The profits-investment nexus Michael Roberts HMNY April 2017

The premise Investment (especially business investment) is the key driver of economic growth and the main swing factor in the capitalist business cycle of boom and slump

The theory Keynesian macro-identities suggest that investment drives GDP, employment and profits through the mechanism of effective demand. Marxist theory says that it is profit that calls the tune, not investment. Profit is part of surplus value, or the unpaid labour in production. It is the result of the exploitation of labour Keynesian macro-identities are thus back to front: investment does not ‘cause’ profit; profit ‘causes’ investment.

The evidence There is strong evidence that profits drive or lead investment in the business cycle, as the Marxist model would suggest. There is little evidence that investment drives profits as the Keynesian model would suggest.

Policy conclusion Thus government spending or budget deficits (net borrowing) will not restore economic growth or end slumps. These end only when the profitability of business capital is revived. The Keynesian multiplier is less compelling than the Marxist multiplier.

Investment is the swing factor

Macro identities (NI) National income = (NE) national expenditure NI (Profits + Wages) = NE (Investment + Consumption) So Profit + Wages = Investment + Consumption.  Now if we assume that wages are all spent on consumption and not saved, then Profits = Investment

Back to Front Profits depend on investment - Keynesian Investment depends on profit - Marxist.  And profit depends on the exploitation of labour power and its appropriation by capital.  An objective causal analysis based on a specific form of class society (Marx) or individual behaviour (Keynes)

Marx’s theory of crisis The law of the tendency of the rate of profit to fall / S C + V ROP falls if C/V rises faster than S/V Here’s the trick! C/V rises faster (tendency) BUT there are times when S/V rises faster (countertendency) s/v/(c/v+1)

Marx’s theory of crisis The impact of the crisis S / C + V Falling C – businesses bust/merged, centralised Falling V – wages down, reserve army rises The rate of profit rises and then mass of profit THE CYCLE OF PROFIT RESUMES

The profit cycle

The US rate of profit

The non-fictitious rate of profit

Big fall globally before GR

Profitability and investment

Close correlation

Profits lead investment

The Kalecki equation Profits = Investment – (non-capitalist) Savings. Savings = households, corporations, government and foreign savings.  If households and corporations save more (as they tend to do in a slump) and foreign savings rise (in other words the national economy’s deficit with the rest of the world rises), then domestic investment will be lower and so will profits.

The Marxist equation Profits + (non-capitalist savings) = Investment If business profits are static or fall, investment will fall UNLESS households and corporations save more and/or foreign savings rise, not fall. Government dissaving is a negative for business profits and thus business investment.

The Krugman multiplier

The Marxist multiplier

Which is compelling?

Japan: the case study

Conclusion The Keynesian view that effective demand and investment drive profits is logically weak and empirically unproven. The Marxist view is that profitability and profits drive investment in a capitalist economy. is theoretically sound and empirically supported. The Marxist multiplier (the changes in real GDP relative to profitability) is a better guide to any sustained change in a capitalist economy than the Keynesian multiplier (changes in real GDP relative to government net spending). Keynesian fiscal stimulus policy prescriptions are unlikely to work in restoring investment, growth and employment in a capitalist economy – indeed they could even delay recovery.