| Summary: | <p>This study seeks to explain why the West German economy, one of the most successful industrialized economies in the post-war period, exhibited a trend decline in the share and rate of profit.</p><p>The contribution of three theories to the analysis of profitability is assessed. Neoclassical theory, especially the vintage production model, is used to analyse the adjustment of the structure of production to a slowdown in the growth rate of the labour force. Neo-Keynesian theory contributes by drawing attention to the authorities' aggregate demand management stance. The Kaleckian model focuses on the role of changes in oligopolistic price-setting behaviour and union bargaining power. This model is extended to an open economy and the effect on distribution of exchange rate changes is analyzed.</p><p>Series for profit shares and rates are constructed from the German national accounts. Conceptual problems in relating accounting data to economic concepts of factor shares and rates of return are investigated. New measures of the "warranted" real wage increase are developed.</p><p>An examination of the reconstruction of the German economy after 1945 shows how profitability was restored. Kornai's concept of "vegetative control" is used to throw new light on the functioning of the economy up to the Currency Reform.</p><p>The subsequent pattern of development of the German economy is traced. Interpretations of trends in profitability in the course of policy discussions by the Bundesbank, government, Council of Economic Experts, unions and business associations are analyzed.</p><p>A synthetic hypothesis is constructed to account for the pattern of manufacturing profitability. The explanatory role of labour shortage, growing openness, union bargaining power and exchange rate changes is confirmed. Set in the context of institutional and policy changes, these factors provide a more satisfying description of the determinants of profitability than previous, frequently monocausal, explanations.</p>
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