Rate of Profit, Distribution and Growth

Two Views

J.A. Kregel

• Publisher: Routledge
• Year: 2017
• Print ISBN: 9780202308692
• eBook ISBN: 9781351494854
• Topic: Economics
• Subtopic: Economic Theory
• Index: Economics

A controversy among economists has raged in the pages of professional journals for the last decade. The debate concerns capital theory and distribution theory, as well as interpretation of models of long-run economic growth. This book is an attempt to integrate recent developments in capital theory and show their implications for models of long-run economic growth in mature capitalistic countries.This book first presents the von Neumann model and outlines its classical approach to the rate of profits and distribution. Sraffa's resolution of the value-price transformation problem is then presented and compared with Samuelson's ""Surrogate Production Function"". With the results of this comparison and the delineation of the special case in which the ""Surrogate"" is valid, several existing models of growth are set out in two representative groups.Neoclassical models form the first group. These are defined by their reliance on marginal theory to determine factor prices, the rate of profit and therefore distribution via the perfectly differentiable production function. Models of Meade, Tobin, Solow, and Samuelson- Modigliani are outlined and analyzed for their treatment and distribution and profits theory. The second group is comprised of models within the strict Keynesian tradition. The basic groundwork of these models as found in the work of Keynes and Kalecki is first cited. The Keynesian models are characterized by their assumption that the investment decision is totally independent of savings decisions in the economy. The models of Harrod, Kaldor, Pasinetti and Joan Robinson are presented and their method of approach to the rate of profits and distribution is analyzed.The concluding chapter focuses on some criticisms brought against the Keynesian models and offers some generalized formulations to deal with these neoclassical objections. General conclusions follow the treatment of each representative group and author.

1 Introduction

A. The Fogus Of The Study

It may not initially be obvious to all readers of this work that there is any primary causal significance to be attached to the rate of profits in relation to economic theory in general or to the problems of distribution theory and theoretical long-run growth models specifically. The direction of causality can be shown to run from the effect of the rate of profits on distribution and, in turn, the effect of distribution on the analysis of long-run growth. From this view, therefore, until the question of profits is settled, there can be no determinate theory of distribution. Thus the key variable that has been chosen for analysis in this study is the dynamic property of profits, the rate of profits.

When applied to long-run dynamic models of economic development in free capitalist economies, the conceptualisation of the rate of profits will set the type of distribution mechanism that rules in such models and will thereby affect both the variables selected for inclusion and the method of analysis of those variables in the theoretical construction. In questions of growth the economist must not only be concerned with various methods of attaining an increase in whatever output aggregate is chosen, but he must also pay sufficient attention to who receives the benefit of this increased production, and finally whether this division is conducive to the stability of the model as formulated.

The primacy of profits theory and distribution theory as basic underlying concepts in the analysis of growth has not previously been given adequate emphasis. In this study it must freely be admitted that the analysis becomes enmeshed in a controversy¹ involving the meaningfulness of some widely accepted concepts in economic theory; consequently the implications of this study will be found to be much more fundamental to the accepted analytical framework of economics than merely in the specific context of growth theory. Nevertheless the major task of this study is to emphasise the implications of this basic controversy towards the correct method of analysing economic growth. Consequently it will be necessary to point out how and why the different approaches in the existing literature will lead to major contradictions.

B. An Historical Perspective

The problem of the role of profits and more precisely the rate of profits on committed finance can be clearly discerned in Ricardo’s search for the universal measure of value. His analytical method, as given in the oft-quoted letter to Malthus,¹ was focused on the problem of dividing the value of output among the factors of production. Ricardo’s express goal (goaded by the existence of the Corn Laws) was to show that the earnings of the landlords – rent – were unnecessary for the promotion of the growth of output. Ricardo’s solution to the problem of distribution involved postulating a necessary subsistence wage, and that wage, corn, was the crux of the development of the rest of his model. When Ricardo expanded the wage good to include more than one commodity he encountered the now familiar difficulty known to Marxian economists as the ‘transformation of values into prices’, for when the wage good is made up of commodities with differing inputs of capital and labour their pattern of relative prices changes with every possible value of the rate of profits. Ricardo’s attempts to reconcile this phenomenon with the classical postulate of uniformity of the rate of profits in different lines of production continued unsuccessfully until his death. Ricardo was the first major writer to approach the problem with which the present study will be primarily concerned.

Ricardo’s value theory and the transformation problem were incorporated by Marx in Capital. Marx’s approach to the problem of distribution, however, was slightly different. By extracting surplus value from labour the capitalist could, according the Marx, exploit labour and make a profit. Marx defines the rate of exploitation in terms of the economy-wide ratio of net profits to wages in value added.¹ Given net output and a uniform rate of profits for all lines of production in the system, the distributive shares and the pattern of prices can be determined. Nevertheless the transformation problem still remained unsolved, even though the system of distribution is logically consistent.

The problem still had not been solved when the neoclassical laissez-faire reaction to Marx developed. To justify the existence of interest and profit the neoclassicists did not emphasise the question of the measure of value (which was Ricardo’s initial question); rather they searched for the cause of value. If labour caused value then so did capital, the neoclassicist argued, and therefore the capitalist received his profits as justly as the worker received his wages. Thus the neoclassicists were not interested in measuring the value of output in terms of the value of inputs, but were satisfied merely to prove that inputs cause value and that value was therefore divided among the inputs in accordance with their contribution to output. Their reaction to Marx’s social theory caused them to miss the crucial problem in Marx’s economic theory.

There are two distinct streams of thought stemming from the neoclassical approach. This dichotomy of views still maintains a stranglehold on most aspects of modern economic theory, even on models of economic growth. These distinct views are connected with the names of Walras and Alfred Marshall. Walras, enamoured at a young age of the harmony of the spheres,² attempted to produce a similar harmony of the economic sphere. The tale of the Walrasian auctioneer and the process of tâtonnement need hardly be retold at this stage. It is logically incontrovertible that the Walrasian system required perfect foreknowledge and equilibrium prices in terms of satisfaction and market clearing.¹ The question that Walras does not explain or explicitly treat is, who owns the initial stocks of commodities that are traded and who earns the prices received?² The pattern of prices is set by the ethereal auctioneer, the equilibrium that exists is merely for a trading day. There is no theory of distribution in the Walrasian system because there is no theory to set the rate of profit and thus determine how the system sets its pattern of prices. Indeed the system can be utilised in terms of allocative efficiency, but it cannot be used to distribute the output once the value is determined. Its application will be seen more expansively below in terms of problems of growth.³

The other half of the neoclassical development is carried forth under the name of Alfred Marshall. Marshall’s intellectual offspring are probably just as numerous as the students of Walras, but seldom do they display the same degree of accuracy to the master. The fault, admittedly, lies partially with Marshall. It is said that a complete and separate theory can be evolved solely from his footnotes and appendices. In addition there is in Marshall both the analysis of a dynamic system and the stationary state. It is not always clear which case is being considered. Joan Robinson has commented that the more she learns about economics the more she respects Marshall as an economist and less as a man.⁴ This view stems from Marshall’s admitted defence of pure competition and capitalism to the extent of rejecting or rationalising away results and paradoxes that Marshall the economist had presented. As a consequence there is some difficulty in finding a concise statement on profits and distribution in Marshall’s writings.

Marshall has a normal rate of profit that rules in the long period where competitive entrants force the rate to uniformity in all lines of production. The normal prices in the system are then cost of production prices – long-run supply prices covering labour costs and a normal profit on the capital committed to the production of output. Sometimes Marshall views the economy as moving along dynamically and at other times grinding towards a stationary state. In the latter case the normal rate of profit is explicitly defined as the discount of the future. But in the stationary state the process of growth is completed; while in the case where the economy is rolling along with net investment continually being made and earning the normal rate of profits there is no explanation of what determines the normal prices or the normal rate of profits.¹ In both cases, however, it is clear that the demand blade of the Marshallian scissors is not the crucial factor.

In both the Walrasian and Marshallian neoclassical systems the problem of the determination of the rate of profits is left unsolved. Many modern neoclassical economists, however, when treating problems of long-run growth and distribution² seem to think that either the problem has been overcome or that it Is inconsequential. Although modern neoclassicists claim Wicksell as a precursor, Wicksell admitted that he had not got the problem sorted our properly.³

The Keynesian revolution interrupted the study of these problems of capital theory for a time, but the application of Keynes’s approach outside the short period was taken up again in the 1950s. The questions that will be focussed on in this volume are (1) whether the classicists, the neoclassicists, or the Keynesians have solved the problem of the determination of the rate of profits, and (2) which group has been able to utilise the concept of the rate of profits in a consistent theory of distribution in the context of economic growth.

C. Regent Discussion of the Problems

The real raison d’être for developing the problem of profits rates and distribution in the context of growth theory is more complex than historical disagreement. The controversy in distribution theory stems from the dual developments in extending macroeconomic theory to long-run problems after the General Theory.¹ In 1939 Harrod presented the first attempt at applying the basic General Theory analysis to problems of long-run growth.² In the late 1940s and early 1950s, on the other hand, the neoclassicists were fitting the concept of the production function into Ramsey–von Neumann models. Samuelson and Solow were the major contributors in this latter line. About the same time, Joan Robinson started pursuing the hint given by Harrod before the war and was further stimulated by Harrod’s post-war Towards a Dynamic Economics.³ Her express intent was a ‘generalisation of the General Theory’ to fit a wider range of long-run economic problems and to provide a theory of distribution. In the course of her work, which resulted in The Accumulation of Capital,⁴ she launched a side analysis and attack on the existing neoclassical theory. This attack began in the literature with her exchange with Solow in the mid-1950s.⁵ Initially this confrontation over the concept of the production function in neoclassical models and the distribution and growth theories stemming from the neoclassical view did not create the furore that was generated in the 1960s.

A major theoretical contribution to the conflict came with the appearance of Sraffa’s Production of Commodities by Means of Commodities¹ in 1960. In that work, after some forty years’ reflection, Sraffa was able to solve the old classical problem of the transformation of values into prices, and, in a short chapter on the choice of techniques, to show that the neoclassical proposition of increasing capital intensity resulting in low interest (profit) rates was not only false but misleading. The book, highly technical in nature, was not fully appreciated initially and it was not until Levhari, at Samuelson’s suggestion, put forward the ‘Non-switching Theorem’² that the value of Sraffa’s work was fully appreciated. Pasinetti, using Sraffa’s system and examples, disproved the non-switching theorem.³ Both the Capital Measurement and Re-switching controversies should have been settled, at least in terms of the necessity of utilising the rate of profits to measure the value of capital and solve distribution, at this point. In 1966, however, Samuelson and Modigliani published a strong reaction,⁴ in neoclassical terms, to a previous growth paper put forward by Pasinetti⁵ which utilised the basic models of Kaldor and Joan Robinson. The question Samuelson and Modigliani posed was not the validity of the underlying determinants of the model (they accepted both types of approach as theoretically consistent), but which of the two approaches achieved the greatest generality of application. This new battle line now moves under the guise of the ‘Two Cambridges Controversy’ with many economists unsure of where they stand between these two camps of giants.

D. The Necessity of the Study

Many of the students of growth theory who are now...

Table of contents

• Cover Page
• Half Title Page
• Title Page
• Copyright
• Table of Contents
• Dedication
• List of Illustrations
• Preface
• 1 Introduction
• 2 Classical and Neoclassical Approaches
• 3 J. E. Meade: An Eclectic Approach to Neoclassical Growth
• 4 J. Tobin: Marginal Productivity, Money and Growth
• 5 R. M. Solow: Rate of Profit and Return on Investment
• 6 Samuelson and Modigliani: The Unseemly Paradox
• 7 Keynes and Kalecki: The Forerunners
• 8 R. F. Harrod: Methodology and Dynamic Growth
• 9 N. Kaldor: Growth and Technical Progress
• 10 L. L. Pasinetti: When Workers Save
• 11 Joan Robinson: The Rate of Profit, Distribution and Accumulation
• 12 Keynesian Models: The Generality of the Assumptions
• Appendices
• Index