Some critical appraisals on the profit-led models of growth

Cardoso, M. & Crespo, E. Presentation Rome – September 11th

the equilibrium rate of capacity utilization does not tend to a normal level even in the long run.  growth and investment depend on the expansion of aggregate demand. and  the normal rate of profit is only a minimum floor to investment. . Goals of the paper:  Analyze critically the Neo-Marxist models of growth and distribution – an inverse relation between growth and income distribution in favor of workers.  Handicaps of this model:  Ignore the capacity effect of investment.  Suppose that the additional capacity will be sanctioned by aggregate demand (Say’s Law is implicit).  Our proposal:  There is no definite link between growth and distribution (histories proves this Point – Brazil in the 70s vs 80s & 90s).

investment and autonomous demand.  The Neo-Marxist Investment Function. .  The impact of the introduction of other autonomous expenditures on The Neo-Marxist Model (investment is considered autonomous). and  Some conclusions. Agenda:  Profits.  A model where the effective rate of profit is not considered.

. Profits. where does the extra 10 monetary unities come from to guarantee the realization of production?  how can production be increased in the absence of some form of autonomous expenditure ?  Conclusion: even (Neo) Marxist models of growth depend on some form of autonomous expenditure (investment) otherwise they can not explain systems of amplified reproduction.  Current income can not finance its own expansion (corn economy x monetary economy) .  Example: -Suppose a capitalist advances 20 monetary unities: .  In this case.10 is generated as surplus value.Suppose also that the production is sold by 30 monetary unities.10 are used to pay salaries (VC). investment and autonomous demand (1)  D – M – D’ => the typical process of capital accumulation. if the capitalist advanced only 20 monetary unities. (only systems of simple reproduction). .10 are used to consume means of production produced in the previous period (CC). .

? Is it a good hypothesis to consider that profits finance its expansion ? . What does real life tells us about…. investment and autonomous demand (2)  In Marxist terms: PP = CC + VC + SV AV = VC + SV Where SV = surplus value and AV is the added value. -It is impossible to observe: VC + SV < AV without either: credit (autonomous expenditures) or Pigou Effect or Keynes Effect (deflation). Profits.

Using the multiplier: => Neither profit nor wage-led (no matter the size of h)! . and (iii) depreciation rate is zero. 1990) – Case 1:  Effects of investment on the level and growth rate of income: Simplifying hypothesis: (i) wages are completely consumed. The Neo-Marxist Investment Function (1)  Problems of the Kaleckian-Steindlian models of growth: double accounting (wage-led models)  Solving the specification problem and reestablishing the inverse relation (Bhaduri and Marglin. (ii) all profits are saved.

Growth becomes wage-led! Solving the specification problem and reestablishing the inverse relation (XXXXXXX) – Case 3: Non Linear Investment Function: . if φ <1 => wage-led.  What is the economic rationally to assume a non-linear investment function !? .Ambiguous result: if φ >1 => profit-led (investment compensates consumption). The Neo-Marxist Investment Function (2)  Solving the specification problem and reestablishing the inverse relation (XXXXXXX) – Case 2: .

Why capitalists would necessarily decide to increase investments when salaries are being reduced. The impact of the introduction of other autonomous expenditures on The Neo-Marxist Model (investment is considered autonomous) (1)  Some problems of the (Neo) Marxist investment function from an heterodox approach: 1 . once the resulting aggregate demand almost certainly is not growing at the same rate of the augmented capacity ? This completely ignores that investment crates productive capacity and that it must be utilized. i. there must be effective demand to use the additional investment. There is no tendency for the rate of capacity utilization to be equal to the desired or Normal level even in equilibrium and in the long or medium run. 2 – The rate of capacity utilization becomes the adjusting variable.. The normal rate of profit is a floor to investment (however there is no direct link with Investment decisions). .e.

-Another curious result: the other components of demand tend to disappear and the growth of demand is sustained by investment only! The rate of capacity utilization would stabilize at an abnormal level. gc = 3. The impact of the introduction of other autonomous expenditures on The Neo-Marxist Model (investment is considered autonomous) (2)  What happens to the rate of capacity utilization when other autonomous investment Component is introduced (other than the investment): -Suppose that α = β = γ = 1/3.Also that gz = 3%.The rate of capacity utilization diverges from the normal!!! (syndrome of the stubborn underutilization of capacity). . . .5% e gi = 4%.

2006 e Blecker.A possible solution? Z/Y (Lima e Carvalho. The impact of the introduction of other autonomous expenditures on The Neo-Marxist Model (investment is considered autonomous) (3)  What if the gi = gz = gc ? (Lima e Carvalho.5% e gi = 4%. gc = 3. . . 2002) -Suppose that α = β = γ = 1/3. -Another curious result: the other components of demand tend to disappear and the growth of demand is sustained by investment only ! The rate of capacity utilization would stabilize at an abnormal level. .Also that gz = 3%. 2006 e Blecker. 2002) – Autonomous expenditure ? .The rate of capacity utilization continuously diverges !!! (syndrome of the stubborn underutilization of capacity).

consequently. but they certainly do not invest as a class” (Kalecki. -“Capitalists do many things as a class. . but increasing its capacity utilization. 1967): . He could increase its mass and rate of profit by working at the normal level of capacity utilization – responding to the increase of the investment by the others NOT increasing his investment. the individual capitalist does not maximize its mass of profits. A model where the effective rate of profit is not considered (1) -The rate of capacity utilization diverges from the normal rate and. -It is not a problem only in the realm of the representative agent (he only sees the normal rate Of profits not the effective rate which drops for several periods of time).Interest of the individual x class. -the “rebel” investor could only let its rate of capacity utilization to increase and enjoy a higher rate of profits than his competitors.

contrary to the profit-led models predictions. A model where the rate of capacity utilization is not a determinant to investment (2) So if there are “free capitalist riders”: When the productive capacity of the whole industry is underutilized. . the individual capitalist will get a higher mass of profits and a higher effective rate of profits than the average or „representative‟ capitalist when he adjusts his investments decisions in order to obtain a normal rate of capacity utilization. contrary to the profit-led models predictions. b) When the productive capacity of the whole industry is overused. the individual capitalist will get a higher mass of profits but a minor effective rate of profit than the average or „representative‟ capitalist when he adjusts his investments decisions in order to obtain a normal rate of capacity utilization.

 A model where the rate of capacity utilization is not a determinant to investment (3) .

However. one should not conclude that there is a functional relation. . who cares ?!  B&M investment function ignores that that investment creates productive capacity and that it must be utilized.  In general. between the normal rate of profit and the capitalist’s decision to invest. However.  No matter how big is the normal rate of profit-elasticity of investment. direct or indirect. which is even more dramatic when salaries are been depressed (= when the normal rate of profit is been increased). The only possible result could be in an non-linear investment Function. So. it Is not possible. Conclusions (1):  The Neo Marxist models of growth tries to justify some sort of mechanism by which the normal rate of profit positively influences investment. In the capitalist system there is always a minimum rate of profit below which capitalists would not be willing to invest. However. from this latter proposition. the level of income is neither profit nor wage led in (Neo) Marxist investment function. the level of income is not Either profit or wage led in the (Neo) Marxist investment function. aggregate investment is in fact financed in this model by an ex nihilo credit.

Grazie !!! . even in its most beneficial case. Conclusions (2):  The insertion of other components of autonomous demand in the NM models: the rate of capacity utilization diverges from the normal one or not (in the curious Kaleckian case).  The free rider capitalist breaks the results of the NM model.  Capitalists do many things as a class. but they certainly do not invest as a class.

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