GOING BACK TO KEYNES—THE IMPORTANCE OF INVESTMENT.

GOING BACK TO KEYNES—THE IMPORTANCE OF INVESTMENT. Professor Glaeser observed that “For decades, the economics profession had been moving away from Keynes….” One indication that economists have moved away from Keynes is that while the name of Keynes has been often invoked during the past two years, much of the discussion has reduced Keynes’s thinking to the simplified issue of whether larger government deficits can stimulate the economy and by how much. The effect of government policy on the amount of private investment has rarely mentioned in the last two years, and, despite the great importance of aggregate private investment for Keynes, private investment is almost never mentioned in discussions of Keynesian thinking. Keynes wrote a great book, THE GENERAL THEORY OF EMPLOYMENT, INTEREST AND MONEY, which can be found (in its entirety!) here. Note that “Book IV” (one of six “Books”) is entitled “The Inducement to Invest.” In his discussion of the determinants of investment, Keynes stresses the importance of expectations of investors. Keynes says in Chapter 11 of his discussion of “The Inducement to Invest” that “Two types of risk affect the volume of investment….The first is the entrepreneur’s or borrower’s risk and arises out of doubts in his own mind as to the probability of his actually earning the prospective yield for which he hopes.” Another chapter in Keynes’s discussion of the “Inducement to Invest” (Chapter 12) is devoted to “The State of Long-Term Expectation.” In it points out that: “The outstanding fact is the extreme precariousness of the basis of knowledge on which our estimates of prospective yield have to be made. Our knowledge of the factors which will govern the yield of an investment some years hence is usually very slight and often negligible.” Thus, for Keynes, aggregate private investment is very important and subject to great volatility because the people who make investments can know so little about the future.