Model Answer
0 min readIntroduction
Nicholas Kaldor, a prominent post-Keynesian economist, developed a theory of distribution in the 1950s and 60s that attempts to explain the long-run shares of profit and wages in national income. Unlike neoclassical theories that rely on marginal productivity, Kaldor’s model focuses on the dynamics of capital accumulation and the behavioral characteristics of capitalists and workers. It posits that these shares are not determined by forces of supply and demand in individual markets, but rather by macroeconomic factors and class behavior. This theory gained prominence as an alternative to the prevailing neoclassical distribution theories.
Kaldor’s Theory of Distribution: A Detailed Explanation
Kaldor’s theory rests on several ‘stylized facts’ about modern capitalist economies:
- Constant Capital-Output Ratio (v): The ratio of capital stock to output remains relatively stable in the long run.
- Constant Share of Profits (π): The share of profits in national income tends to be stable over time.
- Constant Real Wage Rate (w): The real wage rate tends to grow at the same rate as productivity.
- Propensity to Save (s): Capitalists have a higher propensity to save than workers.
The Mechanism Behind the Model
The core mechanism of Kaldor’s model revolves around the interaction between capital accumulation, savings, and the propensity to save. The model can be explained in the following steps:
1. Investment and Capital Accumulation
Investment (I) is the driving force behind capital accumulation. The level of investment is determined by the level of savings in the economy. According to Kaldor, savings are generated by both capitalists and workers, but the propensity to save differs significantly between the two classes.
2. Savings and the Propensity to Save
Let:
- π = Share of profits in national income
- (1-π) = Share of wages in national income
- sc = Propensity to save out of profits (capitalists)
- sw = Propensity to save out of wages (workers)
Total savings (S) in the economy are given by:
S = πsc + (1-π)sw
Since capitalists have a higher propensity to save (sc > sw), an increase in the profit share (π) will lead to higher overall savings.
3. Equilibrium and Distribution
In equilibrium, savings must equal investment (S = I). Investment is determined by the capital-output ratio (v) and the rate of growth (g):
I = vΔY = vgY (where Y is output)
Therefore, πsc + (1-π)sw = vgY
Kaldor demonstrates that the share of profits (π) is determined by the following equation:
π = (sc - sw) / (sc - sw + (sw/v))
This equation shows that the profit share is determined by the difference in the propensities to save between capitalists and workers, and the capital-output ratio. A higher difference in propensities to save, or a lower capital-output ratio, will lead to a higher profit share.
4. Wage Share Determination
The wage share (1-π) is, therefore, inversely related to the profit share. Kaldor argues that the wage share is determined by the rate of growth and the capital-output ratio, alongside the savings propensities. If productivity grows, wages will grow at the same rate, maintaining the real wage rate. However, the distribution of this growth between profits and wages is determined by the factors mentioned above.
Implications and Limitations
Kaldor’s model suggests that the distribution of income is not a natural outcome of market forces but is shaped by class behavior and macroeconomic conditions. It implies that policies aimed at reducing income inequality should focus on altering the savings behavior of capitalists and workers, or influencing the capital-output ratio. However, the model has been criticized for its simplifying assumptions, particularly the constancy of the capital-output ratio and the propensities to save. Furthermore, it doesn’t fully account for the role of technological change and international trade.
Conclusion
Kaldor’s theory of distribution provides a valuable alternative to neoclassical explanations, emphasizing the role of macroeconomic factors and class behavior in determining income shares. While the model’s assumptions have been debated, it offers a compelling framework for understanding the long-run dynamics of profit and wage shares in capitalist economies. Its insights remain relevant for policymakers seeking to address income inequality and promote sustainable economic growth.
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.