This is one of those issues which causes critics of Keynesianism to make all sorts of ignorant statements. For example, it is frequently charged that Keynesianism ignores or neglects the investment function, and focuses too much on consumption.
In reality, the investment function was seen by Keynes as the “prime mover” or “driving force” of most business cycles, and fiscal stimulus is all about (1) filling the gap created when private investment falls by means of public investment and (2) inducing private investment to rise again.
A business cycle will, generally speaking, be led by a contraction in private investment spending (Arestis and Karakitsos 2013: 111; Hansen 1941: 49). Of course, consumption will also fall, usually after a lag, as private income falls, and negative feedback effects will probably reduce investment even further.
Because of government countercyclical fiscal policy such as automatic stabilisers and deficit-financed fiscal stimulus (involving public investment, or social spending, R&D, a greater level of transfer payments, and so on), in the recovery we should usually see such government spending lead the upswing, with (1) consumption and then investment, or (2) investment and then consumption or (3) consumption and investment simultaneously following.
If we look at the graphs below showing an index of US personal consumption and gross private domestic investment expenditures with shaded areas showing recessions, we see that investment does indeed seem to lead the downturn in recessions. Exactly what happens in recoveries is unclear. Some Post Keynesians seem to argue that investment leads the recovery too (Arestis and Karakitsos 2013: 111), and, in regard to some US cycles before 1939, Hansen (1941: 49) reports that investment was leading the recovery. In the graphs below, it appears that consumption often seems to lead the recovery.
After WWII and in the period down to the 1970s, US recessions seem to have been characterised by “inventory recessions”: they were caused by business accumulating excessive inventories which they could not sell (that is, when expected demand failed to materialise or did not grow at a sufficiently high rate), and, when these inventories were liquidated, the fall in investment was a major cause of recessions (Sorkin 1997: 569). In this sense, then, the investment decisions were obviously affected by demand for final output.
Arestis, Philip and Elias Karakitsos. 2013. Financial Stability in the Aftermath of the ‘Great Recession’. Basingstoke, UK.
Hansen, Alvin H. 1941. Fiscal Policy and Business Cycles. W.W. Norton & Co., New York.
Sorkin, A. L. 1997. “Recessions after World War II,” in D. Glasner and T. F. Cooley (eds), Business Cycles and Depressions: An Encyclopedia. Garland Pub., New York. 566–569.