A note on profit-led/wage-led growth models

By Sergio Cesaratto (Guest blogger)

As a follow up on Matías' post on real exchange rate (RER) and growth I want to make a point about "profit/wage led growth", although this is not central in the discussion about RER/Exports.

1) Profit-led growth:

Variations of the normal rate of profit, as such, have no direct and mechanic influence on gross investment, as often argued by post-Keynesian authors of various persuasions. As such, variations of rn only concern the sphere of income distribution. The latter can in turn influence investment decisions:
  • by affecting expected effective demand: a higher/lower rn might, for instance, negatively/positively affect consumption demand if this is affected by lower/higher real wages; or 
  • by being connected to the relative bargaining power of the working class and to the necessity for the ruling class to discipline it by regulating the labour reserve army; but this is generally done by using fiscal, monetary and exchange rate policies and not as a coordinated decisions of capitalists to regulate the accumulation rate.
Therefore, a rise of rn, as such, for no reason would positively affect investment. Likewise, a lower rn will, in general, leave gross investment unaffected as long as capitalists fear to bequeath market shares to competitors: each capitalist is homo homini lupus with respect to her classmates. Ça va sans dire that a rise/fall of ra above/below rn will just signal that actual capacity utilization, ua is above/below the normal one, un. In both cases gross investment will vary in order to readjust the degree of capacity utilization and normal profitability - while the long trend of investment is still set by demand for products associated to normal profitability).

A quote from Franklin Serrano* is timely here: “although politically entrepreneurs prefer higher profit margins and normal profit rates, capitalists do not ‘invest as a class’ but according to the existing investment opportunities and the pressure of competition. Their investment decisions are not an inverse function of the level of the normal rate of profits but a positive function of the size of the market. In the long run the size of lucrative investment opportunities depends on the level and rate of growth of effective demand- the demand of those who can pay normal prices (that price that allow firms to obtain the normal rate of profits, which defines the minimum accepted standard of profitability). If effective demand is expanding, whether normal profit margins and rates happen to be ‘high’ or ‘low’, competition and the search for maximum profits impel the firms collectively to expand productive investment.”

2. Wage-led growth:

Level effects, but not the growth effects as in the neo-Kaleckian model. A lower marginal propensity to save will induce be a temporary faster growth, but once capacity has adjusted to the new higher level of effective demand entailed by the stronger Supermultiplier , the economy will return to the former normal growth rate determined by the growth rate of autonomous expenditure. Of course, "temporary faster growth" might be very relevant. But no-wage-led growth, at least in the long run. The reason: wages are an induced component of aggregate demand, therefore they cannot be the driver. Given the other, well known, shortcomings of neo-Kaleckian models, I would conclude that the very concept of profit/wage led growth should be abandoned (sorry!). So Matias is totally correct on this point.

Not sure about his view about the main issue RER/exports. I may agree that sound and fair growth cannot be led by RER devaluation. Though, growth depends also on preserving a competitive RER, as we well (and sadly) now in Italy after the Euro.

PS: My paper on "Neo-Kaleckian and Sraffian controversies on accumulation theory" is here (version June 2013).

* Serrano, F. (2006), "Power Relations and American Macroeconomic Policy, from Bretton Woods to the Floating Dollar Standard," available here.


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