Financial Markets, Money and the Real World

Financial Markets, Money and the Real World

Paul Davidson

Paul Davidson investigates why the 1990s was a decade of financial crises that almost precipitated a global market crash. He explores the reasons why the global economy still struggles with the aftermath of these crises and discusses the possibility that volatile financial markets in the future will have real impacts on whole industries and national economic systems.

Chapter 4: Investment: Illiquid Real Capital versus Liquid Assets

Paul Davidson

Subjects: economics and finance, money and banking, post-keynesian economics

Extract

Chapter 2 indicated that in The General Theory, Keynes identified two distinct classes of expenditures on the products and services of industry. The category D1 spending is associated with all expenditures that are related to (and normally financed out of) current income. D2 is defined as all expenditures not related to income. Consequently expenditures in this category are unlikely to be financed out of current income. D1 and D2 are precisely and unambiguously defined but in terms that were not easy to understand by the average person or politician. To make this classification more meaningful to the reader of The General Theory, Keynes indicated that consumption spending could be classified as D1, while expenditure category D2 was linked to the ‘amount which it [the community] is expected to devote to new investment’.1 Once the vernacular terms of consumption and investment were introduced, the meanings of these spending categories become more equivocal. The term investment, for example, is often applied to different kinds of purchases in different contexts.2 To avoid such ambiguities and sort out these different meanings of investment a strict technical set of definitions regarding investment expenditures, markets, real capital goods, financial assets and money will be developed in this chapter. A crisp taxonomy is, after all, the essential starting point in a meaningful discussion and analysis of economic problems. 4.1 TWO TYPES OF INVESTMENT For the individual, investment spending denotes the purchase of some durable asset today that is...

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