Rehabilitation of Time Dimension of Investment in Macrodynamic Analysis

Abstract

THE concept of the period of investment appears to have fallen quite into disfavour with modern economic theory. The reason for this is twofold. Firstly recent controversy on the pure theory of capital has revealed that the concept of investment period, as put forward by Jevons and B6hm-Bawerk, is incapable of exact measurement even under the stationary settings in which it was originally conceived. Some economists, notably Professor Knight, therefore argue for its abandonment on the ground that since it cannot be measured with any high degree of accuracy, its use should be avoided in work pretending to be of a scientific character.2 Secondly it was pointed out that this concept, as originally put forward, is essentially static. It applies only to a stationary society, in which the stock of capital has been fully adjusted to the time preference of the population, so that no further accumulation is taking place, and there is no change in the environment, viz., in the technique of production, population, level of employment, natural resources, etc. Such stationary conditions, however, are far removed from the actual facts in a dynamic world of reality. In a dynamic world of constant changes, the difficulty of any reliable measurement of the investment period is indeed overwhelming. With these limitations in view, the use of this concept has been avoided by many economists. The result is rather unfortunate; for it is apt to happen that the baby is cast away with the bath water. In consequence, there is a tendency to neglect altogether the time element of investment in certain theories of dynamic economics. As a notable example, it was quite overlooked by Lord Keynes in his classic