As we know, a central tenet of classical (and neoclassical) economics is the profit-led character of capitalistic economies. This means that, in these views, the presence of a high rate of profit ─ intended as a remuneration of the capital exceeding the “normal level” of “executive salaries” ─ is held essential for promoting investment and growth. This view was shared also by Marx, because he largely based his theory of surplus and exploitation on Ricardo’s labour theory of value.

As for Keynes, he, on the one side, considered central for economic cycle the notion of the marginal efficiency of capital (MEC), which is defined as the marginal and comparative profitability of investment in relation to the real rate of interest. But, on the other side, he introduced a concept at variance with MEC, namely, the central notion of “animal spirits”. According to them, people engage in economic and social activities not only out of strictly economic calculation but also on account of a propensity to do something, to keep themselves busy. Another reason that led Keynes to mitigate the all-important role of profit rate was his awareness that our economic systems are also consistently wage-led. This happens also because, as widely investigated, the propensity to consume ─ and, hence, the corresponding value of the income multiplier ─ of the working classes is far higher than that of entrepreneurs.

Despite these qualifications, the conception of a profit-led economy that accompanied the neo-liberal counterrevolution of Reagan’s and Thathcer’s governments was (and still is) dominant in economic, social, cultural and psychological spheres. As regards this thesis, we can note that:

1) The neo-liberal agenda that started in the 1980s, by increasing economic inequality and the precariousness of life conditions, severely harmed the capacity to consume of middle-lower income classes, with negative effects on the capacity to reach the level of full employment (however defined).

2) The neo-liberal agenda, by rising the real interest rate, badly affected the marginal efficiency of capital and hence triggered the huge financialisation of the system.

3) Especially In the last 30 years, profits have been most often high (especially for large corporations and financial investment), but this rarely warranted a parallel increase of productive investment, which often declined. This took place also as a result of a structural tendency towards an increasing “productivity of capital” and the corresponding relevance of the “immaterial and intangible” side of production.

4) Especially for large corporations, investment decisions are made by managers (and financing institutions) rather than by classic entrepreneurs. And, as investigated by a wide literature, the managers’ goals relate much more to the firms’ expansion than to profit maximization. This is also linked to the growing complexity of firms, which sees the presence of various “public” and “private” stakeholders.

5) Most of the previous aspects, which have been reinforced by neo-liberal policies, laid out the seeds of the recent economic crisis.

As additional remarks, we can note:

6) Public spending has constantly increased, with various ups and downs, in the post WWII period, not only for the pressure of lobbies, but for the more substantial reason that it constitutes ─ in addition to providing public goods necessary for the development of the system ─ a central and irreplaceable component of effective demand (in this sense, the “crowding out effect” is a kind of classical and neo-classical wishful thinking).

The same applies for credit creation, which is a relevant means for increasing effective demand. This aspect leads one to doubt a sharp relation between investment and rate of profit, because investment is in general heavily financed by credit creation.

More substantially, as analysed by many contributions of the “Monetary Circuit”, capitalism is characterized by a sharp division between the capitalists (chiefly composed of the banking and financial institutions) and the entrepreneurs who borrow money from the former in order to finance investments.

7) Many profit-led supporters stress that periods of economic boom, often accompanied by the opening of new markets, very often witness a strong correlation between rate of profit, investment and growth. This aspect has driven many to consider economic inequalities as a necessary price for development. This argument, however, is much weaker than it appears at a first sight. First, investment expenses were geared to the market expansion, especially abroad, and, as just noted, were financed especially by credit creation. Certainly, profits were often high as a result of the increase in productivity and in monopoly power, and partly helped to finance investment. But this does not imply that profits “caused” investment and growth, as it is much more likely that the opposite relation applied: namely, that high profits were a consequence, rather than a cause, of investment and growth. This also for the reasons underlined in the following point 9.

8) For these reasons, high rates of profits are unnecessary for economic growth and when present, are likely to pave the way for future economic imbalances and crises. What really matters for that purpose is the role of public policies in providing material and immaterial infrastructures conducive to economic and social development. But even more important, it seems pertinent to note that the very idea of unlimited economic growth is being more and more questioned in economics, both for environmental and structural reasons. There is nowadays going on a structural transformation of the economic systems towards some kind of steady state (and probably de-growth in the middle-long run), where the “mixed forms” ─ in which many actors and motivations are at play ─ of economic action will become more relevant.

9) As already noted, in investment decisions a central role is played by the so-called “animal spirits”. According to these, people engage in business activities not only out of strictly economic calculation but also out of a propensity to do something, to feel themselves useful and active. Following these insights, Keynes, in the final chapter of the General Theory welcomes a situation where ─ through a policy of sharp reduction of the real interest rate ─ the profit rate would become substantially lower than ordinary level.

In this way, profits would be much less related to market power and much more to a “Schumpeterian” reward for innovation and/or quality of products. Only in this way profits could play a role as an incentive ─ but by no means the sole one ─ for a continual upgrading of products. This arrangement is fully compatible with a system of cooperative enterprises.

 10) As for the Marxist theory of exploitation resting on Ricardo’s labor theory of value, we believe that exploitation can be much better explained by considering the reality of the huge asymmetry of power in labour market. In this way, Marxist economics can be freed from Ricardian economics and its conservative policy implications. As underscored, for instance, by John Rogers Commons, an isolated person offering job to a firm employing, say, 1000 workers, has a contractual power equal to 1/1000, as the management with which (s)he is dealing represents the entire capacity of the firm. The same applies to the market for goods where normally firms enjoy a relevant market power over consumers. The rate of profit is then much tied to the market power over workers and consumers.


In conclusion, the supposed necessity “to restore a high rate of profit” ─ which can also acquire an unconscious phallocentric symbology, as that of patriarchal father possessing the milk of the good mother ─ in order to ensure investment and growth is utterly unrealistic, and dangerous for the building of a progressive economy. Several progressive people accept this theory as it constitutes the basis of Marx’s theory of exploitation. But, as also witnessed by the recent history, the acceptance of such classical hypothesis makes it more difficult to effectively react to the neo-liberal claim that all that matters for economic recovery is the reduction of taxation and real wages. Hence, it seems much more promising for heterodox economists to get rid of classical influence and build a better synergy between the various heterodox streams: in particular, original institutional economics, Post-Keynesian theories, Marxism and other theories of social justice, theories of environmental sustainability. These synergies, by helping better understand the complexity of real world and the effects of different policies, can help frame a progressive and sustainable economy increasingly based on labour and participation.

 Arturo Hermann