Rate of Profit, Distribution and Growth: Two Views

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.

In striking contrast to the models developed by the modern neoclassical writers are two models of general equilibrium developed in the 1930s, one by von Neumann, the other by Sraffa.¹ Both are distinctly in the classical vein, but neither model involves recourse to marginal products, abstinence, rewards of waiting or the perfect substitutability of production functions that were later to be added by the modern neoclassicists.

The analysis and conclusions of the preceding chapter on the treatment of the concept of the rate of profits and its implications for economic growth in mature capitalist economies can now be utilised in the discussion of the models of economic growth put forward by modern neoclassical theorists. The grouping of the following writters such as Meade, Tobin, Solow, Samuelson and Modigliani (many of whom prefer to wear the Keynesian label) as neoclassicists is in regard to their approach to the concept of capital and the rate of profits as the return to capital or more precisely as equal to the marginal product of that substance called capital.

A novel attempt to blend a Keynesian and neoclassical growth system, complete with marginal analysis, is presented by James Tobin in a paper on ‘Money and Economic Growth’.¹ As the title suggests, the paper is an attempt to analyse the role of money in a model of economic growth. Tobin attempts to monetise a standard neoclassical model by means of emphasising the Keynesian consumption—savings—money-holding decisions via his well-known concept of portfolio balance. The two-sided decision, to save or spend, and what form to hold savings, is the crux of the Keynesian format of the model. Unfortunately these savings and portfolio decisions are the only Keynesian aspects of the model. Tobin’s model is neoclassical in all other aspects and it assumes full employment and the applicability of Say’s Law.²

In his recent work¹ Robert Solow has not produced what could be called a full-blown model of economic growth. The models that Solow (occasionally in collaboration with Samuelson) has put forward have been primarily generalisations of earlier work by Ramsey, von Neumann and Harrod, incorporating linear, homogeneous production functions, usually of the Cobb—Douglas variety, into the original models.² Solow’s justification for this approach is that ‘One usually thinks of the long run as the domain of neoclassical analysis, the land of the margin’.³

The last system to be analysed in this section of neoclassical models of growth will be the tour de force prepared by Paul Samuelson and Franco Modigliani¹ in reaction to a limited growth model put forward by Luigi Pasinetti.² The paper’s more technical treatment of the Pasinetti model will be dealt with only briefly at this stage as the formal presentation of Pasinetti’s system will not appear until Chapter 10. More important than the criticism, however, is the neoclassical model that Samuelson and Modigliani formulate in their paper. It will be outlined and its claims analysed on its own merit as a neoclassical model of economic growth.

Having completed a limited coverage of the propositions of writers on growth showing a distinct neoclassical bias, models of the Keynesian persuasion will be discussed in the next four chapters. The purer Keynesian models that will be reviewed here owe, as their nominal title suggests, substantial debt to the reorganisation of economic thinking perpetrated by the writings and actions of J. M. Keynes. Although, during the period of his work, Keynes’s influence was unique, subsequent writers have had convenience to the strikingly similar, and often more direct, work of the Polish economist, Michal Kalecki.^l Thus this chapter, showing the theoretical foundations for the work presented in subsequent chapters, will deal with the insights provided by both writers whose work appeared almost simultaneously in their respective spheres of influence. Particular writers’ utilisation of these seminal ideas will not be spelled out explicitly, for they should in most cases be obvious, with some relying merely on the work of Keynes and others on both (and with a good deal of Karl Marx included in Kalecki’s influence). Neither will an attempt be made to distinguish all the major points of difference between Keynes and Kalecki or between the two and the received body of economic theory as it existed at the time of their work.

Sir Roy Harrod is, without much dispute, the first economist to consider the analysis of economic growth as requiring dynamic concepts of a very unique nature. The Harrod conception of dynamism was initially formulated in a 1934 paper, ‘The Expansion of Credit in an Advancing Economy’, where Harrod states that ‘It is an enquiry into the relation between the rates of increase in a regularly advancing society…’.¹

Nicholas Kaldor, like many other theorists in the Keynesian tradition, takes his initial starting point from Harrod’s challenge to produce a dynamic growth theory.¹ Unlike Harrod, however, Kaldor recognises the possibility of incorporating the guides laid down by Keynes and Kalecki; consequently Kaldor achieves a very different conceptual result by using the same methodological framework. In addition, Kaldor recognises the necessity of distributional aspects, a perception which Kaldor derives from an appreciation of the early work of Ricardo and the extensions of Marx and von Neumann. This view involves explicit recognition of the importance of the rate of profits on capital.

Kaldor’s basic distributional formulae, upon which his distribution theory rests, were corrected for certain omissions in a 1962 paper¹ by Luigi Pasinetti. Pasinetti pointed out that, although Kaldor had made allowance for workers’ savings in his equations, he had not extended to them the possibility of purchasing capital with their savings, nor analysed the effects of the income the workers might receive from owning assets. After making the appropriate alterations, Pasinetti concluded that Kaldor’s results were valid, irrespective of the savings of workers.

As one of the Cambridge economists working closely with Keynes during the development of the General Theory, it is not surprising to find Joan Robinson among the main contributors to the extension of the Keynesian framework into the long period. In fact, Professor Robinson had developed, as early as 1936, an extension of the theory of employment to long-run considerations.¹ It was not, however, until Harrod’s later work that Mrs Robinson concerned herself primarily with long-period growth, and even then she chose not only to look to an extension of the Harrod model in the context of Keynes and Kalecki, but also to delve into existing classical and neoclassical theory in search of a generalised theory of growth.² Her cognisance of the propositions and deficiencies of both previous approaches has led her to a thorough and broad-based analysis of the problem.

The two main approaches to problems of long-run economic growth have now been presented. The analysis of the two types of basic model — neoclassical and Keynesian — has been based on the propositions concerning the treatment of the rate of profits and distribution theory outlined in Chapters 1 and 2.