The Inevitable Dependence of Investment on Expected Demand: Implications for Neoclassical Macroeconomics

The purpose of this chapter is to draw attention to a weakness, so far unnoticed, of the neoclassical argument in support of Say’s Law—that is, of the thesis that investment is determined by savings,1 and that therefore aggregate demand poses no obstacle to selling at cost- covering prices the aggregate supply of goods whatever the forces determining the latter. The neoclassical argument, relying upon an assumed negative interest elasticity of investment derived from the demand-for-capital function, neglects the problems with the marginalist or neoclassical conception of capital: as pointed out by the late Pierangelo Garegnani (1983, 1990), the discovery of reverse capital deepening undermines the foundations of Say’s Law, because it undermines the belief in a negative interest elasticity of the demand for (value) capital, but then also the belief in a negative interest elasticity of aggregate investment; Garegnani concluded that the ‘neoclassical synthesis’ criticism of Keynes could not be accepted, and that aggregate demand had to be considered the determinant of employment and growth not only in the short period but also in the long run. In Petri (2004, ch. 7) I reinforced Garegnani’s contention by showing that the attempts, after Keynes, to derive a negative interest elasticity of investment without relying on the traditional neoclassical conception of capital are all indefensible.2