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Keynes, investment, unemployment and expectations

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Author Info

  • Ron Smith
  • Gylfi Zoega

Abstract

In Keynes' General Theory, investment determines effective demand, which determines unemployment and the labour market plays a negligible role. In New Keynesian models, labour market institutions determine the natural rate of unemployment and the speed at which unemployment adjusts to it. Investment is mostly ignored as a key variable behind the problem of high unemployment, despite a strong empirical association between investment and unemployment. We discuss the evolution of the 'Keynesian' model, and how in the process of domesticating the General Theory, the central relationship between unemployment and investment and the role of the state of confidence was bred out of the model. We then present some evidence of the centrality of investment and expectations to the long-term evolution of unemployment in OECD countries. We also argue that recent results in finance, which find that individuals do not behave rationally and, moreover, that there may be no basis for rational calculation, provides support for Keynes's notion that animal spirits play a central role in investment.

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File URL: http://www.tandfonline.com/doi/abs/10.1080/02692170902954767
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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal International Review of Applied Economics.

Volume (Year): 23 (2009)
Issue (Month): 4 ()
Pages: 427-444

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Handle: RePEc:taf:irapec:v:23:y:2009:i:4:p:427-444

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Related research

Keywords: unemployment; investment; Keynesian theory;

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Cited by:
  1. Juan Carlos Cuestas & Bruce Philp, 2010. "Exploitation and the class struggle," Working Papers 2010/2, Nottingham Trent University, Nottingham Business School, Economics Division.
  2. Giovanni Melina & Stefania Villa, 2011. "Fiscal Policy and Lending Relationships," Birkbeck Working Papers in Economics and Finance 1103, Birkbeck, Department of Economics, Mathematics & Statistics.
  3. Jósef Sigurdsson, 2013. "Capital Investment and Equilibrium Unemployment," Economics wp61, Department of Economics, Central bank of Iceland.

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