The Demand-Side II: Investment

Investment is the second source of demand for current output. For the most part, Keynes’s predecessors and contemporaries did not see any need to explain what determines the demand for goods for investment purposes as a whole. They took it that, savings, whether in physical terms or in monetary terms, were invested and that the rate of interest provided the mechanism which ensured that investment and savings would be equal to each other. Keynes’s insight that the question as to what determines the employment of the available resources had to be addressed, his model of the monetary-entrepreneur economy and his conception of the phenomenon of interest ruled out the possibility that the rate of interest would do any such thing. Accordingly, he had to work out a theory of the demand for output for investment purposes. He did so in a way that complemented his theory of the demand for output for consumption purposes.