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Marginal efficiency of capital

The marginal efficiency of capital (MEC) is a central concept in Keynesian economics, introduced by John Maynard Keynes in his 1936 work The General Theory of Employment, Interest and Money, defined as the rate of discount that would equate the present value of the series of annuities given by the expected returns from a capital asset (net of running costs) over its life to its supply price or replacement cost.^[1] This measure represents the expected rate of return on an additional unit of capital investment at a given moment, serving as a key determinant of investment decisions by firms.^[1] In Keynes's framework, the MEC forms the basis of the investment demand schedule, which plots the relationship between the volume of investment and the MEC for different types of capital assets; investment will proceed until the MEC equals the prevailing rate of interest, as entrepreneurs compare the anticipated profitability of new capital against the cost of borrowing.^[1] If the MEC exceeds the interest rate, additional investment is profitable, stimulating economic activity and employment; conversely, a fall in the MEC below the interest rate discourages investment, potentially leading to economic downturns.^[1] The schedule of the MEC typically slopes downward, reflecting diminishing returns as more investment in a particular asset type reduces its prospective yield while increasing its supply price due to production bottlenecks.^[1] Several factors influence the MEC, primarily through their impact on expectations of future yields and costs.^[1] Prospective yields depend on anticipated sales, output prices, and operating expenses, which are shaped by broader economic prospects, technological innovations, and changes in the value of money; optimistic expectations raise the MEC, encouraging investment booms, while pessimism lowers it, as seen in depressions.^[1] Additionally, risks—such as the entrepreneur's uncertainty about yield forecasts (borrower's risk) and the lender's concerns over default or capital depreciation (lender's risk)—effectively reduce the MEC, particularly during periods of economic instability when these uncertainties intensify.^[1] Unlike classical theories that equate investment primarily to the interest rate, Keynes emphasized the MEC's volatility due to subjective expectations, making it a volatile driver of aggregate demand and business cycles.^[1]

Definition and Basic Concepts

Definition

The marginal efficiency of capital (MEC) is defined as the rate of discount that equates the present value of the expected returns from a capital asset over its lifetime to its supply price.^[1] Mathematically, it is the rate q satisfying

\text{Supply Price} = \sum_{t=1}^n \frac{Q_t}{(1+q)^t},

where Q_t represents the expected net returns (annuities) in period t over the asset's life n.^[1] This rate represents the expected profitability of investing in an additional unit of capital, serving as a key metric for assessing whether such an investment is worthwhile compared to alternative uses of funds.^[2] Intuitively, the MEC captures the highest anticipated rate of return over the cost of acquiring and operating a capital asset, influencing decisions on whether to undertake new investments by comparing this rate to the prevailing interest rate or cost of capital.^[3] For a specific capital asset, such as machinery or equipment, the MEC is calculated based on its unique characteristics, whereas the economy-wide marginal efficiency aggregates these rates across all types of capital assets to reflect overall investment attractiveness in the economy.^[1] Central to this concept are prerequisite ideas like the supply price of capital, which denotes the minimum cost required to produce an additional unit of the asset, often approximating its replacement cost, and expected returns, which are the anticipated net returns from the asset's output after subtracting operating costs and allowing for depreciation over its life.^[1] John Maynard Keynes introduced the term in his 1936 work, The General Theory of Employment, Interest, and Money.^[4]

Marginal Efficiency Schedule

The marginal efficiency of capital (MEC) schedule represents the locus of points connecting the expected rates of return from additional units of capital investment with the corresponding volumes of investment, where returns diminish as investment volume increases owing to the principle of diminishing marginal productivity.^[5] This schedule embodies the investment demand curve, aggregating prospective yields across various capital assets while accounting for rising supply prices and falling marginal yields as more capital is deployed.^[5] The schedule exhibits a downward-sloping shape, beginning at a high expected return for minimal additional investment—reflecting the marginal efficiency at zero extra capital—and progressively declining as investment volume expands, due to reduced productivity per unit of capital from factors such as increased output saturation and higher associated costs.^[5] This curvature arises inherently from the economic reality that successive investments yield progressively lower incremental returns, ensuring the schedule's negative slope across different scales of capital outlay.^[5] While firm-level MEC schedules pertain to specific projects or assets within an individual enterprise, varying by the unique efficiencies of those opportunities, the aggregate economy-wide schedule consolidates these into a broader representation of total investment demand, influenced by collective market conditions and the overall capital stock.^[5] The aggregate form captures systemic dynamics, such as how economy-wide diminishing returns manifest more prominently than isolated firm experiences.^[5] For instance, optimistic expectations about future economic prospects can shift the aggregate MEC schedule rightward, enabling higher levels of investment at any given interest rate by elevating anticipated returns across the board.^[5]

Historical Development

Introduction by Keynes

John Maynard Keynes first introduced the concept of the marginal efficiency of capital (MEC) in his 1936 book The General Theory of Employment, Interest and Money, specifically in Chapter 11.^[1] Keynes developed MEC to explain the pronounced volatility in investment levels, which he attributed primarily to fluctuations in expectations of future returns rather than variations in interest rates or classical supply-side factors like capital productivity.^[2] This approach highlighted how anticipated yields from capital assets, compared against their current supply prices, drive investment decisions in ways that traditional theories overlooked.^[1] This formulation represented a key shift in Keynes' economic thought from his earlier works, such as A Treatise on Money (1930), where he analyzed investment through related notions like the marginal productivity of capital and investment but had not yet formalized the distinct concept of MEC.^[6]^[7] Keynes underscored MEC's pivotal role in economic dynamics, writing: "The schedule of the marginal efficiency of capital is of fundamental importance because it is mainly through this factor... that the expectation of the future influences the present." He further explained that the concept's reliance on such expectations accounts for "the somewhat violent fluctuations which are the explanation of the Trade Cycle."^[1]

Context in the General Theory

In John Maynard Keynes' The General Theory of Employment, Interest, and Money, the marginal efficiency of capital (MEC) is introduced in Chapter 11, titled "The Marginal Efficiency of Capital," where it forms the cornerstone of his theory of investment by linking expected returns on capital assets to the volume of new investment.^[5] This chapter establishes MEC as the expected rate of return that equates the prospective yields from a capital good to its supply price, thereby determining the demand for investment funds and contrasting with the supply-side focus of classical economics.^[5] MEC integrates with other core elements of the General Theory to explain equilibrium output and employment. Investment, driven by the comparison between MEC and the interest rate (itself determined by liquidity preference and money supply), combines with autonomous consumption and the marginal propensity to consume to form aggregate demand, which is then amplified through the multiplier effect to influence overall economic output.^[5] For instance, a decline in MEC reduces investment, lowering income and consumption via the multiplier, while heightened liquidity preference raises interest rates, further suppressing investment unless offset by changes in expectations.^[8] This interconnected framework underscores how fluctuations in MEC can lead to underemployment equilibria, as aggregate demand may fall short of full-capacity output.^[5] Keynes emphasizes that MEC is primarily shaped by short-run expectations under conditions of uncertainty, rather than the long-run certainties assumed in classical theory.^[5] These expectations, influenced by business confidence and psychological factors, drive volatile shifts in the MEC schedule, making investment sensitive to immediate market sentiments rather than stable fundamental values.^[9] This focus on uncertainty highlights the instability of capitalist economies, where optimistic short-run forecasts can spur booms, but sudden pessimism triggers slumps.^[5] The concept of MEC evolved from Keynes' earlier work in A Treatise on Money (1930), where he explored similar notions of capital profitability and the rate of interest but in a less integrated manner, treating investment more as a residual adjustment to savings rather than a driver of demand led by expectations.^[10] In the General Theory, published in 1936 amid the Great Depression, Keynes refined these ideas to emphasize MEC's central role in effective demand, moving beyond the Treatise's focus on monetary disequilibria toward a broader theory of output determination.^[5]

Theoretical Framework

Relation to Investment Decisions

The marginal efficiency of capital (MEC) serves as the primary criterion for investment decisions at both the firm and aggregate levels, determining whether additional capital assets will generate returns sufficient to justify their cost. Firms undertake investment in a particular type of capital asset only if its MEC exceeds the prevailing market rate of interest, as this ensures that the expected yield covers the opportunity cost of funds. Conversely, no investment occurs for assets where the MEC falls below the interest rate, since the anticipated returns would not compensate for the cost of borrowing or forgoing other uses of capital. This core rule implies that investment expands progressively until the MEC equals the interest rate, at which point further additions to the capital stock would yield diminishing returns relative to the cost of finance.^[1] The equilibrium level of investment is thus established at the point where the downward-sloping MEC schedule intersects the horizontal line representing the market interest rate, thereby determining the optimal aggregate capital stock for the economy. At this intersection, the volume of investment adjusts such that all projects with MEC above the interest rate are pursued, while those below it are rejected, achieving a balance between planned capital accumulation and financial costs. This framework highlights how the interest rate acts as a threshold, with lower rates expanding investment by encompassing more projects along the MEC schedule, and higher rates contracting it by raising the cutoff for profitability.^[2] Expectations play a pivotal role in influencing investment through their effect on the MEC schedule, allowing shifts in investor confidence to alter investment levels independently of changes in the interest rate. Optimistic expectations about future yields—driven by anticipated improvements in technology, demand, or economic conditions—raise the MEC schedule, prompting increased investment as more projects become viable relative to the fixed interest rate. Pessimistic shifts, conversely, lower the schedule, reducing investment even if interest rates remain unchanged, underscoring the volatility introduced by subjective forecasts in Keynesian analysis.^[11] Unlike the accelerator principle, which posits that investment is mechanically induced by changes in output levels to maintain a fixed capital-output ratio, the MEC approach centers on profitability expectations derived from prospective returns rather than demand-driven adjustments to production capacity. This distinction emphasizes the forward-looking, psychological nature of investment under uncertainty in the MEC framework, as opposed to the accelerator's reliance on historical output trends.^[12]

Comparison with Classical Views

In classical economic theory, investment decisions were primarily understood through the lens of capital's productivity and individuals' time preferences, as developed by economists such as Eugen von Böhm-Bawerk and Irving Fisher. Böhm-Bawerk argued that interest arises from the difference between present and future goods, with capital's productivity stemming from its role in enabling more roundabout, time-intensive production processes that yield higher output; investment thus expands when the anticipated productivity of additional capital exceeds the interest rate, which equilibrates savings (driven by time preference) and investment. Similarly, Fisher formalized this in his impatience theory of interest, positing that the rate of interest balances impatience to consume now (savings supply) against the marginal productivity of capital in future production opportunities, ensuring full employment equilibrium where savings automatically fund investment at the prevailing rate.^[13] John Maynard Keynes departed significantly from this framework by introducing the marginal efficiency of capital (MEC) in his General Theory, defining it as the expected rate of return over the cost of a capital asset, heavily influenced by subjective expectations of future yields rather than objective productivity measures. Unlike the classical emphasis on supply-side factors like time preference and inherent capital productivity, Keynes prioritized demand-side elements, including aggregate demand prospects and "animal spirits" (entrepreneurial confidence), arguing that investment is driven by whether the MEC exceeds the interest rate, independent of savings levels.^[1] This shift highlighted how volatile expectations under uncertainty could lead to insufficient investment even when savings were available, challenging the automatic equilibrating role of interest. Neoclassical extensions of classical theory, such as the marginal productivity theory of capital, viewed the return on capital as the marginal product of capital (MPK)—the additional output from the last unit of capital—under assumptions of full employment, perfect competition, and rational foresight, where interest adjusts to equate investment with savings.^[14] Keynes critiqued this approach for neglecting fundamental uncertainty in long-term expectations, which renders MPK calculations unreliable and permits underemployment equilibria; in his view, the MEC schedule, fluctuating with pessimistic forecasts, better explains why investment may fall short of full-employment savings without requiring wage or interest rate adjustments.^[15] This introduction of MEC marked a historical pivot in economic thought, as outlined in Chapter 2 of the General Theory, where Keynes directly assaulted the "classical postulates" by demonstrating that the equality of savings and investment does not guarantee full employment if the MEC remains below the interest rate due to deficient demand expectations, thereby undermining the self-correcting mechanisms of classical and neoclassical models.^[15]^[16]

Determination and Influencing Factors

Calculation of MEC

The marginal efficiency of capital (MEC) for an individual investment project is determined as the discount rate r that equates the present value of the project's expected stream of net returns to its supply price, or initial acquisition cost. This rate, denoted as the MEC, is mathematically equivalent to the internal rate of return (IRR) on the project and solves the equation

Q = \sum_{t=1}^{n} \frac{A_t}{(1 + r)^t},

where Q is the supply price of the capital asset, A_t represents the expected net return (or quasi-rent) in period t, and n is the expected economic life of the asset.^[5] For projects assumed to generate a perpetual constant annual quasi-rent q, the calculation simplifies to

r = \frac{q}{Q} \times 100,

expressed as a percentage, since the present value formula reduces to Q = q / r under infinite horizon with no depreciation or salvage value.^[5] To illustrate the general case, consider a machine with a supply price of $10,000 and expected annual net returns of $1,500 for 10 years, assuming no salvage value. The MEC is the value of r that sets the net present value (NPV) to zero, or equivalently,

$10,000 = \sum_{t=1}^{10} \frac{1,500}{(1 + r)^t} = 1,500 \times \frac{1 - (1 + r)^{-10}}{r}.

This equation lacks a closed-form solution and is typically solved iteratively. For example, at r = 0.08 (8%), the annuity factor is approximately 6.710, yielding a present value of $10,065, which exceeds the supply price. At r = 0.081 (8.1%), the factor is approximately 6.662, yielding $9,993, slightly below the supply price. Linear interpolation between these points gives an MEC of approximately 8.09%. Financial software or calculators can compute the exact IRR more precisely using numerical methods like Newton-Raphson.^[17] In practice, the expected net returns A_t in the formula are adjusted for depreciation, which deducts the allocated cost of the asset over its life (e.g., straight-line or declining balance methods); taxes, which reduce returns to after-tax amounts based on applicable corporate rates; and risk, which lowers anticipated A_t to account for uncertainties in cash flows, often via probabilistic adjustments or scenario analysis. These modifications ensure the return stream reflects realistic profitability, with depreciation and taxes embedded directly in A_t, while risk influences the expectations forming the series.^[18]^[19]

Factors Affecting MEC

The marginal efficiency of capital (MEC) is shaped by various economic and psychological factors that influence investors' expectations of returns relative to costs, thereby shifting the MEC schedule upward or downward. These determinants include prospective yields from future sales and profits, changes in technology, the costs associated with acquiring capital goods, ongoing operational expenses and utilization rates, and external disruptions like geopolitical instability. Each factor alters the anticipated profitability of additional capital investments, affecting the overall level of investment in an economy.^[20] Expectations of future sales and profits form the cornerstone of the MEC, as they directly determine the prospective yield of capital assets. Optimism among investors, often driven by Keynes's concept of "animal spirits"—a spontaneous urge to action rather than inaction—elevates these expectations, raising the MEC by increasing anticipated returns on investment.^[21] Conversely, pessimism, stemming from doubts about future demand or economic stability, depresses expectations and lowers the MEC, leading to reduced investment activity.^[21] This psychological dimension underscores how subjective confidence can amplify or dampen the incentive to invest, independent of current market conditions.^[22] Technological changes significantly impact the MEC by altering the productivity and expected returns from capital assets. Innovations and improvements, such as new inventions that enhance efficiency or output, increase the prospective yield of investments, thereby shifting the MEC schedule upward and encouraging higher levels of capital expenditure.^[20] For instance, the adoption of advanced machinery can boost anticipated profits from production, making marginal investments more attractive.^[22] These shifts reflect how technological progress redefines the economic value of capital over time.^[23] The supply price of capital goods, defined as the cost required to produce or acquire additional capital assets, inversely affects the MEC. A decrease in this supply price—due to factors like cheaper raw materials or improved production techniques—raises the MEC for a given level of expected yield, as it lowers the threshold for profitable investment.^[20] Higher supply prices, conversely, reduce the MEC by eroding the net returns, discouraging new capital formation.^[22] This relationship highlights the role of input costs in shaping investment decisions.^[3] Operating costs and capacity utilization further influence the MEC through their effects on the ongoing profitability of capital assets. Rising operating costs, such as higher labor or energy expenses, diminish expected net yields, thereby depressing the MEC and reducing the appeal of new investments.^[22] Similarly, underutilization of existing capacity signals weak demand and excess supply, lowering expectations of future returns and further eroding the MEC.^[22] In contrast, high capacity utilization indicates robust demand, which can elevate the MEC by prompting investments to expand production.^[22] War or political instability profoundly lowers the MEC by undermining long-term expectations and introducing heightened uncertainty. Such events disrupt economic forecasting, fostering pessimism that reduces anticipated yields from capital assets and shifts the MEC schedule downward.^[21] Keynes noted that these disruptions affect investor confidence, often leading to a contraction in investment as the risks outweigh potential rewards.^[21] This factor illustrates how exogenous shocks can override other positive influences on the MEC.^[21]

Implications for Macroeconomics

Role in Business Cycles

The marginal efficiency of capital (MEC) plays a pivotal role in driving the boom phase of business cycles through rising expectations of future profitability, which shift the MEC schedule upward and encourage expansive investment. During periods of optimism, entrepreneurs anticipate higher yields from capital assets, leading to increased investment that stimulates economic growth, employment, and aggregate demand until overcapacity emerges from excessive accumulation.^[24]^[25] In the bust phase, a sudden collapse in confidence causes the MEC to plummet, sharply reducing investment and precipitating recession. Pessimistic expectations about prospective yields render new capital projects unviable, even at prevailing interest rates, resulting in curtailed spending, rising unemployment, and a downward spiral in economic activity as excess capacity persists.^[24]^[26] The interaction between MEC and liquidity preference exacerbates busts, particularly in a liquidity trap where low interest rates fail to revive investment if the MEC remains too depressed. High liquidity preference during uncertainty prompts agents to hoard cash, preventing monetary easing from lowering long-term rates sufficiently to intersect a fallen MEC schedule and stimulate demand.^[27]^[24] Keynes viewed business cycles as primarily propelled by the inherent volatility of expectations influencing MEC, rather than solely by real shocks, with sudden shifts from euphoria to despair generating instability in investment and output.^[24]^[25] A post-1930s illustration of MEC's role appears in the Great Depression, where a downturn in MEC—stemming from overinvestment saturation and ensuing pessimism—amplified the crisis by slashing effective demand and prolonging stagnation. By 1929, prospective yields had fallen rapidly due to prior booms, triggering a sharp MEC decline that deepened unemployment and output collapse throughout the 1930s.^[28]^[24]

Policy Implications

Governments can influence the marginal efficiency of capital (MEC) through fiscal policies aimed at bolstering private investment expectations during economic downturns. Public investment in infrastructure or other capital projects serves as a direct counter to declines in private sector MEC by maintaining aggregate demand and signaling long-term economic viability, thereby encouraging private investors to anticipate higher future returns.^[4] Tax incentives, such as accelerated depreciation allowances or investment credits, further elevate the prospective yield component of MEC calculations, making new capital projects more attractive relative to their supply costs. Monetary policy's effectiveness in stimulating investment via MEC is constrained by the relative positions of the interest rate and the MEC schedule. Lowering interest rates promotes investment only when the MEC curve lies above the new rate; however, in severe recessions where pessimism drives the MEC schedule below prevailing rates, further reductions become ineffective, as seen in liquidity trap scenarios.^[4] This limitation underscores the need for complementary fiscal measures to restore MEC alignment with interest rates. Central banks and governments can also implement confidence-building measures to counteract volatile expectations that depress MEC. Initiatives like public guarantees on investments help stimulate animal spirits—the spontaneous optimism described by Keynes—enhancing the weight of optimistic scenarios in MEC assessments and stabilizing long-term expectations.^[4]^[11] In modern contexts, post-2008 quantitative easing (QE) programs by central banks, such as those of the Federal Reserve, sought to indirectly support MEC by elevating asset prices and easing credit conditions, which in turn bolstered investor expectations of future yields.^[29] More recently, during the COVID-19 pandemic recovery (as of 2022), large-scale fiscal stimuli in the United States and Europe aimed to revive MEC by directly funding investments and supporting demand to counter pessimistic expectations from economic shutdowns.^[30] Keynes himself advocated for counter-cyclical policies explicitly targeting investment through MEC stabilization, emphasizing state intervention to offset cyclical fluctuations in private expectations and ensure full employment.^[4]

Criticisms and Limitations

Conceptual Issues

One key conceptual ambiguity in Keynes' formulation of the marginal efficiency of capital (MEC) lies in its vague definition, which conflates the expected rate of return on an additional unit of capital with broader notions of profitability without specifying a clear marginal unit of analysis. This mixing leads to inconsistencies, as the MEC is described as the discount rate equating the present value of expected yields to the supply price of the capital asset, yet it lacks precision on how to delineate the "marginal" increment amid heterogeneous capital goods.^[31] Critics argue this vagueness undermines its utility as a rigorous investment criterion, rendering it more descriptive than analytically sharp.^[32] Keynes' treatment of time in the MEC framework is inadequate, as it largely ignores intertemporal optimization by assuming static expectations over the asset's life, rather than dynamically adjusting for varying future conditions.^[31] The MEC schedule posits a fixed ranking of projects based on anticipated yields discounted at a uniform rate, but this overlooks how changing opportunity costs across periods could alter optimal timing and sequencing of investments.^[33] Consequently, the approach fails to incorporate forward-looking adjustments that would reflect evolving economic scarcities over time. The relation between MEC and the interest rate in Keynes' theory is conceptually incoherent, as it posits interest as exogenous to investment decisions while neglecting potential feedback loops where investment levels influence saving, liquidity, and thus interest rates themselves.^[28] Although Keynes viewed the interest rate as a "hurdle" determined separately by liquidity preference, this separation disregards how shifts in the MEC schedule—driven by animal spirits or expectations—could endogenously affect the money market and interest formation.^[34] Such oversight creates a one-way causality that critics contend distorts the interplay between saving and investment. Keynes' MEC blurs the distinction between risk, where outcomes have measurable probabilities, and Knightian uncertainty, involving fundamentally unknowable future events, by relying on subjective expectations without a mechanism to differentiate their impacts.^[35] In the original phrasing, the MEC depends on "the expectation of yield," which encompasses both calculable risks (like market fluctuations) and irreducible uncertainties (such as technological shifts), yet the framework treats them interchangeably in yield projections.^[36] This conflation weakens the theory's ability to model decision-making under true unknowables, as it implies expectations can be aggregated like probabilistic risks. From an Austrian perspective, exemplified by Hayek, the MEC contradicts wealth-maximizing net present value (NPV) calculations by overemphasizing volatile subjective expectations at the expense of objective intertemporal coordination.^[31] Hayek critiqued such approaches for promoting malinvestment through distorted signals, where low interest rates artificially inflate the MEC, leading to unsustainable expansions without aligning production stages with consumer time preferences.^[37] Unlike NPV, which integrates market prices to guide resource allocation across time, the MEC's focus on ex ante profitability forecasts exacerbates boom-bust cycles by sidelining the interest rate's role as a scarcity indicator.

Empirical Challenges

One major empirical challenge in studying the marginal efficiency of capital (MEC) stems from the unobservability of expected returns, which form the core of Keynes's definition as the anticipated yield on additional capital investments. Since these expectations are inherently subjective and forward-looking, direct measurement is impossible, leading researchers to rely on imperfect proxies such as Tobin's Q, which approximates the ratio of market value to replacement cost of assets as a stand-in for expected profitability. However, Tobin's Q suffers from significant measurement errors, including the use of book values that omit intangible assets like R&D and goodwill, resulting in non-classical errors that bias regression estimates and inflate values for knowledge-intensive firms. For instance, studies show that simple market-to-book ratios (a common simplification of Tobin's Q) explain only about 40% of variation in more accurate q measures and exhibit mean-reversion, where high Q values predict lower future returns, undermining its reliability as a proxy for MEC-driven investment decisions.^[38] Survey-based approaches to gauge investor expectations, such as those using Purchasing Managers' Index (PMI) data or profit forecasts, offer an alternative but face similar hurdles in capturing the full spectrum of uncertainty and animal spirits emphasized by Keynes. Empirical tests of Keynesian investment functions incorporating these proxies often yield mixed results; for example, while contemporaneous surprises in forecasts significantly predict investment in U.S. quarterly data from 1953 to 2015, lagged effects are inconsistent, and non-expectational factors like interest rates show weak significance, highlighting the difficulty in isolating MEC's role. Econometric estimation further complicates matters, as regressions struggle to disentangle MEC from confounding variables like interest rates and output levels due to non-stationarity, autocorrelation in panel data, and inappropriate detrending methods such as the Hodrick-Prescott filter, which can produce spurious correlations.^[39] The MEC concept is particularly ill-suited for short-run analysis, as it is predicated on long-term expectations for durable assets, rendering it volatile and less applicable to short horizons where immediate demand fluctuations dominate. Post-Keynesian studies provide mixed empirical support for MEC's explanatory power; during the 2008 financial crisis, a collapse in MEC was evident in the sharp drop in investment amid heightened uncertainty, yet quantifying this shift proved challenging due to intertwined financial fragility and liquidity preference effects, with investment falling more than predicted by interest rate changes alone. In modern low-interest-rate environments, such as the post-2008 era, claims of MEC's irrelevance arise from evidence that non-rate factors like financialization and regulatory constraints increasingly dominate investment decisions, with demand-side variables outperforming traditional MEC proxies in explanatory regressions across U.S., U.K., and French data.^[39]

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[PDF] Keynes's monetary theory of interest
Keynes saw that this uncertainty meant that economic activity was at least partly dictated by the expectations – and “animal spirits” – of economic actors. But ...
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Uncertainty, Choice, and the Marginal Efficiencies - jstor
161; italics added). While Keynes conceptualized the marginal efficiency of capit in terms of a stylized functional relation, he in no sense meant imply that he ...
[35]
[PDF] Probability and uncertainty in Keynes's The General Theory
Thus we can say that uncertainty in the sense of Keynes and Knight can be handled using subjective (or intersubjective) probabilities based on betting; while ...
[36]
The road to The General Theory: J. M. Keynes, F. A. Hayek ... - SciELO
Jan 5, 2022 · Hayek's main critique is the lack of capital theory in Keynes' attempt to construct a theoretical scheme based on the Swedish economist Knut ...
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https://www.scielo.br/j/rep/a/mjCxrnCqt4WyPJwPNKSRyhM/?lang=en
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[PDF] What determines investment? A critical survey of post- Keynesian ...
This paper surveys the post-Keynesian literature on investment functions to take stock of where we are in understanding investment behaviour.