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Cambridge Journal of Economics 27:25-48 (2003)
Copyright © 2003 Cambridge Political Economy Society

Article

Capitalism's growth imperative

Myron J. Gordon and Jeffrey S. Rosenthal *

*Professor of Finance, Rotman School of Management, and Professor of Statistics, respectively, both at University of Toronto.

Address for correspondence: Professor M. J. Gordon, Faculty of Management, University of Toronto, 105 St George Street, Toronto, Ontario M5S 3E6, Canada; email: gordon{at}rotman.utoronto.ca, and jeff{at}math.toronto.edu.

Abstract

A capitalist firm operating in a competitive market is subject to a growth imperative, because uncertainty about the profit rate under a no-growth policy makes the firm's prospects highly unattractive in finite time and bankruptcy practically certain in the long run. A no-growth policy determines consumption and investment so that they and capital would remain constant over time if the latter's expected return were realised with certainty. Simulation is used to arrive at the probability of bankruptcy by the end of t periods and the expected values of capital and money, for relevant combinations of time and uncertainty under successively more realistic models of a no-growth firm in a competitive market. The sensitivity of the results to variation in the parameters in each of the models is evaluated. Finally, we establish that a plausible growth policy may achieve growth, but the problem of bankruptcy is not resolved.

Key Words: Growth • Bankruptcy • Capitalist system • Investment


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