If many firms invest together, they will collectively boost demand for their products. The famous British economist John Maynard Keynes called these shared psychological forces “animal spirits,” which he described as the “spontaneous urge to action rather than inaction.”1 When these spirits are aroused and businesses start to see demand strengthening, economic momentum accelerates.2 As sales improve and profits rise, businesses become more confident.
As a result, they invest in machinery, equipment and buildings to expand capacity. Investment expenditures raise employment, household income and spending, which, in turn, boost demand and further stimulate businesses to invest. The other factor that promotes the cyclical flows in investment spending is depreciation. Over time, capital assets depreciate or become obsolete and need to be replaced.