Model Answer
0 min readIntroduction
The theory of distribution, concerning how national income is divided among factors of production – land, labour, capital, and entrepreneurship – has evolved significantly. Classical economists like Ricardo focused on land rent and diminishing returns, while Keynesian economics largely ignored distribution, treating wages as determined by institutional factors. However, post-Keynesian economists like Nicholas Kaldor and Michał Kalecki offered distinct, dynamic theories of distribution, attempting to explain how wage shares and profit shares are determined in a growing economy. Both theories challenged the neoclassical assumption of perfectly competitive markets and emphasized the role of macroeconomic forces in shaping income distribution.
Kaldor’s Theory of Distribution
Nicholas Kaldor (1961) proposed a theory of distribution based on the dynamics of capital accumulation and technical progress. His central argument is that the long-run share of profits is determined by the rate of capital accumulation. Kaldor identified three ‘stylized facts’ of capitalist economies:
- Constant Wage Share: Over long periods, the wage share in national income tends to remain relatively stable.
- Constant Capital-Output Ratio: The ratio of capital stock to output also tends to be stable.
- Normal Rate of Profit: A tendency towards a normal rate of profit exists across industries.
Kaldor argued that if the rate of profit rises, it incentivizes investment and capital accumulation. This increased capital stock, combined with a constant capital-output ratio, leads to faster output growth. However, faster output growth eventually reduces the rate of profit back to its normal level due to increased competition. Conversely, a fall in profits discourages investment, slowing capital accumulation and eventually restoring the rate of profit. Technical progress, while increasing productivity, doesn’t fundamentally alter the distribution as it affects both capital and labour proportionally.
Kalecki’s Theory of Distribution
Michał Kalecki (1939) offered a different perspective, focusing on the power relationships between workers and capitalists. Kalecki argued that the wage share is determined by the ‘degree of monopoly’ – the extent to which firms can influence prices. He distinguished between:
- Price Makers: Firms with significant market power (oligopolies or monopolies) can raise prices above marginal cost, earning higher profits.
- Price Takers: Firms in competitive industries have little control over prices and earn normal profits.
Kalecki posited that workers’ bargaining power, influenced by factors like trade union strength and the level of employment, plays a crucial role. Higher employment strengthens workers’ bargaining position, allowing them to demand higher wages. However, firms with a higher degree of monopoly are better able to resist these wage demands by passing on increased costs to consumers through higher prices. Therefore, a higher degree of monopoly leads to a lower wage share and a higher profit share. Kalecki also emphasized the role of ‘workers’ capital’ – the portion of profits saved by workers – in influencing the level of effective demand and investment.
Comparison of Kaldor and Kalecki
| Feature | Kaldor’s Theory | Kalecki’s Theory |
|---|---|---|
| Key Determinant of Distribution | Rate of capital accumulation and technical progress | Degree of monopoly and workers’ bargaining power |
| Role of Investment | Investment is driven by profit expectations and influences capital accumulation | Investment is influenced by effective demand, which is affected by workers’ savings |
| Market Structure | Assumes a relatively stable market structure | Emphasizes the importance of market power and the degree of monopoly |
| Wage Share | Determined by the dynamics of capital accumulation | Determined by the balance of power between workers and capitalists |
While both theories offer dynamic explanations of distribution, they differ in their emphasis. Kaldor focuses on the supply side – capital accumulation – while Kalecki focuses on the demand side and power relations. Both theories, however, reject the neoclassical assumption of perfect competition and recognize the importance of macroeconomic factors in shaping income distribution. They are not mutually exclusive; both mechanisms can operate simultaneously.
Conclusion
Both Kaldor and Kalecki’s theories provide valuable insights into the complexities of income distribution in capitalist economies. Kaldor’s emphasis on capital accumulation highlights the importance of investment and technological change, while Kalecki’s focus on monopoly power and bargaining power underscores the role of institutional factors and class struggle. Understanding these theories is crucial for formulating policies aimed at achieving a more equitable distribution of income and promoting sustainable economic growth. Contemporary debates on rising inequality often draw upon these frameworks to analyze the underlying forces at play.
Answer Length
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