Model Answer
0 min readIntroduction
Nicholas Kaldor, a prominent post-Keynesian economist, developed a comprehensive theory of distribution in the 1950s and 60s, challenging the neoclassical view that distribution is solely determined by marginal productivity. Kaldor’s theory posits that the distribution of income between wages and profits is not a static outcome of market forces but is dynamically determined by factors like the rate of capital accumulation, technological progress, and the ‘share’ of wages in national income. Understanding this framework is crucial for analyzing the impact of policy interventions aimed at altering income inequality. This answer will outline Kaldor’s theory and explore the implications of changes in wage levels and savings rates on income distribution.
Kaldor’s Theory of Distribution: An Outline
Kaldor’s theory rests on several key propositions:
- The Capital-Output Ratio (v): Kaldor argued that the capital-output ratio, representing the amount of capital required to produce one unit of output, is relatively stable in the long run.
- The Rate of Profit (r): The rate of profit is determined by the ratio of output to capital (1/v) and the rate of capital accumulation (g). Higher capital accumulation leads to a lower rate of profit.
- The Wage Share (w): The wage share is determined by the rate of capital accumulation and the rate of technological progress (σ). Higher capital accumulation and technological progress tend to increase the wage share.
- The Stability of the Wage-Profit Ratio: Kaldor believed that the wage-profit ratio tends to be stable over the long run due to the interplay of these factors.
The Core Mechanisms
The theory operates through a series of interconnected mechanisms. Increased capital accumulation, driven by higher savings and investment, initially lowers the rate of profit. However, it also stimulates technological progress, which increases labor productivity and, consequently, the wage share. The wage share’s increase is constrained by the capital-output ratio. The interplay between these forces determines the long-run distribution of income.
Implications of an Increase in the Wage Level
An increase in the wage level, holding other factors constant, has several implications:
- Reduced Profit Share: A higher wage level directly reduces the profit share in national income. This is a straightforward effect.
- Potential for Reduced Capital Accumulation: Lower profits may lead to reduced investment and capital accumulation, as firms have less incentive to expand.
- Stimulus to Technological Progress: Higher wages can incentivize firms to adopt labor-saving technologies, boosting technological progress (σ). This, in turn, can increase labor productivity and potentially offset the initial reduction in the profit share.
- Impact on Demand: Higher wages increase aggregate demand, potentially leading to increased output and investment, partially mitigating the negative impact on capital accumulation.
However, the net effect depends on the elasticity of investment to changes in profits and the responsiveness of technological progress to wage increases. If investment is highly sensitive to profits, a wage increase could lead to a significant decline in capital accumulation and ultimately harm long-term growth.
Implications of a Reduction in the Saving Rate
A reduction in the saving rate has significant consequences for Kaldor’s framework:
- Reduced Capital Accumulation (g): A lower saving rate directly translates into lower investment and a slower rate of capital accumulation.
- Increased Rate of Profit (r): Slower capital accumulation increases the rate of profit, as the capital-output ratio remains relatively stable.
- Decreased Wage Share (w): Reduced capital accumulation and slower technological progress (as investment in R&D may also decline) lead to a decrease in the wage share.
- Distributional Effects: The shift in income from wages to profits exacerbates income inequality.
The magnitude of these effects depends on the sensitivity of investment to changes in the saving rate and the responsiveness of technological progress to investment levels. A significant reduction in the saving rate could lead to a prolonged period of slower growth and increased income inequality.
A Comparative Look: Wage Increase vs. Saving Rate Reduction
| Factor | Increase in Wage Level | Reduction in Saving Rate |
|---|---|---|
| Capital Accumulation | Potentially reduced (depends on investment elasticity) | Definitely reduced |
| Rate of Profit | Potentially reduced | Increased |
| Wage Share | Potentially increased (due to technological progress) | Decreased |
| Income Inequality | Ambiguous (depends on offsetting effects) | Increased |
Conclusion
Kaldor’s theory of distribution provides a valuable framework for understanding the dynamic interplay between capital accumulation, technological progress, and income distribution. An increase in wages can have complex effects, potentially stimulating technological progress but also reducing profits and investment. However, a reduction in the saving rate unequivocally leads to slower capital accumulation, a higher rate of profit, and a decreased wage share, exacerbating income inequality. Policymakers must consider these dynamic effects when designing policies aimed at achieving equitable and sustainable economic growth. The theory highlights the importance of maintaining a balance between capital accumulation and wage growth to ensure long-term prosperity.
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.