The Investment Function: Five Propositions in Response to Professor Gordon

Abstract

IThe literature of dissent from the neoclassical traditions in our subject has reached significant proportions. Coming from the varied pens of Nobel laureates and the rank and file, not all of the dissent can be dismissed as what Hutchison has called opaque verbiage (1978, p. 212). Some of it no doubt is. Moreover, the neoclassical theory itself is seen as something other than monolithic. It means different things to different critics, as differing aspects of it attract analytical opprobrium. A calm reflection on the debate raises several perspectives from which the analytical significance and the empirical relevance of the earlier economic theory can be assessed. Among them is the question of which variables or identifiable forces can profitably be understood for analytical purposes as endogenous, and which may be regarded as exogenous. That exogeneity-endogeneity debate is directly relevant to the question of investment activity and its significance for the functioning of the economic system. The issue is in no sense a new one. Certain styles of economic theorizing argue, for example, that progress is to be made most effectively by regarding the money wage as exogenous rather than holding to its neoclassical endogeneity. Similarly, the money supply, and particularly changes in the money supply, are best understood, it is claimed, to be endogenous rather than exogenous. The rate of interest, given the Central Bank's policy influence, is thought to be exogenous rather than endogenous. In each case, in relation to the money wage rate, the money supply, and the rate of interest, advances in theorizing have turned the