Rates of Profit and Interregional Flows of Capital

Abstract

This paper investigates the flows of capital in a model of an economy that has two regions. Technology is fixed and independent of scale. Investment is controlled partly by individual firms and partly by central financial institutions. In both cases, investment is divided between regions in a ratio that depends on the rate of profit earned in them. The system has a unique equilibrium growth path. The central conclusion of the model is that even if capital does tend to flow from less to more profitable regions, that flow does not in itself guarantee that profit rates tend to equalize. Therefore net capital flows do not point to higher profit regions, and high relative productivity is not nece..