Prosperity and Depression.pdf

Nature and Causes of the CyclePart IIHence, in some contexts, we mayeleet to interpret investment asgross investment. 1 There are other reasons which would justify thisdecision. First, the definition of the concept cc net investment Upresents great difficulties, because it implies definition of what ismeant by " keeping the capital stock intact U.2 Secondly, sincewe assume that people·act rationally, it should really make nodifference whether a certain sum which is spent by an entrepreneurfor productive purposes represents new investment orreinv.estment. In the latter case, too, the prospective yield ofthis investment should be compared with what can be obtainedfrom the same sum if lent out in the market for investiblefunds or if kept in liquid form (hoarded).8In thus defining investment on the demand side as includingreinvestment, we must be careful to apply a correspondinglybroad definition on the supply side, to the discussion of which wenow turn.The supply of investible funds may he said toSupplY flow from three sources-from amortisation quotas,of investible from new savings and from "inflation" in thefunds. broad sense (including, not only newly printednotes and newly created bank money, but alsowithdrawals from existing hoards of money). The first twoitems, which we may lump together as cc gross saving ", leavethe total demand for goods (MV) constant. Infiation impliesan increase in total demand for goods, a rise in M and lorin v:1 We may put the matter also this way : Gross investment is whatactually is invested. It is always a positive figure. Replacementrequiremeilt is a calculated magnitude-viz., that amount which willhave to be invested if the existing capital stock is to be maintained.I Compare on the subject of these difficult points: Hayek, " Maintenanceof Capital ", in ECOHomica, August 1935, pages 247 et seq.; Pigou,Economics of WeI/are, Part I, Chapter V ("What is meant by maintainingCapital intact "), and Economic Journal, June 1935, page 225 ; Keynes,The General Theory of Employment, Interest and Money, pages 38 et seq.I There may be psychological, and (in the case of corporations) institutional,differences between new investment and reinvestment. similarto those mentioned above in connection with self-financing. But weshall ignore them for the moment.