Model Answer
0 min readIntroduction
Michal Kalecki, a Polish economist, offered a unique perspective on income distribution, diverging from both classical Marxist and neoclassical theories. While Marx focused on the inherent tendency of the capitalist system to exploit labor, leading to a declining wage share, neoclassical economics viewed distribution as determined by marginal productivity. Kalecki, however, argued that the share of income accruing to labor and capital is fundamentally determined by the level of effective demand and, crucially, the degree of monopoly power within the economy. His theory, developed in his seminal work "Essays in Effective Demand" (1938), provides a dynamic framework for understanding income distribution in a capitalist economy.
Kalecki’s Departure from Traditional Theories
Traditional Marxist theory posits that capitalists extract surplus value from labor, leading to a falling rate of profit and a rising organic composition of capital. This inherently leads to a declining wage share. Neoclassical economics, conversely, argues that wages are determined by the marginal productivity of labor, and profits by the marginal productivity of capital. Both theories, however, lack a robust explanation for the observed stability of wage shares in many developed economies.
The Core of Kalecki’s Theory
Kalecki’s theory centers around the concept of ‘degree of monopoly’ (m), which represents the market power of firms. He argued that firms with greater monopoly power can maintain higher prices relative to costs, leading to higher profit margins. This monopoly power stems from factors like product differentiation, barriers to entry, and control over essential resources.
The Distribution Share Equation
Kalecki formulated a key equation to explain the distribution of income:
W = (1-m)/ (1-m+u)
Where:
- W represents the wage share of income.
- m is the degree of monopoly (ratio of mark-up to cost).
- u is the capacity utilization rate (actual output/potential output).
This equation reveals that the wage share is positively related to the capacity utilization rate (u) and negatively related to the degree of monopoly (m). A higher degree of monopoly reduces the wage share, while higher capacity utilization increases it.
Impact of Degree of Monopoly
Kalecki argued that as industries become more concentrated and firms gain greater monopoly power, they are able to suppress wage increases even during periods of economic expansion. This is because they can pass on increased costs to consumers through higher prices, protecting their profit margins. Conversely, in industries with low monopoly power, firms are forced to compete on price, limiting their ability to raise prices and thus incentivizing them to increase wages to attract and retain labor.
Role of Effective Demand
Effective demand plays a crucial role in Kalecki’s framework. When effective demand is high (high u), firms are incentivized to increase production, leading to increased labor demand and upward pressure on wages. However, the extent to which wages rise depends on the degree of monopoly. Firms with high monopoly power can resist wage increases more effectively.
Comparison with other Theories
| Theory | Determinant of Distribution | Role of Demand |
|---|---|---|
| Marxist | Exploitation of Labor | Limited; focus on class struggle |
| Neoclassical | Marginal Productivity | Demand influences prices, but not directly distribution |
| Kalecki | Degree of Monopoly & Effective Demand | Central; drives capacity utilization and wage share |
Conclusion
Kalecki’s theory of distribution provides a nuanced understanding of how income is divided between labor and capital. By emphasizing the role of both effective demand and the degree of monopoly, he offered a compelling alternative to traditional Marxist and neoclassical perspectives. His work highlights the importance of market structure and macroeconomic conditions in shaping income distribution, offering valuable insights for policymakers seeking to promote a more equitable distribution of wealth. The theory remains relevant today, particularly in the context of increasing market concentration and the potential for monopolistic practices.
Answer Length
This is a comprehensive model answer for learning purposes and may exceed the word limit. In the exam, always adhere to the prescribed word count.