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Keynes, investment, unemployment and expectations

Smith, Ron P. and Zoega, Gylfi (2009) Keynes, investment, unemployment and expectations. International Review of Applied Economics 23 (4), pp. 427-444. ISSN 0269-2171.

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Official URL: http://dx.doi.org/10.1080/02692170902954767

Abstract

In Keynes' General Theory, investment determines effective demand, which determines unemployment and the labour market plays a negligible role. In New Keynesian models, labour market institutions determine the natural rate of unemployment and the speed at which unemployment adjusts to it. Investment is mostly ignored as a key variable behind the problem of high unemployment, despite a strong empirical association between investment and unemployment. We discuss the evolution of the 'Keynesian' model, and how in the process of domesticating the General Theory, the central relationship between unemployment and investment and the role of the state of confidence was bred out of the model. We then present some evidence of the centrality of investment and expectations to the long-term evolution of unemployment in OECD countries. We also argue that recent results in finance, which find that individuals do not behave rationally and, moreover, that there may be no basis for rational calculation, provides support for Keynes's notion that animal spirits play a central role in investment.

Item Type: Article
Keyword(s) / Subject(s): unemployment, investment, Keynesian theory
School or Research Centre: Birkbeck Schools and Research Centres > School of Business, Economics & Informatics > Economics, Mathematics and Statistics
Depositing User: Administrator
Date Deposited: 01 Dec 2010 09:26
Last Modified: 17 Apr 2013 12:33
URI: http://eprints.bbk.ac.uk/id/eprint/1988

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