Model Answer
0 min readIntroduction
The theory of distribution, explaining how national income is divided between wages and profits, has been a central concern in economics. While Kalecki emphasized the role of degree of monopoly in determining distribution, Kaldor, in his 1957 paper, argued that labour scarcity is a crucial constraint, making full employment a less realistic assumption. Kaldor’s model links investment, savings, and the wage share, demonstrating how changes in these variables affect income distribution. This answer will explore Kaldor’s approach, the determinants of distributive shares, and the implications of endogenous investment for the model’s stability.
Kaldor’s Theory of Distribution: A Labour Scarcity Perspective
Kaldor’s model departs from Kalecki’s by explicitly acknowledging the possibility of labour shortage, even before full employment is reached. He argued that in a growing economy, the demand for labour may outstrip supply, leading to wage increases and a shift in the distribution of income. Unlike Kalecki, who focused on the power of capitalists to determine wages, Kaldor emphasized the role of technical progress and capital accumulation in driving wage growth.
Investment and Savings Propensities & Distributive Shares
In Kaldor’s model, the distributive shares – the wage share (W) and the profit share (P) – are determined by the relationship between the propensity to save out of wages (sw) and the propensity to save out of profits (sp), along with the ratio of investment (I) to national income (Y). The key equation is:
W = sw / (sw + (sp/ (1-W)))
This equation shows that the wage share is positively related to the propensity to save out of wages (sw) and negatively related to the propensity to save out of profits (sp). A higher sw implies a larger proportion of income is saved by workers, increasing their bargaining power and potentially leading to a higher wage share. Conversely, a higher sp means capitalists save more, increasing their demand for capital and potentially leading to a lower wage share. Investment (I) plays a crucial role as it determines the level of capital accumulation, which in turn affects the demand for labour and the wage share.
Endogenous Investment and Model Stability
Kaldor’s original model assumes investment is exogenous – determined outside the model. However, if investment varies with profits, as suggested by the acceleration principle (I = vΔY, where v is the capital-output ratio), the model’s stability is affected. If profits rise, investment increases, leading to higher output and further increases in profits – a virtuous cycle. However, this can also lead to instability.
When investment is endogenous, the model can exhibit cyclical fluctuations. A rise in profits triggers investment, which increases output and employment, leading to higher wages. This, in turn, reduces profits, dampening investment and initiating a downturn. The stability of the model depends on the responsiveness of investment to profit changes and the values of the propensities to save. If the responsiveness is too high, the model can become unstable, exhibiting persistent oscillations or even divergence. A high sp can exacerbate these fluctuations, as it amplifies the impact of profit changes on investment.
Comparing Kaldor and Kalecki
| Feature | Kaldor | Kalecki |
|---|---|---|
| Key Driver of Distribution | Labour Scarcity & Savings Propensities | Degree of Monopoly Power |
| Role of Investment | Exogenous (originally), affects demand for labour | Determined by profit expectations |
| Wage Determination | Influenced by technical progress & capital accumulation | Determined by the ‘margin of monopoly’ |
| Full Employment | Not necessarily assumed; labour scarcity is key | Possible, but not central to the theory |
Conclusion
Kaldor’s theory of distribution provides a valuable framework for understanding the interplay between investment, savings, and income distribution, particularly in the context of labour scarcity. The introduction of endogenous investment, while making the model more realistic, introduces the potential for instability. The stability of the Kaldor model hinges on the sensitivity of investment to profit changes and the relative propensities to save. Further research exploring the role of institutions and government policies in moderating these dynamics is crucial for achieving stable and equitable income distribution.
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.