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When scholars investigate the legacy of John Maynard Keynes’s Treatise on Probability (1921) for the development of Keynes’s thinking, the attention usually focuses on the connections among Keynes’s probability theory, his conception of decision-making under uncertainty, and the theory of the functioning of the macroeconomic system that derives from it—through the marginal efficiency of capital, the preference for liquidity, and the self-referential functioning of financial markets. By contrast, this paper aims to investigate the connections between Keynes’s probability theory, on the one hand, and his economic policy recommendations, on the other. It concentrates on the policy recommendations defended by Keynes during the Great Depression but also after the General Theory. Keynes’s economic policy can be understood as a framework for decision-making in situations of uncertainty: fiscal policy aims to induce private agents to change their “rational” probability statements, while monetary policy aims to allow more weight to these statements.

This paper examines Armen Alchian’s work on Keynes’s marginal efficiency of capital. Alchian is correct to assert that Keynes’s theory of investment based on the marginal efficiency of capital is flawed. However, Alchian does not emphasize the importance of Keynes’s error. This paper extends Alchian’s analysis to show that Keynes’s marginal efficiency of capital is a significant error.

This article discusses ‘unconventional’ monetary policy after the 2008 crisis. The focus is the original theoretical basis for such policy and possible Keynesian readings and criticisms. Drawing inspiration mainly from Keynes (1930; 1936) and Minsky (1975), the paper seeks to explain why ultra-low/negative interest rates neither caused ‘rentiers’ to die, nor achieved full employment. The main hypothesis goes in the direction pointed to by Keynes: the problem is the low marginal efficiency of capital, the liquidity trap, and the lack of active government fiscal policy, which should be used in conjunction with monetary policy that maintains low long-term interest rates in order to spur investment. Monetary policy and very low/negative interest rates seem insufficient to overcome low growth. They are also incapable, at least in the short term, of promoting euthanasia of the rentiers as current monetary policy allows financial institutions to benefit from the capital gains it spurs.

Contrasts Hayek’s idea in 1945 that prices help create a rational economic order with the speculative financial order which emerged in the latter decades of the twentieth century.

The efficiency of physical capital accumulation plays a critical role for economic growth. This paper aims at examine if economic freedom promotes economic growth via physical capital accumulation. This is done by estimating a production function by replacing the inputs with institutional indices. The first input is GDP per capital growth rate which serve as a proxy for institutional aspects and the other input are the economic freedom indexes which will serve as proxies for physical capital accumulation. This is done by applying the augmented mean group (AMG) estimator that is designed for dealing with macro panel data analysis, including twenty developing countries where the economies have experienced a rapid growth, and the time period are between 1995 and 2017. The theoretical framework is based on the Solow growth model, institutional theory and marginal efficiency of capital (MEC). The results show that economic freedom promotes economic growth via physical capital accumulation where GDP per capital growth rate served as a proxy for institutional aspects and economic freedom indexes as proxies for physical capital accumulation. The results also show that the AMG estimator is the best fit for macro panel data analysis since it are designed for dealing with heterogeneity.

This paper discusses the role of austerity policies in the long-run path of the economy, from a Post Keynesian perspective. Our starting points are the role of aggregate demand to determine output in the short and long run and the importance of fiscal policy as a tool for demand stabilization. As main theoretical elements, the paper uses the concept of corridor of stability, adapted by Cardim de Carvalho (2016), and Keynes’s model of shifting equilibrium, as presented by Kregel (1976). We argue that adverse output shocks, followed by contractionary policies that prolong the recession, have an impact on the propensity to consume, liquidity preference, and the marginal efficiency of capital, and thus define a new growth trend for the economy. Not only the depth but also the length of the recession matters if the system is to absorb shocks and return to its previous growth trend. As a result of long recessions, a new trend may arise and be acknowledged as “normal”, thus defining a new corridor of stability. RESUMO Este artigo procura discutir os efeitos de políticas de austeridade fiscal sobre a trajetória da economia no longo prazo a partir de uma perspectiva pós-keynesiana. Toma como pontos de partida o papel da demanda agregada na determinação do produto no curto e longo prazo e a importância da política fiscal como instrumento de estabilização do produto. O artigo utiliza como elementos teóricos o conceito de corredor de estabilidade adaptado por Cardim de Carvalho (2016) e o modelo de equilíbrio móvel de Keynes, tal como apresentado por Kregel (1976). Argumenta-se que choques adversos sobre o produto, seguidos de políticas restritivas que prolongam a recessão, impactam a propensão a consumir, a preferência pela liquidez e a eficiência marginal do capital, gerando uma nova trajetória de longo prazo para a economia. Não apenas a profundidade da crise, mas também sua duração importa para a possibilidade de o sistema absorver os choques e retornar à sua trajetória anterior de crescimento. Recessões longas levam a uma nova trajetória reconhecida como “normal”, em torno da qual um novo corredor de estabilidade se estabelece.

We showed what Economics owes to Psychology … in Microeconomics with utility and in Macroeconomics with the 4 propensities to consume, to save, to invest and to hold cash. Psychology is a science in-the-making, but par excellence essential in Keynes’ model. Keynes’ 3 independent variables—consumption, rate of interest and marginal efficiency of capital, are presented (in the appendix). We also derived a “demand curve” for goods, using “Pareto’s power law”. We showed (partly) Keynes’ microeconomics, something which many argued Keynes lacked. We took—in addition—the opportunity to use Hicks’ IS/LM curves. Moreover, we used the “Swan-Solow” diagram. These 3 diagrams helped us to present the situation in Eurozone, in our country Greece, and from the impact of the “Global financial crisis” (GFC) since end 2008, drawing on Temin & Vines [3] and … of course on Keynes [1]. We saw that emphasis in the quality of goods, which we consume, and in the proper attention to the environment, we live, was largely absent! Economists escaped from their half responsibilities by an alibi saying that: our science is “about what is” …

This paper is a theoretical one and deals with the real interest rate channel of monetary policy and sensitivity of investment to real interest rate. In the first part, the mechanism of the real interest rate channel is analysed. The second part focuses on the neoclassical model of demand for capital, Fisher’s theory of investment, Tobin’s q and Keynes’s investment theory. All these theories are discussed in the context of real interest rate, i.e., whether they consider that investment reacts inversely to changes of real interest rate. The third part of the paper targets application of theories to the framework of the real interest rate channel. The paper concludes that all the mentioned theories of investment imply that investment reacts inversely and permanently to changes of real interest rate and also that central banks may influence investment via all types of real interest rate, i.e., short and long or market and retail real interest rate.

The classical theory of the rate of interest is the theory that mainstream economists inherited chiefly from Marshall, Ricardo and Wicksell, and is also this same theory that John Maynard Keynes criticizes in his General Theory for presenting an explanation centered solely on the special case of full employment. Despite the difficulties, Keynes offered a scathing critique of the theory of the rate of interest from both classical and neoclassical economists. This was only made possible because the traditional rationale of these economists remained imprisoned by the trap set by Say's Law. Therefore, within this context, the main objective of this paper is to undertake a critical analysis of Keynes regarding the classical general theory of the rate of interest, through which we may then demonstrate the points on which he was in disagreement with the neoclassical school. The main conclusion is that Keynes considered that traditional analysis is defective because it was unable to identify the independent variables of the system. Indeed, savings and investment are determined variables and not the determinants of the dynamics of the capitalist economic system. Such determined variables are the twin product of the true determinants, i.e., from the propensity to consume, from the scale of the marginal efficiency of capital and from the interest rates, and this is why the flow of investments tends to expand until the marginal efficiency of capital remains at the rate of interest. The classical theory of the rate of interest is the theory that mainstream economists inherited chiefly from Marshall, Ricardo and Wicksell, and is also this same theory that John Maynard Keynes criticizes in his General Theory for presenting an explanation centered solely on the special case of full employment. Despite the difficulties, Keynes offered a scathing critique of the theory of the rate of interest from both classical and neoclassical economists. This was only made possible because the traditional rationale of these economists remained imprisoned by the trap set by Say's Law. Therefore, within this context, the main objective of this paper is to undertake a critical analysis of Keynes regarding the classical general theory of the rate of interest, through which we may then demonstrate the points on which he was in disagreement with the neoclassical school. The main conclusion is that Keynes considered that traditional analysis is defective because it was unable to identify the independent variables of the system. Indeed, savings and investment are determined variables and not the determinants of the dynamics of the capitalist economic system. Such determined variables are the twin product of the true determinants, i.e., from the propensity to consume, from the scale of the marginal efficiency of capital and from the interest rates, and this is why the flow of investments tends to expand until the marginal efficiency of capital remains at the rate of interest.

When a man buys an investment or capital-asset, he purchases the right to the series of prospective returns, which he expects to obtain from selling its output, after deducting the running expenses of obtaining that output, during the life of the asset. This series of annuities Q1, Q2, … Qn it is convenient to call the prospective yield of the investment.

Keynes ‘s General Theory has two separate, but interrelated models. Keynes called these models the D-Z and IS-LP(LM) models. The D-Z model deals only with expected results and outcomes. Expectations, uncertainty and confidence are dealt with by Keynes through his analysis of D=D1+D2 and Z=Z1 +Z2, where D1 measures expected consumption expenditures by consumers and D2 measures expected investment expenditures by businessmen based on Keynes’s Marginal Efficiency of Capital (mec) concept. This model is built mathematically in chapters 20 and 21 of the General Theory after having been introduced briefly in chapter 3. Chapter 20 deals with the Goods and Labor markets. Keynes incorporates the Money market into the D-Z model on pp. 304-306 of the General Theory. The IS-LM(LP) model is an entirely separate model that deals with the actual or realized results of an economy. It is presented in its final form on pages 298-303 of the General Theory. Its form is Y=C+I, where C equals actual consumption expenditures and I equals actual investment expenditures. I has absolutely nothing to do with expectations or expected mec results. Keynes did not publish his December, 1933, four equation model presented in December 4th to his students or the very similar mid 1934 first draft copy of the General Theory because these models mixed up realized variables with expected variables. The IYLM model of O’Donnell and Rogers (2016; Cambridge Journal of Economics) presents a model that is very similar to the earlier four equation models that Keynes realized were a conceptual breakthrough, but which were badly flawed mathematically and technically. Their IYLM model mixes up realized and expected results and does not make any sense mathematically because you can’t add realized consumption and expected investment to equal realized aggregate demand as done by O’Donnell and Rogers (2016). Their main error was their inability to recognize the interrelated, but separate nature of Keynes’s two models.

We have seen in the previous chapter that the scale of investment depends on the relation between the rate of interest and the schedule of the marginal efficiency of capital corresponding to different scales of current investment, whilst the marginal efficiency of capital depends on the relation between the supply price of a capital-asset and its prospective yield. In this chapter we shall consider in more detail some of the factors which determine the prospective yield of an asset.

Practically all of R. Skidelsky’s views on Keynes’s General Theory are a reflection of the many myths about Keynes that Joan Robinson spread. Basically, these myths are figments of her imagination. For instance, one such myth about Keynes was that uncertainty for Keynes meant that all decision making over time takes place under conditions of complete and total uncertainty and ignorance. Therefore, there are no stable economic functions so that there can never be any equilibriums or equilibrium analysis. This means that the use of mathematics and statistics in economics is worthless. Of course, nowhere in anything written by Keynes in his life time did he state that uncertainty meant what Joan Robinson said it meant. Once this Robinsonian myth is accepted, then it results in the acceptance of the dozens of other myths spread by the mathematically and economically illiterate Joan Robinson about Keynes, based on the mistaken belief that she worked with Keynes on the writing of the General Theory. Joan Robinson never worked with Keynes on the writing of the General Theory because she did not have the necessary training in basic mathematics and economics to understand what he was talking about. Her understanding of Keynes comes directly from what she was told Keynes meant by Austin Robinson and Richard Kahn, both of whom completely failed to recognize Keynes’s IS-LP(LM) model of chapters 15 and 21 and Keynes’s D-Z model of chapter 20. The result is a completely fictitious claim by Skidelsky that Keynes’s theory of the rate of interest was a purely monetary theory in which the marginal efficiency of capital and the investment multiplier played no role in the determination of the rate of interest. Keynes’s summary of his model and critique on pp.298-306 is a complete and straightforward rejection of Skidelsky’s ‘Robinsonian’ Keynes. Robinson’s inability to do even sixth grade level, Introduction to Algebra, math is displayed in the September-November, 1936 exchanges between Keynes and Robinson over his liquidity preference function and his IS-LP(LM) model in CWJMK, volume 14, pp.134-148. Keynes’s conclusion is that her writings on liquidity preference were “nonsense”. Robert Skidelsky has incorrectly based his work on Keynes on Joan Robinson.

We have shown in chapter 11 that, whilst there are forces causing the rate of investment to rise or fall so as to keep the marginal efficiency of capital equal to the rate of interest, yet the marginal efficiency of capital is, in itself, a different thing from the ruling rate of interest. The schedule of the marginal efficiency of capital may be said to govern the terms on which loanable funds are demanded for the purpose of new investment; whilst the rate of interest governs the terms on which funds are being currently supplied. To complete our theory, therefore, we need to know what determines the rate of interest.

Based on archival evidence, this paper demonstrates that Keynes did not borrow the concept of the marginal efficiency of capital from Fisher, but, rather, developed it himself.

In the past, Muslims and non-Muslims mainly depended on equity-based financing while debt was an exception, but this whole system was altered with the inception of banks followed by the corporations and the role of partnerships started to shrink. Accordingly, many issues emerged concerning the current financial system, for instance three different banking theories were developed that are based on different understanding of how banks and money function and each lead to different economic and policy implications. Frankly, the new entire system was borrowed from the English law and hence raised doubt about its compliance with Sharī’ah. Accordingly, the study aims to re-examine the structure of corporations, especially the concept of legal personality, and the provision of debt finance under the principles of Islamic law and their effect on the economy as compared to partnerships. The study employed library research, content analysis as well as case study approaches and found that the only correct banking theory that is supported by an empirical evidence is the credit creation theory which states that banks can create money out of nothing. Moreover, after analyzing the concept of legal personality, the concept proved not to be accepted by the classical scholars although the majority of the contemporary scholars insist on its validity. Furthermore, the whole structure was found to contradict some of the main principles of Islamic law. Finally, partnerships were found to be more efficient than the debt-based system in terms of allocating the investable resources and the marginal efficiency of capital.

One of the core premises of post Keynesianism is that a proper understanding of the macroeconomy demands a dynamic analysis set in historical time. The default tool of mainstream economics, the general equilibrium framework, cannot possibly capture such a world. The goal of this paper is to suggest an alternative that allows for path-dependent, holistic analysis: system dynamics. Developed in the 1950s by Massachusetts Institute of Technology engineer Jay Forrester, not only does the worldview it embraces share much with that of post Keynesians, but there are many resources from which to draw including a wide literature, ready-made software, and numerous how-to guides. The paper provides an introduction to system dynamics and builds a model of Keynes's trade cycle theory.

Keynes was always alert to the fact that capitalism, though in his mind the most efficient form of economic organization, was flawed in many respects and often offered its participants no incentive to rearrange matters to bring about a better outcome. In this paper the authors briefly review some of his schemes to illustrate the general shape of his thinking on the flaws of capitalism and their correctives, and then expand on one of his concerns— that over time the marginal efficiency of capital is likely to fall—and show its relevance to the present crisis. They explore his solution, the social control of investment, discuss problems of implementation, and conclude with some general remarks on the future of capitalism.

Book IV analyzes properties of the investment function and the function of money. Instead of Keynes’s concept of the marginal efficiency of capital, I define the marginal efficiency of investment, which is advocated by Lerner, by using Uzawa’s Penrose-function based investment theory. In Chap. 12 of The General Theory, Keynes considers why the value of a firm diverges from its fundamental value, and although he proceeds rather vaguely, he examines how such a psychological background affects the long-term expectations of entrepreneurs. I find that whenever all firms in an economy pursue the maximization of their fundamental values, Say’s law revives and the principle of effective demand proposed in Book I in The General Theory is negated. This is because firms’ capital investment only becomes surrogated savings for households. This also implies that another store of value must exist in order to validate the principle of effective demand. Such a store of value is money. I emphasize that two functions of money (i.e., the transaction medium and store of value) are inseparable properties, and that autonomous expenditure from hoarded money (e.g., the consumption from pension) consists of part of aggregate demand.

The present investigation was conducted in Kolhapur district of Maharashtra. The study showed a reduction in the operational efficiency of the selected PACS during the post-economic reform period as against the pre-economic reform period. The operational efficiency was measured in respect of various liquidity ratio, profitability ratios and financial leverage ratios. Not only the selected societies showed a decline in their current ratio, rate of return on assets, return on owner’s equity and marginal efficiency of capital (MEC) but also higher dependency on lender’s capital for their finances. This dependency was seen to be higher in the case of ‘A’ graded society. Nonetheless, ‘A’ graded society showed an improvement in its permanent capital during the latter period as against the former period. On the other hand, permanent capital position of ‘B’ graded society had declined during the latter period. Further, in the case of ‘A’ graded society there was not much improvement in the net worth, and in fact the share of net worth in its total liability had declined in the post-economic reform period. The declining share of net worth had caused an increase in debt-asset ratio of this society during the latter period as against the former period. In fact, among various ratios, the most important ratio estimated in this study was the return on owner’s equity. The estimated return on owner’s equity of the selected societies were seen to fall sharply during the post-economic reform period. Since the return on owner’s equity is a function of as to how efficiently a firm manages its assets, the net profit margin on sales and the degree of financial leverage, a reduction in return on equity of the selected societies could, therefore, be considered as a sign of reduction in the efficiency of the societies in managing their assets and liabilities, and also income and expenditure pattern during the latter period as against the former period.

Keynes provided not one but two formulae for calculating the relationship between the Present and the Future. On the one hand we have the well-known Marginal Efficiency of Capital (MEC), where the value of the present stock equals the discounted sum of future earnings, but on the other we have the Conventional Projection (CP) where the expected earnings in the future reflect the productivity of present facilities. The MEC is likely to reflect the views of fund managers, the CP the views of corporate managers. These two sets of judgments of the future may coincide or diverge. Either way they determine the value of the present capital in terms of claims to it—and this determination may be stable or unstable, but in any case will be volatile in the sense that the underlying uncertainty can lead to rapid shifts. By contrast, the Classical Equations will give us the value of present capital in terms of its replacement or real cost. This is reliable, being based on the real side of the economy. The ratio of thi...

From Joachim Starbatty’s point of view the answer of many politicians to today’s economic crisis is deficit spending and protectionism. He declares that these are typical keynesian tools - which are - even in Keynes’ theory - only suitable in special circumstances and argues that the actual economic crisis is no Keynesian crisis. The actual lack of demand was predominantly caused by a problematic US monetary policy, not by a lack of marginal efficiency of capital. Keynesian tools cannot solve the crisis and risk to even worsen the situation in different ways. Karen Horn represents the opinion that the global financial and economic crisis has brought about a shift in the relative importance of government and market as well in terms of scope as in popularity. She says: The dichotomy may however seem overstated: both politics and the market are no more than evolved arenas for the social interaction of fallible humans. The crisis just demonstrates the natural failures and limitations of both more clearly than ever. But this is precisely the reason why social processes should become freer discovery procedures allowing for a dynamic generation of new knowledge. The precautionary principle recommends more active government focus on the rule level and clear limits of state action elsewhere in order to prevent a ratchet effect of intervention. In politics, a slippery slope leads directly from pragmatism to constructivism. Gustav Horn addresses the question if and under what conditions economic policy should intervene with markets during an economic crisis. He explains that two different forms of interventions are distinguished: A macroeconomic and microeconomic intervention. Their mutual impact is discussed and a theoretical macroeconomic approach of de Grauwe is used to derive a theoretical foundation. The conclusion is that at a time of crisis both macroeconomic interventions as well as microeconomic interventions that serve to stabilize production of a public good are appropriate. Not appropriate is a state intervention for purely microeconomic reasons.

A model to explain and predict market-driven investment in renewable energy capital is proposed. The model is suitable for application to the biomass, wind, solar and ocean-derived energy industries. It basically assumes that, given a set of prices and a specific technology, the marginal efficiency of capital invested in these industries only depends on the productivity of the project's site and on its energy transport distance. As suggested by traditional investment theory, the model supposes that only those projects offering marginal efficiencies of capital above the current available rate of interest would be implemented, thus demarcating a region in the productivity–energy transport distance space where all the economically viable projects should lie. By relating this region to the geographic space available for development, total potential investment can be deduced. By using cash flows defined in variable energy transport distance and mean wind speed, a case study for the Chilean wind energy industry is presented. The use of the model to analyse the effect of alternative support schemes for wind energy in Chile is briefly demonstrated. It is concluded that for increasing the area economically available for the development of new wind farms, a research and development support scheme aimed at reducing investment cost of wind turbines by 25% is equivalent to a 20% price subsidy on energy.

International audience; This article contributes to the literature on the Hayek-Keynes controversy on two points. The first contribution is to show that the question of the micro-foundations of macroeconomics is crucial to understand the Hayek-Keynes controversy. The second contribution is to reveal that Hayek's attack on the micro-foundations issue had a methodological impact on the making of the General Theory especially via the concept of marginal efficiency of capital. The paper concludes that what finally contrasts Hayek and Keynes is the kind of micro-foundations that economists should adopt to explain business cycles

La version espanola de este articulo se puede encontrar en: http://ssrn.com/abstract=2603259 This proposal of essay considers the possibility to corroborate the Keynesian stance, about economic cycles, respect to some ‘historical counterpoises’. Particularly it is looking up to confirm, the acceptance or not, around the concept of Marginal Efficiency of Capital by some theoretical peers of Keynes. For that reason, it will be done a review of literature which notices the greatest number possible of connections – in favor or against – between Keynesian theory and other economic schools. The brief historical review takes elements about classic economics, afterwards it is reviewed other Keynes’s contemporary theory stances, and ends with some neoclassical contributions. In that way, it may present some contributions of authors such as Marshall, Mitchell, Hicks and Lucas. It will conclude that there is not agreement, not to mention acceptance, about Keynes’s theory of cycles in the most modern schools of economic thought. Mainly, it will recognize and will expound the differences between some cycle theories where takes precedence the instability – Keynes case – against some others where the equilibrium path is ensured by the economic system.

This article elaborates the analysis of asset choice proposed by Keynes and later adopted by Post Keynesians such as Paul Davidson and Hyman Minsky. The article incorporates the essential aspects of the theory of confidence presented in Dequech (1999), first into an investigation of the relation between confidence and the liquidity premium and then into the broader theory of asset choice. Keynes considered two methods of determining planned investment expenditures: one method is based on the comparison between the marginal efficiency of capital and the interest rate; the other is based on the comparison between the demand price and the supply price of a particular capital good. Both methods can be generalized for asset choice, with investment as a particular case. The article refines and develops these two methods so as to specify more precisely the influence of confidence and speculation on the determination of liquidity premia and hence on the several assets' profitability.

PurposeTo evaluate the relevance of the source country idiosyncratic factors in determining the firm's foreign direct investment (FDI) propensity and consequently the country's outward FDI position.Design/methodology/approachA sample containing all countries with positive outward FDI flows for the whole period between 1976 and 1999 is selected. The sample consists of 25 countries and is divided in three groups, namely advanced countries, middle‐income countries and developing countries. An econometric model is estimated for each country group aiming to determine the variables affecting outward FDI position.FindingsMarket structure differentiation and openness are the only variables affecting outward FDI in all country groups. Marginal efficiency of capital is the significant variable in advanced and middle‐income countries. All other variables, namely technology, human capital and exchange rate affect outward FDI position of advanced countries.Research limitations/implicationsThe list of FDI explanatory variables is not an exhaustive one. Changes of country income indicating changes of economic development may be explicitly introduced among others as an explanatory variable in a model, with outward FDI changes as the dependent variable in order to identify any relation between the two.Practical implicationsA very useful source of information for policy makers.Originality/valueThe validity of the model is tested over each country income group aiming at capturing variations in the statistical significance of the FDI explanatory variables between countries that have passed certain economic development thresholds.