Macroeconomic theories of investment and

development of a New Economic Theory

Seeraj Mohamed

XIV INTERNATIONAL COLLOQUIUM: TOWARDS A HUMAN-CENTERED

SUSTAINABLE ECONOMIC AND SOCIAL SYSTEM FOR THE 21ST CENTURY,
Sustainability Institute, Lynedoch EcoVillage, Stellenbosch, May 10-12, 2017
 Introduction
• Mainstream economic theory too often ignores institutions and is
ahistorical.

• It cannot deal with path-dependence in the process of reproduction and

accumulation in society.

• The alternative approach favoured here is to consider institutions and time

as related.

• Mainstream economics generally abstracts from time and institutions

• heterodox economics considers institutions, their history and how they

operate during a specific era
 Introduction
• Economies and markets are often treated by mainstream economists as if
they are fair and neutral.

• However, world views of dominant economic agents, e.g., those in large

multinational corporations and financial institutions, are generally absent
from mainstream models

• Therefore, attitudes towards racial and gender discrimination, religious

beliefs, environmental issues, and economic security are ignored when
analyzing economies

• Heterodox economics understands that there is ‘path dependence’ shaped by

a history of institutions and affected by the beliefs and biases of people
running those institutions.
 Investment under uncertainty and irreversibility
• Mainstream approaches inadequately account for uncertainty and
irreversibility of investments.

• Heterodox macroeconomics is shaped by the idea of fundamental or radical

uncertainty and irreversibility of investment.

• There is a clear psychological element to behaviour of individuals and

recognition of the psychology of group behaviour.

• Perceptions are shaped by society and its institutions

• Many of the institutions that have been developed are to help economic
agents attempt to create stability in a world of fundamental uncertainty and
irreversibility.
Crotty (1994, p.27) says:
The future is unknowable; we exist in an environment of true
uncertainty. In such an environment, neoclassical theory fundamentally
misspecifies agent choice. Fortunately, the price of recognition of the
existence and centrality of fundamental uncertainty is not theoretical
chaos as neoclassicists would have us believe. The concept of the
socially constructed human agent and conventional decision making in
concert with an understanding of the institutional foundations of
conditional stability create a world with nondeterminist or contingent
laws and tendencies, a world that can indeed be appropriated through
theory. However, a theory adequate to its task must be institutionally
contingent and never lose sight of the dialectical relation between
uncertainty and the structures and practices we have created to try to
remove its sting.
Investment under uncertainty and irreversibility ctd
• The relation between conventional decision making and stability is
dialectical.

• Institutions can never create more than conditional stability

• Institutions as socially constructed entities are filled with contradictions

• They cannot find solutions to instability without creating new forms of

instability.

• Institutions transform the effects of uncertainty and shift them across

time rather than permanently eliminate them”.
Theory of the firm
• The theory of the firm that shapes post-Keynesian investment theory is
different to the neo-classical models because the goal of the firm for post-
Keynesian theory is more than just maximising profits.

• At the centre of this theory is a realisation that managers and owners of

firms have different roles and interests.

• Managers have an interest in ensuring that firms survive competition from

other firms and they are constrained in their ability to maintain the survival
and growth of the firm by the portion of profits they can use to support the
accumulation of the firm
Theory of the firm
• An important aspect of post-Keynesian theory of the firm is the
growth-profit or growth-safety trade off that managers face when
making investment decision.

• This formulation draws on the distinction between inside and outside

finance and Kalecki’s principle of increasing risk where managers
want to limit outside borrowing.

• Firm borrowing is not constrained by financial market pressures but

by managers’ determination to maintain independence from financial
market pressures.
 Aggregate Demand
• At the heart of all post-Keynesian approaches is the principle of effective
demand: production of goods adjusts itself to demand for goods.

• The economy is demand-determined and not constrained by supply or

available endowments

• Investment is independent of saving; investment and capital accumulation

are not tied to intertemporal consumption decisions of households

• A key difference between heterodox and mainstream approaches is that

there are no market forces to drive the level of aggregate demand towards
any supply-side equilibrium

• Aggregate demand sets the level of economic activity in an economy.

 Distributive outcomes and distributional conflicts
• Marglin and Bhaduri’s (1990) investment model has investment dependent
on both profitability and capacity utilisation where:
• Income distribution is a key determinant of aggregate demand and economic activity
• Income distribution affects whether an economic regime is wage led or profit led

• Kalecki (1943): the difference between distributive outcomes and

distributional conflicts
• The interest of capitalists is not only to earn profits but to maintain a system where
they are in control and able to keep earning profits and maintaining stability
• The stability of a system will depend on the underlying institutions

• Social Structures of Accumulation and French Regulation Schools:

• Social structures of accumulation are a set of historically specific institutions that
define a capitalist mode of production
• The French Regulation School explains expansion & crises in capitalism by examining
institutions that provide periods of stability for accumulation & economic expansion
Economic growth path and path dependency
• Sawyer says that current demand may influence the path of an
economy takes in three ways by influencing :
• Investment that builds not only stocks of physical capital but also
infrastructure and capabilities in e.g., education, health and environment
• How people are absorbed or ejected from the labour supply
• Level of econ. activity that drives learning by doing & productivity growth

• Endogenous money and path dependence

• Endogenous money: money is created within the private sector when banks
provide credit through the creation of deposits
• The structural influence of banks and other financial institutions on an
economy can be seen in who and what they choose to finance and the
terms on which they provide finance.
Market structure
• Heterodox economics sees the economy as dominated by large
corporations and the role of multinational corporations and trade
unions is essential.

• Prices in most markets are not the result of competition but are
administered

• Prices and wages are parameters in determining the rate of savings by

businesses and households and revenue inflows and discretionary
income of the public sector.
 Financialisation
• Investment theory and models are incorporating the effects of
financialisation

• Heterodox theory and models are to adapting to take account of changes

from an industrialised capitalism to the current financialised phase of
capitalism

• Empirical studies find that the growing shareholder value orientation of

firms has a negative impact on accumulation

• The extraction of interest and dividend payments by rentiers reduces the

amount available for retained earnings and thus a firm’s internal funds
available for fixed investment.