Comment on «Aggregate Investment and Output in the U.K.»

Abstract

The conclusions of this paper are interesting and controversial. Its conclusions that the promotion of investment can only come about by means of reducing real wages, and, the public sector borrowing requirement means that Keynesian policies being recommended for the reduction of unemployment are inconsistent, in that increases in these two variables will lead according to the results of this model to a reduced level of investment, and hence a lower rate of growth of output, and a lower rate of job creation. These results being true in the short run as well as in the long run. In my view it has not been conclusively shown that these results are true for the British Economy, and I intend in the rest of my comments to explain my reservation about the model and its results.As these results are derived solely from a view of the data obtained from their model, a first approach is to examine their model critically. At first the model seems unexceptable. In fact in many ways it embodies a degree of structure unusual in such a study. However, the structure is not complete, one could not expect it to be, and it is here that some problems may arise.The investment equation is determined as one from a set of factor demand equations derived from profit maximisation subject to a KLEM technology. Output is somewhat curiously defined but for the moment let us pass over that and concentrate on the problem max