The Role of the Rate of Profit

Abstract

Although the rate of interest, as we have emphasized repeatedly plays a fundamental role in the allocation of investment, particularly as the result of cheap credit, in most instances the crucial role is played by the rate of profit. The interest rate, at least in the beginning of business fluctuations resulting from an artificial expansion of credit, facilitates the expansion and in that way it leads to distortions between the distribution of investment plans and the distribution of consumption. Yet the further induced re-allocations of resources are governed by the rate of profit. This shows, in particular, that the rate of interest does not play the significant role that economists trained in thinking about “aggregates” suppose that it plays. With a given rate of profit per annum, which can be obtained proportionately at any subdivision of time such as a month or a quarter, the “Ricardo effect” takes place. As Hayek notes: