Financialisation and Rising Shareholder Power in Kaleckian/Post-Kaleckian Models of Distribution and Growth

Abstract

We establish the link between rising shareholder power on the firm level, increasing pressure on labour, and redistribution at the expense of wages, with the macroeconomic effects on capacity utilisation, profits and capital accumulation. Three channels of transmission of ‘financialisation’ and increasing shareholder power, the ‘preference channel’, the ‘finance channel’ and the ‘distribution channel’, are introduced into two different variants of the Kaleckian distribution and growth model, the Kaleckian model and the Post-Kaleckian model. Within these models, three potential regimes of accumulation are derived, the ‘contractive’ regime, the ‘profits without investment’ regime, and the ‘finance-led growth’ regime. Only the ‘profits without investment’ regime generates a strict micro-macro identity, whereas the other two regimes are characterised by fallacies of composition, a ‘paradox of accumulation’ in the ‘finance-led growth’ regime and a ‘paradox of profits’ in the ‘contractive’ regime.

Acknowledgments

An earlier version of this paper (Hein & van Treeck, 2007) was presented at the conference ‘Finance-led Capitalism? Macroeconomic Effects of Changes in the Financial Sector’, 26–27 October 2007, in Berlin. For helpful comments on that version we would like to thank the participants in the conference. We are also most grateful for comments by an anonymous referee.

Notes

¹See for example the overview in Eatwell & Taylor (2000) for an early analysis, Krippner (2005), Orhangazi (2008), Duménil & Lévy (2004a, 2004b) and the contributions in Epstein (2005) for a detailed treatment of the development in the US and other countries, van Treeck (2009a) and van Treeck et al. (2007) for a comparison of the macroeconomics of financialisation in the US and Germany, and Stockhammer (2008) for the development in Europe.

²Monetary and financial variables have been introduced into Post-Keynesian models of distribution and growth since the late 1980s, as is shown in the review by Hein (2008a). However, the focus in these models was mainly on the integration of exogenous interest rates and endogenous credit. The integration of financialisation issues only started in the early 2000s. See for instance the early work by Aglietta (2000) and Boyer (2000), the papers with partial models on the effects of financialisation on investment by Stockhammer (2004, 2005–06) and on consumption by Bhaduri et al. (2006) and Dutt (2006), and the work on complete, stock-flow consistent models developed by Dallery & van Treeck (2010), Hein (2008c, 2010), Lavoie (2008), Skott & Ryoo (2008a, 2008b) and van Treeck (2009b). For an overview see Hein & van Treeck (2010).

³The following arguments on financialisation and the Post-Keynesian theory of the firm draw on Hein & van Treeck (2010).

⁴The profit rate of the financial sector in the US, however, has increased significantly since the early 1980s exceeding the profit rate of the non-financial sector by a considerable amount since then (Duménil & Lévy, 2004a).

⁵The approach presented here is therefore different from the one in Hein & van Treeck (2007) where we assumed the debt/capital and equity/capital ratios to be constant, which can only hold in a very special case or in the very short run. Here, we make no such assumption. The procedure is thus similar to the one in Hein (2008b). For an explicit analysis of the debt and equity dynamics in otherwise similar Kaleckian models see Hein (2008c, 2010).

⁶Of course, one may also consider the possibility that an increase in shareholder power reduces the rentiers' profit rate, when there are strong contractive macroeconomic effects on the overall profit rate. Here, we exclude this possibility for simplicity.

⁷In our model, we consider only rentiers' consumption out of current income flows. When shareholder value orientation is furthermore linked to increasing stock prices, it can be expected that rising stock market wealth further lowers the overall saving rate, in particular when households can borrow extensively against collateral, as described by Dutt (2006) and Bhaduri et al. (2006). However, the expansive effects of increasing wealth-based and credit-financed consumption might only be temporary because of subsequent interest payments and repayment of credit, which dampen aggregated demand.

⁸Note that , so that a strong effect via the ‘preference channel’ on firms' investment increases the value of the right-hand side of condition (15a′).