New Issues in the Theory of Investment

The investment good market, together with the consumer good market, the money market and the labour market, are indeed the most extensively studied markets. The exhaustive survey of investment theory by Eisner and Strotz, already quoted four hundred references in 1963, although this work advocating for adjustment costs, was in fact only carried out at the very beginning of modern investment theory! This chapter gives an introduction of the extensive field and is an attempt to present some key ideas of investment theory. 1) We show that modern investment theory is the integration of many traditional approaches. The content of the chapter is set as follows. Section 2 presents an illustrative model of investment theory. Section 3, using this model, describes the investment decision of the firm. Sections 4 to 10 each present a "classical" investment hypothesis within the framework of the model. Section 11 concludes. For convenience, the key to the symbols used is given in Table 1. 2. The Model of the Firm Investment theory was born with the claim of Keynes (1936) that besides the capital demand (demand for a stock of capital at a point in time), an investment demand (demand for the increment of the capital stock in a period 1) Recent surveys are: Abel (1988), Coen and Eisner (1987) Artus and Muet (1984). The book on investment theory by Nickell (1978) is outstanding.

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Investment Theory: An Integrative Framework.- 1. The Main Problem of Investment Theory.- 2. The Main Approaches to Investment Theory.- 3. An Integrative Framework.- Ageing of Capital Stock and Fiscal Policy.- 1. Description of the Model.- The Modernization Motive to Invest.- Replacement Investment.- Production.- The Approach Chosen.- 2. Predictions of the Model.- Product Innovation and Investment Activity.- Types of Technology and Disinvestment Activity.- Sluggish Adjustment Caused by Depreciation.- Ageing of Capital Stock.- Persistence of Extensive Growth.- 1. Description of the Model.- Extensive Growth of the Soviet Planning Economy.- The Law of Increasing Relative Costs.- Increasing Returns to Scale.- The Approach Chosen.- 2. Predictions of the Model.- Stylised Facts of the Soviet Growth Process.- Persistence of Extensive Growth.- Brezhnev's Slowdown.- Growth Policy and Reform.- I Investment Theory: An Integrative Framework.- 1. Introduction.- 2. The Model of the Firm.- 3. The Investment Decision of the Firm.- 3.1 Necessary and Sufficient Conditions.- 3.2 Economic Interpretations.- 4. Tobin's "Q - Investment Demand".- 5. Treadway's "Optimal Accelerator".- 5.1 A Simplified Capital Accumulation Problem.- 5.2 The Steady State.- 5.3 Around the Steady State.- 6. Lucas's "Optimal Investment with Rational Expectations".- 7. Keynes's "Marginal Efficiency of Capital".- 8. Jorgenson's "Neoclassical Investment Demand".- 9. Kydland and Prescott's "Time to Build".- 10. Arrow's "Irreversibility of Investment".- 11. Conclusions.- II Ageing of the Capital Stock: A Long Run Side-Effect of Expansive Fiscal Policy.- 1. Introduction.- 2. The Model of the Firm.- 2.1 Production Function.- 2.2 Adjustment Costs Functions.- 2.3 State Transition Equation for K(t).- 2.4 State Transition Equation for E(t).- 2.5 Objective Functional.- 3. Necessary and Sufficient Conditions.- 3.1 Efficiency Conditions.- 3.2 Economic Interpretations.- 4. Predictions of the Model.- 4.1 Marginal Value of Tangible and Intangible Capital.- 4.2 Investment and Disinvestment.- 4.3 Tangible and Intangible Capital.- 5. Fiscal Policy and Age of the Capital Stock.- 5.1 Short Run.- 5.2 Long Run.- 5.3 Environment Protection Policies.- 6. Conclusions.- III Persistence of Extensive Growth: A Growth Model of the Soviet Economy.- 1. Introduction.- 2. Model of the Central Planning Economy.- 2.1 Objective Functional of the Planning Authority.- 2.2 Technology: the Framework.- 2.3 Costs of Adjustment.- 2.4 Extensive and Intensive Growth.- 3. Necessary Conditions.- 3.1 Interdependence of Investment Activity.- 3.2 Shadow Values of P&E Capital and R&D Capital.- 4. The Growth-Process.- 4.1 Multiplicity of Steady States.- 4.2 The Take-off Problem.- 4.3 The Persistence of Extensive Growth.- 4.4 Slowdown.- 4.5 Factor Productivity Growth.- 5. The Growth Process of the Soviet Union.- 5.1 Stylised Facts.- 5.2 Uskorenie.- 5.3 Perestroika.- 6. Conclusions.- References.- Appendices.- Appendices to Chapter I.- Appendix 1.- Appendix 2.- Appendix 3.- Appendix 4.- Appendix 5.- Appendix 6.- Appendices to Chapter II.- Appendix 1.- Appendix 2.- Appendix 3.- Appendix 4.- Appendix 5.- Appendices to Chapter III.- Appendix 1.- Appendix 2.