Public investment under disequilibrium: a post Keynesian viewpoint

Given convex technology and preferences, the neoclassical equilibrium has optimality features that prompted its use for normative analysis. The canonical version of the model assumes that the optimum is reached through the decentralised decisions of atomistic producers and consumers that take prices as given parameters, in a barter economy with no State. In this context, any economic policy will be harmful, as it will introduce a distortion into what would otherwise be an optimum. However, as Governments around the world realized in the recent crisis, this optimum cannot be the only reference for economic policy, unless it is demonstrated that, besides being desirable for its optimality features, it is also feasible and relevant for real life applications, something which in general it is not possible to do. If the word equilibrium is used as a synonymous of neo-classical optimum, and the latter is recognised as a very specific ideal case, all situations relevant for real life policy choices can be qualified as disequilibrium ones. The paper discusses the evaluation of economic policies in the field of public investment in such a disequilibrium context. It is argued that the model of the monetary circuit, put into the more general perspective of post Keynesian analysis, is useful to illustrate policy choices in disequilibrium situations, characterized by an underemployment of the labour force and a sub optimal utilisation of the productive capacity. Indeed, when credit money is introduced, it is easy to understand why situations of insufficient effective demand tend to become permanent. This type of disequilibrium implies also that investment causes savings and that the whole is not the sum of the parts, justifying the claim for macro foundations of microeconomics and giving renewed relevance to fiscal policy and its coordination. In particular, when new money creation is a possible mean of financing public investment, the model of the circuit shows that if the State budget is restricted to previously accumulated savings for financing its expenditures, it deprives itself of an important instrument for planning long-term budgetary policies that could stabilise the economy by anchoring the diverging expectations of the private sector. This type of “expectational” externality should be quantified in cost benefit analyses that look at the comparison of alternative ways of financing public investment policies. It also gives support to the idea of coordinating European fiscal policy at continental level through the collective management of investment and other public expenditure.