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Profit-led growth and the stock market

Author

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  • Thomas R. Michl

    (Department of Economics, Colgate University, New York, NY, USA)

Abstract

This paper presents a simple stock-flow consistent model of corporate capitalism with a financial market for firm equities issued by managers as part of their investment plan with the investment rate in turn sensitive to the q ratio, workers who save for life-cycle motives, and capitalist rentier households who save from a bequest motive. The model assumes full capacity utilization; saving and investment decisions are coordinated through changes in the valuation of the capital stock or q ratio. Changes in valuation can induce enough investment and capitalist consumption to fill the demand gap left by a reduction in the wage share. But unless there is a strong sensitivity of investment to the q ratio, the increased profitability will be dissipated in a profit-led stock market boom. The model helps resolve the neoliberal paradox of rising profitability with little growth. It also clarifies the relationship between classical and Keynesian growth models which can be seen as special cases arising from limiting values of the investment sensitivity to the q ratio.

Suggested Citation

  • Thomas R. Michl, 2017. "Profit-led growth and the stock market," Review of Keynesian Economics, Edward Elgar Publishing, vol. 5(1), pages 61-77, January.
    • Handle: RePEc:elg:rokejn:v:5:y:2017:i:1:p61-77
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    Citations

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    Cited by:

    1. Petach, Luke & Tavani, Daniele, 2019. "No one is alone: Strategic complementarities, capacity utilization, growth, and distribution," Structural Change and Economic Dynamics, Elsevier, vol. 50(C), pages 203-215.
    2. Leila Davis & Joao de Souza, 2022. "Stylized facts on the evolution of profit rates in the US: Evidence from firm-level data," Working Papers 2022-01, University of Massachusetts Boston, Economics Department.
    3. Luke Petach & Daniele Tavani, 2020. "Income shares, secular stagnation and the long‐run distribution of wealth," Metroeconomica, Wiley Blackwell, vol. 71(1), pages 235-255, February.
    4. Daniele Tavani & Luke Petach, 2021. "Firm beliefs and long-run demand effects in a labor-constrained model of growth and distribution," Journal of Evolutionary Economics, Springer, vol. 31(2), pages 353-377, April.
    5. Codrina Rada, Marcio Santetti, Ansel Schiavone, Rudiger von Arnim, 2021. "Post-Keynesian vignettes on secular stagnation:From labor suppression to natural growth," Working Paper Series, Department of Economics, University of Utah 2021_05, University of Utah, Department of Economics.

    More about this item

    Keywords

    Pasinetti paradox; Cambridge equation; q ratio; heterodox growth model; stock-flow consistency;
    All these keywords.

    JEL classification:

    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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