Review of Political Economy, Volume 11, Number 3, 1999

Kalecki Versus Keynes on theDeterminants of Investment

JULIO LOÂPEZ1

& TRACY MOTT2

1Facultad de EconomiÂa, Universidad Nacional AutoÂnoma de MeÂxico, Avda.Universidad 3000, Edit. O ® cenas Administrativas, 1er. Piso CP 04510,MeÂxico2Department of Economics, University of Denver, 2040 S. Race Street,Denver, Colorado, 80208-2685, USA

This paper explores the differences between the investment theories of Michal Kaleckiand John Maynard Keynes. We argue that Kalecki’ s ideas (and empirical support for

them) are necessary for Keynes’ s arguments regarding the determination of the level of

effective demand. Kalecki’ s theory of the role of ® nance in investment also provides afuller understanding of the importance of liquidity concerns for Keynesian theory and

connects the theory of effective demand to the logic of capitalism.

1. Introduction

John Maynard Keynes and Michal Kalecki, the founding fathers of the theory of

effective demand, were the ® rst to emphasize within a coherent analytical

framework the centrality of investment in determining aggregate demand and

output and the course of the business cycle. Investment spending determines thelevel of saving by changing the level of national income. Business upswings and

downswings follow the movement of investment. Kalecki also introduced the

pricing policy of ® rms and the distribution of income as additional factors

in¯ uencing the level of economic activity.

In deriving the relation of investment to total output and employment underconditions of `imperfect’ competition, Kalecki found that the rate of change of

output equals the rate of change of investment provided the `degree of mon-

opoly’ is unchanged. However, if the degree of monopoly were to decline while

investment was falling, then output would drop propor tionately less than

investment (at the limit, it might not drop at all) as decreases in prices relativeto money wages would increase real wages and consumption spending.1

Thus, Kalecki anticipated, but with altogether different arguments, the

291

This paper was ® rst presented at the session on `Kaleckian Perspectives on Economic Issues’ in the

Union for Radical Political Economics section of the Allied Social Sciences Association meetings,4±6 January 1997, New Orleans, LA, USA. We would like to thank the participants in the session,

especially our discussant Steve Fazzari, as well as two anonymous referees and the editor of this issueof the journal for their very helpful comments.1

See Kalecki (1991 [1954], p. 255) and Mott (1985±86).

ISSN 0953-8259 print/ISSN 1465±3982 online/99/030291-11 Ó 1999 Taylor & Francis Ltd

292 Julio LoÂpez & Tracy Mott

`New Keynesian’ idea that unemployment may be partly due to rigidities in

prices and pro® t margins.2

It should be emphasized, however, that Kalecki’ s conclusion is exactly the

opposite of that of the New Keynesians. He showed that real wages need to risein order for increases in consumption to offset decreases in investment. In starkcontrast to the `neoclassical synthesis’ or `Bastard Keynesian’ 3 conclusion,

nominal wage stickiness (or a low degree of downward wage ¯ exibility) is

something to be desired, rather than feared; it keeps pro® t margins from

expanding when investment spending decreases. In Chapter 19 of The GeneralTheory, Keynes also argued that downward money wage ¯ exibility would notnormally increase aggregate demand and could in fact decrease it. Both Kalecki

and Keynes saw that decreases in money wages would likely be accompanied by

decreasing prices, but neither felt any need to take into account the `Pigou

effect’ , the market-clearing bugbear of last resort of the neo- or New Keyne-

sians.4

Kalecki also criticized Keynes’ s theory of investment. He argued that

Keynes did not appreciate the necessary dynam ics of the determination of

investment. He and Keynes also had a debate about the effects on investment of

changes in income distribution, which also related to their differences on the

stability of investment decisions.We will explore those issues in this paper, and we will also identify some

additional points raised by Kalecki on the role of ® nance in determining

investment. Kalecki’ s theory of investment and its relation to the determination

of effective demand is based on his understanding of the logic of the repro-

duction of a capitalist economy. We hope to show the signi® cance of Kalecki’ sanalysis of investment and that his ideas are necessary for the `Keynesian’

theory of effective demand to reach some of its key conclusions. Finally, we will

see what light the record of empirical investment studies sheds on these matters.

2. Kalecki’ s Disagreem ents with Keynes on Investment

Keynes develops his theory of investment in Chapter 11 of The General Theory.

He posits a declining schedule of `the marginal ef® ciency of capital’ (which he

identi® es with Irving Fisher’ s `rate of return over cost’ ) as the level of

investment increases. Keynes recognizes limits on investment coming from the

state of product market demand, but his major explanation for a decreasing rateof return on investment in the short-period is the rising supply price of capital.

Investment will be pushed to the point where the marginal ef® ciency of capital

equals the rate of interest. Keynes then comes to focus, especially in Chapter 12,

on establishing the precariousness governing expectations of the future

2 See Mott (1998) for a comparison of Kalecki’ s theory with key ideas of the New Keynesian work.3

The earliest use of this appellation by Robinson to the neoclassical revision of Keynes that we havefound in print is Robinson (1980 [1962], pp. 100±102).4

Indeed, Keynes as editor of the Economic Journal published Kalecki’ s (1990 [1944], pp. 342±43)critique of Pigou’ s (1943) article, the ® rst such critique to be published. Keynes (quoted in Kalecki,

1990, p. 568) concluded their correspondence on the subject by writing, `The whole thing, however,is really too fantastic for words and scarcely worth discussing.’

The Determinants of Investment 293

pro® tability of capital. This leads to potential capriciousness and volatility in the

marginal ef® ciency of the capital schedule, particularly when we have liquid

securities markets, which allow psychological and conventional factors to govern

the buying and selling of titles to capital.

Kalecki (1990, p. 231), in his review of The General Theory wrote,

¼ Keynes’ s concept, which tells us only how high investment should be in

order that a certain disequilibrium may turn into equilibrium, meets a serious

dif ® culty along this path also. In fact, the growth of investment in no way

results in a process leading the system toward equilibrium.

Thus it is dif ® cult to consider Keynes’ s solution of the investment problem to

be satisfactory. The reason for this failure lies in an approach which is

basically static to a matter which is by its nature dynamic.

Behind this criticism lies a deeper methodological issue. Kalecki had been

brough t up within the Marxist traditionÐ a tradition where economics must

analyse the `inner laws of motion of capitalism’ . It was not this or that particularepisodeÐ not even the depression the world was going through during the

1930sÐ that Kalecki wanted to explain. His theory of effective demand and of

investment was embedded in a much grander designÐ to develop a theory of the

overall dynam ics of a capitalist economy. He wanted to develop a theory that

could explain why a capitalist economy is capable of achieving `expandedreproduction’ , and why long-run growth goes hand in hand with cyclical

movements around the trendÐ cyclical movements that may give rise to a deep

depression. Kalecki devoted most of his enormous analytical skills to developing

such a theory.

Joan Robinson (1980 [1964] , p. 95) mentioned this difference between ourtwo authors, noting that `[Kalecki] went straight to a theory of the trade cycle,

on which Keynes was very weak.’ However, she probably overstated her point,

for it may also be argued that Keynes did not see the necessity, or perhaps even

the possibility, of developing the theory Kalecki sought. Indeed, even a theory

capable of explaining a cycle of relatively constant amplitude and length seemedout of the question. Behind his dicta (`we make our livings in the short-run’ ; `in

the long-run we are all dead’ ), one may ® nd, we think, a certain distrust for

long-run theories. His was a very short-run theory because the medium and

long-run could not be analysed.

This distrust of the long-run was perhaps also related to his view ofinvestment, and the level of employment in capitalism, as highly volatile. In part,

investment volatility stemmed from psychological factors, such as `animal

spirits,’5

expectations and conventions. But it was due also to an assumption that

the `decision period’ for capitalists (i.e. a period long enough for capitalists to

take new decisions) was a very short one. Capitalists were viewed as takingdecisions almost on a day-to-day basis.6

5Here `animal spirits’ is taken to mean, as Keynes (1964 [1936], p. 161) put it, `a spontaneous urge

to action rather than inaction’ . For another interpretation, appealed to by Mott & Caudle (1995), see

Fitzgibbons (1988). Arguments against Fitzgibbons’ s interpretation and in favor of the de® nitiongiven here can be found in Gerrard (1994, p.15).6

This aspect of Keynes’ s thinking is emphasized most strongly of course in the famous Chapter 12of The General Theory. Steindl (1991 [1981]) has analysed in depth the implications for models of

294 Julio LoÂpez & Tracy Mott

Kalecki never denied that psychological factors do in¯ uence investment

decisions or that investment might be volatile. In fact, in several works he

actually made reference to a `crisis of con® dence’ .7

But in his theory the weight

is given entirely to `objective’ factors. He insisted that capitalists did not react

solely, or mainly, to their expectations, but rather to the `hard fact’ of realizedpro® ts; and he assumed the investment function to be relatively stable in the

sense that investment will not fall or rise due to events with a very short life.

Furthermore, in the ® rst stages of his theory Kalecki assumed the existence of

a `decision period’ of a certain length, and he distinguished between investment

orders, investment outlays, and delivery of capital goods.8

3. The Stability of Investment Decisions

Kalecki held that investment must be determined by an interrelation among

investment, pro® ts, and capacity. Investment is mainly governed by the actual

pro® tability of business both as a guide to the expected pro® tability of invest-ment but also as the primary source for investment ® nance. An increase in

investment will increase pro® ts in the aggregate of businesses, spurring more

investment, but will also increase productive capacity, which may reduce the

current as well as the prospective yield on further investment. The theory thus

has to be dynamic. These objective determinants primarily govern investmentbecause capitalists cannot guarantee the pro® tability of their individual invest-

ments by acting in concert.

This insight led Kalecki to a view different from Keynes on the issue of the

degree of the stability of investment decisions. An exchange of letters regarding

a paper sent by Kalecki to the Economic Journal (of which Keynes was theeditor) deals directly with this disagreement.9

That paper, `A theory of commodity, income and capital taxation’ , argued

as follows. If an increase in public expenditure is ® nanced with taxes levied on

pro® ts, and if capitalists do not pass taxes on to prices, then gross pro® ts before

taxes will increase enough to keep after-tax pro® ts constant.10

Two key assumptions in Kalecki’ s argument have already been mentioned.

According to the ® rst, in any given (short) period gross real investment and

consumption are given, being the result of past decisions. According to the

the cycle of assuming instantaneous reactions from entrepreneurs. Hahn (1995) has criticized this

assumption in theories of ® nancial crisis.7 For example, in his ® rst broad theoretical paper, he wrote (Kalecki, 1990 [1933], p. 98), `Finally,

in the analysis of the money market we must still consider a ª crisis of con® denceº which can breakout during the depression ¼ ,’ which would worsen matters so much that ` ¼ the regular functioning

of our mechanism of the business cycle ¼ ’ would be disturbed.8 See Kalecki (1990 [1933], p. 70).9

See also Asimakopulos (1990) for further details about this exchange.10 He was assuming, of course, a closed economy. In an open economy pro® ts would fall owing to

the increase in the trade de® cit (recall that in Kalecki’ s theory, where workers do not save, in an openeconomy pro® ts are equal to investment plus capitalist consumption plus the budget de® cit plus the

foreign trade surplus). See Mott & Slattery (1994) for an extension of Kalecki’ s theory of taxationto the cases where workers save and where taxes may lead to higher mark-ups.

The Determinants of Investment 295

second, capitalists do not react on a day-to-day basis, but rather after a certain

`decision period’ .11 Thus, the announcement, and even the enactment of the new

tax, levied to ® nance an increase in government expenditure, will not bring about

an immediate reduction in capitalists’ expenditure because they will wait until

the end of the current decision period and see what happens. If no reduction ininvestment and consumption occurs during this decision period, increased

government expenditure will expand aggregate demand, dragging with it pro® ts

before taxes, so that pro® ts after taxes will not be reduced. But if pro® ts after

taxes do not fall during this decision period, then investment decisions, future

investment, and future pro® ts are not likely to fall.12

It seems worthwhile to present the main passages of the exchange of letters

already alluded to. Upon receiving Kalecki’ s paper, Keynes wrote to him

(Kalecki, 1990 [1937] , p. 559, emphasis added) that `If capitalists assume that

their income subject to tax will remain the same, the effect of the tax will surely

be to reduce their spending. It is only if they have read your article and areconvinced by it that pro® ts will rise by the amount of the tax that they will

maintain their spending as before.’

Kalecki (1990 [1937] , p. 560; emphasis in the original) answered as

follows: `After the introduction of new tax the entrepreneurs even if they expect

their incomes to fall cannot immediately reduce their investment because it is theresult of previous investment decisions which require a certain time to be

completed. [¼ ] Their consumption remains also unaltered, if their propensity to

consume is not changed ¼ [T]he expectation of future fall of income can

in¯ uence the present propensity to consume. I think, however, that the capital-

ists’ consumption is rather insensible to expectations ¼ ’He added `I think that this assumption [i.e. about the behavior of capitalists

following immediately the introduction of income tax] is essential not only for

the problems of taxation, but for the whole of the General Theory. If, for

instance the rise of money wages caused the capitalists to reduce immediately

their consumption in expectation of future fall of pro® ts, the result would berather in accordance with the classical theory.’

Keynes’ s rebuttal (Kalecki, 1990 [1937] , pp. 561±62) went as follows: I

regard the assumption that investment is ® xed as

unplausible [sic]. Firstly, because it ignores the possibility of ¯ uctuation in

stocks. Secondly, because it ignores the possibility of altering the pace at

which existing investment decisions are carried out, and thirdly, because at

best it can be overcome after a time lag, which may be very short indeed.

I hope you are not right in thinking that my General Theory depends on an

assumption that the immediate reaction of a capitalist is of a particular kind.

11A decision period that Donald Harris has suggested to us that may in fact be taken as a `learning

period’ .12

Asimakopulos (1990) seems to be of the opinion that this assumption is not basic for Kalecki’ smain theoretic results. We do not share his point of view. Consider Kalecki’ s argument, found in its

most developed form in Kalecki (1991 [1971]), that pro® ts need not fall with a rise in wages. Ifcapitalists’ expenditure were to decline with that rise, then pro® ts would fall.

296 Julio LoÂpez & Tracy Mott

I tried to deal with this on page 271,13 where I assume that the immediate

reaction of capitalists is the most unfavourable to my conclusions.

Now, in The General Theory Keynes wrote as follows (Keynes 1964

[1936] , p. 261, emphasis in the original):

Perhaps it will help to rebut the crude conclusion that a reduction in money-

wages will increase employment `because it reduces the cost of production’ , if

we follow up the course of events on the hypothesis most favourable to this

view, namely at the outset entrepreneurs expect the reduction in money-wages

to have this effect. [ ¼ ] If, then, entrepreneurs generally act on this expec-

tation, will they in fact succeed in increasing their pro® ts? [ ¼ ] [T]he proceeds

realised from the increased output will disappoint the entrepreneurs and

employm ent will fall back again to its previous ® gure, unless the marginal

propensity to consume is equal to unity or the reduction in money-wages has

the effect of increasing the schedule of marginal ef® ciencies of capital

relatively to the rate of interest and hence the amount of investment.

As we can see, Keynes and Kalecki are reasoning in the same wayÐ any

increase in employment resulting from a reduction in money wages will prove

transitory unless the marginal propensity to consume is raised to equal unity, or

investment is immediately increased thanks to an improvem ent in the marginalef® ciency of capital.14 Only in these two cases will aggregate demand turn out

to be adequate to justify the new employment. In the rest of this chapter Keynes

goes on to analyse what effects a reduction of wages might have on consumption

and investment. He thought that any resulting redistribution of income would

likely reduce consumption and that, if falling money wages led, as should belikely, to expectations of a further fall, investment might well decrease in the

interim. He concluded (Keynes, 1964 [1936] , p. 267), `There is, therefore, no

ground for the belief that a ¯ exible wage policy is capable of maintaining a state

of continuous full employment¼ ’

Were the case under consideration a rise in money wages, Keynes wouldpresumably argue in an identical fashion, thus, support ing Kalecki’ s claim in

their correspondence. It is also particularly interesting to note again that Keynes

considered the marginal ef® ciency of capital to be highly dependent upon

expectationsÐ so much so that Keynes saw it as necessary to distinguish

between wage movements considered transient and wage movements consideredpermanent (because their in¯ uence upon investment will be different in the two

cases).

For Kalecki, the expected pro® tability of investment did not change with

new subjective expectations. Instead they were mostly based on the past

performance of ® rms. This may also explain why he rarely used the term`marginal ef® ciency of investment’ and why he did not consider it necessary to

differentiate the likely impact of expected transitory from expected permanent

changes in economic variables on investment.

The above may also explain why, near the end of his life, Kalecki harshly

13 Asimakopulos is of the opinion that Keynes actually meant page 261, which we agree is correct.14

We must, though, be sure to state that Kalecki’ s version of this relies on the marginal propensityto consume out of pro® ts not being equal to unity.

The Determinants of Investment 297

criticized the alleged volatility of investment and the psychological emphasis in

Keynes’ s theory. Kalecki (1993 [1968], p. 260) wrote, `Keynes failed to make

a distinction between investment and investment decisions; he also did not show

that capitalists’ pro® ts, rather than some nebulous propensity to save, are the

mainspring of economic decisions.’

4. The Role of Finance in Investment

Kalecki attributed much larger importance to the past real perform ance of ® rms

than to developments in the ® nancial market for investment decisions. Keynesand Kalecki agreed somewhat on the effect of changes in interest rates on

investment. Both saw dif® culties in the ability of monetary policy to move

long-term interest rates very much, and both emphasized that changes in the

realized or expected pro® tability of investment could well swamp any effects

coming from changes in interest rates.In Chapter 12 of The General Theory, Keynes, however, seems to identify

the expected pro® tability of investment (`the marginal ef® ciency of capital’ ) with

the values given to share prices on the stock exchange. While it is clear that

there are correlations between actual and expected pro® ts and share prices, it is

also the case that there are movements in share prices that are not closelyconnected with changes in actual or prospective ® rm pro® ts. Indeed, Chapter 12

is one of the earliest and most brilliant discussions of how stock exchange

behaviour can easily come to re¯ ect expectations about the behavior of market

participants rather than changes in prospective business returns. Keynes, how-

ever, allows the tail to wag the dog by asserting that share price movements candetermine expected pro® tability as opposed to the other way around.

Kalecki’ s theory, which relied on past pro® ts as the major in¯ uence on

investment, came not only from the correlation between actual and expected

pro® ts but also from his `principle of increasing risk’ , the idea that marginal risk

to the wealth position of an entrepreneur increases with the percentage of his orher wealth sunk into an illiquid investment. The use of leverage further increases

this risk and issuing new equity dilutes the ownership value of the original

investors. This leads to the conclusion that actual pro® ts are both the basic and

the preferred source of funds for investment spending.

Discussing borrower versus lender risk in Chapter 11 of The GeneralTheory Keynes notes that an increased rate of return was necessary to cover risk

from the possibility of loan default. This risk went beyond the risk attaching to

the outcome of the project.

Kalecki’ s (1937) principle of increasing risk attempted to answer the

question `What limits the size of an enterprise?’ In addition to establishing thesigni® cance of retained pro® ts for ® nancing and so affecting investment spend-

ing, it also questions the notion of a downward-sloping marginal ef® ciency of

investment schedule under perfect competition. Kalecki allowed for a limit on

® rm expansion coming from market demand under imperfect competition, but in

his 1936 review of The General Theory he pointed out that we cannot assumethat investment is determined at the point of intersection of the interest rate with

an aggregate marginal ef® ciency of investment schedule derived from such

298 Julio LoÂpez & Tracy Mott

market limits, since this schedule would not itself remain unchanged as invest-

ment was changing.

Keynes’ s use of a downward-sloping schedule of investment opportunities

along which the economy moves is perhaps a relic of Ricardian long-run

economics.15

Keynes modi® ed this view, as we have noted, by making theschedule potentially volatile.

It is certainly not the case that Keynes ignored the importance of ownership

conditions and the distribution of wealth to macroeconom ics. He advocated the

`euthanasia of the rentier’ and stressed the desirability of redistributional

taxation. However, Kalecki’ s principle of increasing risk and his theory ofinvestment determinants connects the problems of the capitalist economy to the

questions of access to wealth and liquidity preference. The degree of liquidity

preference in general should be seen as a matter of the willingness to make

wealth more illiquid. This involves moving wealth between more or less liquid

assets and, for ® rms, between ® nancial stocks (or untapped borrow ing potential)and physical production capacity. Such liquidity preference should be affected

not only by pro® t and interest rate expectations but also by who holds or can get

access to ® nance.

For Keynes, pessimistic expectations towards investment pro® tability and

heightened liquidity preference could make the marginal ef® ciency of investmentschedule intersect with the interest rate at a point which gives insuf® cient levels

of effective demand and high unemployment. This idea makes much more sense

if it is related to the interaction among investment, pro® ts, and capacity and so

to the illiquidity of excess ® xed capital and the insuf® ciency of realized liquid

pro® ts to provide internally-generated ® nance and attract external ® nance.Keynes’ s (1964 [1936] , p. 164) understanding of the barriers to improving

national economic performance by `a merely monetary policy directed towards

in¯ uencing the rate of interest’ , therefore need not rest solely on the inelasticity

of speculators’ interest rate expectations and the elasticity of their stock market

expectations in the face of radical uncertainty.Robinson (1973 [1971] , pp. 79±85) showed how Keynes’ s failure to

emphasize the dynamic aspects of the determination of investment enabled

interpreters of The General Theory to give us the IS-LM model and made

`Keynesian’ economics seem a matter of interest elasticities and liquidity traps,

or as Leijonhufvud (1981, p. 183) has called it, `variable-velocity monetarism’ .Robinson (1980 [1964]) describes very neatly how Kalecki’ s version of the

theory of effective demand clears up or places on ® rmer ground many ideas

in The General Theory. She states that Kalecki had a huge advantage in

never having learned orthodox economics.16

He did not have to go through the

struggle to escape from the old ideas as she and Keynes had. Moreover, she

15In Chapter 16 of The General Theory, for example, we see the marginal ef ® ciency of capital from

a long-run perspective. Cf. Alvin Hansen’ s (1938, 1941) concerns for `secular stagnation’ . See Mott

& Caudle (1995) for more on Keynes as a `classical’ economist.16 He was also well acquainted with and very interested in the Swedish School economics, particularly

with their approach to dynamics, so much so that he went to Sweden in 1936 to study with aRockefeller grant.

The Determinants of Investment 299

writes (p. 96) that `starting from Marx would have saved [Keynes] a lot of

trouble. [¼ ] Kalecki began at that point’ .

Thus, Kalecki avoided the remnants of neoclassical thinking that plagued

Keynes’ s presentation. Kalecki’ s theory and relates investment and liquidity

preference to each other and to the nature of wealth, or capital. That is, Kaleckitreats investment and liquidity concerns in a manner similar to Marx’ s formula

for the circuit of capital, M-C-M’ . Liquid ® nance must be sunk into illiquid

productive inputs in the hope of realizing liquid pro® ts. This is how the system

works when it works well; when it does not, it is due to a break at either

connection in the circuit. The logic of this process shows us how the causes ofits successes and failures are self-created.

5. The Empirical Evidence

Examining the empirical work done in the intervening years on our subject mayshed further light on the debate. Evidence from the many investment studies

does not appear to contradict Kalecki.17 In many of these studies an important

determinant of investment is lagged pro® ts, and the estimated functions appear

to be stable for relatively extended periods.18

Furthermore, in practically all

estimated investment functions, business ® xed investment does not appear toreact to short-lived modi® cations of the economic environment. The 1987 stock

market crash, for example, would seem on Keynes’ s arguments very likely to

provoke a collapse of investment (or consumption, for that matter), as was

expected by many observers, but in actuality it did not. To impinge upon

investment, events have to have a minimum persistence.A second point concerns the irrevocability of investment decisions once

taken by entrepreneurs. Studies on the credit market and ® nance show that prior

to, or at the start of business downturns, a lot of credit goes to ® nance investment

planned earlier, though currently not needed. Firms ® nd it extremely dif® cult and

costly to cancel investment orders already placed, and must carry on theirprevious decisions even at the cost of increasing their indebtedness. 19 Thus, ® xed

investment seems to be quite insensitive to the current state of affairs.

Surely, though, this irrevocability cannot be extended to inventory invest-

mentÐ an objection put forward by Keynes in the exchange already alluded to.

Indeed, we have ample evidence that inventory investment is highly volatile.20

But given its relatively small share, inventory investment is unlikely to exert a

large impact on total pro® ts and through them on capitalists’ expenditure

decisions.21

17 See Fazzari & Mott (1986±87) and Fazzari et al. (1988) and the references cited there.18

From what was previously said, in Keynes’ s view it might be thought unlikely to ® nd a stableinvestment function. Kalecki (1991 [1954]) himself estimated such a function for the United States.19

Wolfson (1994, 167±170) calls this `necessitous borrowing’ . Fazzari & Petersen (1993) ® nd that® rms often smooth ® xed investment relative to ¯ uctuations in pro® ts with working capital.20

See for example, Carpenter et al. (1994). As Fazzari has pointed out in conversation, volatilitydoes not in itself imply instability.21

Fazzari & Petersen (1993) argue that much of the cyclical variation of inventories may arise from® rms’ smoothing of ® xed investment relative to pro® ts’ ¯ uctuations.

300 Julio LoÂpez & Tracy Mott

Michael Evans (1969, pp. 95±105) summarizes the evidence up to that date

on the lag structure of the ® xed business investment function. He reports that

investment is primarily determined by variables lagged one year or more. The

studies he surveys also support the existence of `decision’ and `appropriations’

lags as described by Kalecki. The decision lagÐ the time from observation ofrelevant factors to the formation of actual investment plansÐ seems to be around

three to six months. The appropriations lagÐ the time between approval of the

plans and the actual investment outlaysÐ is estimated generally to vary from

three to ® ve quarters.

More importantly, Evans reports that the only variable whose changesbetween the dates of appropriations and expenditure seem to affect investment

spending signi® cantly is sales. This supports Kalecki’ s view that prospective

increases in taxes on pro® ts or workers’ wages should not decrease investment

spending because of a perceived threat to prospective pro® ts.

We must also note, however, that this does not rule out any in¯ uence of`animal spirits’ on investment. Late reactions to changes in sales and the part of

the investment not explained by existing investment functions are signi® cant

enough to allow for some of the `spontaneous’ effects identi® ed by Keynes.22

Kalecki’ s argument that higher taxes on pro® ts or rising wages do

not threaten investment is strengthened to the extent that changes in sales arethe key contemporaneous variable affecting investment. In this case, rising

wages or tax-® nanced government spending should increase sales, and so

investment.

6. Conclusions and Implications

Kalecki and Keynes both made extraordinary contributions to our understandingof the capitalist economy. In criticizing Keynes’ s investment theory Kalecki

strengthened two of the most important implications of The General Theory: (1)

that wage cuts in the general case do not increase employment, and (2) that

taxation of capital income can increase the economic well-being of all.

By working out the dynam ics of investment and by explaining ¯ uctuationsin investment by objective factors, Kalecki put the volatility of investment and

the importance of investment and income distribution to effective demand on a

much sounder footing. Through his principle of increasing risk, Kalecki showed

how income distribution and the ® xity of capital anchored the theory of effective

demand and liquidity concerns to the laws of motion of capitalism.

References

Anderson, M. & Goldsmith, A. (1996) Mr. Keynes’ s theory of investment: do forward lookingexpectations and weight really matter? Mimeo.

22For example, Fazzari & Mott (1986±87) ® nd some lagged procyclicality of investment beyond

that explained by their variables, as shown by shifts in the intercepts of their annual regressions. See

Courvisanos (1996) and Anderson & Goldsmith (1996) for recent work attempting to identify theimportance of Keynes’ s emphasis on subjective factors governing investment.

The Determinants of Investment 301

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