Assignment on

Kaldor Model of Income Distribution

Course Title: Advanced Development Economics

Course No.: 0311 15 Econ 5103

Submitted To:
Dr. Shahnewaz Nazimuddin Ahmed
Professor
Economics Discipline
Khulna University, Khulna - 9208
Submitted By:
Md. Mostafijur Rahman
Student ID: MSS-231501
MSS 1st year, 1st term
Economics Discipline
Khulna University, Khulna - 9208

Date of Submission: 8 March, 2023

 Table of Contents
Title Page No.
Kaldor Model of Income Distribution.....................................................................1-6
1.1 Preamble .............................................................................................................. 1
1.2 Features ................................................................................................................ 1
1.3 Assumptions......................................................................................................... 2
1.4 Model Explanation ............................................................................................... 2
1.5 Theoretical Implications ...................................................................................... 4
1.6 Critical Evaluation ............................................................................................... 5
1.7 Limitations of the Model ..................................................................................... 5
References ...................................................................................................................vii

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 Kaldor Model of Income Distribution

1.1 Preamble
By using the concept of Keynesian multiplier concept Kaldor determines the relative
factor shares in his alternative theory of income distribution. Kaldor suggests that given
marginal propensities to save of capitalists and workers, the share of profit depends on
the ratio of investment to income. In Kaldor’s theory, the economy is assumed to have
a state of full employment for a given level of output. The income in the economy (𝑌)
can be classified into two broad categories: wages (𝑊) and Profit (Π). The wages
consist of income generated from manual labor as well as salaries, while profits are
comprised of not only the income from entrepreneurs but also the income of property
owners. The difference between these two income groups lies in their attitude toward
consumption and savings. the marginal propensity to save of wage earners is relatively
far lower than that of profit earners or capitalists.
Besides, Kaldor took certain facts as the bases of his model and as a starting point. For
example, according to him, there is no recorded tendency for a falling rate of growth of
productivity. There is a continued increase in the amount of capital per worker. There
is a steady rate of profit on capital at least in the developed country. There is no change
in the ratio of profits and wages. A rise in real wages is only in proportion to the increase
of labor productivity. the capital-output ratios are steady over long periods. This implies
near identity in the percentage rates of growth of production and of the capital stock.
There are appreciable differences in the rate of growth of labor productivity and total
output in different sectors or economies.

1.2 Features

 The starting point of Kaldor is the belief that the income of the society is
distributed between different classes, each having its own propensity to save (K
= W + P). The equilibrium can be brought about only by a just and appropriate
distribution of income. In other words, growth rate and income distribution are
inherently connected elements. Kaldor’s model depends on these two elements
and their relationships and brings forth the importance of the distribution of
income in the process of growth this is one of the basic merits of Kaldor’s
model.

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  In his model, on the one hand, the relations of distribution of income determine
the given level of saving (or social saving) and, therefore, investment and
economic growth rate. On the other hand, the achievement of this or a definite
growth rate requires a given level of investment and, therefore, of saving and
hence, a corresponding distribution of income.

1.3 Assumptions
 There are two factors of production capital and labor (K and L) and thus only
two types of income are profits and wages (P and W). All profits are saved and
all wages are consumed.
 There are constant returns to scale and production function remains unchanged
over time. Capital and labor are complementary.
 There is perfect competition as such the rates of wages and profits are the same
in different places.
 The marginal propensity to consume of workers is greater than that of
capitalists.
 The investment income (output) into (I/Y) is an independent variable.
 There is a state of full employment so that total output or income (Y) is given.
 There is an unlimited supply of labor at a constant wage in terms of wage goods.

1.4 Model Explanation

Let 𝑆𝑊 and 𝑆Π denote aggregate savings of wage and profit earners respectively. Now
the income identities can be written as:
𝑌=𝑊+Π
𝐼=𝑆
𝑆 = 𝑆𝑤 + 𝑆𝜋
Now for a given level of investment, the savings of both income groups are assumed to
be proportionally related to their corresponding incomes. That is, the saving functions
can be written as:
𝑆𝑤 = 𝑆𝑤 . 𝑊 and 𝑆𝜋 = 𝑆𝜋 . Π
Hence from income identities, we obtain
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 𝐼 = 𝑆𝑤 . 𝑊 + 𝑆𝜋 . Π
I = 𝑆𝑤 . (𝑌 − Π) + 𝑆𝜋 . Π
Or
𝐼 = 𝑆𝑤 . 𝑌 + (𝑆𝜋 − 𝑆𝑤 ). Π
𝐼
= 𝑆𝑤 + (𝑆𝜋 − 𝑆𝑤 ). 𝜋 … … … … … … … (1)
𝑌
𝜋 1 𝐼 𝑆𝑤
=𝑆 ∗ 𝑌 − (𝑆 …….. (2)
𝛾 𝜋 −𝑆𝑤 𝜋 −𝑆𝑤 )

The equations (1) & (2) imply that for given marginal propensity to saves 𝑆𝑤 and 𝑆𝜋
the share of capitalist’s income, i.e. the ratio of profit to total income depends on the
ratio of investment to total income. In this model the share of profit in income is
invariant with the changes in the two saving propensities 𝑆𝑤 and 𝑆𝜋 . This invariant
relation along with the assumption of full employment also implies that aggregate
demand determines the price level and money wage and with the increase in investment
causes to rise in demand thereby leading to increase in price levels. The rise in price
level will in turn raise the profit margins. On the other hand, the fall in investment and
thus in aggregate demand will depress the price level and thereby cause a compensatory
rise in real consumption. As the price level is assumed to be flexible, the economic
system in this model attains stability at the full employment level.
When the two marginal propensities to save differ to each other, i.e. 𝑆𝑤 ≠ 𝑆𝜋 and 𝑆𝑤

< 𝑆𝜋 ,the model will operate. If 𝑆𝜋 < 𝑆𝑤 , a fall in price would cause a decline in
demand and thus lead to a further fall in prices. Similarly increase in price also have
cumulative effect and will drive the system away from the stability. When 𝑆𝜋 > 𝑆𝑤 ,
the stability will be achieved. The intuition behind the mechanism of stability is that at
the full employment situation when 𝑆𝜋 > 𝑆𝑤 and investment exceeds exante saving,
the aggregate demand will increase and thereby leading to increase in prices and profit
𝜋
margins and also share of profit to income ( ). This redistribution of income in favour
𝛾
of capitalists will also raise aggregate real saving. Opposite situation will arise when
investment falls leading to the aggregate demand. This will consequently decrease the
price level as well as profit margin and finally the share of profit to income. The degree
1
of stability depends on the factor . This is known as the “coefficient of
𝑆𝜋 −𝑆𝑤
sensitivity of income distribution” as it measures the change in share of profit in income

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due to change in share of investment in output. When 𝑠𝑤 = 0, the amount of profit
1
equals to the amount of investment and the consumption of capitalist is then Π = 𝐼.
𝑠𝜋

According to Kalecki, this situation implies that the earnings of capitalists depend on
what capitalists spend. The share of wages on the other hand can be derived as:
Since,
Y = W + P
Therefore,
𝑊 𝜋 𝑊 1 1 𝑆𝑤
= 1 − 𝑜𝑟 = 1−[ . − ]
𝑌 𝑌 𝑌 𝑆𝜋 − 𝑆𝑤 𝑌 (𝑆𝜋 − 𝑆𝑤 )

Now for stability of the system we must consider the case in which 𝑆𝜋 > 𝑆𝑤 . If this

condition is not satisfied, one of the factor shares will become negative. It can be shown
𝜋 𝑊 𝜋
𝑑 𝑑 𝑑
that 𝑑𝑆𝑌 < 0 and 𝑑𝑆𝑌 > 0. When 𝑑𝑆𝑌 < 0 holds, it can said that the greater the capitalists
𝜋 𝑤 𝜋

spend, the higher will be their earnings. The opposite will happen for workers. The
𝑊
𝑑
positive sign of 𝑌
implies that the share of workers’ income will increase if they save
𝑑𝑆𝑤

more.

1.5 Theoretical Implications

Since 1956 Mr. Kaldor has been developing a model of income distribution and
economic growth in order to explain the observed constancies in the capital-output
ratios, the distribution of income, and the rates of profit on capital of the United
Kingdom and United States economies. Whether or not the three ratios are in fact
constant is in dispute. For example, the participants in the recent conference on capital
theory at Corfu, faced with the same empirical evidence concerning the capital-output
ratio of the United States, split into two groups-one arguing that it was stable, the other
that it was not. However, the dispute is irrelevant to the present discussion which is
concerned with the technical features of Kaldor’s model. Moreover, his views on the
forces which determine the distribution of income and the rate of growth of capitalist
economies warrant consideration independently of whether their formal expression in
a model implies constancy of the above ratios.

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1.6 Critical Evaluation
The basic features of Kaldor’s model may be summed up as follows:
 Its great merit lies in the development of the concept of technical progress
function and the belief that the technical progress acts as the main engine of
growth. Technical progress function under Kaldor’s model replaces the as usual
production function.
 Another great merit of Kaldor’s model lies in the views that the inducement to
invest doesn’t depend on MEC or interest rate comparisons. The rejection of
long-run underemployment equilibrium, the introduction of a distribution
mechanism into Harrod’s model.
 Kaldor believes that economic growth and its process are based on the
interdependence of the fundamental variables like savings, investment,
productivity, etc.
 In Kaldor’s opinion a dynamic process of growth should not be the
presented and can not be understood with the help of certain constants
but in terms of the basic functional relationships.
 The basic fundamental relationships among the fraction of income
saved, the fraction of income invested and the rate increase of
productivity per man, determine the outcome of the dynamic process.

1.7 Limitations of the Model

 Since Kaldor seeks to relate the functional distribution of income directly to
variables that are of crucial importance in the determination of the level of
income and employment, his analysis is rightly described as an aggregate or
macroeconomic theory of income distribution. But his analysis is severely
restricted by its underlying assumptions. The theory does not tell us how the
distribution of income in a functional sense will be affected by changes in real
income below the full employment level, though it does tell that any attempt to
increase capacity and full employment is reached, will bring about a relative
increase in the non-wage share in the total income. In this sense, Kaldor’s model
has a distinct classical flavour, even though his framework is that of modern
employment theory.

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 It is on account of its restrictive assumptions that Kaldor’s model is not easily
generalized for more than two classes. His assumption of invariable shares of
income saved (sp and sw)—is much too rigid. Empirical analysis shows that
these shares tend to change over time depending on income growth and other
factors. While Kaldor himself remarks on the excessively generalized nature of
his conception, one must say that its fundamental methodological flow amounts
to more than that. It is an attempt to fit into the rigid framework of purely
technological change the whole complexity of socio-economic changes, which
characterize the growth of free competitive capitalism into monopoly and state
monopoly capitalism—changes which had/have an effect on the distribution of
the national income (in a manner postulated by Kaldor according to his
assumptions).
 Moreover, Kaldor’s abstract model takes no account at all of the vast
unproductive expenditure which burden modern capitalist society, especially
government military spending. The introduction into his model of state income
with a corresponding ‘propensity to save’ could upon up a source of growth and
rising rates of accumulation other than the wage earner’s income.
 Kaldor’s model, in its present state cannot be accepted either as a model of
growth or as a model of macro-distribution. His model depends upon a unique
profit rate, which has the needed value to produce or ensure steady—state
growth—but he doesn’t tell or show, how this unique rate of profit is determined
? This, in fact, is a great shortcoming of his model and the line of thought has
to be developed further to make it more fruitful; the aim being to develop a
general equilibrium model of growth. The model, therefore, needs to be
supplemented by a theory of income distribution.
 Kaldor’s Model fails to take into consideration the impact of redistribution of
income on human capital. His theory lays emphasis on physical capital.
McCormik remarks, “the failure of the theory to incorporate human capital
leaves the theory too simple to explain the complexities of the real world.” With
an increase in I/Y, the share of profit (P/Y) will increase and the share of labour
will fall, deteriorating human capital—which in turn, will bring a reduction in
income output.

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 References

Araújo, J. T. (1992). The government sector in Kaldor–Pasinetti models of growth and

income distribution. Journal of Post Keynesian Economics, 15(2), pp. 211-228.
Atsumi, H. (1960). Mr. Kaldor's theory of income distribution. The Review of Economic
Studies, 27(2), pp. 109-118.
Chiang, A. C. (1973). A simple generalization of the Kaldor-Pasinetti theory of profit
rate and income distribution. Economica, 40(159), pp. 311-313.
Fazi, E. and SALVADORI, N. E. R. I. (1981). The existence of a two‐class economy
in the Kaldor model of growth and distribution. Kyklos, 34(4), pp. 582-592.
Harcourt, G. C. (1963). A critique of Mr. Kaldor's model of income distribution and
economic growth. Australian Economic Papers, 2(1), pp. 20-36.
Nishi, H. (2022). Income distribution, technical change, and economic growth: A two-
sector Kalecki–Kaldor approach. Structural Change and Economic Dynamics, 60,
pp. 418-432.
Palley, T. I. (1997). Aggregate Demand and Endogenous Growth: a Generalized
Keynes‐Kaldor Model of Economic Growth. Metroeconomica, 48(2), pp. 161-176.

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