Tracing the concept: Investment (Term Paper Sample)

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Tracing the concept: Investment
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Tracing the concept: Investment
Introduction
Investment is a mechanism where individuals, institutions and, governments commit their resources in the form of finances, time, and energy mainly in anticipation of future benefits. The paper is going to focus on the theories and concepts that were formulated by Keynes, Schumpeter, and Smith that have lead to the development of the concept of investment from the early times to what it is today and to evaluate the impact that this concept has had on numerous economies .The benefits may include future streams of income or other defined benefits. Individuals and institutions like companies are known to consider investment as a concept that is quite essential in putting them in a position that enables them to earn increased level of incomes in the future than at the moment. Individuals normally invest in numerous businesses and ventures to improve their welfare in the future through the increased earnings that can lead to much financial freedom that is critical for their futures. Firms are also of the same reasoning where they aim at putting various investments in place to ensure that they grow and become profitable with time. The governments through various organs and institutions may investment to make profits or increase welfare of the citizens where numerous investment plans are drafted top lead to numerous projects in various sectors to ensure that they attain their goals are met at the end of the day.
The concept of investment has been in existence for a long period since individuals, organizations, and governments have always been looking for mechanisms of making themselves better as they move into the future. Each of these three parties has been thinking on the best way out to ensure that the future becomes fruitful and prosperous enough to ensure that there are sustainability and profitability. It is this thinking that led to the concept of investment among numerous parties worldwide.
One of the leading economists that led to the development of the concept of investment was John Keynes through his theory of investment. In his theory, he places much emphasis on the importance of interest rates in determining investment decisions of individuals and firms. He latter includes the aspect of profitability in his investment analysis where he argues that firms, as well as individuals, will find it necessary to invest in various ventures provided that they find them profitable. It implies that the main reason as to why people make investment decisions is to earn profits that enable them to expand their activities to the required levels.
On the idea of interest rates, he argues that investors and businessmen always have two options at hand where they can either save their money in the banks to earn interest or invest in businesses to earn profits. He observed that when the rates of interest in the economy are quite high, businessmen will find it fit to save their money in the savings accounts of various banks where the returns on their saved money will be higher than when they invest it in any form of business. He goes ahead to state that when the rates of interest are high, businessmen and firms find it quite difficult to finance their ventures since the banks and other financial institutions charge extremely high amounts in terms of interests. It implies that the cost of capital is high since the firms have to pay high amounts on the capital borrowed to finance their activities. Such a scenario is quite discouraging to those who might be in the mood of investing since they may not be willing to pay the high interest rates.
On a positive note, he analyzed that when the rates of interest are low, businessmen tend to increase their levels of investments since they can obtain capital quite cheaply. At such a moment, the rates of interest charged on the borrowed capital is quite low implying that businessmen can go ahead and borrow money from various institutions since they can repay back with much ease. When the cost of capital is low, businessmen are motivated to borrow on an increased scale since they are quite sure of repaying the amounts borrowed because they will not pay a lot of extra funds to repay back the borrowed funds.
Views of Keynes are still being put into practice at this moment since investors are always on the lookout to establish the cost of capital before making numerous investment decisions. They are always seeking information regarding the rates of interest charged by various financial institutions for them to make decisions regarding borrowing. When the rates of interest go down, the investors normally rush to the banks to get loans to expand their business to enable them to be extremely profitable. There are numerous banks and other non-banking institutions that are giving out loans to the businessmen who have the intentions of investing in numerous ventures. These loan giving institutions are competing amongst themselves basing on the interest rates charged where those that charge low levels of interest have a high likelihood of attracting numerous clients in the form of individuals and firms to borrow from them thus implying that Keynesian notion of interest rates as reason behind their decisions.
The other aspect other aspect that investors are observing is the fact that when the interest rates are high, they prefer keeping their money in the savings rates than investing them in numerous businesses where they may be subjected to numerous risks that may hamper their returns. Another option at the disposal of investors is the idea of investing in shares and government bonds; here they rely on the prevailing interest rates to make decisions regarding such investments. It is obvious that investors will be willing to buy shares and bonds when the rates of interest are high for them to make better returns that can enable them to accumulate increased finances. Such decisions are also pegged on the analysis that Keynes made regarding the relationship that exists between the rates of interest and a desire by individuals to make investment decisions.
This theory has been instrumental in helping individuals and firm to assess their investment decisions where they analyze the trends in the rates of interest for them to be informed of the course of action to take. It implies that investors make their investment decisions pegged on the prevailing rates of interest in the economy where they have two options to chose from in case they want to make a decision of what to do with their money or when it comes to borrowing from the financial institutions.
The role played by the Austrian school of economics cannot escape unnoticed since it played a vital role in ensuring that the society gets to understand how to approach investment issues and business in general. One of the most outstanding economists in this school of thought was Joseph Schumpeter who also worked as a political analyst. His works surrounded on issues like business cycles and innovation where he always emphasized and appreciate the role played by entrepreneurs in the society. He is an individual that lauded the manner in, which entrepreneurs helped to create new jobs and increase production levels, which he believed were tremendous to economic growth and prosperity of any economy.
On business cycles, he observed that they were essential in explaining the business situations of the economy. He believed that capitalism is prone to long-term cycles since it is largely based on scientific inventions ad innovations. He lauded the role played by scientific innovations in facilitating the expansion that is responsible for increasing economic gains that force entrepreneurs to invest heavily. He urged the governments to always ensure that there are numerous innovations and inventions in the economy to ensure that the businessmen invest to prevent cases of recession that may lead to closures of businesses and hence bankruptcy. He argued that such innovations could lead to destructive results where the current means of production and products are rendered useless thus implying that the firms will start producing at reduced levels thus leading to unemployment in the short-run. Such scenarios are necessary for economic growth since the economy can start a fresh based on new products that result from the modernized innovations.
His ideas are quite essential in the sense that many governments and policy makers have come to understand that the economy has to be allowed to go through numerous cycles in certain times for there to be new products that are desired by the society. It stresses on the notion that the business world is quite dynamic and many at times quite unpredictable thus implying that there is always need for policies to be in place to manage such changes. The prospect of having an economy that is supportive of innovations that are based on advancing scientific techniques is quite essential since it helps to increase productivity. As technology and innovations change, there are those individuals and firms that will find it hard to adjust in the short-run thus implying that there shall be structural unemployment where some employees will find their skills unnecessary thus signaling the need for re-training. These innovations motivates firms and individuals to invest more thus leading to a situation where there is enough capital stock to work with that enables the productivity level in the economy to raise a lot.
The concepts highlighted by Schumpeter are quite essential since the firms should be aware of the fact that there have to be business cycles, which may end up impacting negatively on their businesses thus the need for them to come up with means of coping with this situation to help them to manage their resources better. The idea of facilitating innovat...