The government pays serious attention to investment as one of the backbones of the Indonesian economy amidst the challenges and threats of a world recession next year. To research and learn about investing, there are several theories known, one of which is Keynesian.
Before moving on to discussing the history and meaning of Keynesian, we need first to understand the meaning of investment. According to the Financial Services Authority (OJK) website, investment is an investment, usually in the long term, for the procurement of total assets or the purchase of shares and other securities to gain profit.
Although profit-oriented, investment activities are always faced with uncertainties related to various risk and return factors. Therefore, the risk of investment needs to be understood and managed so as not to cause losses when expecting returns.
One way is to study the theories put forward by various experts, such as John Maynard Keynes, who is known as an economist and originator of Keynesian theory or Keynesianism.
They are launching the land. The Keynesian theory was applied based on economic ideas in England in the 20th century. Maynard Keynes introduced a mixed economy where the state and the private sector have an important role in economic activity. His theory states that macroeconomic trends influence individual behavior in microeconomics.
Keynes believed that economic problems were complex problems, not specific or separate, such as the understanding of laissez-faire economic theory. He believes that knowledge of economics is not only related to money, even though money is the driving force of economic activity.
Government intervention in economic activity is expected to be able to manage consumer demand through issued policies or taxes so that later it can prevent inflation and unemployment.
Keynesian investment theory
The Keynesian theory views investment decisions by comparing the Marginal Efficiency of Capital (MEC) with the real interest rate. MEC is the profit that will be obtained from the investment. The higher the interest rate, the lower the investment.
The expected profit in Keynes’s investment theory is called MEC because if the MEC’s expected profit is greater than the interest rate, then investment can be made. Conversely, investment cannot be made if the MEC is less than the interest rate. Then, if the MEC is equal to the interest rate, the investment may or may not be implemented.
The description above explains the nature of the relationship between the amount of investment and interest rates. Therefore, Keynesian investment shows that the amount or amount of an investment does not depend on a single factor of return but is influenced by the cost of capital or interest rates.
The MEC concept of investment shows the nature of the relationship between the amount of investment to be made and interest rates. There is an inverse relationship between interest rates and the total level of investment in the economy to account for price changes.
The following are several factors that influence investors in making investment decisions, referring to Keynesian investment theory:
- Optimism arises when individuals or companies know the future conditions and dare to invest and impact the benefits obtained later.
- The level of supply and demand influence each other. Therefore, it will affect investment conditions because demand increases when the economical rate increases and affects economic growth in the country.
- The increase in public share capital causes the marginal yield product to decrease. It reduces the value of the MEC because the product of marginal returns is the additional output the firm obtains with an additional unit of capital.
- Technological developments that are profitable and moving positively will affect investment despite the fixed interest rate.