Financialisation and the ‘supply-side’ face of the investment-profit puzzle

Abstract

The high level of profits along with low levels of gross physical investment has been characterized as a puzzle in heterodox economics. One of the most extended answers at the firm level is that changes in corporate governance have altered the objectives of the firm toward profits, rather than growth. However, once it is acknowledged that investment becomes the basis upon which companies supply commodities as well as compete with other firms, an ever decreasing rate of investment should not be compatible with permanent high levels of profits. This is what we call the ‘supply-side’ face of the investment-profit puzzle. The article builds on the post-Keynesian theory of the firm and its investment decision and explores different answers already linked to the financialisation literature such as changes brought about by production outsourcing, increased market power, the attack on labor conditions and financial accumulation. Once these solutions are critically assessed, an extension to the theory is proposed in order to show that firm’s profitability has been detaching from its physical investment decisions.

Keywords:

• Financialisation
• globalization
• investment
• monopolization
• profit

Notes

1 The idea of maximization is contested. In a context of fundamental uncertainty, the firm may seek overall satisfactory performances, rather than maximizing ones (Koutsoyiannis 1975; Lavoie 2014).

2 And this is why both of them belong to what has been termed the ‘investment financing’ theory of profits which is a different theory of profit margins from that of other early post-Keynesians such as Kalecki and Robinson (for a detailed analysis see Melmiès 2016).

3 In Wood’s original formulation, the EF (or opportunity frontier as he defined it), was concave but did not have a positive slope segment.

4 Dallery (2009) and Dallery and Van Treeck (2009) are notable exceptions which will be discussed in Section 4.

5 The kind of macroeconomic analysis we make reference to should not be confused with that which studies different types of macroeconomic regimes under financialisation (such as Boyer 2000; Hein and Van Treeck 2010).

6 Unless all firms are doing the same. However, this has not been the case worldwide.

7 It could be argued that, by the time Stockhammer (2004) and Dallery (2009) wrote their papers, the rate of accumulation was not g** but a higher one and, since that moment, it has been decreasing towards g**. But then the question should be why they didn’t chose g** in the first place.

8 Authors do not distinguish between residential and nonresidential.

Additional information

Notes on contributors

Joel Rabinovich

Joel Rabinovich is Postdoctoral Research Fellow at Leeds University Business School, UK and Associate Researcher at CEPN (Centre d’Economie de l’Université Paris 13), France.