by Jerry O’Driscoll
In a previous post, Mario Rizzo reminds us that Keynes was concerned with the volatility of investment. Keynes was not alone. By the dawn of the 20th century, virtually every significant business cycle theorist viewed the volatility of investment as the central theoretical problem.
In the General Theory, Keynes (p. 149) posed the problem as follows: “The outstanding fact is the extreme precariousness of the basis of knowledge on which our estimates of prospective yield have to be made.” It quickly becomes clear that Keynes means “expectations,” not knowledge. And investment is not governed by “the genuine expectations of the professional entrepreneur” (p.151). Continue reading