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Corporate Profits and Relationship to Investment

In: The Post ‘Great Recession’ US Economy

Author

Listed:
  • Philip Arestis
  • Elias Karakitsos

Abstract

Profits play a crucial role in business investment and the equity market. The former has a major impact on long-term GDP growth and in business cycle analysis. The equity market, on the other hand, affects both investment and, via the wealth effect, consumer expenditure. But profits are one of the most volatile variables in the economy. Accordingly, they play a key role in long-term growth trends and in business cycle analysis. Until very recently a prevalent view was that the long-term decline in profitability that took place from the late 1960s to the early 1980s had been reversed. Such a decline was associated with the heyday of trade union power and the interference of Keynesian-type demand management with laissez-faire economics. Defenders of such policies attributed the decline to the two oil shocks that redistributed income and wealth from the oil-consuming to the oil-producing countries. There was a strong belief that neoliberalism invigorated the power of the market mechanism and managed to reverse the long-term decline in profitability.

Suggested Citation

  • Philip Arestis & Elias Karakitsos, 2010. "Corporate Profits and Relationship to Investment," Palgrave Macmillan Books, in: The Post ‘Great Recession’ US Economy, chapter 5, pages 97-119, Palgrave Macmillan.
    • Handle: RePEc:pal:palchp:978-0-230-27610-9_5
    DOI: 10.1057/9780230276109_5
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