Keynesian Capital Theory, Declining Interest Rates and Persisting Profits

Abstract

The current debate as to whether zero interest rates are caused by a saving glut or a liquidity glut is resolved with the distinction between the market rate and the “natural”, or better, equilibrium rate, where saving affects only the latter variable, and monetary policy mainly the former. The equilibrium rate represents a particular numerical value of the market rate, an estimated number which is expected to allow for macro equilibrium. This topic is linked to a second one: the monetary determination of the rate of profit in Keynesian capital theory. Explaining the existence of positive equilibrium returns on capital, real and financial, has been a key theme in the history of economic thought, particularly after the seminal work by Böhm-Bawerk. Keynes’s contribution to this debate remained underrated, possibly because he presented his message using the money demand rather than credit supply framework. But if we incorporate liquidity preference into the portfolio choice of a representative investor, a bridge opens to Marx’s M-C-M' formula, which is then based on a different foundation. Finally, zero interest rates evoke Keynes’s vision of the “euthanasia of the rentier”. The data show, however, that we have not reached a state of capital satiation. The rising gap between the rate of profit and the rate of interest poses a challenge for capital theory.