The Rate of Profit and Investment

  • W. A. Eltis

Abstract

The equilibrium relationship between the rate of profit and aggregate saving and investment will be analysed in this chapter. It will be argued that both planned saving and planned entrepreneurial investment will vary strongly with the rate of profit, and the reasons for this will be outlined. The object of the analysis will be to obtain plausible saving and investment functions which can be used (together with the equations from Chapters 6 and 7) to determine the equilibrium values of the economy’s major variables.

Keywords

Income Milton Payback 

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Notes

  1. 1.
    M. Kalecki, Essays in the Theory of Economic Fluctuations (Allen & Unwin, 1939) chap. 4. Modern portfolio theory has arrived at the same result. See, for instance, R. S. Hamada, ‘Portfolio analysis, market equilibrium and corporation finance’, Journal of Finance, vol. XXIV (Mar 1969).Google Scholar
  2. 1.
    Cf. J. Hirshleifer’s use of shareholder indifference curves in Investment, Interest and Capital (Englewood Cliffs, N.J.: Prentice-Hall, 1970).Google Scholar
  3. 2.
    Modigliani and Miller have shown that, in equilibrium, the value of a single company’s shares will be independent of its rate of dividend. See Franco Modigliani and Merton H. Miller, ‘The cost of capital, corporation finance, and the theory of investment’, American Economic Review, vol. XLVIII (June 1958). However, there can only be general (as against partial) equilibrium if the overall relationship between income and growth is the one that wealth owners prefer. If this condition is not fulfilled, individual share prices will not be in equilibrium and wealth owners will bid up the prices of shares which offer favoured distribution ratios, and bid down shares with relatively unfavoured distribution ratios, until the overall balance of consumable current income and growth is compatible with equilibrium.Google Scholar
  4. 1.
    J. L. Harvey and A. Newgarden (eds.), Management Guides to Mergers and Acquisitions (New York: Wiley, 1969) p. 96.Google Scholar
  5. 1.
    There is considerable analysis of the constraints on managerial policy which are due to the possibility of takeover in Robin Marris, The Economic Theory of ‘Managerial’ Capitalism (Macmillan, 1964).Google Scholar
  6. 1.
    See, for instance, Milton Friedman, A Theory of the Consumption Function (Princeton U.P., 1957) chaps, iv and v; F. Modigliani and A. Ando, ‘The permanent income and the life cycle hypothesis of saving behaviour: comparisons and tests’, in Proceedings of the Conference on Consumption and Saving, vol. n (Philadelphia, 1960); and A. Ando and F. Modigliani, ‘The “life cycle” hypothesis of saving: aggregate implications and tests’, American Economic Review, vol. LIII (Mar 1963).Google Scholar
  7. 2.
    See, for instance, Sir John Hicks, Critical Essays in Monetary Theory (Oxford U.P., 1967) chap. 6, ‘The pure theory of portfolio selection’.Google Scholar

Copyright information

© W. A. Eltis 1973

Authors and Affiliations

  • W. A. Eltis
    • 1
  1. 1.Exeter CollegeOxfordUK

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