The Relation between the Rate of Interest and Investment in Post-Keynesian and Neo-Ricardian Analysis

The results of the Cambridge capital controversy suggest that marginal productivity analysis cannot be used to derive an inverse relation between the rate of interest and investment. Nevertheless, post-Keynesians and neo-Ricardians continue to use an inverse relation. In this paper, the authors demonstrate that the analyses put forward by leading post-Keynesian and neo-Ricardian economists continue to use the suspect marginal productivity concepts to derive the inverse relation between investment and the interest rate. The authors then show that it is possible to replace such concepts with M. Kalecki's principle of increasing risk, thus providing a more satisfying basis for the theory of investment.