Download Investment and profits in neo-kaleckian models: a critical

Introduction
Objectives
Investment and profits in neo-kaleckian models: a
critical appraisal
Luigi Salvati
Supervisor: Prof. Attilio Trezzini
Roma Tre University
Department of Economics
November 16, 2015
L. Salvati
Investment and profits in neo-kaleckian models: a critical appraisal
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Introduction
Objectives
Introduction
Many of the so called neo-Kaleckian models incorporate the idea that
investment is an increasing function of the rate of profit (e.g. Rowthorn
1981) or of the profit-share (e.g. Bhaduri and Marglin 1990).
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Investment and profits in neo-kaleckian models: a critical appraisal
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Introduction
Objectives
Introduction
Many of the so called neo-Kaleckian models incorporate the idea that
investment is an increasing function of the rate of profit (e.g. Rowthorn
1981) or of the profit-share (e.g. Bhaduri and Marglin 1990).
Some of the papers in this school of thought can be undoubtedly defined
as underconsumptionist (the aforementioned Rowthorn model, but also
Dutt 1984 and Taylor 1985), since the effect of an increase in the wage
rate is unambiguously positive for growth or utilization rate, while
others (Bhaduri and Marglin in primis) are open to the possibility that in
certain countries the effect of a lower profit margin/share deriving from
higher wages would be that of reducing the utilization rate through its
descouraging effect on investment.
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Investment and profits in neo-kaleckian models: a critical appraisal
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Introduction
Objectives
Introduction
In Bhaduri and Marglin, indeed, we can find both stagnationist
(underconsumptionist) regimes and exhilarationist regimes (in which a
higher profit margin/share is associated to a higher degree of
utilization). In the same article, we can also find conflictual or
cooperative regimes, depending on the effect of higher wages on the total
wage bill and on the total profits. However, at the base of this reasoning
(which Stockhammer and Stehrer (2009) dub, alternatively, as the
“Goodwin-”, “Marx-” or “classical story”), there is the idea that a higher
wage share could reduce investment expenditures.
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Investment and profits in neo-kaleckian models: a critical appraisal
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Introduction
Objectives
Introduction
In Bhaduri and Marglin, indeed, we can find both stagnationist
(underconsumptionist) regimes and exhilarationist regimes (in which a
higher profit margin/share is associated to a higher degree of
utilization). In the same article, we can also find conflictual or
cooperative regimes, depending on the effect of higher wages on the total
wage bill and on the total profits. However, at the base of this reasoning
(which Stockhammer and Stehrer (2009) dub, alternatively, as the
“Goodwin-”, “Marx-” or “classical story”), there is the idea that a higher
wage share could reduce investment expenditures.
Based on this belief, a huge literature on the so called demand regimes
has been developing. Put simply, the idea can be summarized as follows.
A rise in the wage share, other things being equal, would have two effects
(keeping out, for now, foreign trade): it would increase consumption
(since it is assumed that workers have a higher propensity to consume
than capitalists) and at the same time it would reduce investment.
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Investment and profits in neo-kaleckian models: a critical appraisal
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Introduction
Objectives
Introduction
An economy in which the former effect were to prevail would be dubbed
as a “wage-led regime”, while it would be a “profit-led regime” if the
latter were the prevailing effect. In other words, a wage-led regime is
characterized by the fact that a rise in the wage share brings about an
increase of total aggregate demand, while the opposite will happen in
a profit-led regime.
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Investment and profits in neo-kaleckian models: a critical appraisal
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Introduction
Objectives
Introduction
An economy in which the former effect were to prevail would be dubbed
as a “wage-led regime”, while it would be a “profit-led regime” if the
latter were the prevailing effect. In other words, a wage-led regime is
characterized by the fact that a rise in the wage share brings about an
increase of total aggregate demand, while the opposite will happen in
a profit-led regime.
These models can be extended in order to account for foreign trade. In
this case, increasing real wages in a country would make its exports more
costly, reducing them. It is possible to define “total demand regimes”
those resulting from the consideration of both domestic and foreign trade
effects of the changes in functional distribution. Wage-led domestic
regimes can become profit-led “total” regimes when the reduction in
exports caused by the rise in the wage share overcompensates the
positive effects on the aggregate demand resulting from the domestic
characteristics of the country.
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Investment and profits in neo-kaleckian models: a critical appraisal
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Introduction
Objectives
Introduction
As Onaran and Galanis (2013) write: “Whether the negative effect of
lower wages on consumption or the positive effect on investment and net
exports is larger in absolute value essentially becomes an empirical
question”. Many attempts to estimate the total effects of a changing
functional distribution have been made starting with the essay by Bowles
and Boyer (1995), while more recent papers are those by Barbosa-Filho
and Taylor (2006), Stockhammer and Onaran (2004) and Stockhammer,
Onaran and Grafl (2011).
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Investment and profits in neo-kaleckian models: a critical appraisal
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Introduction
Objectives
Objectives
Whatever the results of the estimation attempts reveal, it is clear that the
function of investment is of vital importance to the “regimes” literature.
In particular, it is the direct dependence of investment upon different
indicators of profitability (let it be the profit rate, the profit margin or the
profit share) which gives life to the different demand regimes.
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Investment and profits in neo-kaleckian models: a critical appraisal
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Introduction
Objectives
Objectives
Whatever the results of the estimation attempts reveal, it is clear that the
function of investment is of vital importance to the “regimes” literature.
In particular, it is the direct dependence of investment upon different
indicators of profitability (let it be the profit rate, the profit margin or the
profit share) which gives life to the different demand regimes.
There are several problems with this kind of explanations. First of all,
there is no unanimity on the fact that investment depends on profits.
The doubts when the argument of the function is the profit share are
even stronger. In these specifications, for example, there are no
considerations on the effect that a higher wage share/rate could have on
demand expectations, which could reasonably be considered among the
main determinants of investment.
L. Salvati
Investment and profits in neo-kaleckian models: a critical appraisal
6/8
Introduction
Objectives
Objectives
In my research, I will try to perform a critical review of the demand
regimes framework. This task should be accomplished from three points
of view (which should be incorporated into three thesis chapters/papers):
L. Salvati
Investment and profits in neo-kaleckian models: a critical appraisal
7/8
Introduction
Objectives
Objectives
In my research, I will try to perform a critical review of the demand
regimes framework. This task should be accomplished from three points
of view (which should be incorporated into three thesis chapters/papers):
from a theoretical point of view: I will try to highlight the
shortcomings of a function of the investment with the
aforementioned specifications;
L. Salvati
Investment and profits in neo-kaleckian models: a critical appraisal
7/8
Introduction
Objectives
Objectives
In my research, I will try to perform a critical review of the demand
regimes framework. This task should be accomplished from three points
of view (which should be incorporated into three thesis chapters/papers):
from a theoretical point of view: I will try to highlight the
shortcomings of a function of the investment with the
aforementioned specifications;
from an empirical point of view: the empirical literature on the
investment-profits relationship will be considered and its results and
those suggested by possible alternative estimation methods will be
taken into consideration and evalued;
L. Salvati
Investment and profits in neo-kaleckian models: a critical appraisal
7/8
Introduction
Objectives
Objectives
In my research, I will try to perform a critical review of the demand
regimes framework. This task should be accomplished from three points
of view (which should be incorporated into three thesis chapters/papers):
from a theoretical point of view: I will try to highlight the
shortcomings of a function of the investment with the
aforementioned specifications;
from an empirical point of view: the empirical literature on the
investment-profits relationship will be considered and its results and
those suggested by possible alternative estimation methods will be
taken into consideration and evalued;
as a matter of history of economic thought: the idea is to examine
how accumulation and profits are related in the literature, especially
in the works by classical economists.
L. Salvati
Investment and profits in neo-kaleckian models: a critical appraisal
7/8
Introduction
Objectives
References
Barbosa-Filho, N. H., Taylor, L. (2006). Distributive and demand cycles in the US
economy-a structuralist Goodwin model. Metroeconomica, 57(3), 389-411.
Bhaduri, A., Marglin, S. (1990). Unemployment and the real wage: the economic basis for
contesting political ideologies. Cambridge Journal of Economics 14 (4), 375-393.
Bowles, S., Boyer, R. (1995). Wages, aggregate demand, and employment in an open
economy: an empirical investigation. Macroeconomic policy after the conservative era,
Cambridge University Press, Cambridge, 143-71.
Dutt, A. K. (1984). Stagnation, Income Distribution and Monopoly Power. Cambridge
Journal of Economics 8 (1), 25–40.
Onaran, Ö., Stockhammer, E., Grafl, L. (2011). Financialisation, income distribution and
aggregate demand in the USA. Cambridge Journal of Economics, 35(4), 637-661.
Onaran, Ö., Galanis, G. (2013). Is aggregate demand wage-led or profit-led? A global
model. Wage-led Growth: An Equitable Strategy for Economic Recovery, Basingstoke, UK:
Palgrave Macmillan, 71-99.
Rowthorn, B. (1981). Demand, real wages and economic growth. North East London
Polytechnic.
Stockhammer, E., Stehrer, R. (2009) Goodwin or Kalecki in Demand? Functional Income
Distribution and Aggregate Demand in the Short Run. PERI Working Papers: 153.
Stockhammer, E., Onaran, Ö. (2004). Accumulation, distribution and employment: a
structural VAR approach to a Kaleckian macro model. Structural Change and Economic
Dynamics, 15(4), 421-447.
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Investment and profits in neo-kaleckian models: a critical appraisal
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