The Outcome of the Pasinetti-Process: A Note

Author(s): J. E. Meade
Reviewed work(s):
Source: The Economic Journal, Vol. 76, No. 301 (Mar., 1966), pp. 161-165
Published by: Wiley-Blackwell for the Royal Economic Society
Stable URL: http://www.jstor.org/stable/2229072 .
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1966] THE RATE OF PROFIT IN A GROWING ECONOMY 161

THE OUTCOME OF THE PASINETTI-PROCESS:

A NOTE

THISnote is intended solely to elucidate the boundaries which separate

the various possible outcomes of the Pasinetti-process. It is, I believe,
uncontroversial,but may help to throw light on some of the points at issue.

Assume: capitalists who do no work and save Sp of their income and

workers who save Sw(Sw < Sp) of their income. The Pasinetti-processis
concerned with the nature of the ultimate long-run steady-state equilibrium
when the ratio of property owned by capitalists to property owned by
workershas tended to its final value. The outcome may take any one of
three forms:
(1) no steady-state equilibrium exists;
(2) the distribution of property settles at a value at which = g-
K -p

where P is total profits, K total capital, and gn the steady-state rate of

growth (the case examined by Pasinetti in his original Reviewof Economic
Studiesarticle); or
(3) the distribution of property tends to a value at which Y-gn
where Y is total income (the case which I exemplified with a Cobb-
Douglas production function in my subsequent ECONOMICJOURNAL
article).
The present note is a piece of geometric taxonomy to show how the
boundaries between cases (1), (2) and (3) depend upon the interplay of
the parameters gn, Sp and Sw; and the technical characteristics of the
production function.
P
Measure as in Fig. 1 the rate of profit R on the horizontal axis and the
y
output-capital ratio on the vertical axis. Draw the line OA at 450 to the
axes. We are concerned only with the space between the vertical axis and
the line OA, since below the line OA y is > 1, i.e., profitswould absorb more

than the whole national income. Let OB = gn and OC -=gp and complete
SP SW
the rectangle OCDEB. Since Sp > Sw, the point D lies above OA.
y p
The long-run steady state values of and if they exist, must lie either
on the line CD or on the line DE. This can be seen as follows:
(i) Consider first any point to the right of BG. Then S-P > g,. The
No. 30I.-VOL. LXXVI. M
162 THE ECONOMIC JOURNAL [MARCH

property of capitalists is growing more quickly than the steady-state growth

value. If this continues, sooner or later total capital will be growing at a
higher rate than gn, which is incompatible with steady-state equilibrium.
SWY
(ii) Considernext any point above the line CF. Then SK > gn. But
K
swy (tilbgrwn
total capital must be growing at least as fast as K (it will be growing

faster than S- if any significant amount of income is going to capitalists).

Therefore, once more a steady-state equilibrium is excluded because
capital is growing at a higher rate than gn.
y A
K ~~~G

C
_ D F

gn

0 gn /p
~~~K S~~~~~~~
FIG. 1

(iii) Consider finally any point inside the area OCDE. Here both
K. < gn and < gn. Since < gn, capitalists' property will be
growing at a rate lower than gn. In this case, then, if a steady-state exists
the ratio of capitalists' to workers' property tends to zero; but if this were
so, since SK < gn capital would in fact be growing at a rate less than gn,
so that no steady-state can exist.
On the line CD we have, = gn and sp < gn. This is the case of
the long-run steady state in which workers' capital comes to dominate
capitalists' capital; and we have a long-run steady state with =g.

On the line DE we have SWY < gn and SK = gn. This is the case
K K
(examined by Pasinetti in his Reviewof EconomicStudiesarticle) where the
1966] THE OUTCOME OF THE PASINETTI-PROCESS 163

distribution of property adjusts itself between workers and capitalists until

P gn

We can now see how, given Sw, Sp, and gn, the production function will
decide the outcome. The following are three illustrative cases.
(1) The Cobb-Douglas case of unitary elasticity of substitution between
K and L (the amount of labour measured in efficiency units as expanded by
Harrod-neutral technical progress). This was the case examined in my

y
K /H
L A

C D

450
0 B P
K
FIG. 2

ECONOMICJOURNAL article. In this case y is fixed by the production

-

function. In the case illustrated by the line OH in Fig. 2 (where

Y < gn, i.e., Sw > [1- Q]Sp,where 1-Q is the proportionof income
P~~~w ~
going to profits) we get the result = SW. In the caseof the line OL (where

Sw < [1 - Q]Sp) we get the result P- gn

(2) The fixed technical coefficient case, where the elasticity of substitu-
tion between K and L is zero, is shown in Fig. 3. In this case K is fixed by

the production function; and in Fig. 3 three possible fixed values of K

y
(namely, ON, OL and OJ) are illustrated. With = OL (since the line

LM cuts the line DE) a steady-state solution exists with - gn But with
164 THE ECONOMIC JOURNAL [MARCH

- ON or OJ no steady state exists, since the lines NP and JK cut neither

K
CD nor DE. With fixed K therefore, no steady state exists if Yis > BD or
K) TC~~~~I
< BE = OB. In other words, with fixed - for a steady state to exist we

must have gn > _ >gn or Sw <

.K g gnyK <r S

K MA

L ~ ~ /

K~~~~~~~~~~~~

N/

(3) The fixed-rate-of-interest case, i.e., where the elasticity of substitution

between K and L is infinite and there are no diminishing returns to either
KSw
In this casep is fixed by the production function. In Fig. 4 two
factor.
P
p
possible values for a fixed (namely OQ and OS) are illustrated. With
P Si.. Pt >)no steady state can exist, since the line ST cuts

neither CD or DE. With (

Qi.e., wihp<g a steady state exists

with - gn

y
The ratio T,can find this predetermined value by a suitable adjustment
of the ratio of K to L, and so of profits to wages, and so of capital to total
income.
The above are, of course, only three particular examples of production
 1966] TRADE CREDIT AND MONETARY POLICY: A " REJOINDER " 165

functions. The outcome with any production function can, however, be

found by drawing on Fig. 1 a line showing the technically given relationship
between the rate of profit and the output-capital ratio and observing whether
y

R T A

C D

iE

FIG. 4

this line cuts CD or DE or neither. For the line to cut CD, the elasticity of
substitution between labour and capital must, of course, be greater than
zero, and, for it to cut DE, less than infinite.
J. E. MEADE
Christ'sCollege,
Cambridge.

TRADE CREDIT AND MONETARY POLICY:

A " REJOINDER"

IN December 1963 we published in thisJOURNAL a theoretical and em-

pirical analysis of the potential influence of Trade Credit as a frustrator of
the short-run effects of monetary policy.' In December 1964 thisJOURNAL
published a criticism of our work written by William H. White.2 White's
purpose was to cast doubt on our conclusion that trade credit is a " strong
potential frustrator of monetary policy " 3and to argue instead that our
study " probably established the opposite: the induced expansion of trade
credit provides a very weak offset to tight money." 4
White based his case on eight main charges and five subsidiary points.
1 F. P. R. Brechling and R. G. Lipsey, " Trade Credit and Monetary Policy," ECONOMIC
JOURNAL, December 1963, pp. 729-34.
2 W. H. White: " Trade Credit and Monetary Policy: A reconciliation," ECONOMIC JOURNAL,
December 1964, pp. 935-45.
3 Brechling and Lipsey, op. cit., p. 641.
4 White, op. cit., p. 935.