[OPE-L:6129] Re: falling profits

From: Gerald_A_Levy (Gerald_A_Levy@email.msn.com)
Date: Thu Nov 01 2001 - 09:33:11 EST

Re Fred's [6125]:

I think there is more diversity of perspective on the role of profit in
mainstream economic theory than you have asserted.

E.g. Hayek (who described himself as a 'neo-Austrian') wrote that
'during the downward swing of business activity ...it may be not so much
the money rate of interest as the rate of profits and real wages which
govern the decline and eventual revival of investment" (_Profits,
Interest and Investment_,  1939, p. 37 in Kelley reprint). Similarly,
profit is a variable for Schumpeter's analysis in _Business Cycles_
(also 1939).

On S-side theory:

> I have never seen a supply-side theory in which profit is a variable at
> all, let alone a crucial variable.  Supply-side theory focuses on
> individuals, not firms.  The central variable in supply-side theory is
> personal income tax rates.  The argument in that a reduction of personal
> tax rates would cause individuals to save more.  This increased saving
> somehow gets channeled to firms, who then increase their investment.  I
> don't see profit anywhere in this theory.  I agree with Patrick that no
> one takes seriously the "madness of supply-side rhetoric."

I think that the above is mistaken for many reasons.

Supply-side theory focuses 'on individuals, not firms'?  This is not the
case. E.g. S-side tax cuts emphasize not only tax reductions in the
personal income tax for individuals with the highest income but also
reductions in the capital gains tax *and* (very importantly) reductions
in *corporate taxes*.  Moreover, the argument made by S-siders is that
this would lead to increased _investment_ (not savings) *because* it
would result in an increase in after-tax corporate profitability.
Look at the S-side argument about deregulation: i.e.  if you get
rid of existing regulations it will lower firms' costs of production and
thereby increase corporate *profitability* which it is asserted will
lead to increases in investment and aggregate supply. When they
propose wage controls the argument is very similar. So profitability is
the *crucial* variable in S-side theory and policies (which is not
surprising, since if you assume Say's Law, then if profitability goes up one
can anticipate increases in AS and economic growth). Is this
'madness'? Well ... I would say that it is no more or less madness
than GET.  And, to the extent that many state economic policies have
been rationalized with S-side arguments, one could argue that it is
a  more relevant 'madness' than Walrasian theory. Indeed, one can
identify many S-side arguments in the 'structural adjustment policies'
that have been such an important part of the Neo-Liberal agenda.

In solidarity, Jerry

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