Keynesian approach to savings and investment reveals that there exists an avalanche of equilibrium positions for income. The ingenious argument that ensues from this approach assumes equilibrium between intended saving and intended investment is disturbed after investors decide to spend more on equipment and plant (Harcourt 2012, 24).
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The neoclassical theory relates to the Keynesian approach in a number of ways, although there exist differences on the impact of the interest rate on savings. The Marxian theory provides a varying look into the savings-investment phenomenon by postulating that competition is the major determinant of saving and investment in a firm. This essay will compare the Keynesian approach with the neoclassical theory and the Marxian theory.
The Keynesian Approach
The Keynesian approach was conceived after the observation of the extent to which the Great Depression affected the global economy. According to the approach, investment had declined with the level of savings also decreasing. The level of investments and savings fell after a fall in the level of national income.
As opposed to neoclassical theory, the Keynesian approach suggested that savings was a function of the level of national income (Holt & Pressman 2006, 40).
According to Dillard (2005, 63), several adjustments follow to return the savings-investment equilibrium back to its equilibrium position. The rise in investment expenditure culminates in the increase in the total income. The aforementioned condition can only be met after income has increased enough to produce the desired increase in savings.
To decipher the level of income that would necessitate the restoration of the equilibrium, the Keynesian approach uses the multiplier concept that permits theoretically accurate answers to the problem. The level of investment influences the income via the multiplier effect. The mechanics of the multiplier concept are highly relevant in the contemporary world (Gnos & Rochon 2008, 26).
Gnos & Rochon, (2008, 26-27) reveal that according to the Keynesian approach, when income and national output increases, the level of aggregate savings also increases. Although the interest rate may have a significant level of influence on the level of savings, the Keynesian approach goes against the classical approach by considering that changes in the level of national income determines aggregate savings in all periods.
As opposed to the classical approach to savings and investment, the Keynesian approach considers that investment spending is an aggregate demand component that drives the national income.
The Keynesian Approach and the Neoclassical Theory
In the neoclassical theory, the decisions on whether to invest or save are influenced by the rate of interest. After comparison of the neoclassical theory with the Keynesian approach, it is apparent that the Keynes approach differs from the neoclassical theory as the former shatters the argument about the link of the interest rate and saving.
The instance where the Keynesian approach and the neoclassical theory have similar findings is that the interest rate has an important role in the analysis of investment notwithstanding whether it is related to savings or not (Wolff & Resnick 2012, 5-6).
If net yields surpass the rate of interest, investment would be worth. In the light of this, there seems to be continuity between the neoclassical theory and the Keynesian approach. According to the Keynesian approach, as capital stock grows the rate of return decreases.
Keynes puts significant weight on the impact of psychological factors on investment and savings. Keynes asserts that investment expenditures cannot be undertaken despite profitable returns in case the entrepreneurs have bearish expectations. Fear of the loss of capital influences investment decisions in the Keynesian approach (Rochon 1999, 66).
Salvadori & Gehrke (2012, 183) reveal that the neoclassical theory has also commented on pessimism and optimism as determinants of savings and investment. Nevertheless, such considerations are given a narrow limit, as the neoclassical never attaches significant importance to the psychological considerations in determining saving and investment.
Keynes views the aforementioned problem in a different way. After establishing that the savings-investment equilibrium varies widely, he adduces that the temperament of the entrepreneurs determines the behavior of the economy. The aforementioned phenomenon reveals a central policy concern in the Keynesian approach. Increased levels of income tend to generate more savings. If equilibrium is to be achieved, there is the need for investment to be equal to savings.
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As opposed to the neoclassical economists, Keynes thought that it was not safe to assume that significant increases in investment could be achieved through monetary measures meant to lower borrowing costs (Carvalho n.d., 1-5).
Hicks (1985, 29-43) reveals that during depression, bearish expectations by the entrepreneurs could neutralize the impact of a reduction in interest rates. However, the Keynesian approach notes shortcoming on the move and claims that such economic policy techniques cannot remedy aggregate demand deficiencies.
The Keynesian Approach and the Marxian Theory
The Marxian theory has similar suggestions to the Keynesian Approach regarding investment and saving. The ideas of the Keynesian approach are central to the Marxian theory, which had been a source of insight to investment, competition, and savings.
According to the Marxian theory, the majority of the firms invests after competitive pressure and level of investment. (McCloskey 2009, 4-5) reveals that the Marxian theory explains how competitive pressure compels firms to accumulate in an attempt to take an advantage in the market.
The formulations of the Marxian theory of accumulating wealth reveal that low rates of profits lower investment. The theory of financial fragility postulated under the Keynesian approach borrows basic assumptions of the Marxian theory of capital accumulation for investment. Through competitive pressure, firms are coerced to invest all their savings accumulated through profits.
The Marxian theory assumes that capitalists are the only individuals who make savings. Moreover, through the theory, Marx revealed that competition forces firms to invest all their savings, a development that renders problems of aggregate demand inexistent.
Some of the postulates in the Marxian theory show the nature in which Marx advocated for savings through accumulation. He meant that firms had to convert huge proportions of surplus production to capital to facilitate further production (Lavoie, Rodriguez, & Seccareccia 2004, 128).
As opposed to the analysis of interest rates and their resultant influence on savings and investment in the neoclassical theory and the Keynesian approach, the Marxian theory focuses on competition and the extent to which it made it possible to increase the capital reserved for industrial investment.
Because of the pressure emanating from competition, investment has a constraint in the limited access to funds. With the lack of financial markets as in the Marxian theory, investment would equal profits, which would be converted into savings. The firm has no decision to make under such a scenario (Barber 1967, 237).
Under the Marxian theory, the manager of the firm has to survive as a capitalist and the assurance of this can be achieved only through the growth of the firm. For the firm’s survival, the manager has to ensure there is accumulation and investment through the profits.
If a shrink in the market and a decrease in profits render a firm bankrupt, the assets can be sold without loss and the resultant proceeds can be used to acquire another firm or assets (Harcourt 2007, 96-97 ). Competition makes a firm invest against its will.
This may happen in case the firm’s competitors buy more plants. The Marxian theory provides conditions, which reveal that individual firms should invest for survival in the market. However, investment of this nature tends to lower rates of profit according to the neoclassical and Keynesian approaches to investment and savings.
In summary, the Keynesian approach to savings and investment shows the existence of numerous equilibrium positions for income. James Maynard Keynes, who used the multiplier concept to explain the nexus between savings and investment, formulated this approach. This essay compares the Keynesian approach to the neoclassical theory and the Marxian theory.
From the neoclassical theory, there exist similarities with regard to the way the two approaches treat the relationship between savings and investment. However, a disparity occurs with regard to the influence of interest rates on savings.
On the other hand, the Marxian theory has also been compared with the Keynesian approach. The two theories agree on numerous issues although the Marxian theory postulates that competition is the main determinant of saving and investment in firms.
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