IDEAS home Printed from
MyIDEAS: Log in (now much improved!) to save this paper

Public investment under disequilibrium: a post Keynesian viewpoint

Listed author(s):
  • Massimo CINGOLANI


Registered author(s):

    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.

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

    File URL:
    Download Restriction: no

    Paper provided by Department of Economics, Management and Quantitative Methods at Università degli Studi di Milano in its series Departmental Working Papers with number 2009-21.

    in new window

    Date of creation: 01 Oct 2009
    Handle: RePEc:mil:wpdepa:2009-21
    Contact details of provider: Postal:
    Via Conservatorio 7, I-20122 Milan - Italy

    Phone: +39 02 50321522
    Fax: +39 02 50321505
    Web page:

    More information through EDIRC

    No references listed on IDEAS
    You can help add them by filling out this form.

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:mil:wpdepa:2009-21. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (DEMM Working Papers)

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.