Capital investment, business behaviour, and the macroeconomy

Abstract

AbstractGC Harcourt made many fundamental and essential contributions to the development of capital investment theory – most famously via his development of the Cambridge Capital Controversies, exposing conceptual and analytical flaws and contradictions in neoclassical approaches to defining and measuring capital. Relatedly, Harcourt also made essential contributions to our understanding of how accounting rules, used by real-world businesses to guide their investment decision-making, create anomalies and deficiencies in the accumulation of capital at a microeconomic level – with significant, deleterious consequences for the accumulation of capital at a macroeconomic level. In developing Harcourt’s contributions, this paper links Harcourt’s early insights about accounting rules with subsequent developments in behavioural economic models of business decision-making, thus aligning Harcourt’s contributions with insights from behavioural models of investment decision-making. These insights are then combined in showing how the misapplication of investment appraisal criteria at a microeconomic level contributes to under-investment and investment volatility in the macroeconomy, with negative implications for output, employment, labour productivity, wages and cyclical volatility.