Chapter III Fluctuations in Investment

The Relation Tested

In this and the two following chapters, a number of the results obtained in applying the method described above to one of the central relations in business-cycle theory will be discussed. The relation in question may be defined as that indicating the ‘proximate’ objective causes of changes in investment activity, looked at from the demand side – i.e., from the side of investing entrepreneurs and public authorities.

Calculations have been made for investment in general, as well as for residential building and railways as important special cases.

As emphasized in chapter I, the principles underlying the procedure are that economic theory has to suggest the factors to be considered, while the statistical testing process shows the maximum degree of accordance obtainable and the relative strength of each factor required to obtain the degree of accordance.

For the investigation of investment in general, the choice of the relevant factors has been based on the following considerations. Total investment activity is the sum of the investment activity of those individual entrepreneurs who decide to invest at all. The larger the number, the greater in general will the volume of investment be. Whether or not an entrepreneur decides to invest depends first of all on whether he expects to make profits or not. Therefore, the number of entrepreneurs planning investment will depend on profit expectations.