1. The Role of Profit in Advanced Market Economies

For further discussion on the role of profit as a driving force in capital formation activities in business firms, see Smith (1776), Ricardo (1815), Marx (1867), Schumpeter (1934), Keynes (1936), Solow (1957), Sraffa (1960), Friedman (1962), Baumol (1974), and Samuelson (1974). Keynes’ (1936) assertion that investment and employment opportunities depend on the marginal efficiency of capital sparked substantial research on the relationship between required profit rates and capital formation, for example, see neo-Keynesian and neoclassical studies by Jorgenson (1963, 1967, 1971), Hall and Jorgenson (1967), Lucas and Prescott (1971), Abel, Mankiw, Summers, and Zeckhauser (1989), and Feldstein (1996). Relatedly, the cost of capital is a key determinant of investment in models of capital formation based on Tobin’s q ratio of the value of a company given by financial markets to its total assets, for example, see Alchian (1955), Brainard and Tobin (1968), Tobin (1969), Abel (1979), Summers (1981), Hayashi (1982), Shapiro (1986), and Asimakopulos (1971, 1991).