Profits, Investment, and Causality: An Examination of Alternative Paradigms

Abstract

Determinants of the level of profits and the share of these profits in national income in the short run have received only limited attention from economists. Most paradigms such as the neo-classical, neo-Keynesian and neo-Marxian theories have, in general, attempted to explain distributive shares in long run equilibrium/disequilibrium or steady state growth frameworks.' Further, there is little discussion of the behavioral relationships of various economic agents who affect and are affected by changes in distributive shares. Kalecki [19] argued for determination of profits and wages by the expenditure behavior of capitalists and by the such as the degree of monopoly in output and input markets-particularly the labor market.2 Capitalists' expenditure together with the determine workers' consumption and, consequently, national output and employment. The national output will be pushed to the point where profits carved out of it in accordance with the 'distribution factors' are equal to the sum of capitalists' consumption and [19, 81]. Further Kalecki argued at length that, given the distribution factors in the short run, It is their [capitalists'] consumption and investment that determine profits, and not vice versa [19, 79]. Similar behavioral roles of different economic classes are emphasized in the works of Keynes [20], Kaldor [18], and Pasinetti [25]. Keynesians/neo-Keynesians also ascribe a leading role to investment; however there are differences in detail between the popular Keynesian paradigm and that of Keynes's own work [10; 23]. Neo-classical theory, on the other hand, seems to reverse this direction of causation between investment and profits due to the absence of an independent investment function.