New Issues in the Theory of Investment

This monograph starts with a survey of the One-Relative-Price (Q value) theory of investment and then explores the richness of the Many-Relative-Price theory of investment. A tractable model of modernization investment is presented which recognizes that in modern economies more than half of the gross investment consists of replacement investment, and that the main motive for replacement investment is to modernize the capital stock. This model predicts that an activation of investment by fiscal policy is only possible at the cost of causing an ageing of capital stock. Secondly a model is presented in which initial over - or underinvestment causes further over - or underinvestment and thus has a persistent effect on the structure of the capital stock. This model explains why in centrally planned economies a rapid and persistently extensive growth was possible and had to be followed by stagnation.