The role of demand surely big part of the answer? Extent of demand growth determines how much firms willing to reinvest. Up through the 1970s you've got govt committed to sustaining demand, this starts to shift in the 80s, then you've got big credit boom in 90s. Lower investment-profit ratio from 2000s onwards reflects gradual/eventual slowdown of private (consumer) credit growth and govt not really stepping up to plate to compensate. Anwar Shaikh is really interesting on this (Capitalism, Ch. 15). He puts the investment-profit ratio at the heart of his understanding of macroeconomics, linking it to demand management and the generation of inflation (i.e. the investment-profit ratio as better alternative to Phillips Curve).
Huge fan for years - "The Bleak Left" was a favorite in my Jacobin reading group and inspired some of us to read Endnotes. I'm glad you started a Substack! Do you ever read Julius Krein? I think this article is a good theory on the disconnect between profit and investment.
"These issues are even more significant, if somewhat less visible, in firms’ internal capital allocation decisions. In theory, firms should invest in a new project whenever the expected returns on the investment exceed the firm’s cost of capital. In practice, however, firms have maintained “hurdle rates” considerably above their cost of capital; multiple studies have shown that hurdle rates typically exceed firm cost of capital by up to 7.5 percent.16 Moreover, hurdle rates have largely remained constant at around 15 percent for decades despite falling interest rates (and thus lowered cost of capital) in recent years.17
From the standpoint of economic theory, this represents an irrational refusal to maximize profits. But with regard to maximizing equity value, it is an eminently rational strategy. Lowering hurdle rates would mean investing in projects that might increase earnings, but which would likely degrade earnings quality. In other words, metrics like return on assets would deteriorate and valuation multiples would probably fall. Avoiding such investments—and instead returning cash to shareholders to further prop up valuations—becomes a preferable approach to maximizing shareholder value even if it forgoes substantial profit opportunities. But if the link between shareholder value and profits is severed, then the justifications for shareholder primacy—and much else in economic theory—collapse.18"
The role of demand surely big part of the answer? Extent of demand growth determines how much firms willing to reinvest. Up through the 1970s you've got govt committed to sustaining demand, this starts to shift in the 80s, then you've got big credit boom in 90s. Lower investment-profit ratio from 2000s onwards reflects gradual/eventual slowdown of private (consumer) credit growth and govt not really stepping up to plate to compensate. Anwar Shaikh is really interesting on this (Capitalism, Ch. 15). He puts the investment-profit ratio at the heart of his understanding of macroeconomics, linking it to demand management and the generation of inflation (i.e. the investment-profit ratio as better alternative to Phillips Curve).
Huge fan for years - "The Bleak Left" was a favorite in my Jacobin reading group and inspired some of us to read Endnotes. I'm glad you started a Substack! Do you ever read Julius Krein? I think this article is a good theory on the disconnect between profit and investment.
https://americanaffairsjournal.org/2021/08/the-value-of-nothing-capital-versus-growth/
"These issues are even more significant, if somewhat less visible, in firms’ internal capital allocation decisions. In theory, firms should invest in a new project whenever the expected returns on the investment exceed the firm’s cost of capital. In practice, however, firms have maintained “hurdle rates” considerably above their cost of capital; multiple studies have shown that hurdle rates typically exceed firm cost of capital by up to 7.5 percent.16 Moreover, hurdle rates have largely remained constant at around 15 percent for decades despite falling interest rates (and thus lowered cost of capital) in recent years.17
From the standpoint of economic theory, this represents an irrational refusal to maximize profits. But with regard to maximizing equity value, it is an eminently rational strategy. Lowering hurdle rates would mean investing in projects that might increase earnings, but which would likely degrade earnings quality. In other words, metrics like return on assets would deteriorate and valuation multiples would probably fall. Avoiding such investments—and instead returning cash to shareholders to further prop up valuations—becomes a preferable approach to maximizing shareholder value even if it forgoes substantial profit opportunities. But if the link between shareholder value and profits is severed, then the justifications for shareholder primacy—and much else in economic theory—collapse.18"
New Tim Barker lets goooooo