Nothing gets heterodox economists quite so fussed as the long-run theory of the rate of profit. Yet, Keynes did without one altogether and when examined closely there is no way that such a theory can say anything tangible about the real world. In order to lay this out I am going to take my leave from Joan Robinson’s excellent book Economic Heresies: Some Old-Fashioned Questions in Economic Theory.
When Robinson discusses Keynes she says that he had no real interest in a long-run theory of profits and accumulation. In the long-run, Keynes famously said, we are all dead. All that matter is short-term analysis. Crucially Keynes thought that profits and accumulation could not be discussed without reference to expectations — that is, to his ‘animal spirits’ — and thus any discussion about profits and accumulation in the long-run is only building so many castles in the sky.
In her book Robinson takes Keynes to task for discussing financial markets rather than the actual sphere of production. The Marxian and Ricardian influences on Robinson are clear when she writes, for example,
Keynes rather lost his grip on the distinction between the rentier and the entrepreneur. His discussion of the ‘state of long-term expectations’ is devoted to the Stock Exchange rather than to the accumulation of means of production. (pp31-32)
I think in this instance Robinson is reading her own biases into Keynes’ work. I don’t think that Keynes was confused at all. I think that he had probably considered the question of accumulation in the long-run and dismissed it as something that could not be adequately or usefully theorised.
Throughout Robinson’s discussion of accumulation in the long-run in the book you can feel that this doubt is nagging away at her. She is at pains to justify the idea that such an analysis might produce useful results but she never quite manages to do so.
The book was first published in 1971 and I think that in the next few years Robinson would basically give up on trying to theorise accumulation and more so focus on the idea that, since non-homogenous historical time is what we really deal with in economics, most of these attempts at theorisation are only so many parlor games. I think you get a distinct impression of this in her 1974 Stanford lecture entitled What is Wrong With Neoclassical Economics?.
But as I said, in 1971 she was still trying to justify a long-run theory. And when you read her sections on Ricardo and Von Neumann you can sense the doubt in her mind. Take the following passage, for example,
Reality is never a golden age. There are disturbances due to markets in which supply and demand rule, mistaken expectations, and unforeseen events. The rate of profit on capital is neither uniform throughout the economy nor steady through time. Nevertheless, the concept of a natural rate of profit determined by investment and the propensities to save provides the framework of a general theory within which detailed analysis can be built up. (pp47-48)
Robinson is by far one of my favorite economists but she is simply wrong here. The future is completely uncertain. In order for us to conceive of some sort of ‘natural’ rate of profit (always prick your ears up when you hear the word ‘natural’ used in economics!) we would have to assume that investors know with what frequency investments fail and with what frequency they succeed. We would have to conceive of the world as being full of objective probabilities and investors as knowing these probabilities and integrating them into their investment decisions.
In short, we would have to conceive of the link between investment and accumulation as resembling the strong-case Efficient Markets Hypothesis (EMH) where investors have access to objective information about the future. Keynes knew that this was nonsense and that is why he did not try to construct a long-run theory of accumulation. He said so explicitly when he wrote,
Even apart from the instability due to speculation, there is the instability due to the characteristic of human nature that a large proportion of our positive activities depend on spontaneous optimism rather than on a mathematical expectation, whether moral or hedonistic or economic. Most, probably, of our decisions to do something positive, the full consequences of which will be drawn out over many days to come, can only be taken as a result of animal spirits — of a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities. Enterprise only pretends to itself to be mainly actuated by the statements in its own prospectus, however candid and sincere. Only a little more than an expedition to the South Pole, is it based on an exact calculation of benefits to come. (The General Theory, Chapter 12)
With that statement Keynes threw out any notion of a ‘natural’ rate of profit or any misguided attempt to try to work out the realities of the process of accumulation on the back of an envelope — a great tradition stretching from Ricardo through Marx to Robinson and Pasinetti.
Is this to say that their contributions are entirely useless? Some of them undoubtedly are; most of Robinson’s The Accumulation of Capital has no relevance to the real world at all — and, again, I think Robinson came around to seeing this toward the end of her life. But there were a few nuggets of gold that should be salvaged. The basic growth theorems laid down by Kaldor and improved upon by Pasinetti do provide some insights which may be relevant so long as we treat them with care. The idea that different savings propensities lead to different distributive dynamics is an interesting one indeed.
But, as I have pointed out before, it is by no means adequate to explain distribution in the real world alone. For that we need to understand the role of financial markets and asset prices. Something which I have spent the past year working on and which, if I can ever sit down and really thrash it out, I might be able to shed some light on. In the meantime the empirical work of James Galbraith and Steven Fazzari is where its at. Anyone trying to theorise distribution should start there and only look to the old accumulation theories as a well-bred girl looks upon a love letter, as the great German philosopher Hamann said in a different context.