A Specification of the General Theory of the Firm: Employment and Profit, Investment and Interest rates

Adopting a Cobb-Douglas specification, this paper clarifies and confirms the results of the general theory of the firm. First, it shows that wage rigidity in the short run is linked to the fact that it depends, on the one hand, on average labor productivity, which is not very flexible in the short run, and, on the other hand, the state of the labor market in terms of primary income distribution, which generally only changes after lengthy wage negotiations. Second, the article confirms, on the one hand, that gross profit is the determinant of labor demand in the short run while the level of real wages is one of its determinants in the medium and long run and, on the other hand, that the security of labor is favorable to employment, while its flexibility is favorable to gross profit. Third, the article confirms that (i) the corporate investment strategy depends on the financing structure of companies; (ii) the relationship between investment and interest rate is complex and not monotonous; the sign of this relationship depends in particular on the nature and level of financing constraints, the degree of interest rate elasticity of the credit supply and the level of capital profitability. Fourth, the article shows that the interest rate and the depreciation rate affect investment level in different ways and that each of these rates is a determinant of investment in its own right. Therefore, considering the sum of the interest rate and the depreciation rate (r + δ) as a determinant of investment would not be relevant.