The investment, financing and control of the firm: a long-run survival view

Abstract

The present paper was motivated by a concern with the inadequacy of neoclassical theory in dealing with the investment and financing decisions of individuals and firms. The theory is founded upon the classical world of certainty, in which capital is held by indi viduals who maximise their wealth by undertaking the investment that equates the mar ginal rate of return on investment with the interest rate. Under these conditions Say's Law is true; that is, the supply of output creates its own demand and there can be no involuntary unemployment. In his General Theory Keynes (1936) argued that with uncertainty and risk aversion the savings and investment decisions of individuals and firms could lead to depressed demand and unemployment. This, together with the Great Depression of the 1930s, generated interest in a theory of investment and financing under uncertainty. The search for such a theory was largely usurped by neoclassical economists, who devoted their attention to establishing the conditions under which the properties of a perfectly competitive system under certainty also hold under uncertainty and risk aversion.1 Unfortunately, the dis covery of these conditions has not advanced our understanding of firm investment and financing behaviour on either a micro or macro level. We are no better equipped to explain the behaviour of actual capitalist systems or the widespread unemployment in capitalist countries than we were before the advent of the theory. The critical and patently false assumption of the neoclassical theory of capital under uncertainty is that the firm's objective is to maximise the current market value of its securities. This objective may be appropriate from the standpoint of a firm's shareholders if they happen to be portfolio investors with relatively small stakes in the firm. However, it has not been shown that such policies serve the interests of those who control the firm. Three classes of firms may be distinguished on the basis of how they are controlled. In one, ownership and control are completely joined in a proprietorship. In the second, ownership and control are completely separated in a corporation whose control resides