Academic journal article Review of Social Economy

Unproductive Outlays and Capital Accumulation with Target-Return Pricing

Academic journal article Review of Social Economy

Unproductive Outlays and Capital Accumulation with Target-Return Pricing

Article excerpt

It has been shown by Kaleckians that, under some conditions, unproductive activity could be positively related to effective demand and capital accumulation (Dutt 1992a, 1992b). When there are reserves of unused capacity, these conditions have been related to the investment and the savings functions. With respect to the former, it needs to be assumed that the desired rate of investment depends explicitly on the rate of capacity utilization. On the issue of savings, one needs to assume that unproductive labor does not save; otherwise an increase in unproductive labor would increase savings and might reduce effective demand (Dutt 1992a: 105). In a review published in this journal, it has been pointed out that the positive relationship between unproductive activity and capital accumulation relies on an additional condition, which had been previously left in the background. The additional issue is "whether firms are able to pass on unproductive outlays as higher prices" (Burkett 1994: 119). Under the conditions of monopoly capitalism, i.e., the real world of megacorps surrounded by smaller firms, managerial and sales staff costs could thus be shifted on to the consumer, and hence induce higher prices, at given nominal wage rates for productive labor, even though there are still excess reserves of capacity. These higher prices "could limit the positive impact of such expenses on effective demand in the economy as a whole" (Burkett 1994:119). The intent of the present paper is to explore this possibility.

To do so a simple one-sector model will be constructed. As in Dutt (1992a: 104), it will be assumed that investment depends on the rate of profit, and that no savings are done by labor, whether productive or unproductive. Under these conditions, unproductive activity should be positively related to capital accumulation. In contrast to Dutt and most Kaleckians, however, we shall not assume that prices are fixed through a simple markup on direct costs (or productive labor costs). We shall assume, rather, that prices are fixed through a target-return pricing procedure, which takes into account direct as well as indirect costs, such as those incurred for managerial, supervisory, and sales staff. We shall then discover that additional unproductive costs may lead to higher capital accumulation depending on whether firms, on average, are running below or beyond their standard rate of capacity utilization. A further distinction, between unproductive labor costs and unproductive capital outlays, will also be required. In the last part of the paper, we shall see whether the introduction of savings by unproductive labor changes any of the results.(1)

THE PROFITS-COST EQUATION

The standard Kaleckian model of growth and distribution with excess capacity can be brought down to two equations describing the rate of profit, from the supply side and from the demand side (Rowthorn 1981; Dutt 1990). We start out with the derivation of the profits function seen from the cost side (the profits cost equation PC). From national accounting, we know that the value of output is equal to the sum of the wage costs and the profits on capital:

pq = [w.sup.*]L + rpK

where p is the price level, q is the level of real output, [w.sup.*] is the average nominal wage rate, L is the level of labor employment, r is the rate of profit, K is the stock of capital in real terms. This may be rewritten as:

(1) p = [w.sup.*](L/q) + rpK/q

We now consider two sorts of labor: unproductive labor and productive labor. Broadly speaking, we shall associate unproductive labor with overhead or fixed labor ([L.sub.f]), and productive labor with direct or variable labor ([L.sub.v]). We then make use of the following definitions:

L = [L.sub.v] + [L.sub.f]

(2) [L.sub.v] = q/[y.sub.v]

(3) [L.sub.f] = [q.sub.[f.sub.c]]/[y.sub.f]

[W.sub.v] = w

(4) [w.sub.f] = [Sigma][w.sub.v] [Sigma] [greater than] 1

[w. …

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