Kaldor's growth model

LINK_POOL:

• economic growth
• Keynesian economics
• capital accumulation
• income distribution
• investment
• savings
• technical progress
• capital-output ratio
• full employment
• aggregate demand
• productivity
• capital stock
• Solow model
• marginal propensity to save
• business cycle

What Is Kaldor's Growth Model?

Kaldor's growth model is a post-Keynesian framework within economic growth theory that emphasizes the interplay between income distribution, savings behavior, and investment in driving economic expansion. Developed by Nicholas Kaldor, the model diverges from neoclassical approaches by highlighting the endogenous nature of technical progress and its link to capital accumulation. It posits that a capitalist economy can achieve stable long-run growth through specific relationships between profits, wages, and their respective savings rates.

History and Origin

Nicholas Kaldor, a Hungarian-born British economist, developed his growth model in the mid-20th century, notably presented in his 1957 essay titled "A Model of Economic Growth."²⁹ This work emerged as an alternative perspective to traditional neoclassical growth theories, such as the Solow model, which often treated technological progress as an exogenous factor.²⁸ Kaldor's model drew heavily on Keynesian economics and the dynamic approach of the Harrod-Domar model, but aimed to provide a more comprehensive framework by integrating the genesis of technical progress directly into the process of capital accumulation. Kaldor's work was influenced by observations of historical constancies in key economic ratios, such as the share of wages and profits in national income, and sought to explain these regularities as outcomes of the economic system's internal forces.²⁵, ²⁶, ²⁷ His theoretical contributions also extended to other areas, including the development of the "compensation" criteria for welfare comparisons and the cobweb model.

Key Takeaways

• Kaldor's growth model is a post-Keynesian framework that links income distribution and savings behavior to economic growth.
• It emphasizes the endogenous nature of technical progress, which is tied to capital accumulation.
• The model assumes an economy operating at or near full employment and divides income into wages and profits.
• A core tenet is that capitalists have a higher marginal propensity to save out of profits than workers do out of wages.
• The model suggests that a stable growth path can be achieved when investment equals savings at a level consistent with the technical progress function.

Formula and Calculation

Kaldor's model does not present a single, universally applied formula in the same way as some other growth models. Instead, it relies on a set of relationships and functions that interact to determine the equilibrium growth path. A central concept is the link between investment and savings, especially considering different propensities to save for workers and capitalists.

The total savings (S) in the economy are expressed as:

Where:

• ( S ) = Total savings
• ( s_w ) = Propensity to save out of wages
• ( W ) = Total wages
• ( s_p ) = Propensity to save out of profits
• ( P ) = Total profits

Given that total income (( Y )) is the sum of wages and profits (( Y = W + P )), and assuming that total savings must equal total investment (( I )), the share of profits in national income (P/Y) can be derived:²⁴

This formula implies that the share of profits in national income is determined by the ratio of investment to income and the differing saving propensities of workers and capitalists. A higher investment-to-income ratio or a larger disparity between profit and wage saving rates tends to increase the profit share.

Another key relationship in Kaldor's model is the "technical progress function," which replaces the traditional aggregate production function.²³ It posits a relationship where the rate of increase in output per worker is an increasing function of the rate of capital accumulation (or investment per worker). This endogenizes technological advancement within the model.

Interpreting the Kaldor's Growth Model

Interpreting Kaldor's growth model involves understanding its core mechanism: how the distribution of income between wages and profits, combined with different savings propensities, influences investment and, consequently, economic growth. The model suggests that for a stable growth path, a certain level of profit share is necessary to generate sufficient savings to finance investment. If the share of profits is too low, savings may not keep pace with desired investment, hindering growth. Conversely, policies that encourage profit-led investment may stimulate growth but could also exacerbate income inequality.²²

The model also highlights the role of aggregate demand as a prime mover of long-term economic growth, arguing that sustained expansion depends on robust demand leading to increased investment and employment.²¹ This contrasts with models that primarily emphasize capital accumulation and exogenous technological progress.

Hypothetical Example

Consider a hypothetical economy trying to achieve stable economic growth. In this economy, workers save 5% of their wages (( s_w = 0.05 )), while capitalists save 25% of their profits (( s_p = 0.25 )). The current investment to income ratio (( I/Y )) is 15%.

Using Kaldor's profit share formula:

This indicates that for the economy to sustain its current investment rate given the saving propensities, profits would need to constitute 50% of the national income. If, for instance, the actual profit share were consistently lower than 50%, the model implies there would be insufficient savings to finance the desired investment, potentially leading to a slower growth rate or an adjustment in the investment-to-income ratio. Conversely, a higher actual profit share could provide more savings for investment.

The model also suggests that if this economy experiences technical progress linked to its capital accumulation, an increase in investment could lead to a higher rate of productivity growth, further fueling economic expansion.

Practical Applications

Kaldor's growth model offers insights for policymakers and economists examining the dynamics of economic growth, particularly concerning income distribution and its impact on investment and savings.

One practical application lies in understanding the potential effects of policies aimed at income redistribution. For instance, policies that shift income towards profits (e.g., through tax incentives for businesses or deregulation) might, according to the model, increase the overall savings rate if capitalists have a significantly higher marginal propensity to save. This could then facilitate greater capital accumulation and growth. However, such policies also carry implications for income inequality.

The model also highlights the importance of fostering technical progress through investment. Governments or industries might consider how to encourage investment in new technologies or productive capacity, as Kaldor's framework suggests this directly fuels productivity growth. For example, the Organization for Economic Co-operation and Development (OECD) frequently publishes research on how investment in innovation and technology can drive long-term productivity and economic growth, aligning with Kaldor's emphasis on endogenous technical progress. [Source: https://www.oecd.org/economy/growth/]

Furthermore, the emphasis on aggregate demand implies that macroeconomic policies, such as fiscal stimulus or monetary easing, designed to boost demand can indirectly contribute to growth by encouraging investment and employment.

Limitations and Criticisms

While Kaldor's growth model provides valuable insights, it is subject to several limitations and criticisms. One significant point of contention revolves around its assumption of full employment.²⁰ Critics argue that this assumption simplifies the complexities of real-world economies, where unemployment and underemployment are common, thus limiting the model's applicability.¹⁹

Another major critique targets the model's behavioral assumptions, particularly the fixed and disparate savings rates for capitalists and workers.¹⁷, ¹⁸ Some economists argue that this simplification ignores factors like the "Life-Cycle" hypothesis, which suggests that individuals' saving patterns change throughout their lives, irrespective of their income class.¹⁶

Furthermore, the model has been criticized for not fully explaining how the unique profit rate required for steady-state growth is determined, or how income distribution automatically adjusts to ensure stable growth.¹⁴, ¹⁵ The model's "technical progress function," while innovative for endogenizing technical progress, has also faced scrutiny, with some arguing that it may be derived from a standard aggregate production function and that aggregation problems inherent in capital theory can undermine such functions.¹², ¹³

Some critics also point out that Kaldor's model, in its initial form, may not adequately account for income earned through rent or interest, focusing primarily on wages and profits.¹¹ The stability of empirical ratios, such as the capital-output ratio and income distribution, which Kaldor sought to explain, has also been a subject of ongoing debate among economists.⁹, ¹⁰

Kaldor's Growth Model vs. Solow Model

Kaldor's growth model and the Solow model are two prominent frameworks in economic growth theory, differing primarily in their treatment of technical progress and the role of income distribution.

While the Solow model emphasizes the role of savings and capital accumulation in reaching a steady state, with long-run growth determined solely by exogenous technical progress, Kaldor's model provides an alternative by making technical progress a function of investment.⁷, ⁸ This difference in the treatment of technical progress is fundamental. Additionally, Kaldor's model gives a more prominent role to income distribution and the differing savings behaviors of economic classes, which is less central in the Solow framework.⁶

FAQs

Who developed Kaldor's growth model?

Kaldor's growth model was developed by the Hungarian-born British economist Nicholas Kaldor.

What are the main assumptions of Kaldor's growth model?

Key assumptions include an economy operating at or near full employment, income divided into wages and profits, and differing savings propensities for workers and capitalists (with capitalists saving a higher proportion of their income). It also assumes technical progress is endogenous and linked to capital accumulation.⁵

How does Kaldor's model incorporate technical progress?

Unlike some other models that treat technical progress as external, Kaldor's model includes a "technical progress function." This function suggests that the rate of increase in productivity per worker is an increasing function of the rate of capital accumulation or investment per worker, thus making technical progress endogenous.

What is the role of income distribution in Kaldor's model?

Income distribution plays a crucial role. The model posits that the share of profits in national income is determined by the investment-to-income ratio and the differing marginal propensity to save between capitalists and workers. This distribution influences the overall savings available for investment and thus impacts economic growth.³, ⁴

What are some criticisms of Kaldor's growth model?

Criticisms include its assumption of full employment, simplified behavioral assumptions regarding savings propensities, and a lack of clear explanation for how the unique profit rate for steady growth is determined. Some also question the validity of the technical progress function and the constancy of empirical ratios it aimed to explain.¹, ²