously impede new investment, so long as alternative ways in which to hold his savings are available to the individual. This is the dilemma. So long as it is open to the individual to employ his wealth in hoarding or lending money, the alternative of purchasing actual capital assets cannot be rendered sufficiently attractive (especially to the man who does not manage the capital assets and knows very little about them), except by organising markets wherein these assets can be realised for money. (Keynes 1936:161)
In this conclusion, Keynes's metaphor can be used to explain the view that guided this thesis. As Keynes noted, in an early stage of capitalism ...
FINANCE AND ECONOMIC DEVELOPMENT
1 In Chick's (1983:190) words: "The ideological importance of this view of investment resulting from saving is clear enough: savers determined the rate of capital accumulation. The choices of households control the firms: consumer sovereignty determines current output and saving determines future output.'
2 For an analysis of the theory of saving and investment in economic history until Keynes, see Schumpeter (1954:322-54).
3 On this, see Cameron et al. (1967) and below.
4 Chick's hypothesis that the proposition that investment precedes saving depends on the stage of development reached by the banks was already raised in her Macroeconomics after Keynes (1983:190). This was certainly the main inspiration of her theory of the stages of the development of the banking system (Chick 1986). More on this theory in Chapter 3.
5 It is worth noting that although sharing the postulate of the long-term neutrality of money the theoretical agenda of the classical and neoclassical schools are different:
in classical political economy the laws of motion are all proposed as a result of the interaction between elements such as the surplus rate, the organic composition of capital, real wages and so on. The central proposition of neoclassical theory refers to the reconciliation between limited availability of resources and the consumers' preferences obtained by the system of relative (real) prices. Money cannot influence the basic choices to be made, except to the extent that it can obscure the informational content of market prices. In the long run, when all erratic influences are cancelled out and agents learn to separate information from noise (created by monetary disturbance), all that matters is real variables.
6 The neoclassical labour market can be described as follows. The labour supply schedule is upward sloping in the real-wage/employment space, so as to reflect the decline of marginal disutility of labour (as opposed to leisure) as work hours increase. The labour demand curve is derived from the production function: assuming that capital is fixed (the Marshallian short period) and diminishing returns, the marginal productivity of labour declines with employment. Equilibrium in the goods market is achieved at the point where the real wage equals the...