Chapter 4: Investment: Illiquid Real Capital versus Liquid Assets
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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