Abstract
Kaldor presented his remarkable paper “Alternative Theories of Distribution” in the Review of Economic Studies (1955-1956). The theory of income distribution has been the principal problem in political economy since Ricardo, and Kaldor presented a bird’s-eye view of the various theoretical attempts since Ricardo at solving this problem. He took up Ricardian or classical theory, Marxian, neoclassical or marginalist theory, and Keynesian as four main strands of thought. His “Keynesian theory,” now called “Kaldor’s model,” is characterized as an application of Keynesian principle of the multiplier and of the idea of widow’s cruse.
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This is in line with the idea of widow’s cruse in determining the profits. Profits are likened to a widow’s cruse in Keynes’s Treatise on Money (1930, p. 125): If entrepreneurs choose to spend a portion of their profits on consumption (and there is, of course, nothing to prevent them from doing this), the effect is to increase the profits on the sale of liquid consumption goods by an amount exactly equal to the amount of profits which have been thus expended. … Thus profits, as a source of capital increment for entrepreneurs, are a widow’s cruse which remains undepleted however much of them may be devoted to riotous living. Referring to this passage, Kaldor (1955-1956, p. 227 n. 1) puts an emphasis on that “here Keynes regards entrepreneurial incomes as being the resultant of their expenditure decisions, rather than the other way round — which is perhaps the most important difference between ‘Keynesian’ and ‘pre-Keynesian’ habits of thought.” In connection with the multiplier, Kaldor (1955-1956, p. 228 n. 2) also refers to Robinson (1956) and Kalecki (1942). Kaldor mentions that he owed “a great deal of stimulus to a paper by Kalecki, ‘A Theory of Profits,’ whose approach is in some ways reminiscent of the widow’s cruse of Keynes’ Treatise.” Kalecki (1945) explains widow’s cruse idea clearly in Chapter 3, The Determinants of Profits, which was developed back in 1935 in his “Essai d’une théorie de mouvement cyclique des affairs,” Revue d’Economie Politique (March-April 1935), and his “A Macrodynamic Theory of Business Cycles,” Econometrica (July 1935). Kalecki (1945, p. 46) says that “It is clear that capitalists may decide to consume and to invest more in a given period than in the preceding one, but they cannot decide to earn more. It is, therefore, their investment and consumption decisions which determine profits, and not vice versa.”
Refer to Harrod (1948, lecture 3). According to Harrod, the warranted rate of growth Gw is the growth rate of output that warrants a savings-investment equilibrium under optimum utilization of capital. This is expressed as Gw=s/ct, where ct, = the required capital coefficient I/△Y.
Kaldor (1955-1956, p. 232) says that “this does not mean that there will be an inherent tendency to a smooth rate of growth in a capitalist economy.” Problems of the trade cycle lie outside the purposes of this book. However, he explains it as follows: The causes of cyclical movements should be sought in a disharmony between the entrepreneurs’ desired growth rate (as influenced by the degree of optimism and the volatility of expectations) that governs the rate of increase of output capacity G, and the natural growth rate G′ (dependent on technical progress and growth of the working population) that governs the rate of growth in output over longer periods. Then it is the excess of G over G’ — not the excess of s over G′v — that causes periodic breakdowns in the investment process. Refer to Kaldor (1957a, pp. 251-254) for a further discussion.
Refer to Iyoda (1975) for a similar discussion. See Appendix 3A for a comparison with a neoclassical model of income distribution.
The relative share of profits pcis nonnegative, and Kaldor sets a condition, 1 ≥ sp ≥ sw ≥ 0 for fully operating the model. Then C > sw. In case of C < swpc then the profit rate n becomes negative. Kaldor (1955-1956, p. 229 n. 1) says on sp > sw that “This may be assumed … simply as a consequence of the fact that the bulk of profits accrues in the form of company profits and a high proportion of companies’ marginal profits is put to reserve.” So there is support for a view that this is a plausible condition. An inequality C > sw became one of the focal points between Pasinetti (1962) and Samuelson and Modigliani (1966a). Kaldor (1966a, p. 312) later says, “From the point of view of the mechanics of a Keynesian model, it is gross savings out of gross profits, and gross investment, that are relevant, not net savings and net investment.” He himself makes a remark on inequality C > sw, which was “the original postulate of my ‘Keynesian’ distribution theory” (1978, p. xv). This is a plausible assumption, in particular under full employment, though the condition was not stated explicitly in his original model. We also consider that this condition will still holds true of the underemployment economy. We shall construct our Kaldorian models in gross terms in the next chapter. Condition C > sw will become more plausible in this treatment. For the same volume of depreciation is included in both numerator and denominator.
This Wis different from Kaldor’s original model, where W= ωL. Kaldor treats W/L as the real wage rate in the model (1955-1956, p. 232). Two remarks can be made in relation to this. First, considering this Kaldor’s treatment, his notations are in real terms (at constant price). As far as arguments are made in the ratio, it does not seem to make any difference between nominal and real terms. I will develop his discussion in nominal terms. This treatment is important because I do not examine the classical dichotomy (for a further argument, refer to “The Classical Dichotomy” in Chapter 5). Second, the real wage identity above is a much-simplified version of reality. One aggregate product (possibly based on the national income) is considered in the model. The price level e here is not exactly the same as consumer (or retail) prices. For a more accurate discussion, it may be possible to take the national income deflator as price level e and the consumer (or retail) price index as the consumer prices, respectively. The same arguments hold true of the real wage identity used in Chapter 4.
Price level e here will have no effect on the ratio of I/Y, for where Ir, = investment in real terms. Therefore, according to equation (2), given sp and sw, pc is independent from price level e. The next is the capital/output ratio. If Kv = eK, by above equation (a) v is also independent from e; however, if Kv = the historical cost, v will be affected by e. Then, by above equation (b) we can discuss the effect of price level on the profit rate, which depends on the method of measuring capital.
Changes of the investment/output growth ratio are decomposed into per capita investment growth and per capita productivity growth as follows: where Ir = investment in real terms. Then where i, = I,/L. From this, we have a growth rate form
See the discussion in “Historical Constancies” in this chapter for details.
See “Historical Constancies” in the chapter for a simple explanation of his technical production function.
Refer to polemic papers in the Review of Economic Studies 96 (October 1966). For example, Samuelson and Modigliani (1966a, 1966b), and Solow (1966) were on the MIT and Harvard side; Pasinetti (1966), Robinson (1966), and Kaldor (1966a) were on the U.K. Cambridge side. Refer to note 27 of Chapter 2 for some arguments in relation to Solow (1966). Kaldor (1966a, p. 315) clearly expresses two reasons that he rejects the marginal productivity approach: (i) All empirical studies concerning the short period relationship between output and employment (at least in manufacturing activities) show the elasticity of the former with regard to changes in the latter to be greater, not less, than unity (“Okun’s Law” makes it 3 [Okun (1962)], which implies of course that the short-period marginal product of labour exceeds the average product. … (ii) All empirical studies concerning the relationship of productivity and production (again, for manufacturing activities) reveal the existence of (long-run) increasing returns, both on account of the economies of large-scale production, and of the subdivision of processes (and industries) with an increase in the scale of activities. More or less same arguments are seen in Kaldor (1960a, 1960b), which are a rejoinder to Atsumi (1960) and Tobin (1960) and to Findlay (1960), respectively. Furthermore, refer to Kaldor (1961, pp. 203-208) for his views of rejecting the production function. Robinson (1953-1954, 1967) also basically shares with Kaldor these views of marginal productivity and production function, though there are some differences between them.
See Kaldor (1957a, p. 251 n. 1) for the discussion in relation to these. Kaldor (1961) constructs a model denoting sp and sw as the propensity to save out of profits and wages, respectively.
See Weintraub (1958, p. 105). A similar argument is seen in Watanabe (1960).
For some of these examples, refer to note 2 in Chapter 1.
For the distributive shares, Kaldor quotes Brown and Hart (1952) for the United Kingdom and Kuznets (1952) for the United States. For the capital/output ratio, he quotes Brown and Weber (1953) for the United Kingdom, Maywald (1956) for Great Britain, and Fellner (1947, table 3) based on Kuznets estimates for the United States. For the rate of profit on capital, he quotes Brown and Weber (1953) for the United Kingdom and Kuznets (1952) for the United States.
Refer to Iyoda (1971b) for arguments on the model.
Kaldor (1961, p. 179) says that none of these facts can be plausibly explained by the theoretical construction of neoclassical theory. The purpose of his paper (1961) was to present a model of income distribution and capital accumulation that is capable of explaining at least some of these stylized facts.
These figures in percentage are stable (around 55) during the years 1870 to 1884, then become higher (around 60) during the years 1890 to 1904, and far higher (around 64 to 69) during the years 1924 to 1933 and 1948 to 1950. But during the World War II period they are around 60.
For example, see Domar (1961, table 5). Kravis (1959) shows that the capital/output ratio has been increasing from around the year 1900 to the 1930s, and then decreasing to the 1950s in the United States.
The capital/output ratio is calculated by gross capital stock to gross national product (at constant prices).
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Iyoda, M. (1997). Kaldor’s Model. In: Profits, Wages, and Productivity in the Business Cycle. Springer, Dordrecht. https://doi.org/10.1007/978-94-011-5376-8_3
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