The conventional neoclassical theory of investment

The neoclassical theory of optimal capital argues that the theory of investment mainly concerns (a) the desired or 'destined' stock of produced fixed capital that producers would want to have at some juncture, and (b) the flow of investment, which moves the capital stock from the current to the desired amount (von Hayek, 1950 [1941]; Jorgenson, 1971; Jorgenson and Hall, 1963; and Knight, 1936, 1946).5 The approach considers the adjustment of investment to an 'equilibrium level.' Investigation of investment determinants is handled at firm- level, meaning that the complexities of the macroeconomic structure are overlooked. The analysis is confined within the rigid micro-level optimisation assumptions of the neoclassical approach. Investment is viewed as a component of aggregate demand that is shaped by supply- side conditions or more generally by factors related to the cost of capital (Fisher, 1954 [1930]). In this model of intermittent adjustment, investment becomes a function of the interest rate, whereby demand for investment falls with an increase in interest rates and vice versa (Clower, 1954).6 In the 'desired' stock model, the 'optimal' capital stock is the level at which the Marginal Productivity of Capital (MPK)7 is equal to the cost of using capital (that is the rental cost of capital, which is understood to equate to the interest rate) (Clark, 1899). It follows, therefore, that there is no extraordinary profit left to the capitalists at the 'equilibrium level.'8 The firm will keep investing until the MPK is equal to the interest rate, assuming profit and utility maximisation, perfect competition, and a well-behaved neoclassical production function in which market prices fully reflect all available information

(Fazzari and Mott, 1986-87: 171 and Poitras, 2002: 106). This analysis presents a 'stable' or 'stationary' investment function that operates within an explicit perfect competitive economy with perfect information and with minimal need for public policy, which may only exist to correct for market imperfection (Fine, 2001).

In Syria, there are practically only imperfections and little perfect competition or symmetries either in information exchange or power structures. The role of public policy progressively served private ends, from which the interests of the public was discarded. The ideal neoclassical world is already ideal for societies in which the market institution is governed by the rule of law and the power structures are not too biased for an even playing field to emerge. In Syria, the real conditions are so imperfect and distorted, such that, an investment function cannot possibly be mapped by a price system whose natural end is to steer commercial gains away from social welfare.

The recent strand of the literature on investment determinants has considered a broader set of factors when studying investment. A plethora of empirical literature has discerned the impact of different factors, such as fiscal policy, financial availability, broader macroeconomic factors (inflation), policy instability and risks on supply-side variables, and on investment at the firm level (Alesina et al., 2002, 2005; Batra et al., 2003; Calomiris and Hubbard, 1990; Cummins et al., 1994; Fazzari et al., 1988; Hubbard et al., 1995; Sakellaris, 1994). Like the preceding neoclassical model of investment theory developed by Jorgenson and others during the 1960s, the recent strand of literature has also been set within the constrained framework of the firm maximising profit and/or minimising costs. Whether considering firm-specific or microlevel variables, or much broader macroeconomic stability variables, the empirical analysis at the firm level has also concentrated on the supply side. These studies investigate how different micro or macro components can influence profits and investment through their impact on the firm's cost of production (cost of capital and labour). State intervention is conceived as a microeconomic supply-side measure that is separable from the macroeconomic demand-side policies. The economy therefore is perceived as a price-determined system. 9 In this sense, aggregate level performance of the economy - changes in output (income) and rates of profit - are ignored, while social and political considerations in the economy are also neglected.

There is always an interface between the macro context and micro or individual initiatives. Transparency, the free flow of information and the extent to which individual agency is realised in the state permits the micro-macro interface to be codetermined by the social forces of society as a whole, with the broader context shifting itself to accommodate newly arising individual or firm level circumstances. Even cursory knowledge of Syria demonstrates that individual agency or firm level initiative is subordinate to a macro context. In Syria, the latter is a policy framework, which is construed to channel resources from the working to the owning classes. No price system is undistorted by power relations. Prices are the purveyors of value, which, in turn, are regulated by the corresponding powers and macro shares of capital and labour. However, the Syrian price system itself, which 'clears the market,' has gradually favoured the ruling class as openness progressed, and has become biased to the point where the story of the profit maximising firm that emits jobs and welfare became completely nonsensical. In point of fact, the immis- eration of working class conditions reached a dreadful point just prior to the uprising as will be demonstrated by the content of this book.

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