Chapter 4: Finance-dominated Capitalism and Long-run Productivity Growth
1 4.1 INTRODUCTION In this chapter we focus on the long-run effects of financialization on capital accumulation and productivity growth – and hence on potential growth. On the one hand, the early orthodox proponents of shareholder value orientation had argued that increasing shareholder power would induce managers to make more efficient use of the funds at their disposal and thus reduce the inefficiencies inherent in the ‘principal-agent’ conflict of modern corporations (Jensen/Meckling 1976). Therefore, increasing shareholder power and shareholder value orientation of management should have a positive effect on productivity growth and the growth potential of the economy. On the other hand, those who have argued that financialization, increasing shareholder power and rising shareholder value orientation of management would cause a policy of ‘downsize and distribute’ (Lazonick/O’Sullivan, 2000), in order to satisfy shareholders’ demand for distributed profits and high stock and share prices, should expect that low capital stock growth associated with such a policy would also have negative effects on productivity growth and thus on long-run potential growth of the economy as a whole through several channels. We address these potentially contradicting effects of financialization on capital accumulation and productivity growth in a simple Kaleckian distribution and growth model for a closed private economy with endogenously determined productivity growth. We start by presenting the basic model features. Then we will make use of the distinction between the demand and the productivity regime, as suggested by Setterfield/Cornwall (2002), and analyse the demand regime before we turn to the productivity regime. Putting...
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