The Generalization of the General Theory: Joan Robinson’s 1952 Finance

Joan Robinson’s 1952 work, often referred to as “Finance,” published in the Review of Economic Studies, presented a critical analysis and extension of Keynesian economics, specifically challenging the standard interpretation of the role of finance in investment decisions. It’s a relatively short but pivotal piece that highlights her early contributions to post-Keynesian thought.

Robinson’s central argument was that mainstream Keynesian models inadequately addressed the influence of finance on investment. Traditional models, she argued, often assumed that firms already possessed the necessary funds or could readily obtain them from perfectly efficient capital markets. This assumption, Robinson believed, misrepresented the real-world complexities of the investment process.

She emphasized that investment decisions are not solely determined by comparing the expected rate of return on a project with the market interest rate. Instead, the availability and cost of finance significantly shape a firm’s investment possibilities. She highlighted the role of “finance” as the availability of credit needed *before* investment occurs. Entrepreneurs require the financial means to initiate projects, including purchasing inputs and paying wages, before any revenue is generated.

Robinson differentiated between “finance” and “funds.” “Funds” represent realized profits and savings that can be reinvested. “Finance,” in contrast, is the credit created by the banking system. She argued that the expansion of credit by banks is crucial for facilitating investment. If banks are unwilling or unable to provide credit, investment is constrained, regardless of expected profitability or interest rates.

A key point in Robinson’s analysis is the inherent circularity in investment and finance. Investment generates income, which in turn generates savings, which can then be used to finance further investment. However, the initial act of investment requires finance *before* income and savings are realized. The banking system, therefore, plays a vital role in breaking this circularity by creating new credit to fuel economic activity.

Furthermore, Robinson emphasized the importance of expectations and uncertainty. Investment decisions are based on expectations about future profitability, which are inherently uncertain. The willingness of banks to provide finance depends on their assessment of these expectations and the perceived risk of the investment. Periods of optimism tend to foster greater credit creation and investment, while periods of pessimism lead to credit contraction and reduced investment.

Robinson’s “Finance” contributed to the development of post-Keynesian economics by underscoring the proactive role of the banking system in shaping investment and economic growth. It challenged the notion that investment is solely determined by interest rates and expected returns, emphasizing the availability and cost of finance as crucial determinants. Her work laid the groundwork for further research into the endogenous nature of money and credit, and their influence on aggregate demand and the dynamics of capitalist economies. This perspective highlights the inherent instability of investment driven economies and the crucial function banks play, shaping their potential and limits.