Reconsidering the Investment–Profit Nexus in Finance-led Economies

8/17/2019 Reconsidering the Investment–Profit Nexus in Finance-led Economies

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RECONSIDERING THE INVESTMENT–PROFIT NEXUS IN

FINANCE-LED ECONOMIES: AN ARDL-BASED APPROACH

Till van Treeck*Macroeconomic Policy Institute (IMK) in the Hans Boeckler Foundation

(August 2007; revised September 2007)

ABSTRACT

A Post-Keynesian growth model is developed, in which nancial variables are explicitly taken intoaccount. Variants of an investment function are estimated econometrically, applying the ARDL(auto-regressive distributed lag)-based approach proposed by Pesaran et al . (Journal of Applied Econo-metrics , 16 (3), pp. 289–326). The econometric results are discussed with respect to a remarkablephenomenon that can be observed for some important OECD countries since the early 1980s: accu-mulation has generally been declining while prot shares and rates have shown a tendency to rise. Weconcentrate on one potential explanation of this phenomenon, which is particularly relevant for the

USA and relies on a high propensity to consume out of capital income.

1. INTRODUCTION

Since the early 1980s, we can observe a remarkable phenomenon in a numberof important OECD countries: while accumulation rates have generally beendeclining, prot shares and rates have shown a tendency to rise. Althoughthis ‘investment–prot puzzle’ has received ‘curiously little attention so far’

(Stockhammer, 2005–6, p. 197), 1 it clearly poses a challenge to traditionalPost-Keynesian theories of all provenances with their postulation of a‘double-sided [positive] relationship between the rate of prot and the rate of accumulation’ (Robinson, 1962, p. 12).

* I am grateful to Malcolm Sawyer, Eckhard Hein and two anonymous referees for very helpfulcomments on earlier drafts of the paper and to Yongcheol Shin for discussions about theARDL-based approach. I am also indebted to Franck Van de Velde and to Laurent Cordonnierfor inspiring discussions. Of course, I bear sole responsibility for errors and inaccuracies.Financial support of the German Academic Exchange Service (DAAD) and the Hans BoecklerFoundation is gratefully acknowledged.1 See, however, Duménil and Lévy (2003), Van de Velde (2005), Cordonnier (2006) and Lavoie(2006, p. 20) for discussions of this phenomenon.

Metroeconomica 59:3 (2008) 371–404doi: 10.1111/j.1467-999X.2008.00312.x

© 2008 The AuthorJournal compilation © 2008 Blackwell Publishing Ltd, 9600 Garsington Road, Oxford, OX42DQ, UK and 350 Main St, Malden, MA 02148, USA


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The paper therefore addresses two main questions: rst, why do rms notinvest their prots? Second, how can high (increasing) prot rates be com-patible with low (declining) accumulation rates at the macroeconomic level?We propose one potential solution to these questions, based on an analysis of shareholder value orientation, which appears to increasingly affect accumu-lation dynamics in some countries. The intuition behind this is that increasedshareholder inuence on rms, reected by a high dividend payout ratio, hasa depressive effect on investment but a high propensity to consume of therecipients of capital income stimulates prots. The conditions for such anaccumulation regime are derived analytically and then tested empirically.Although in recent years shareholder value orientation seemed to increas-ingly affect all industrial countries, it is most long established and particu-

larly pronounced in the USA so that our empirical analysis mainlyconcentrates on this country.In the empirical part of the paper, the ARDL (auto-regressive distributed

lag)-based bounds-testing approach recently developed by Pesaran et al .(2001) is applied to the estimation of investment functions. As this estimationtechnique requires far less demanding theoretical assumptions than the tra-ditional cointegration approach and allows for more exible, data-drivenmodelling of economic dynamics, it may be seen as more compatible withopen-system economics as other approaches to time-series econometrics. In

particular, testing for long-run-level relationships is possible even when theorder of integration of the underlying variables is unknown, thereby render-ing unit root pre-testing dispensable.

The paper proceeds as follows. Section 2 gives a brief survey of somerelevant ‘stylized facts’ on growth and distribution in France, Germany, theUK and the USA since 1960. Section 3 reviews the theoretical literatureon the ‘investment–prot nexus’ within the Post-Keynesian tradition anddiscusses some empirical results obtained in earlier studies. In section 4,an extended Post-Keynesian growth model is presented and the analyticalconditions for a particular accumulation regime combining a decliningaccumulation rate and an increasing prot rate as a result of increasedshareholder value orientation are derived. The empirical analysis is pro-vided in sections 5 and 6. Two series of regression analysis are conducted.First, standard Post-Keynesian investment functions are estimated and wend evidence of a breakdown of the investment–prot nexus in the early1980s for France, Germany and the USA, but not for the UK. Second, forthe USA, variants of our extended investment function from section 4 are

estimated, and the accumulation regime combining low accumulation andhigh protability is indeed found to be empirically relevant for the periodsince the early 1980s, assuming plausible values of the propensity to

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consume out of capital income. Section 7 discusses some open questions,before section 8 concludes.

2. DISTRIBUTION AND GROWTH: STYLIZED FACTS

It has become common practice to distinguish three main periods of eco-nomic development in the advanced industrialized economies since theSecond World War (see, for example, Boyer, 1990, 2000; Williams, 2000;Stockhammer, 2005–6): the rst three post-war decades have been labelledthe ‘Fordist era’, 2 or ‘Golden Age of Capitalism’. 3 They were characterizedby high accumulation and output growth and relatively peaceful social rela-

tions between ‘labour and capital’. The years from the late 1960s/early 1970sto the early 1980s were a ‘period of crises’, with a sharp decline in output andcapital stock growth and increasingly erce conict over the distribution of income. During the years from the early 1980s onwards, which are oftencalled the ‘neoliberal era’, 4 economic growth could be to some extent stabi-lized, albeit not at rates comparable with those of the Fordist era. A distin-guishing feature of this last period is the redistribution of income from wagesto prots, which has been (over)compensating the redistribution in the otherdirection during the Fordist era and the period of crises.

Figure 1 and table 1 show that the slowdown in accumulation and outputgrowth since the end of the Golden Age has been particularly pronouncedin France and in Germany. In the USA, a similar downward trend can beobserved, although the picture is more complex in this case. In particular,during the second half of the 1990s (‘New Economy boom’), accumulationrates have come close to those of the late Fordist era, but the subsequentdownturn brought accumulation down to a historical low point of the post-war era. The UK is an exception in some ways because it is the only of the

four countries under investigation that has not experienced a declining trendof accumulation and output growth. Of course, the macroeconomic perfor-mance in this country had been considerably weaker than in the three othercountries throughout the Fordist era.

From table 1 and gure 2, it is apparent as an overall trend that privateenterprise protability in terms of prot rates and prot shares rst declinedfrom the mid-1960s until the early 1980s, before recovering and peaking in

2 The ‘Fordist growth regime’ has been extensively analysed within the French ‘regulationschool’. See Aglietta (1976) and, for a survey, Boyer (1990).3 A seminal analysis of the ‘Golden Age’ is Marglin and Schor (1990).4 An analysis of this era is provided by Duménil and Lévy (2001).

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recent years. As such, this positive development of protability despite the

weak accumulation dynamics is clearly at odds with what standard Post-Keynesian theory would predict, as will be discussed in the next section.

Finally, it is worth noting that the USA differs substantially from the otherthree countries in terms of households’ saving behaviour (see table 1). Whilethe household savings rate has also been declining in other countries, it hasfallen most considerably in the USA since the early 1980s, and has even comeclose to 0 per cent recently.

3. THE INVESTMENT–PROFIT NEXUS IN THE POST-KEYNESIANLITERATURE

The most famous formulation of the investment–prot nexus in Post-Keynesian economics is the Cambridge equation:

r g r s= ( ) Π (1)

which follows from the interaction of the following simple investment and

savings functions: g I K g ri e= = ( ) (2)

0

0.02

0.04

0.06

0.08

0.1

1960 1965 1970 1975 1980 1985 1990 1995 2000 20050

0.01

0.02

0.03

0.04

0.05

0.060.12

France Germany

UK USA

Figure 1. Accumulation rate .Note : Growth rate of business capital stock (left scale: France, Germany).

Source : OECD Economic Outlook.

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g S K s rs = = Π (3)

with r = P /K = realized prot rate, g = I /K = S /K = (equilibrium) accumula-tion rate, re = expected prot rate, and sP = propensity to consume out of prots. It is assumed that there are no savings out of labour income. Inequilibrium: r = re and for a given propensity to save out of capital income,the accumulation rate is ‘a function of the rate of prot that induces it’, while

the prot rate is ‘a function of the rate of accumulation that generates it’(Robinson, 1962, p. 48) . On one hand, investment is positively related tocurrent prots as an indicator of future protability and as an importantsource of investment nance. On the other hand, at the macroeconomic level,prots result from capitalist expenditure on investment and consumption.

Notice that, by denition,

r Y Y Y Y K hu v= ( )( )( ) =Π * * (4)

with Y = actual output, Y* = full capacity output. In the early Cambridgemodels, developed in, for example, Kaldor (1956) and Robinson (1956), therate of capacity utilization, u, is assumed to be, in the long run, at full, or

Table 1. Growth, distribution and household saving behaviour since 1960

1960–74 1975–84 1985–2004

FranceReal GDP growth 5.09 2.17 2.11Prot share 33.29 30.21 38.34Household savings rate 17.03 a 15.51 11.06

GermanyReal GDP growth 4.08 2.45 2.13Prot share 35.11 32.16 35.18Household savings rate 12.76 12.44 11.33

UKReal GDP growth 2.94 1.51 2.73Prot share 30.27 29.40 32.08Household savings rate 6.38 b 9.86 7.42

USAReal GDP growth 4.00 3.06 3.13Prot share 29.83 32.40 34.05Household savings rate 8.85 9.83 4.77

Source : OECD Economic Outlook.Note : a1970–74; b1963–74.




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‘normal’, level. Therefore, for a given capital/full capacity coefcient, v, the

share of prots in national income, h, is also positively linked to accumula-tion and prot rates.

In the more recent Kaleckian models, the rate of capacity utilization isendogenized. However, the positive relationship between the accumulationrate and the prot rate is maintained. In the ‘stagnationist’ variant of theKaleckian growth model, propagated, among others, by Rowthorn (1981),Dutt (1984) and Taylor (1985), investment decisions are positively inuencedby prots and sales expectations (see also Kalecki, 1954; Steindl, 1976). Thecorresponding investment function can be written as

g g r r ui e= ( )( ), (5)

Combining this investment function with the savings function of equation (3)yields the ‘canonical Kaleckian model’ (Lavoie, 1992), where an increase inthe prot share adversely affects capacity utilization, accumulation and protrate, ceteris paribus .5

As argued by Bhaduri and Marglin (1990), the ‘stagnationist’ investmentfunction effectively implies the assumption of a ‘strong accelerator effect’, if

5 This is shown by Blecker (2002) for a simple linear model.

0.05

0.15

0.13

0.11

0.09

0.07France Germany

UK USA

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

Figure 2. Rate of prot.Source : See Appendix C.

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coefcients on both r and u are to be positive. Bhaduri and Marglin (1990)therefore suggest the alternative general investment function:

g g r h ui e= ( )( ), (6)

The resulting model allows for different ‘regimes’: accumulation can be‘wage-led’ (d g /dh < 0) or ‘prot-led’ (d g /dh > 0), and the prot rate can beeither positively or negatively affected by changes in the prot share, depend-ing on the parameters in the savings and investment functions. However,considering equation (4), and for a given capital/full capacity ratio, v, accu-mulation in the Bhaduri–Marglin investment function effectively dependsonly on the actual rate of prot as well. In this sense, the investment–protnexus takes an essentially similar form as in the Cambridge model.

Confronting the stylized facts presented in the previous section with thetraditional Post-Keynesian models of growth and distribution, one mayrather naturally conclude that the high realized rates of prot of the Fordistera are to be explained by high rates of accumulation and that high expectedrates of prot brought into existence a virtuous circle of sustained economicexpansion. The period of crises is characterized by falling accumulation andprot rates, which is again consistent with basic theory. Marglin and Bhaduri(1990) have argued that the decline of the Golden Age was partly due to a‘prot squeeze’ faced by rms and that accumulation may have switchedfrom ‘wage-led’ to ‘prot-led’. First, the decline of the prot share had adirect negative impact on the prot rate from the cost side. This simulta-neously deteriorated rms’ expectations about the future rate of prot andthus triggered a slowdown of accumulation, which in turn also contributed tothe fall of the realized prot rate.

A number of empirical works have been dedicated to the debate of prot-led versus wage-led growth, although most studies focus on aggregatedemand rather than accumulation regimes. Bowles and Boyer (1995), in one

of the most widely noted contributions in this eld, estimate investment,savings and net export functions and nd that aggregate demand in someadvanced economies was indeed prot-led, at least when taking into accountthe impact of foreign trade. However, their period of estimation for thedifferent equations (1953/61–1987) does not match with our periodizationproposed in section 2. Comparable and more recent studies include Edererand Stockhammer (2007), Hein and Vogel (2007) and Naastepad and Storm(2007). 6 These studies come to different conclusions about the wage-led or

6 Bhaskar and Glyn (1995) also estimate an investment function inspired by the Bhaduri– Marglin model, but they do not interpret it in the framework of a closed macro model. For asurvey on the empirical literature on distribution and growth, see Hein and Vogel (2007).




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prot-led nature of different economies over different periods. One problemwith these studies, however, is that they often do not conduct subsampleanalyses corresponding to the periodization sketched in the previous section.In particular, the diverging development of accumulation and protabilitysince the early 1980s remains unexplained. We argue that including nancialvariables into the model may give rise to a potential explanation of thisphenomenon for some countries.

In the existing literature, there have been a number of theoretical attemptsto consider the impact of nancial variables on accumulation and aggregatedemand within a Post-Keynesian framework. For the purpose of comparisonwith our own approach presented in the next section, it is helpful to distin-guish two different global approaches.

The rst type of approach can be found in models of ‘nance-led growth’,where investment is inuenced by some argument capturing the degree of shareholder value orientation of rms. For example, in Boyer’s (2000)seminal article, a ‘nancial norm’ reecting the protability requirement thatshareholders impose on rms is included in the investment function with anegative sign. A similar channel of shareholder inuence is formalized byStockhammer (2005–6) who postulates an objective function reecting a‘growth–prot trade-off’ faced by rms. Higher shareholder value orienta-tion leads the rm to give a higher weight to protability at the expense of

expansion. Yet, these models emphasize the possibility of a ‘virtuous systemof nancial growth’ (Boyer, 2000, p. 127) where shareholder value orienta-tion has a positive impact on output in the short run, based on the wealtheffect on consumption. 7 In terms of Stockhammer’s (2005–6) model, ‘a strong(positive) effect of shareholder power on asset prices and a strong wealtheffect could offset the direct (negative) effect the increase of shareholderpower has on investment’ (p. 209). Of course, the interest in such an outcomeof nance-led capitalism was mainly due to the experience of the NewEconomy boom in the USA in the late 1990s, when output growth andaccumulation temporarily reached remarkably high levels. But, as recognizedby Stockhammer (2005–6), from a longer-term perspective, there is anotherand in our view more ‘interesting puzzle in macroeconomic trends: the ratioof investment to prots [. . .] shows a declining trend. [. . .] (p. 197).’ Never-theless, the divergence of (falling) accumulation and (increasing) prot ratescannot be fully explained by the models mentioned above. The solutionproposed by Stockhammer (2005–6) seems to be effectively based on theadding up of the ‘growth–prot trade-off’ for n identical rms, leading to the

7 Aglietta (e.g. Aglietta, 2000) talks of a ‘nancial wealth-induced growth regime’.

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conclusion that ‘the increase in shareholder power will unambiguouslydecrease investment per prot’ (p. 211). But it remains unclear how exactlythe microeconomic ‘growth–prot trade-off’ feeds through to the macroeco-nomic level. As we have recalled above, the investment–prot nexus as for-malized in the traditional Post-Keynesian macro models describes a positiverelationship between investment (the accumulation rate) and prots (theprot rate). 8 Another problem with the accounts of shareholder value orien-tation described above is that they are difcult to test empirically, given thatthe ‘nancial norm’ or ‘shareholder power’ is not directly observable.

There is a second type of approach to the inclusion of nancial variablesinto Post-Keynesian models that is more closely related to the Cambridgeand Kaleckian traditions discussed above. The idea is not to consider pos-

sible changes in rms’ preferences due to increased shareholder power but toanalyse the effects of nancing constraints that arise from the distribution of prots to rentiers. The most relevant work for our purposes includes Lavoie(1995) and Hein (2006, 2007), who propose monetary extensions of thetraditional ‘real’ Kaleckian models. The main difference between these con-tributions is the specication of the investment function. However, whileLavoie (1995) extends the investment function given in equation (2) and Hein(2006, 2007) those given in equations (5) and (6), respectively, their results areessentially similar. Different accumulation regimes can be derived with

respect to changes in the interest rate, and both authors focus on the distinc-tion between the ‘normal case’ and the ‘puzzling case’. In the rst case, aninterest rate hike depresses both accumulation and prot rates, as usuallyexpected, while in the second case, a rising interest rate leads to an increase inboth the accumulation rate and the prot rate, ceteris paribus , because invest-ment is relatively insensitive to changes in the interest rate and rentiers havea very high propensity to consume. One of the merits of Lavoie (1995) andHein (2006, 2007) is to show that even in a Kaleckian model there can be apositive relationship between the interest rate and the prot rate, as postu-lated by some neo-Ricardian authors (see, for example, Panico, 1988). In ourview, however, the ‘normal case’ and the ‘puzzling case’ are empirically lessrelevant for the period since the early 1980s than what could be called an‘intermediate case’, which combines an increasing prot rate with a decliningaccumulation rate. Also, we will argue below that, empirically, increases individend payments may be linked to more important developments regarding

8 The positive relationship between investment and prots also follows from the nationalaccounts identity: Prots = Investment + Consumption out of capital income - Savings out of wages + Public decit + External surplus.




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investment and consumption decisions than interest rate changes, in particu-lar in the USA since the early 1980s. This intuition also underlies the enlight-ening contributions of Van de Velde (2005) and Cordonnier (2006), whosuggest that investment is being increasingly substituted for by shareholderconsumption in the determination of macroeconomic prots.

There have also been a few attempts to estimate the effects of nancialvariables on investment econometrically. Hein and Ochsen (2003) estimate alinear version of a Bhaduri–Marglin type investment function extended forthe interest rate as an additional regressor. They relate the estimated coef-cients of the investment function to those of a savings function, in whichhousehold savings is regressed on consumption out of wages and out of interest income. However, their implied conclusions regarding the accumu-

lation patterns in different countries and time periods do not match particu-larly well with our own conjectures: as an example, the ‘puzzling case’ isderived for the USA during 1982–95. Clearly, we would expect that increasedshareholder value orientation has depressed accumulation since the early1980s (with the exception of the New Economy boom), while consumptionout of capital income has stimulated prots. Hein and Ochsen acknowledgethat their results are somewhat unrealistic and that this may be due, amongother things, to biased estimates of the propensity to consume out of rentierincome and to insignicant coefcients in the estimated investment function. 9

Another econometric study is Stockhammer (2004). An investment functioninspired by the Bhaduri–Marglin model but extended for nancial variablesis estimated. Financialization is proxied by a variable ‘interest and dividendincome/value added’ (of non-nancial businesses), which is included in aregression of the accumulation rate on measures of capacity utilization, theprot share and the cost of capital. 10 Stockhammer nds ‘strong support for(the) hypothesis (that nancialization caused a slowdown in accumulation) inthe USA and France, some support in the UK, but none in Germany’(p. 739). However, Stockhammer does not interpret his results in the frame-work of a macro model so that no conclusions about the divergence betweenmacroeconomic accumulation and protability can be made. Also, while inStockhammer (2004) nancialization is proxied by interest and dividendincome received by businesses, in our context it seems more appropriate toproxy shareholder value orientation by net dividend payments made bybusinesses.

9 Furthermore, they argue that the estimation results may be affected by the unrealistic assump-tion of an interest-inelastic mark-up; see our discussion in section 7.10 The effects of the cost of capital are almost always insignicant and weak.

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4. THE THEORETICAL MODEL

Our model is set up as follows: 11

r Y Y Y Y K hu v= ( )( )( ) =Π * * (4)

Π Π Π= + + = + +r b b s s ri K i K INT DIV (7)

INTK = i K K b b (8)

DIVK = i K K s s (9)

g s s K

r s sb s

b s

s INT DIV INT DIV

INTK DIVK

= − − + +( )= − −( ) − −( )

Π1 1 (10)

g ri INTK DIVK= + − − > > >α γ θ φ α γ θ φ , , ; ;0 0 0 (11a)

g u hi INTK DIVK= + + − − > > >α β τ θ φ α β τ θ φ , , , ; ;0 0 0 (11b)

g g s i= (12)

Denition (4) was given above. The prot share can be seen as exogenouslygiven by a constant mark-up applied to unit labour costs. 12 Equation (7)decomposes total prots into prots retained by rms, P r, net interest pay-ments, i bK b = INT , and net dividend payments, i sK s = DIV . Denitions (8)and (9) are introduced for computational convenience and used in the savingsand accumulation functions respectively given by equations (10) and (11).According to equation (10), an increase in interest and/or dividend payments(related to the capital stock) leads to a decrease in the savings rate: retainedprots are saved by denition, while rentiers consume at least part of their

income. It is assumed that there are no savings out of labour income. Twovariants of the accumulation function are given in equation (11). The rst onecan be seen either as an extension of the investment function known from theCambridge model, or as the effective demand constraint in a Kaleckian/Steindlian model. In the latter case, the rate of capacity utilization is endog-enously determined following u = rv/h. Therefore, we shall refer to this model

11 For a more complete account of the theoretical underpinnings of the Kaleckian growthmodel, see Lavoie (1995) and Hein (2006, 2007).12 Formally, p = (1 + m)wl , where p = price, m = mark-up, w = unit wage and 1/ l = labourproductivity. Unit labour costs are assumed constant up to full capacity. Then,h = P / pY = 1 - 1/(1 + m).




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as an extension of Lavoie’s (1995) ‘Minsky–Steindl model’. With the invest-ment function given by equation (11b), the model becomes an extension of alinear Bhaduri–Marglin model, close to that developed by Hein (2007). Thecrucial innovation of our model is the additional variable DIVK in thesavings and investment functions. The motivation behind specifying twodifferent investment functions is that they have different respective advan-tages in the context of econometric estimation and can also be used forrobustness checks (see section 6).

In the investment function, INTK and DIVK both reect rms’ expendi-ture directed to households and therefore have a negative direct effect onaccumulation, as they reduce internal means of nance. In inherently imper-fect capital markets, these are essential for nancing investment directly and

for facilitating access to external means of nance (see Kalecki’s (1937)‘principle of increasing risk’). However, it is argued here that the two vari-ables proxy rather different mechanisms concerning the governance of rms.More precisely, we expect f > q and argue that an increase in DIVK (proxy-ing shareholder value orientation), as experienced in some countries since the1980s, should be associated with a particularly pronounced downward pres-sure on accumulation. This hypothesis is grounded in an extension of thePost-Keynesian theory of the rm in the context of nancialization, close tothat developed by Stockhammer (2004, 2005–6). Firms are assumed to face a

‘growth–prot trade-off’ throughout the relevant range of their investmentpossibilities, mainly because fast expansion is seen as giving rise to a numberof technical and organizational inefciencies at the rm level (see Lavoie,1992, pp. 114 et seq.; Stockhammer, 2005–6). The relevant unit of analysisis the corporation operating in oligopolistic markets and where ownershipand control are separated. It has traditionally been argued that the manage-ments of such rms are typically keen on achieving power and esteem vialarge market shares requiring high accumulation rates (see, for example,Galbraith, 1969; Eichner, 1976; Lavoie, 1992). 13 We argue that bondholdersand banks (whose inuence in corporate governance is proxied by INTK inour model) are, in general, mainly concerned about the long-term viability of a rm. As expansion appears to be the best guarantee for long-term survival,they are therefore likely to passively accept or even favour managements’accumulation strategies. Quite conversely, an increase in shareholder valueorientation (proxied by DIVK) is seen as favouring a rm’s preference forprotability at the expense of accumulation because shareholders are over-

13 Following Lazonick and O’Sullivan (2000), managements can be seen as advocating thestrategy ‘retain and invest’, as opposed to shareholders’ preference for the policy ‘downsize anddistribute’.

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whelmingly interested in (short-term) returns. 14 In effect, one of the majorobjectives of shareholder orientation is to prevent ‘overinvestment’ by rms,which was seen as harming shareholder interests during the Golden Age:‘Among the manifestations of this lack of control over management were thepursuit of market share and growth at the expense of protability [. . .]’(OECD, 1998, p. 17). Nowadays, managements are increasingly disciplinedby the threat of ‘mergers and the market for corporate control’ (Manne,1965), by a competitive ‘market for managers’ (Fama, 1980), by stockprice-oriented remuneration schemes, etc. While the ofcial objective of these measures is to reduce the ‘agency costs of outsider equity’ (Jensen andMeckling, 1976), there is strong empirical evidence that managers to a largeextent restrain from investment projects even with a very high perceived ‘net

present value’, because they fear a strong negative reaction of the stockmarket in the case of a (temporary) deterioration of earnings (e.g. Grahamet al ., 2005).

Yet, as we have recalled in the previous section, at the macroeconomiclevel a higher accumulation rate induces a higher prot rate, ceteris paribus .Clearly, the breakdown of the investment–prot nexus is so interestingbecause it seems to imply that the demand by shareholders for higher micro-economic protability at the expense of accumulation has been realized evenat the macroeconomic level. In our simple model of a closed economy without

economic activity of the state, this is only possible through the effects of rentiers’ consumption on macroeconomic prots. 15

Formally, making use of the equilibrium condition given by equation (12),the endogenous variables of the model containing equation (11a) as theinvestment function can be shown to be

r s sb s* = + − −( ) + − −( )[ ] −( )α θ φ γ INTK DIVK1 1 1

g s sb s* = + −( ) −[ ] + −( ) −[ ]{ } −( )α γ θ γ φ γ INTK DIVK1 1 1

with the condition for short-run stability being ∂ g i /∂r < ∂ g s/∂r ¤ g < 1.

14 Note that dividends are only one way for rms to distribute prots to shareholders, withequity repurchases being an (increasingly) important alternative. For a more extensive discus-sion, see van Treeck (2007).15 Unlike models of ‘nance-led growth’ (Boyer, 2000; Stockhammer, 2005–6), our model doesnot explicitly allow for consumption out of (stock market) wealth. For a more complete analysis,see van Treeck (2007).




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The effects of a change in DIVK on the endogenous variables areambiguous:

∂∂ =− −( ) + − −( )

∂

∂−r s ss b

DIVK

INTK

DIVK1 1

1

φ θ

γ

∂∂

=−( ) − +

∂∂

−( ) −[ ]

− g s ss b

DIVK

INTKDIVK

γ φ γ θ

γ

1 1

1

With the accumulation function given by equation (11b), the equilibriumvalues of the endogenous variables are

u h s s h vb s* = + + − −( ) + − −( )[ ] −( )α τ θ φ β INTK DIVK1 1

r h v h s s h vb s* = + + − −( ) + − −( )[ ]{ } −( )α τ θ φ β INTK DIVK1 1

g h v h s h vs h v h v

b

s

* = +( ) + −( ) −[ ]{+ −( ) −[ ]} −( )

α τ β θ β φ β

INTKDIVK

11

with short-run stability condition ∂ g i /∂u < ∂ g s/∂u ¤ b < h/v.The marginal effects of an increase in DIVK on the endogenous variables

of the model are given by

∂∂

=− −( ) + − −( )

∂∂

+ −( ) ∂

∂−

u s s u v h

h v

s b

DIVK

INTKDIVK DIVK

1 1φ θ τ

β β

∂∂

=− −( ) + − −( )

∂∂

+ ∂∂

−( )u h v s s h

h us b

DIVK

INTKDIVK DIVK

1 1φ θ τ β vv

h v

{ }− β

∂∂

=

−( ) + −( )∂∂

− + ∂∂

−( )

u

s s h v h

h u vs b

DIVK

INTKDIVK DIVK

β φ τ β 1 1

−− ∂∂

−

INTKDIVK

θ

β

h v

h v

Tables 2 and 3 show that the two variants of our model indeed contain the

possibility of an ‘intermediate case’ as one potential explanation of the recentaccumulation dynamics in some countries: an increase in DIVK simulta-neously depresses the equilibrium accumulation rate and increases the

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equilibrium prot rate. Similar comparative statics can be derived forchanges in INTK. We consider only cases featuring short-run stability. Also,we assume ∂ INTK/ ∂ DIVK = 0 and, for table 3, ∂ INTK/ ∂ h = ∂ DIVK / ∂ h = 0.We discuss these assumptions in section 7.

5. ESTIMATION STRATEGY

In what follows, we analyse the long-run-level relationships implied by theinvestment functions given by equations (2), (6), (11a) and (11b) econometri-cally. Our main focus will be on the USA, where accumulation has indeedshown a long-term tendency to decline and where shareholder value orien-tation can be observed over a relatively extended period of time. However,

for comparability with previous studies we also carry out estimations for theother three countries, in an attempt to illustrate the ARDL-based approachand to test the nature of the investment–prot nexus in different periods.

Table 2. Effects of dividend and interest payments in the extended ‘Minsky–Steindl model’ (investment function (11a))

‘Normal case’ ‘Intermediate case’ ‘Puzzling case’

1 - ss < f f < 1 - ss < f / g 1 - ss < f / g ∂ r/∂ DIVK - + +∂ g /∂ DIVK - - +

1 - sb < q q < 1 - sb < q / g 1 - sb > q / g ∂ r/∂ INTK - + +∂ g /∂ INTK - - +

Table 3. Effects of dividend and interest payments in the extended ‘Bhaduri–Marglin model’ (investment function (11b))


1 - ss < f f < 1 - ss < f h/ bn 1 - ss > f h/ bn ∂ u/∂ DIVK - + +∂ r/∂ DIVK - + +∂ g /∂ DIVK - - +

1 - sb < q q < 1 - sb < q h/ bn 1 - sb > q h/ bn ∂ u/∂ INTK - + +∂ r/∂ INTK - + +∂ g /∂ INTK - - +




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The specication of investment functions is notoriously difcult. As onemanifestation of these difculties, already Kalecki was ‘very much concernedwith the lags involved between cause and effect’ (Arestis, 1992, p. 130). Of course, Kalecki did not have very sophisticated econometric techniques at hisdisposal and therefore, ‘for the purposes of analysis, (he) incorporated anaverage lag between decision and implementation. Clearly, a more empirical-based approach would need to take account of different lags in differentcircumstances’ (Sawyer, 1985, p. 53). A recent innovation in time-serieseconometrics, which appears to precisely full this requirement, is theARDL-based approach advanced by Pesaran et al . (2001, hereafter PSS).This approach allows one to test for long-run-level relationships directlyfrom dynamic error correction models (ECMs) and has important advan-

tages over simple partial adjustment models or the traditional cointegrationapproach developed by Engle and Granger (1987) and Johansen (1995, forexample).

Applying the PSS approach, the following unrestricted ECMs can bederived on the basis of equations (2), (6), (11a) and (11b):

∆ ∆ ∆− − g g r g rt t r t i i

p

t i j r

j

q

t j t= + + + + +− −= =∑ ∑α ρ λ ϕ ε 1 1

1 0

Ψ (13)

∆ ∆

∆ ∆

−

− −

g g u h g

u h

t tu

th

t i i

p

t i

j u

t j j h

t j

= + + + +

+ +( )

− − −=∑α ρ λ λ ϕ

ψ ψ

1 1 11

j j

q

t=∑ +

0

ε (14)

∆ ∆ − g g r g t t r t t t i i

p

t i = + + + + +

+

− − − −=∑α ρ λ λ λ ϕ 1 1 1 1

1

INTK DIVKINTK DIVK

ψ ψ ψ ψ ε j r t j j t j j t j j

q

tr∆ ∆ ∆− − −+ +( )+=∑

INTK DIVKINTK DIVK0

(15)

∆ g g u ht t u t h t t t

i i

p

= + + + + +

+

− − − − −

=

α ρ λ λ λ λ

ϕ

1 1 1 1 1

1

INTK DIVKINTK DIVK

∑∑ ∑+ + +(+

=

∆ ∆ ∆ ∆

∆

− − − − g u ht i j u t j j h t j j t j j

q

j

ψ ψ ψ

ψ

INTK

DIVK

INTK

DIVK0

tt j t− )+ ε

(16)

Equations (13) and (14) are based on linear versions of the traditional invest-ment functions underlying the Cambridge model and the Bhaduri–Marglinmodel and will be estimated for all countries of our sample. Estimation of

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equations (15) and (16) should provide the basis for a direct test of ourhypothesized ‘intermediate case’. On the basis of the estimates obtained fromthese regressions, we will be able to make conclusions about possible accu-mulation regimes in terms of tables 2 and 3 for plausible propensities to saveout of capital income. Unfortunately, appropriate data for INTK and DIVKwere found only for the USA. But this matches well with the general impres-sion that shareholder value orientation has been particularly pronounced inthis country.

Our estimation strategy is as follows: rst, unrestricted ECMs are esti-mated, starting with p = q = 2 before sequentially dropping regressors withinsignicant coefcients. That is, the short-run dynamics of the model areautomatically determined following statistical signicance. This acknowl-

edges the complexity of investment behaviour and can be argued to t wellinto the epistemological principles advocated by many Post-Keynesians. 16

We can then make inferences about potential long-run-level relationshipsbetween the dependent and explanatory variables.

The seminal contribution by PSS has been to derive the asymptotic distri-bution of a test statistic ( F PSS statistic) which is non-standard under the nullhypothesis irrespective of whether the underlying regressors are I (0), I (1),or mutually cointegrated. As an illustration, the null hypothesis of no long-run relationship between g , r, INTK and DIVK in equation (15) is

r = l r = l INTK = l DIVK = 0. The F PSS test is based on a pragmatic bounds-testing approach, and PSS have tabulated two sets of critical values, oneassuming that all the regressors contain a unit root, the other assumingthat they are all stationary. Whenever the F statistic falls outside the criticalvalue bounds, valid inference can be made without making assumptionsabout the order of integration of the underlying variables. Extendingthe work by Banerjee et al . (1998), PSS have also tabulated upper andlower bound critical values for a t test, the null hypothesis of whichis r = 0 (tBDM test). If the null is rejected, estimated long-run coefcients canbe obtained as ˆ ˆ ˆL r r= −λ ρ , ˆ ˆ ˆLu u= −λ ρ , ˆ ˆ ˆLh h= −λ ρ , ˆ ˆ ˆL INTK INTK= −λ ρ and

16 According to Gerrard (2002, p. 119), the ‘LSE approach’, in which ARDL modelling isgrounded, can be seen as a ‘radical methodology’ as opposed to ‘conservative, theory-driven,approaches to econometric techniques’, in that it ‘is founded on the presupposition that thenature of the DGP (data generating process, TvT) is not known a priori but has to be discoveredduring the modelling process’ (Gerrard, 2002, p. 129). Furthermore, general-to-specic model-ling implies extensive diagnostic testing, focusing in particular on serial correlation problems. Infact, the LSE approach interprets serial correlation as indicative of a specication problem,suggesting that the model may have to be respecied. In contrast, the ‘conservative approach’often consists in adjusting ordinary least squares residuals for serial correlation via iterativemethods or on the basis of theory-led assumptions about the autocorrelation structure (seeGerrard, 2002, p. 127).




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ˆ ˆ ˆLDIVK DIVK= −λ ρ from the ordinary least squares estimates from equations(13)–(16), respectively. PSS have shown that the estimated long-run coef-cients are T -consistent (super-consistent) and follow the limiting normaldistribution, while all the short-run parameters are T -consistent and havethe standard normal distribution.

The exibility of the approach by PSS is of invaluable utility for our matterand potentially helps to overcome a number of ambiguities affecting earlierstudies on related topics. In some studies, the order of integration of theunderlying variables and the related econometric issues are not explicitlydiscussed (e.g. Bhaskar and Glyn, 1995; Bowles and Boyer, 1995). Mean-while, the Engle and Granger (1987) approach to cointegration, applied, forexample, by Hein and Ochsen (2003), requires one to ascertain that all

underlying variables are homogeneously I (1) and that the regressors are notmutually cointegrated. However, as is widely recognized, the power of unitroot tests is disconcertingly low (e.g. Campbell and Perron, 1991). As anillustration, we report the results of unit root tests conducted for the variablesused in our estimations in Appendix A. In some cases, the order of integra-tion is indeed ambiguous. Some variables appear to be I (0) for some coun-tries (e.g. GDP growth, used as a proxy for capacity utilization). Thetraditional cointegration analysis would then have to exclude these variablesfrom the long-run-level relationship, a solution that, from the point of view

of economic theory, ‘at best must be deemed unconventional’ [. . .]: ‘Theusual approach in economics is to exclude from the long-run solution onlythe variables whose long-run multipliers are zero, whatever their order of integrability’ (Pagan and Wickens, 1989, p. 1003). The contribution by PSSthus helps to reconcile economic theory with econometric estimation. In ourcontext, we do not have to rely on unit root pre-testing and/or controversiala priori judgements, e.g. ‘theoretical reasons to assume that accumulation isI (0) rather than I (1)’ (Stockhammer, 2004, p. 737), and can allow for mutual(possibly only temporary) cointegration between the regressors, e.g. protsand dividends.

Denitions of the data used are reported in Appendix C, but some remarksshould be made here. Notice rst that variables are in current prices. Thismeasure also underlies Stockhammer’s (2005–6) formulation of the‘investment–prot puzzle’ and is used in previous econometric work, e.g.Stockhammer (2004). It is justied by our focus on the determination of (current) prots by (current) capitalist expenditure, while it may produce asomewhat too negative picture of the slowdown of accumulation in the past

decades from a mere productive capacity point of view (ination has beenrelatively low and relative prices of investment goods may have decreased).We use yearly observations. Where possible, regressions are run with data

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from a single data source. As no uniform and reliable measure of capacityutilization is available at the international level, real GDP growth is taken asa proxy. Although certainly not a perfect solution, this is common practicein investment studies (see the survey in Hein and Vogel, 2007). An obvioustechnical problem is the small number and low frequency of available obser-vations. Unfortunately, this problem is difcult to overcome and intrinsicto the notion of accumulation regimes associated with historically distinct,relatively short, ‘eras’. In our estimations, these eras are determined byapplying the Chow test to several potential breakpoints and then choosingthat with the highest test statistic.

6. REGRESSION RESULTS

6.1 What happened to the investment–prot nexus? First lessons from thetraditional Post-Keynesian models

Table 4 reports the estimation results for equation (13). 17 On the basis of thisvery simple regression, no long-run relationship between accumulation andprot rate was found for France and Germany. For Germany, the long-runcoefcient on the prot rate is even of the ‘wrong’ sign. In the case of the UK,where accumulation has not slowed down during the neoliberal era, thelong-run coefcient on the prot rate is signicant at the 10 per cent level,although this result is to be treated with caution, given the values of the tBDMand the F PSS test statistics. For the USA, equation (13) could be estimatedover a longer period. Interestingly, the long-run coefcient on the prot rateis highly signicant for the period 1965–82, while it is insignicant for 1965– 2004. Somewhat surprisingly, the period 1982–2004 also features a positivelong-run relationship between accumulation and prot rate. However, the

long-run coefcient on the prot rate is only weakly signicant and it ispossible that the estimation results are dominated by the New Economyboom of the late 1990s. Indeed, when a time dummy is included for the shortperiod 1997–2000, the investment–prot nexus breaks down, with the timedummy being highly signicant and accounting for a temporary increase inaccumulation of roughly 1.3 percentage points.

Equation (14) could be estimated over longer periods for most countries(see table 5). In France, a long-run relationship between the accumulation

17 All estimations are performed with Microt 4.1. As a matter of economy of presentation, onlythe long-run coefcients are reported.




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T a b l e 4 . R e g r e s s i o n r e s u l t s f o r e q u a t i o n ( 1 3 )

F r a n c e

G e r m a n y

U K

U S A

1 9 8 0 – 2

0 0 4

1 9 8 0 – 2

0 0 4

1 9 8 0 – 2

0 0 4

1 9 6 5 – 2

0 0 4

1 9 6 5 – 8 2

1 9 8 2 – 2

0 0 4

1 9 8 2 – 2

0 0 4

L r

0 . 3 4

- 0 . 2 5

0 . 3 9 *

0 . 7 1

0 . 3 1 * * *

0 . 6 8 *

0 . 0 4 5

( 0 . 7

1 )

( 0 . 7 9

)

( 1 . 7

7 )

( 1 . 4

4 )

( 3 . 4

9 )

( 1 . 7

9 )

( 0 . 2

0 )

L D

_ 9 7 – 0 0

0 . 0 1 3 * * *

( 3 . 6

2 )

t B D M

- 1 . 8 5

- 1 . 7 5

- 1 . 8 6

- 2 . 1 7

- 2 . 9 8 *

- 3 . 6 3 * *

-

5 . 4 4 * * *

F P S S

4 . 3 2

1 . 8 9

3 . 5 6

2 . 2 5

4 . 8 6 *

1 1 . 6

7 * * *

1 5 . 1 2 * * *

R ¯ 2

0 . 3 4

0 . 1 6

0 . 5 8

0 . 5 8

0 . 6 1

0 . 7 5

0 . 8 4

χ C h o w

2

1 6 . 3

[ 0 . 0

1 ]

2 8 . 8

[ 0 . 0

0 ]

χ S C 2

1 . 6 8 [ 0

. 2 0 ]

0 . 2 0

[ 0 . 6

5 ]

1 4 . 7

8 [ 0

. 2 5 ]

2 . 3 3 [ 0

. 1 3 ]

0 . 0 6 [ 0 . 8 1 ]

0 . 0 1 [ 0

. 9 3 ]

0 . 7 1 [ 0

. 4 0 ]

N o t e s : F i g u r e s i n p a r e n t h e s e s a r e t v a l u e s ,

g u r e s i n b r a c k e t s a r e p v a l u e s . S

i g n i c a n c e a t t h e 1 0 p e r c e n t , 5 p e r c e n t a n d 1 p e r c e n t l e v e l i s d e n o t e d b y

* , * * a n d * * * , r e s p e c t i v e l y . T h e c r i t i c a l v a l u e s o f t h e t B D M

t e s t a n d t h e

F P S S

t e s t a r e t a k e n f r o m P e s a r a n e t a l . (

2 0 0 1 ) . χ C h o w

2

a n d χ S C 2 a r e m a x i m u m -

l i k e l i h o o d t e s t s t a t i s t i c s f o r t h e n u l l h y p o t h e s i s o f n o s t r u c t u r a l b r e a k a n d o f n o s e r i a l c o r r e l a t i o n , r e s p e c t i v e l y .

390 Till van Treeck



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T a b l e 5 . R e g r e s s i o n r e s u l t s f o r e q u a t i o n ( 1 4 )

F r a n c e

G e r m a n y

U K

U S A

1 9 6 5 – 2

0 0 4

1 9 6 5 – 8

3

1 9 8 4 – 2 0 0 4

1 9 6 5 – 2

0 0 4

1 9 6 5 – 8 2

1 9 8 3 – 2

0 0 4

1 9 8 0 – 2 0

0 4

1 9 6 5 – 2

0 0 4

1 9 6 5 – 8

1

1 9 8 2 – 2

0 0 4

L u

2 . 8 2 * * *

1 . 4 9

0 . 8 3

0 . 6 1 * * *

0 . 3 2

0 . 6 2 * * *

0 . 1 8

0 . 7 7 * * *

0 . 9 5 *

0 . 6 2 * *

( 3 . 8

4 )

( 1 . 4

9 )

( 1 . 6

0 )

( 4 . 2

6 )

( 1 . 5 8

)

( 6 . 2

6 )

( 0 . 9

5 )

( 3 . 6

5 )

( 1 . 6

8 )

( 2 . 5

5 )

L h

- 0 . 3 8

- 0 . 2 7

-

0 . 1 1

- 0 . 0 8

0 . 3 7 * * *

- 0 . 4 5 * * *

0 . 3 7 *

- 0 . 3 0

- 0 . 4 6

1 . 3 0 *

( - 1 . 3 2 )

( - 0 . 7 5 )

( - 0 . 2 6 )

( 1 . 1

5 )

( 3 . 8 5

)

( - 8 . 6 2 )

( 1 . 8

0 )

( - 1 . 4 2 )

( - 0 . 9 1 )

( 1 . 9

4 )

t B D M

- 3 . 2 0 *

- 1 . 9 5

-

2 . 5 1

- 4 . 8 9 * * *

- 5 . 5 9 * * *

- 4 . 9 2 * * *

- 3 . 4 4 * *

- 4 . 7 5 * * *

- 5 . 5 9 * * *

- 3 . 0 7 *

F P S S

1 0 . 1

3 * * *

4 . 4 1 *

2 . 2 8

1 6 . 7

4 * * *

7 . 3 0 * * *

1 0 . 3

1 * * *

8 . 7 0 * * *

1 5 . 2

6 * * *

1 0 . 4

4 * * *

1 3 . 4

8 * * *

R ¯ 2

0 . 6 0

0 . 5 1

0 . 5 3

0 . 6 4

0 . 8 3

0 . 5 8

0 . 5 9

0 . 8 2

0 . 8 6

0 . 9 2

χ C h o w

2

1 1 . 6

[ 0 . 1

1 ]

5 . 5 2 [ 0

. 1 3 ]

1 3 . 3

[ 0 . 0

4 ] 2 9

. 5 [ 0

. 0 0 ]

1 6 . 3

2 [ 0

. 0 4 ] 2 6

. 7 [ 0

. 0 0 ]

χ S C 2

0 . 7 4 [ 0

. 3 9 ]

0 . 1 1 [ 0

. 7 4 ]

0 . 0 9 [ 0

. 7 6 ] 0 . 0 2 [ 0

. 8 8 ] 3 . 9 1

[ 0 . 0

5 ]

3 . 1 6 [ 0

. 0 8 ] 0 . 5 9 [ 0

. 4 4 ]

1 . 0 0 [ 0

. 3 2 ]

1 . 3 3 [ 0

. 2 5 ] 0 . 4 7 [ 0

. 4 9 ]

N o t e : S i g n i c a n c e a t t h e 1 0 p e r c e n t , 5

p e r c e n t a n d 1 p e r c e n t l e v e l i s d e n o t e d b y * , * * a n d * * * , r e s p e c t i v e l y .




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rate and the explanatory variables is detected for the whole period 18 and thesubperiod 1965–83, but it breaks down in the last subperiod. Notice also thatthe coefcient on the prot share is insignicant (and furthermore of the‘wrong’ sign) in all periods so that prot-led accumulation in the sense of Bhaduri and Marglin (1990) does not seem likely. In Germany there is arelatively strong positive relationship between the prot share and accumu-lation during 1965–82, but this breaks down in the early 1980s, as expected.In the UK, the prot share is positively related to accumulation in 1980– 2004. 19 As for the USA, a strong accelerator effect is indicated for all periods.The coefcient on the prot share is insignicant and has the ‘wrong sign’ forthe periods 1965–2004 and 1965–81, so that ‘prot squeeze’ in the sense of Bhaduri and Marglin (1990) does not appear as a major cause of the slow-

down of accumulation in these periods. However, the large positive coef-cient on the prot share for the period 1982–2004 is somewhat surprising,even if it is only marginally signicant. Again, the results may be dominatedby the investment boom of the late 1990s, although experimentation with atime dummy did not yield substantially different results.

It is not attempted to derive quantitative conclusions regarding the prot-led or wage-led nature of economies in particular periods of time. In effect,Appendix B shows that many of our regressions are affected by the problemof unstable equilibria, a problem encountered also by Hein and Ochsen

(2003). This problem may in part be due to GDP growth being only a roughproxy of capacity utilization, on which b is the coefcient. Also, the estimatedcoefcients may be biased as a consequence of the omission of relevant (inour context, nancial) variables. 20 However, our regressions do give someevidence that accumulation has been positively affected by the prot sharein the UK during the neoliberal era, while this is clearly not the case forGermany and France. As for the USA, the coefcient on the prot shareappears unrealistically high in 1982–2004. In the next subsection, it isattempted to produce a more realistic picture of recent accumulation dynam-ics in the USA and to propose a potential solution to the ‘investment–protpuzzle’, based on our model of shareholder value orientation.

18 In this regression, a linear time trend was included. Without the time trend, the absolutevalues of the coefcients are (even) higher, while sign and signicance of the coefcients remainunaffected.19 For the UK, equations (13) and (14) were also estimated for the period 1971–2004, but this didnot yield statistically signicant results.20 There may also be more fundamental reasons for instability. For a systematic assessment of the stability conditions in Post-Keynesian models of growth and distribution, see Dallery (2007)who concludes that ‘the most plausible models are unstable’ (p. 1).

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6.2 Is our ‘intermediate case’ realistic? Evidence for the USA

Financialization has led to a number of remarkable changes in the USeconomy over the past decades. Figures 3 and 4 give support to our conjec-ture that an increase in the share of prots distributed to rentiers is linked tothe slowdown in accumulation and that distributed prots have increasinglyfuelled household consumption. Notice that private corporations distributedalmost 100 per cent of prots in some years while households’ savings ratehas dropped to almost 0 per cent recently. The private savings rate startedfalling in the early 1980s, just when the rentier income share heavilyincreased. US national account statistics show that, while interest paymentshave heavily increased around the year 1980, throughout the late 1980sand the 1990s rentier income was spurred by rapidly increasing dividendpayments.

The estimation results for equation (15) in table 6 are very interesting. Thet of the regression over the whole period is substantially improved com-pared with the estimation results from equation (13). There is also strong

evidence of a long-run-level relationship and all long-run coefcients arehighly signicant. While the Chow test indicates that there may not have beena structural break in the early 1980s, including a time dummy for the period

0

0.01

0.02

0.03

0.06

1960 1965 1970 1975 1980 1985 1990 1995 2000 20050

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.05

0.04

accumulation rate

rate of retained profits

Figure 3. Accumulation rate and rate of retained prots, private corporations, USA .Note : Net capital formation/xed assets (left scale) and prots after tax, net interest and

dividend payments/net operating surplus.Source : NIPA (BEA).




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1997–2000 again improves the t and allows for some interesting interpreta-tions. While in the rst regression the coefcients on INTK and DIVK takevirtually identical values, the coefcient on DIVK strongly increases whencontrolling for the New Economy boom, during which the dividend payoutratio exceptionally increased together with accumulation. When making conjectures about possible accumulation regimes in terms of table 2, the coef-cient on the dummy variable is difcult to interpret. Therefore, and despitethe result of the Chow test, the regression was also run separately for thesubsample 1980–2004. Again, it is seen that the coefcient on DIVK exceedsthat on INTK in absolute value. On the basis of this last regression, table 7shows that the ‘intermediate case’ obtains for very plausible propensities toconsume out of dividend income.

The estimation results for equation (16), reported in table 8, conrm theresults from table 6. 21 The coefcient on DIVK is again strongly negative and

21 The result of the serial correlation test is somewhat surprising, given the relatively complex lagstructure underlying this regression. However, visual inspection of the residuals did not indicatepersistent serial correlation problems over the (relatively short) estimation period.

0

0.02

0.04

0.06

0.08

0.1

0.12

0.14

0.18

0.16

rentier income share

savings rate

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

Figure 4. Rentier income share and household savings rate, USA .Note : Household net interest and net dividend income/(household net interest and net dividendincome + compensation of employees) and household savings as a share of disposable income.

Source : NIPA (BEA).

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exceeds that on INTK in absolute value during the neoliberal era. As theequilibrium obtained from this regression is stable (see Appendix B), we canagain derive intervals for the propensities to save out of capital incomeyielding different accumulation regimes (see table 9). Again, the ‘intermedi-ate case’ appears to be perfectly realistic, although the conditions for thedifferent regimes in tables 7 and 9 differ somewhat.

Finally, notice that our analysis potentially gives an explanation to thephenomenon of the so-called New Economy boom of the late 1990s: theinvestment boom during this period, observed together with a high rate of distributed prots, may correspond simply to a temporary shift from the

‘intermediate case’ to the ‘puzzling case’. Interestingly, a careful study byMaki and Palumbo (2001) nds, for the period of the 1990s, that the sharpdrop in the overall personal savings rate in the USA can be accounted for by

Table 6. Regression results for equation (15)

USA

1965–2004 1965–2004 1980–2004

L r 0.33*** 0.36*** 0.60***(3.14) (3.82) (3.39)

L INTK - 0.54*** - 0.58*** - 0.58**(- 3.07) ( - 3.61) ( - 2.86)

LDIVK - 0.55*** - 0.89*** - 0.73**(- 3.19) ( - 4.06) ( - 2.81)

LD_97–00 0.01**(2.22)

tBDM - 4.52** - 5.09*** - 5.85***F PSS 9.70*** 12.36*** 11.13***R̄

2 0.71 0.75 0.89 χ Chow2 11.5 [0.24] χ SC2 0.11 [0.74] 0.03 [0.87] 0.12 [0.91]Note : Signicance at the 10 per cent, 5 per cent and 1 per centlevel is denoted by *, ** and ***, respectively.

Table 7. Effects of an increase in DIVK in the extended ‘Minsky – Steindl model’ (1980–2004)


1 - ss < 0.73 0.73 - ss < 1.22 1 - ss > 1.22Note : The three cases are dened as in table 2.




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the increased propensity to consume of the highest income quintile alone.Noting further that the richest income quintile held between 80 and 90 percent of corporate equity in the 1990s (Maki and Palumbo, 2001, p. 24) andthat capital gains from rising equity prices add to shareholders’ wealth andthus potentially to the ability and willingness to consume, the ‘puzzling case’may indeed become possible in times of a booming stock market andeuphoric consumption behaviour. Duménil and Lévy (2003, p. 22) summa-rize the nature of such an accumulation regime to the point: ‘This is really aspending spree within the richest fraction of the population, the same people

who benet from the new ows of income and the rise of the stock market.’Similarly, during times of widespread euphoric expectations about futureprots, due, for instance, to an allegedly ‘new technological era’, the negative

Table 8. Regression results for equation (16)

USA

1965–2004 1982–2004

L u 0.52*** 0.26***(3.91) (3.57)

L h - 0.03 0.24*(- 0.31) (1.84)

L INTK - 0.41*** - 0.46*(- 3.45) ( - 1.88)

L DIVK - 0.38** - 0.62**(- 2.04) ( - 2.09)

tBDM - 4.76** - 6.82***F PSS 17.51*** 30.49***R̄

2 0.91 0.96 χ Chow2 17.3 [0.24] χ SC2 0.87 [0.35] 6.21 [0.01]Note : Signicance at the 10 per cent, 5 per cent and 1 per centlevel is denoted by *, ** and ***, respectively.

Table 9. Effect of an increase in DIVK in the extended ‘Bhaduri–MarglinModel’ (1982–2004)


1 - ss < 0.62 0.62 < 1 - ss < 0.76 1 - ss > 0.76Note : The three cases are dened as in table 3.

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direct impact of shareholder value orientation on investment may be tempo-rarily reduced. However, such constellations appear possible only underrather exceptional historical circumstances.

Of course, the simplicity of our model (as well as the short time series usedfor the estimations) should be reason of some caution regarding the exactvalues of the parameter estimates. Although our results do support thegeneral conjecture that nancial variables play an important role for realeconomic development in the USA and may in particular be linked to aweakening of the investment–prot nexus, our model remains somewhatsimplistic and could be extended in a number of ways.

7. SOME OPEN QUESTIONS AND DIRECTIONS FORFUTURE RESEARCH

To begin with, the public and foreign sectors should be included into theanalysis. Clearly, public budget decits and export surpluses could contributeto a breakdown of the investment–prot nexus (see Kalecki, 1942). On theother hand, weak domestic investment (in particular in the industrial, i.e.tradable goods sector) may affect productivity growth, and hence the tradebalance, adversely (see, for example, Hersh, 2003). Another critical issue is

the sustainability of the external decit that may be linked to a low domesticsavings rate in the ‘intermediate’ or ‘puzzling’ case.

Moreover, one would have to fully analyse the various possible interac-tions between ows and stocks in the nancial and real sectors of theeconomy. For instance, the ratio of debt to disposable income of US house-holds has been heavily rising during the past decades (from around 65 percent in the early 1980s to above 120 per cent in recent years). This can in partbe seen as a result of increasing nancial wealth, which serves as collateral forcredit, and may have contributed to a declining propensity to save, which wasone of the driving forces of the New Economy boom and recent growthdynamics in the USA. However, a likely effect of rising household indebted-ness would be that the savings rate eventually needs to increase again in thelong run to cover interest payments and debt repayments (Bhaduri et al .,2006). This would then have adverse effects on output growth and accumu-lation, ceteris paribus . Besides, the relationship between rentiers’ interest anddividend claims and the overall share of prot in national income should beanalysed. In fact, it may well be the case that rms succeed to raise their

mark-ups when facing increased interest rates or dividend claims (see Hein,2006, 2007 for a theoretical discussion). Similarly, one could also analyseinteractions between the dividend/capital ratio and the interest/capital ratio.




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It may in effect be necessary for rms to nance dividend payments (or equityrepurchases) partly by bank credit, so that higher leverage and interest pay-ments (and their effects on accumulation) would in part be an indirect effectof shareholder value orientation. Likewise, one would need to analyse theeffects of stock market capital gains and losses resulting from households’portfolio decisions and rms’ stock market interventions (in particular,equity repurchases are an important alternative to dividend payments as away of distributing prots to shareholders). In an attempt to take thesecomplex interactions into account, at least at a theoretical level, van Treeck(2007) has developed a synthetic stock-ow consistent model of nancializa-tion, following the general framework advanced by Lavoie and Godley(2001–2).

Finally, the impact of technological and structural change on accumula-tion, prots and output growth should be considered. Aglietta (2000),among many others, argues that the dynamics of accumulation are signi-cantly affected by the declining costs of investment due to innovations ininformation technology, the increasing importance of human capital rela-tive to physical capital and the decline of the industrial sector relative to theservices sector. However, many economists are sceptical about the idea of ‘growth without investment’. For instance, Rajan (2006) argues that invest-ment in information technology is subject to very high depreciation rates

and hence needs to be frequently renewed. Furthermore, much of theemployment created in the services sector consists of so-called ‘bad jobs’,contributing to the decline in the share of wages in national income. Argu-ably, higher physical accumulation would have allowed for better jobs formany employees. An important part of the prots and jobs created in theservices sector also arises from nancial activities, where physical invest-ment plays a less prominent role than in the industrial sector. According toUS national accounts, the ratio of nancial sector prots to non-nancialsector prots, after being roughly constant at around 20 per cent during1960–80, has since rapidly increased to achieve record highs of around 70per cent in the early 2000s. However, all prots must have some ‘real’ eco-nomic counterpart, and we have argued above that this can be increasinglyfound in (capitalist) consumption expenditure. In support of this hypoth-esis, numerous studies show that a large part of nancial sector prots inthe USA in past years arose from the rapid expansion of (consumer) creditallowed for by the stock market and housing booms that increased house-holds’ collateral, even among lower-income groups (for an overview, see

Chancellor, 2005). Of course, this makes consumption, prots, jobs andhousehold solvability highly vulnerable to negative changes in equity andhousing prices.

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8. CONCLUDING REMARKS

In their famous analysis of the decline of the Golden Age, Marglin andBhaduri (1990, pp. 184–185) argued that higher protability was a pre-condition for the recovery of investment and growth in the developed indus-trialized countries. The essential conclusions of their analysis were ‘(a) torecognise the present need for protability, (b) the ultimate desirability of making accumulation independent of protability, and (c) to provide abridge from here to there’.

Ironically, it appears today that nancialization may play a role in ‘makingprotability independent of accumulation’. More specically, consumptionout of capital income (and wealth) seems to have increasingly replaced invest-

ment as a source of macroeconomic prots, particularly in the USA.22

Ourresults suggest that the increasing prot share and rentier income share havenot favoured accumulation during the past decades. The so-called NewEconomy boom of the late 1990s was an exception in this respect and may beinterpreted in terms of our model as a temporary shift to the ‘puzzling case’.In general, however, the accumulation dynamics of recent times seem toentail important risks for future economic development.

While these conclusions are primarily relevant for the USA, furtherresearch is necessary to substantiate our results and to better understand the

‘investment–prot puzzle’ at an international level.Finally, we have also highlighted the usefulness of the ARDL-based

approach for the estimation of investment functions.

22 With reference to a traditional dictum, one could argue that ‘capitalists (still) get what theyspend’, but their expenditure involves less positive externalities for society than during theGolden Age.




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APPENDIX A: UNIT ROOT (AUGMENTED DICKEY–FULLER (ADF))TESTS

Country Variable

t-statistic of ADF(p) test

p

1 2 3 4

France g (trend) - 2.12 - 2.30 - 2.81 - 2.12r - 1.69 - 2.66* - 4.29*** - 4.84***u - 2.48 - 2.10 - 1.99 - 1.81h - 2.06 - 2.19 - 2.55 - 2.74*

Germany g (trend) - 3.58** - 3.23* - 3.12 - 3.02r - 4.89*** - 2.53 - 4.00** - 3.70**u - 5.27*** - 3.64** - 3.24* - 3.21*h - 1.71 - 1.36 - 1.35 - 1.33

UK g - 2.97** - 3.28** - 3.34** - 2.89*r - 2.16 - 1.38 - 0.97 - 1.36u - 5.25*** - 4.04*** - 3.80*** - 2.77*h - 2.16 - 1.56 - 1.33 - 1.43

USA g (trend) - 4.62*** - 3.06 - 3.72** - 3.49*r - 2.35 - 2.23 - 2.48 - 2.43

u -

5.27*** -

4.64*** -

4.30*** -

3.45**h - 2.35 - 2.20 - 2.34 - 2.42INTK - 1.91 - 1.96 - 1.98 - 1.92DIVK 0.14 - 0.16 - 0.05 - 0.27

Notes : With a few exceptions due to data availability, tests are performed for the period1965–2004. Rejection of the null hypothesis of a unit root at the 10 per cent, 5 per cent and 1 percent level is denoted by *, ** and ***, respectively. For all variables for which the null hypothesiscannot be rejected, there is strong evidence of rst-difference stationarity. The ADF test requiresone to specify whether or not the underlying variable follows a linear time trend. While this isoften difcult to ascertain, it may signicantly affect the conclusions to be drawn from the ADFregression.

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APPENDIX B: STABILITY IN THE BHADURI–MARGLIN TYPE MODELS

Equation (14):Stability if s P h/n - b > 0a

Equation (16):Stability if h /n - b > 0

Period s P h/n - b Period h /n - b France 1965–2004 0.23 sP - 2.82 < 0

1965–83 0.17 sP - 0 > 01984–2004 0.33 sP - 0 > 0

Germany 1965–2004 0.17 sP - 0.61 < 01965–82 0.14 sP - 0 > 01983–2004 0.22 sP - 0.62 < 0

UK 1980–2004 0.32 sP - 0 > 0

USA 1965–2004 0.20 sP - 0.77 < 0 1965–2004 0.20 - 0.52 < 01965–81 0.13 sP - 0.95 < 0 1982–2004 0.32 - 0.26 > 01982–2004 0.32 sP - 0.62 < 0

Notes : aFor a derivation of this stability condition, see Hein (2004, p. 196).The values for b are obtained from tables 5 and 8 in the text, respectively. Insignicant coef-cients are set equal to zero. Values for h and v are calculated from OECD Economic Outlook.The capital/full capacity ratio, v, is proxied by the average value of the ratio of nominal grosscapital stock to nominal GDP, as in Hein and Ochsen (2003).

APPENDIX C: THE DATA SETAccumulation rate

( g t)Rate of growth of business capital stock 1;

Investment net of consumption of xedcapital 2/xed assets, non-residential businesses 3

Prot rate ( r t) Income from property and other/business capitalstock 1 (for Germany); net operating surplus/netcapital stock, non-nancial corporations 4; net rateof return, private non-nancial corporations 5; net

operating surplus2

/private xed assets3

Output growth ( ut) Growth rate of real GDP 1,2

Prot share ( ht) Prot share in the business sector 1; net operatingsurplus/(net operating surplus + compensation of employees) 2

Interest/capitalratio (INTK t)

Net interest payments, domesticbusinesses 2/non-residential capital stock 3

Dividend/capitalratio (DIVK t)

Net dividend payments, privatecorporations 2/non-residential capital stock 3

Sources : 1OECD Economic Outlook; 2NIPA Tables (Bureau of Economic Analysis, USA);3Fixed Assets Tables (Bureau of Economic Analysis, USA); 4French National Accounts(INSEE); 5Blue Book (Ofce for National Statistics, UK).




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