Re: Keynes and Capital formation

["Esteban Perez" <eperez@xxxxxxxxxxxx>]

>>> Paul Davidson <pdavidson@xxxxxxx> 05/14/03 01:43pm >>>
Paul's response:

Of  course, the liquidity preference decision is absent.  This passage that
you cite is Keynes's  paraphrase of  a "Committee of Statistical Experts"
who had published a report in 1938 claiming to provide statistics relative
to capital formation -- but really relying on the old classical theory that
Savings finances investment. and liquidity preference is ignored by these
experts.
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E. Perez:
I can always refer to CW. Vol XIV.pp.212-213 and the distinction between the relationship of I and S and liquidity preference. I don't want to get into that but I was only commenting on this. I realise how classical the Committee was in its thinking: p.282. Keynes reminds the committe for example: "Prior savings has no morfe tendency to release funds available for subsequent investment than prior spending does."and most important: "Increased invement will always be accompanied by increased saving, but can never be preceded by it". p.282.

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Perez wrote:
The second stage refers both to funding and finance proper as these are two
sides of investment finance: (see, CW, Vol. XIV, p.217).

Paul's response:

The first point of Keynes's (above), the  obtaining "sufficient short term
finance"  is what I call "finance". The second point "fund his short term
obligations by a long-term issues" is what I call funding. Since time is a
device that prevents everything from happening at once, finance MUST
precede funding in calendar time!
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E. Perez: By second stage I mean in streams of funds becoming available for investment. That is all. I never made any reference to
'sufficient short term finance'. I think we agree. Stage b includes
finance+funding. See, p. 283.
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P. D.
  I give a detailed explanation of the differences  between finance and
funding on pp. 96-98  and more importantly in CHAPTER 6 of my book
FINANCIAL MARKETS, MONEY AND THE REAL WORLD     --- and reading these pages
may help you to understand that what  above you refer to as:
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Thank you for the suggestion. I re-read the pages.
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P.D.
"c. Actual outlay of money for the acquisition of capital goods"
   should be interpreted as the FINANCING of short-term WORKING CAPITAL
LOANS  obtained from the banking system [ for the production of  capital.
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E. Perez
 I am not sure this is correct. It seems that he refers to the disbursement of funds for acquiring a capital good see. p.280. This occurs one the funds have been transferred.
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P.D.
"a. Setting aside savings out of income
b. Streams of funds becoming available for investment "

is what I call FUNDING --  and this depends on two decisions [as I
explained as early as 1972 in  my book MONEY AND THE REAL WORLD and repeat
in my later writings in FINANCIAL MARKETS, MONEY AND THE REAL WORLD] namely
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E. Perez. Actually it is finance+funding.
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P.D.
I suggest you read chapter 6 of my FINANCIAL MARKETS, MONEY AND THE REAL
WORLD. The chapter is entitled "Planned Investment, Planned Savings,
Liquidity and Economic Growth"
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E. Perez.
Just as a note. You are referring to chapter 7. Not 6. Chapter 6 is entitled: Financial Markets, liquidity and fast exits. I read chapter 7.
In Chapter 7 you state that "Harrod's Growth Analysis Did not inquire into the role played by financial markets and financial intermediaries in achieving and maintaining any specific warranted growth." Why should financial factors be included in HArrod?. In 1939, Harrod stated that his analysis relates to a single point in time. In 1960 (Second Essay), EJ, p.279: "I regard the fundamental concept of dynamic economics as the rate of increase...It is the rate of increase that obtains at a given point of time". If as pointed out by Besomi, 1999, p.151: "if the temporal horizon is reduced to a single instant there is no room the distinction between past and future". If there is no room for the distinction between past and future is there a need for financial markets within HArrod's own framework?.

Your inequality. (7.6)  scP+mshYh < (1-i)I + iI = scP +mshY < I, given m<1.The result is that "market  price of equities will fall, the cost of capital funding will increase, and planned investment projects will be choked off." I understand the rest of the explanation om pp.127-128. But if the planned investment spending will exceed the demand form securities out of household savings, where do the rest of the savings go?. The savings can be held as bank deposits and  as Keynes pointed out in Vol XX, p.77: "the public will provide the deposit and the whole of the deposit will be lent out to business men to make up their losses". Or it could be spent and scP may increase. Aren't these also possible outcomes?

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E. Perez. The rest of the question you answered. Thanks.