The Review of Economic Studies Ltd.
Alternative Theories of Distribution
Author(s): Nicholas Kaldor
Source: The Review of Economic Studies, Vol. 23, No. 2 (1955 - 1956), pp. 83-100
Published by: The Review of Economic Studies Ltd.
Stable URL: http://www.jstor.org/stable/2296292
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Alternative Theories of Distribution
Accordingto the Prefaceof Ricardo'sPrinciples,the discoveryof the laws which
regulatedistributiveshares is the "principalproblemin Political Economy". The
purposeof this paperis to presenta bird'seye view of the varioustheoreticalattempts,
sinceRicardo,at solvingthis" principalproblem". Thoughall attemptsat classification
in sucha vast fieldare necessarilyto someextentarbitrary,and subjectiveto the writer,
in termsof broadclassification,one should,I think,distinguishbetweenfourmainstrands
ofthought,someof whichcontainimportantsub-groups.Thefirstof theseis theRicardian,
or ClassicalTheory,the secondthe Marxian,the thirdthe Neo-Classicalor Marginalist
Theoryandthe fourththe Keynesian. Theinclusionof a separate" Keynesian' theory
in this contextmay causesurprise. An attemptwill be madeto showhoweverthat the
specificallyKeynesianapparatusof thoughtcouldbeappliedto theproblemof distribution,
ratherthanto theproblemof the generallevelof production; thatthereis evidencethat
in its earlystages,Keynes'own thinkingtendedto developin this direction-only to be
divertedfromit withthediscovery(madesometimebetweenthepublicationof theTreatise
on Money andthe GeneralTheory)thatinflationaryanddeflationarytendenciescouldbest
be analysedin termsof the resultingchangesin outputand employment,ratherthanin
The compressionof a wholearmyof distinguishedwriters,and schoolsof thought,
betweenRicardoandKeynes(Marxaside)underthetermof Neo-Classicalor Marginalist
Theoryis hardertojustify. Forapartfromthemarginalistsproper,thegroupwouldhave
to include such " non-marginalists" or quasi-marginalists(from the point of view of
distributiontheory)as the Walrasiansand the neo-Walrasians,1as well as the imperfect
competitionists,who though marginalist,do not necessarilyhold with the principleof
MarginalProductivity. But as I shallhope to show,thereare importantaspectswhich
all thesetheorieshave in common,2and whichjustifiesbringingthemunderone broad
Ricardoprefacedhis statementby a referenceto the historicalfactthat"in different
stagesof societythe proportionsof the wholeproduceof the earthwhichwill be allotted
to eachof these(three)classesunderthenamesof rent,profitandwageswillbeessentially
different."3 To-day,a writeron the problemof distribution,wouldalmostbe inclinedto
say the opposite-that " in differentstagesof (capitalist)societythe proportionsof the
nationalincome allottedto wages, profits,etc., are essentially similar". The famous
"historicalconstancy" of theshareof wagesin thenationalincome-and thesimilarityof
these sharesin differentcapitalisteconomies,such as the U.S. and the U.K.-was of
coursean unsuspectedfeatureof capitalismin Ricardo'sday. But to the extentthat
recentempiricalresearchtendsto contradictRicardo'sassumptionaboutthe variability
of relativeshares,it makesthe questionof what determinesthese shares,more,rather
thanless,intriguing. In fact no hypothesisas regardsthe forcesdeterminingdistributive
1 By the term " neo-Walrasians" I mean the American " linear programming" and "Activity
analysis" schools,as well as the generalequilibriummodelof von Neumann(Reviewof EconomicStudies,
tions (in particularthat of the " circularity" of the productionprocess)are quite different. From the
point of viewof distributiontheoryhowever,the approachonly yieldsa solution(in the shapeof an equi-
libriuminterestrate)on the assumptionof constantrealwages(dueto an infinitelyelasticsupplycurveof
labour); it shows thereforemore affinitywith the classicalmodels than with the neo-classicaltheories.
2 Withthe possibleexceptionof the " neo-Walrasian"groupreferredto above.
84 REVIEWOF ECONOMICSTUDIES
sharescould be intellectuallysatisfyingunlessit succeedsin accountingfor the relative
stabilityof thesesharesin theadvancedcapitalisteconomiesoverthe last 100yearsor so,
despitethe phenomenalchangesin the techniquesof production,in the accumulationof
capitalrelativeto labourand in realincomeperhead.
Ricardo'sconcernin theproblemof distributionwasnot due,or not onlydue,to the
interestin the questionof distributivesharesper se, but to the beliefthat the theoryof
distributionholdsthe key to an understandingof the wholemechanismof the economic
system-of theforcesgoverningtherateof progress,of theultimateincidenceof taxation,
of the effectsof protection,and so on. It was through".the lawswhichregulatedistri-
butiveshares" that he was hopingto buildwhatin present-dayparlancewe wouldcall
"a simplemacro-economicmodel".1 In thisrespect,if no other,the Ricardianandthe
"Keynesian" theoriesare analogous.2 With the neo-Classicalor Marginalisttheories
on the otherhand,theproblemof distributionis merelyone aspectof the generalpricing
process; it has no particulartheoreticalsignificanceapartfrom the importanceof the
questionper se. Nor do thesetheoriesyielda "macro-economicmodel" of thekindthat
of dependentand independentvariables.
I. THE RICARDIANTHEORY
Ricardo'stheory was based on two separateprincipleswhich we may term the
"marginalprinciple"andthe" surplusprinciple"respectively.The" marginalprinciple"
servesto explaintheshareof rent,andthe" surplusprinciple" the divisionof theresidue
betweenwagesandprofits. To explaintheRicardianmodel,wemustfirstdividetheecon-
omyinto two broadbranches,agricultureandindustryandthenshowhow, on Ricardo's
assumptions,theforcesoperatingin agricultureserveto determinedistributioninindustry.
whereOy measuresquantitiesof " corn" (standingfor all agriculturalproduce)and Ox
the amountof labouremployedin agriculture. At a givenstateof knowledgeand in a
givennaturalenvironmentthe curvep-Ap representsthe productperunitof labourand
the curvep-Mp the marginalproductof labour. The existenceof these two separate
curves,is a consequenceof a decliningtendencyin the averageproductcurve-i.e., of the
assumptionof diminishingreturns. Corn-outputis thus uniquelydeterminedwhenthe
quantityof labouris given:3 foranygivenworkingforce,OM,totaloutputis represented
bytherectangleOCDM. Rentisthedifferencebetweentheproductoflabouron" margin-
al " land and the producton averageland, or (allowingfor the intensive,as wellas the
dependson the elasticityof the p-Ap curve, i.e., the extent to which diminishing
Themarginalproductof labour(or,in classicalparlance,the"produce-minus-rent")
is not howeverequalto thewage,butto thesumof wagesandprofits. Therateof wages
is determinedquiteindependentlyof marginalproductivityby the supplypriceof labour
I ' PoliticalEconomy" he told Malthus" you thinkis an enquiryinto thenatureandcausesof wealth
-I thinkit shouldratherbe called an enquiryinto the laws whichdeterminethe divisionof the produce
of industryamongsttheclasseswhoconcurin its formation. No lawcanbe laiddownrespectingquantity,
but a tolerablycorrectone can be laid downrespectingproportions. Everyday I am moresatisfiedthat
the formerenquiryis vainand delusive,andthe latteronly the trueobjectsof the science." (Letterdated
9 Oct., 1820,Works(Sraffaedition)vol. VIII, pp. 278-9.)
2 And so of courseis the Marxian: but thenthe Marxiantheoryis reallyonly a simplifiedversionof
Ricardo,clothedin a differentgarb.
3 This abstractsfromvariationsin outputperheaddueto the use of moreor less fixedcapitalrelative
to labour-otherwise thecurvescouldnot beuniquelydrawn,relativeto a givenstateof technicalknowledge.
As betweenfixedcapital andlabourthereforethe modelassumes" fixedcoefficients'; as betweenlabour
ALTERNATIVE THEORIES OF DISTRIBUTION 85
hypothesisimpliesan infinitelyelasticsupplycurveof labourat the givensupplyprice,
OW.1 Thedemandforlabouris not determinedhoweverby thep-Mp curve,butbythe
accumulationof capitalwhichdetermineshow manylabourerscan findemploymentat
thewagerate0 W. Hencetheequilibriumpositionis not indicatedby thepointof inter-
sectionbetweenthe p-Mp curveand the supplycurveof labour,but by the aggregate
demandfor labourin termsof cornl-the " wagesfund".2 As capitalaccumulates,the
1 The basis of this assumption is the Malthusian theory of population, according to which numbers
will increase (indefinitely) when wages are above, and decrease (indefinitely) when they are below, the
'c"subsistence level ". In Ricardo's hands this doctrine had lost its sharp focus on a biologically determined
quantum of subsistence to which the supply price of labour must be tied ; he emphasized that habits of
restraint engendered in a civilized environment can permanently secure for labour higher standards of
living than the bare minimum for survival. Yet he retained the important operative principle that in any
given social and cultural environment there is a " natural rate of wages " at which alone population could
remain stationary and from which wages can only deviate temporarily. The hypothesis of an infinitely
elastic supply curve of labour thus did not necessarily imply that this supply price must be equal to the
bare minimum of subsistence. Yet this assumption was inconsistent with another (implied) feature of
his model discussed below, that wages are not only fixed in terms of " corn " but are entirely (or almost
entirely) spent on corn.
2Total wages depend on-and are " paid out of "-capital simply because production takes time, and
the labourers (unlike the landlords) not being in the position to afford to wait, have their wages " advanced "
to them by the capitalists. This is true of fixed as well as circulating capital, but since with the former, the
turnover period is relatively long, only a small part of annual wages is paid out of fixed capital ; the amount
of circulating capital was therefore treated as the proper " wages fund ". Despite his analysis of the effect
of changes in wages on the amount of fixed capital used relative to labour, i.e., on the proportions of fixed
and circulating capital employed in production (Professor Hayek's celebrated " Ricardo effect ") for the
purpose of his distribution theory this ratio should be taken as given, irrespective of the rate of profit.
86 REVIEWOF ECONOMICSTUDIES
labourforcewillgrow,so thatanyadditionto thetotalwagefund,throughcapitalaccum-
ulation-the agriculturalwagesfundis indicatedby the area0 WKM- will tendto be a
horizontaladdition(pushingthe verticalline KM to the right)and not a verticalone
For any givenM, profitsarethusa residue,arisingfromthe differencebetweenthe
marginalproductof labourandtherateofwages. Theresultingratio,Wages determines
the rateof profitpercenton thecapitalemployed; it is moreoverequalto thatratio,on
the assumptionthat the capitalis turnedoveronce a year,so that the capitalemployed
and not an essentialpartof the story).
In a stateof equilibrium,the moneyrateof profitper cent earnedon capitalmustbe
the samein industryand in agriculture,otherwisecapitalwouldmovefromone formof
employmentto the other. Butit is the peculiarityof agriculturethat the moneyrateof
profitin that industrycannotdivergefromthe rateof profitmeasuredin termsof that
industry'sown product,i.e., the corn-rateof profit. This is becausein agricultureboth
the input(thewageoutlay)andthe outputconsistof the samecommodity,"corn". In
manufacturingindustryon the other hand, inputand outputconsist of heterogeneous
commodities-the cost per man is fixedin corn, whilethe productper man, in a given
stateof technicalknowledge,is fixedin termsof manufacturedgoods. Hencethe only
way equalityin the rate of profitin money termscan be attainedas betweenthe two
branchesis throughthe pricesof industrialgoodsbecomingdeareror cheaperin termsof
agriculturalproducts. The money rate of profit in manufacturingindustrytherefore
dependson thecorn-rateof profitin agriculture,2the latteron the otherhand,is entirely
a matterof the marginof cultivation,whichin turnis a reflection(in a closedeconomy
andin a givenstateof technicalknowledge)of the extentof capitalaccumulation. Thus
"diminishingfertilityof the soil,"as JamesMillputit, "is the greatandultimatelyonly
necessarycauseof a fall in profit".
To makethe wholestructurelogicallyconsistentit is necessaryto suppose,not only
thatwagesarefixedin termsof "corn" but thattheyare entirelyspenton "corn", for
wages(in termsof commoditiesin general)so thatthe sizeof the "surplus", andtherate
of profiton capitalgenerally,is no longerderivablefromthe "cornrateof profit"-the
relationshipbetweentheproductof labourandthecostof labourworkingonmarginalland.
in agricultureand WCDKin therestof theeconomy. Any increasein 0 WKM(caused,
e.g.,byprotectiontoagriculture)mustnecessarilylowertherateof profit(whichis thesource
1 Thefeaturewhichthemodemmindmayfindmostdifflicultto swallowis notthatcapitalaccumulation
shouldleadto a risein populationbut thatthe reactionshouldbe takenas somethingso swiftas to ignore
the interveningstage, wherethe increasein the wagesfund shouldraisethe rateof wagesratherthan the
numbersemployed. The adjustmentof populationto changesin the demandfor labourwould normally
be treatedas a slow long-runeffectwhereaschangesin the demandfor labour(causedby capitalaccumu-
lation) may be swift or sudden. Ricardohoweverconceivedthe economy as one which proceedsat a
moreor lesssteadyrateof growthin time,withtheaccumulationof capitalgoingon at a (moreor less con-
stant)rate; whilehe concededthat changesin the rateof capitalaccumulationwill temporarilyraiseor
lower wages,he assumedthat the rate of populationgrowthitself is adaptedto a certainrateof capital
accumulationwhich had been going on for some time.
2 Theanalyticalbasisforthisconclusion,givenabove,wasnever,as Sraffaremarks,statedbyRicardoin
any of his extant lettersand papersthoughthereis evidencefrom Malthus'sremarksthat he must have
formulatediteitherina lostpaperontheProfitsof Capitalorinconversation(cf. Works,Vol1.,Introduction,
ALTERNATIVETHEORIESOF DISTRIBUTION 87
of all accumulation)and thus slow downthe rateof growth.' Similarlyall taxes,other
down the-rate of accumulation. Taxation and agriculturalprotectionthus tend to
managesto shiftthep-Ap andp-Mp curvesto therightsufficientlyto suspendaltogether
the operationof the Law of DiminishingReturns)to thatultimatestateof gloom,the
StationaryState,whereaccumulationceasessimplybecause"profitsareso low as not to
afford(the capitalistsmore than) an adequatecompensationfor their troubleand the
risk whichthey must necessarilyencounterin employingtheir capitalproductively"*2
II THE MARXIAN THEORY
The Marxiantheory is essentiallyan adaptationof Ricardo's" surplustheory".
The mainanalyticaldifferencesare :- (1) that Marxpaid no attentionto (anddid not
believein) the Law of DiminishingReturns,and hencemade no analyticaldistinction
betweenrentandprofits; (2)thatMarxregardedthesupplypriceof labour(the"costof
reproduction"of labour)as beingfixed,not in termsof "corn", but of commoditiesin
general. Hencehe regardedthe shareof profits(includingrent)in outputas determined
simplyby the surplusof the productper unit of labouroverthe supplyprice(or cost)
of labour-or the surplusof productionto the consumptionnecessaryfor production.3
Thereare importantdifferencesalso as betweenMarx and Ricardoin two other
respects. The firstof theseconcernsthe reasonsfor wagesbeingtied to the subsistence
level. In Marx'stheorythis is ensuredthroughthe factthatat any one timethe supply
of labour-the numberof workersseekingwage-employment-tendsto exceedthedemand
for labour. The existenceof an unemployedfringe-the "reservearmy" of labour-
preventswagesfromrisingabovethe minimumthatmustbe paidto enablethe labourers
of pre-capitalisticenterprisemorelabourersarereleasedthroughthe disappearanceof the
non-capitalistor handi-craftunitsthanareabsorbedin the capitalistsector,owingto the
differencein productivityper headbetweenthe two sectors. As long as the growthof
capitalistenterpriseis at the cost of a shrinkageof pre-capitalistenterprisethe increase
in thesupplyof wagelabourwillthustendto runaheadof theincreasein thedemandfor
Sooneror later, however,the demandfor labourresultingfrom accumulationby
capitalistenterprisewillrunaheadof theincreasein supply; atthatstagelabourbecomes
scarce,wagesrise,profitsare wipedout and capitalismis facedwith a "crisis". (The
crisisin itselfslowsdownthe rateof accumulationandreducesthe demandfor labourat
any given state of accumulationby increasingthe "organiccompositionof capital,"
so thatthe "reservearmy" willsooneror laterbe recreated.)
The secondimportantdifferencerelatesto the motivesbehindcapitalaccumulation.
ForRicardothiswassimplyto beexplainedbythelureof a highrateof profit. Capitalists
accumulatevoluntarilyso long as the rate of profitexceedsthe minimum"necessary
compensation"for the risksand troubleencounteredin the productiveemploymentof
capital. ForMarxhowever,accumulationbycapitalistenterpriseis nota matterof choice
1 The evil of agriculturalprotectionis thus not only that real incomeis reducedthroughthe transfer
of labourto less productiveemployments,but that owingto the reductionin the rate of profit,industrial
pricesfall in termsof agriculturalprices; incomeis thustransferredfromtheclasseswhichusetheirwealth
productivelyto classeswhich use it unproductively.
2 Ricardo,Principles,p. 122 (SraffaEdition).
3 Ricardohimselfabandonedin thePrinciplesthe idea that wagesconsistof corn (to the exclusionof
manufactures)but whetherhe also abandonedthe ideathatthe agriculturalsurplusis criticalto the whole
distributionprocessthroughthe fixityof wagesin termsof cornonlyis not clear. (Cf. Sraffa,op. cit., pp.
88 REVIEWOF ECONOMICSTUDIES
but a necessity,due to competitionamongthe capitaliststhemselves. This in turnwas
explainedby the existenceof economiesof large scale production(togetherwith the
implicitassumptionthat the amountof capitalemployedby any particularcapitalistis
governedbyhisownaccumulation). Giventhefactthatthe largerthescaleof operations
the moreefficientthe business,eachcapitalistis forcedto increasethe sizeof his business
throughthere-investmentof hisprofitsifheisnotto fallbehindinthecompetitivestruggle.
It is only at a laterstage,when the increasingconcentrationof productionin the
handsof the moresuccessfulenterprisesremovedthe competitivenecessityfor accumu-
lation-the stageof " monopolycapitalism"-that in the Marxianschemethereis room
for economiccrises,not on accountof an excessiveincreasein the demandfor labour
followingon accumulationbut on accountof an insufficiencyof effectivedemand-the
failureof marketsresultingfromthe inabilityof thecapitalistseitherto spendor to invest
the fullamountof profits(whichMarxcalledtheproblemof " realisingsurplusvalue").
Marxhas also takenoverfromRicardo,and the classicaleconomistsgenerally,the
ideaof a fallingrateof profitwiththe progressiveaccumulationof capital. Butwhereas
withthe classiciststhis was firmlygroundedon the Lawof DiminishingReturns,Marx,
havingdiscardedthatlaw,had no firmbasefor it. His own explanationis basedon the
assumedincreasein the ratio of fixed to circulatingcapital(in Marxianterminology,
i' constant " to " variable" capital) with the progress of capitalism ; but as several
authorshavepointedout,' the law of the fallingrateof profitcannotreallybe derived
fromthe law of the " increasingorganiccomposition" of capital. Since Marxassumes
that the supplypriceof labourremainsunchangedin termsof commoditieswhen the
organiccompositionof capital,andhenceoutputperhead,rises,thereis no morereason
to assumethat an increasein " organiccomposition" will yield a lowerrate of profit
thana higherrate. For even if outputper man wereassumedto increasemoreslowly
than (" constant" plus " variable") capital per man, the " surplusvalue" per man
(the excessof outputper man over the costs of reproductionof labour)will necessarily
increasefasterthanoutputperman,andmaythussecurea risingrateof profitevenif there
is diminishingproductivityto successiveadditionsto fixedcapitalper unit of labour.
Whilesome of Marx'spredictions-suchas the increasingconcentrationof produc-
tion in the handsof largeenterprises-provedaccurate,his most importantthesis, the
steadyworseningof the livingconditionsof the workingclasses-" the immiserationof
the proletariat"2-has beencontradictedby experience,in both the "competitive" and
" monopoly" stagesof capitalism. On the Marxianmodelthe shareof wagesin output
mustnecessarilyfall witheveryincreasein outputperhead. The theorycan only allow
fora riseof wagesin termsof commoditiesas a resultof thecollectiveorganisationof the
workingclasseswhichforcesthe capitaliststo reducethe degreeof exploitationand to
surrenderto the workerssome of the "surplusvalue".3 This hypothesishoweverwill
onlyyielda constantshareof wageson theextremelyfar-fetchedassumptionthattherate
ofincreaseinthebargainingstrengthof labour,dueto thegrowthofcollectiveorganisation,
preciselykeepspacewiththerateof increasein outputperhead.
Cf. in particular,JoanRobinson,AnEssayin MarxianEconomics,pp. 75-82.
It is not clear,in termsof Marx'sown theoreticalmodel,whysucha progressiveimmiscrationshould
takeplace-since the costs of reproductionof labourappearto set an absolutelimitto the extentto whiclh
labourcan be exploited. Somepartsof Das Kapitalcould howeverbe construedas suggestingthatwages
can be drivenbelowthe (long run)reproductioncost of labour,at thecost of a (long run)shrinkagein the
labourforce: andwiththeincreasingorganiccompositionof capital,andtheriseof monopolies,thedemand
for labour may show an equally decliningtendency.
3 Marxhimselfwouldhaveconceiveda reductioninthe" degreeof exploitation"intermsof a reduction
in thelengthof the work-ingday ratherthana risein realwagesperday. In fact both have occurredside
ALTERNATIVE THEORIES OF DISTRIBUTION
III THE NEO-CLASSICAL THEORIES
While Marx's theory thus derives from Ricardo's surplus principle, neo-classical
value and distribution theory derives from another part of the Ricardian model: the
marginal principle" introduced for the explanation of rent (which explains why both
Marx and Marshallare able to claim Ricardo as their precursor). The differencebetween
Ricardo and the neo-classics is (1) that whereas Ricardo employed the " principle of
substitution" (or rather, the principle of " limited substitutability"-which is the basic
assumption underlyingall "marginal" analysis) only as regardsthe use of labour relative
to land, in neo-classical theory this doctrine was formalized and generalized, and assumed
to hold true of any factor, in relation to any other ;1 (2) whereas Ricardo employed the
principle for showing that a " fixed " factor will earn a surplus, determined by the gap
between the average and marginal product of the variable factor, neo-classical theory
concentrated on the reverse aspect-i.e., that any factor variable in supply will obtain a
remuneration which, under competitive conditions, must correspond to its marginal
product. Thus if the total supply of all factors (and not only land) is being taken as given,
independently of price, and all are assumed to be limited substitutes to one another, the
share-out of the whole produce can be regarded as being determined by the marginal
rates of substitution between them. Thus in terms of our diagram, if we assumed that
along Ox we measurethe quantity of any particularfactor of production, x, the quantities
of all the others being taken as fixed,p-Mp will exhibit the marginalproductivityfunction
of the variable factor. If the actual employment of that factor is taken to be M, AM will
representits demand priceper unit, and the rectangle OBAM its sharein the total produce.
Sincethis principlecould be appliedto any factor, it must be true of all (including,as Walras
and Wicksellhave shown, the factorsowned by the entrepreneurhimself) hencethe rectangle
BCDA must be sufficient,and only just sufficient,for remuneratingall other factors but x
on the basis of their respective marginal productivities. This, as Wicksteed has shown2
requires the assumption that the production function will be homogeneous of the first
degree for all variables taken together-an assumption which he himself regardedas little
more than a tautology, if " factors of production" are appropriately defined.3 Froir
the point of view of the theory, however, the appropriatedefinition of factors involves
theelimination of intermediateproductsand theirconversioninto " ultimate " or "original"
factors, since only on this definition can one assume the properties of divisibility and
variability of coefficients. When factors are thus defined, the assumption of constant
1As wellas of anyparticularcommodityin the sphereof consumption. The utilitytheoryof valueis
reallyRicardianrent-theoryappliedto consumptiondemand. In fact, as Walrashas shown, limitedsub-
stitutabilityin consumptionmightin itself be sufficientto determinedistributiveshares,providedthat the
proportionsin whichthe differentfactorsareusedaredifferentin differentindustries. His solutionof the
problemof distribution,based on "fixed coefficients" of production(intendedonly as a first approxi-
mation)is subjecthoweverto varioussnags since the solution of his equationsmay yield negativeprices
forthefactorsas wellas positiveonesandit cannotbe determinedbeforehandwhetherthiswill be the case
or not. If the solutionof the equationsyieldsnegativepricesthe factorsin questionhave to be excluded
as "free goods"; and the operation(if necessary)successiverepeateduntil only factors with positive
pricesare left. Also, it is necessaryto supposethat the numberof different"factors" is no greaterthan
the numberof different"products" otherwisethe solutionis indeterminate.
2 TheCo-ordlinationof theLawsof Distribution(1894).
3Ibid.,p. 53 "We mustregardeverykindandqualityof labourthatcan be distinguishedfromother
kindsandqualitiesas a separatefactor ; andinthesameway,everykindof landwillbetakenas a separate
factor. Stillmoreimportantis it to insistthat insteadof speakingof so many£ worthof capitalwe shall
speakof so manyploughs,so manytons of manure,and so manyhorsesor footpoundsof power. Each
of thesemay be scheduledin its own unit." Under theseconditionsit is trueto say that "doubling all
factors will double the product", but since these "factors" are indivisiblein varyingdegrees,it does
not meanthattheproductionfunctionis a linearandhomogeneousone in relationto incrementalvariations
of output. Also a changein outputmaybe associatedwiththe introductionof newfactorsof production.
90 REVIEW OF ECONOMIC STUDIES
returnsto scaleis by no meansa tautology; it is a restrictiveassumption,whichmaybe
regarded,however,as being co-extensivewith other restrictiveassumptionsimpliedby
the theory-i.e., the universalrule of perfectcompetition,and the absenceof external
The basicdifficultywith the wholeapproachdoes not lie, however,in this so-called
adding-up problem " but in the very meaning of " capital " as a factor of production.'
from"capitalgoods") cannotbe measuredin termsof physicalunits.2 To evaluatethe
marginalproductof labourit is necessaryto isolatetwo situationscontainingidentical
"capital" buttwo differentquantitiesof labour,or identicalamountsof labourandtwo
differingquantitiesof "capital", in precisenumericalrelationship.3
Marshall,withoutgoinginto the matterin anydetail,hadshownin severalpassages
that he was dimlyawareof this ; and in carefullyre-definingmarginalproductivityso
as to mean " marginalnet productivity"(nietafterdeductionof all associatedexpenses
on other" factors") he shiedawayfromthe taskof puttingforwarda generaltheoryof
In fact,inso faraswecanspeakof a " Marshallian" theoryof distributionat all,it is
in the sense of a " short period" theory,whichregardsprofitsas the " quasi-rents"
earnedon the useof capitalgoodsof variouskinds,the supplyof whichcan be treatedas
givenfor the time being,as a heritageof the past. The doctrineof the " quasi-rent"
assimilatescapitalas a factorof productionto Ricardianland: the separatekindsof
capitalgoods being treatedas so many differentkinds of "land". Herethe problem
of the measurementof capitalas a factorof productiondoes not arise: since,strictly
speaking,no kind of changeor reorganizationin the stock of intermediateproductsis
permittedin connectionwitha changein the levelor compositionof production. It was
this aspectof Marshallwhich,consciouslyor sub-consciously,providedthe " model"
formostof thepost-MarshallianCambridgetheorizing. Pricesareequalto, ordetermined
by,marginalprimecosts; profitsaredeterminedby the differencebetweenmarginaland
averageprimecosts ; primecosts,for the systemas a whole,arelabourcosts(sinceraw-
materialcosts, for a closed economyat any rate,disappearif all branchesof industry
aretakentogether); ultimatelythereforethedivisionof outputbetweenprofitsandwages
is a matterdependingon theexistenceof diminishingreturnsto labour,as morelabouris
usedin conjunctionwitha given capitalequipment; and is determinedby the elasticity
of labour'saverageproductivitycurvewhichfixesthe shareof quasi-rents.
Marshallhimselfwouldhavedisagreedwith the use of the quasi-rentdoctrineas a
distributiontheory,holding that distributivesharesin the shortperiodare determined
by long-periodforces.5 Clearlyeven if one wereto hold strictlyto the assumptionthat
" profit margins" are the outcome of short-periodprofit-maximisation,this " short-
1 For a generalequilibriumsystem,capitalgoods cannot be regardedas factorsof productionper se
(in the mannersuggestedby Wicksteed)otherwisethe same things are simultaneouslytreated as the
parametersand the unknownsof the system.
2 Measurementintermsof value(asso manyL'sof "capital")alreadyassumesa certainrateof interest,
on thebasisof whichservicesaccruingin differingperiodsin the future,or costs incurredat differingdates
in the past,are broughtto a measureof equivalence.
3 The productof the " marginalshepherd" is the difference,in termsof numbersof sheep, between
10shepherdsusing10crooksand 11shepherdsusing11slightlyinferiorcrooks,theterm" slightlyinferior"
beingtakento meanthatthe 11crooks in the one case representpreciselythe sameamountof "capital"
as the 10crooksintheothercase. (Cf.also, Robertson,"WageGrumbles,"in EconomicFragments,1931.)
4 "The doctrinethattheearningsof a workertendto be equalto the net productof his work, has by
itselfno realmeaning; sincein orderto estimatethe net product,we have to take for grantedall the ex-
pensesof productionof the commodityon whichhe works,other than his own wages". Similarly,the
doctrinethat the marginalefficiencyof capital will tend to equal the rate of interest"cannot be made
intoa theoryof interest,anymorethana theoryof wages,withoutreasoningin a circle". (Cf.Principles,
8th edition, Book VI, ch. I, paras7-8.)
b Cf., in particular,Principles,8th edition,Book V, ch. V, and 6, and Book VI, ch. VIII, paras.4.
ALTERNATIVETHEORIESOF DISTRIBUTION 91
period" approachdoes not reallyget us anywhere: for the extentto whichdiminishing
returnsoperatefor labourin conjunctionwith the capitalequipmentavailableto-dayis
itselfa functionof the price-relationshipswhichhaveruledin the pastbecausethesehave
determinedthe quantitiesof eachof the kindsof equipmentavailable. The theorydoes
not thereforereallyamountto morethansayingthatthepricesof to-dayarederivedfrom
the pricesof yesterday-a propositionwhichis the more true and the more trivialthe
shorterthe " day" is conceivedto be, in termsof chronologicaltime.
For the true neo-classicalattemptto solve the generalproblemof distributionwe
mustgo to WicksellwhothoughtthatbyintegratingtheAustrianapproachto capitalwith
Walrasianequilibriumtheoryhe could providea generalsolution,treatingcapitalas a
two-dimensionalquantity,the productof time and labour. The " t-i-me"in this case is
the investmentperiodor waitingperiodseparatingthe applicationof " original" factors
fromtheemergenceof thefinalproduct,andthemarginalproductivityof capitaltheadded
productresultingfroman extensionof "time". This attempt,again,cameto grief(as
Wicksellhimselfcamenearto acknowledginglatein life')(i) owingto theimpossibilityof
measuringthatperiodin termsof an "average" of somekind;2 (ii)owingto theimpossi-
bility of combiningthe investmentperiodsof different"original" factorsin a single
In factthewholeapproachwhichregardsthe shareof wagesandof profitsin output
as beingdeterminedby the marginalrateof substitutionbetweenCapitaland Labour-
withits corollary,thatthe constancyof relativesharesis evidenceof a unity-Elasticityof
SubstitutionbetweenCapitalandLabour4-is hardlyacceptableto present-dayeconomists.
Its inadequacybecomesevidentas soon as it is realizedthatthe "marginalrateof substi-
tution" betweenCapitaland Labour-as distinctfromthe marginalrateof substitution
betweenlabourand land-can only be determinedonce the rate of profitandthe rate
of wagesare alreadyknown. The sametechnicalalternativesmightyieldverydifferent
;; marginalratesof substitution" accordingas the ratioof profitsto wagesis one thing
or another. The theoryassertsin effect,that the rateof interestin the capitalmarket,
(andthe associatedwageratein thelabourmarket)is determinedbytheconditionthatat
any lower interest rate (and higher wage rate) capital would be invested in such
"labour-saving"formsas wouldprovideinsufficientemploymentto theavailablelabour;
whilstat anyhigherrate,capitalwouldbe investedin forms that offeredmore placesof
employmentthan could be filledwith the availablelabour.
Quiteapartfromallconceptualdifficulties,thetheoryfocusesattentionon a relatively
unimportantfeatureof a growingeconomy. Foraccumulationdoesnot takethe formof
"deepening thestructureof capital(ata givenstateof knowledge)butratherin keeping
pacewithtechnicalprogressandthegrowthin thelabourforce. It is difficultto swallow
a theorywhichsays,in effectthatwagesandprofitsarewhattheyarefor otherwisethere
wouldbe too much deepeningor too little deepening(the capital/outputratioswould
be eithertoo largeor too small)to be consistentwith simultaneousequilibriumin the
savings-investmentmarketandin the labourmarket.
Cf.theconcludingpassageof his posthumouscontributionto theWieserFestschrift. Die Wirtscltqfis-
ilheorieder Gegenwart(1928) Vol. III, pp. 208-9 ; also his Analysisof Akerman'sProblem,reprintedin
Lectures,Vol. 1, p. 270.
2 Sinceowingto compoundinterest,the weightsto be usedin thecalculationof the averagewillthem-
selves be dependenton the rate of interest.
$ For a moreextendedtreatmentcf. myarticleson capitaltheoryin Econometrica,April1937and May
1938; alsoJoanRobinson,TheProductionFunctionin theTheoryof Capital,Reviewof EconomicStudies,
Vol. XXI (1953-54)p. 81, and Commentby D. G. Champernowne,ibid page 112.
4Cf. Hicks, TheTheoryof Wages(1932)ch. VI, passim.
92 REVIEW OF ECONOMIC STUDIES
(B) THE " DEGREE OF MONOPOLY" THEORIESOF DISTRIBUTION
Monopolyprofitwas alwaysregardedas a distinctformof revenuein neo-classical
theory,thoughnotoneof anygreatquantitativeimportancesincethemassof commodities
wasthoughtof asbeingproducedundercompetitiveconditions. Butthemoderntheories
of imperfectcompetitionemphasisedthat monopolyprofit is not an isolated feature.
Profitsin generalcontainanelementof monopolyrevenue-an elementthatis bestdefined
as theexcessof theactualprofitmarginin outputoverwhattheprofitmarginwouldhave
beenunderperfectlycompetitiveconditions. UnderMarshallian" short-period" assump-
tions the perfectly-competitiveprofitmarginis givenby the excessof marginalcost over
averageprimecosts. Theadditionalmonopolyelementis indicatedby theexcessof price
overmarginalcost. Theformer,aswehaveseen,is a derivativeof theelasticityof labour's
productivitycurvewherecapitalequipmentof all kindsis treatedas given. The latter
is a derivativeof theelasticityof demandfacingtheindividualfirm. Thenovelfeatureof
imperfectcompetitiontheoriesis to have shownthat the increaseof profitmarginsdue
to thiselementof monopolyneednot implya correspondingexcessin the ratesof profit
on capitalover the competitiverate; throughthe generationof excesscapacity(i.e.,
the tendencyof demandcurvesto become" tangential" to the cost curves)the latter
mayapproacha "competitive"or " normal"rate(as a resultof the consequentialrise
in the capital/outputratio)evenif theformeris abovethecompetitivelevel.
Kaleckilbuilton this a simplifiedtheoryof distribution,wherethe shareof profits
in outputis shownto bedeterminedbytheelasticityof demandalone. Thiswasbasedon
thehypothesisthatin the shortperiod,labourandcapitalequipmentarelargely"limita-
tional" -andnot " substitutional"factors,with the resultthat the short-pernodprime
cost-curveis a reverse-L shapedone (primecosts beingconstantup to full capacity
output). In thatcasemarginalcostsareequalto averageprimecosts ; theratioof price
to primecosts(andhence,in a closedeconomy,theratioof grossprofitsto wages)is thus
entirelyaccountedfor by the elasticityof the firm'sdemandcurve.
firmturnedout to be no lessof a brokenreedthanits counterpart,theelasticityof substi-
tution betweenfactors. Thereis no evidencethat firmsin imperfectmarketsset their
pricesby referenceto the elasticityof theirsales-function,or that short-periodpricingis
theoutcomeof anydeliberateattemptto maximizeprofitsby referenceto an independent
revenueanda cost function. Indeedtheverynotionof a demandcurvefor theproducts
of a singlefirmis illegitimateif thepriceschargedby differentfirmscannotbe assumedto
be independentof eachother.2
In the laterversionsof his theoryKaleckiabandonedthe linkbetweenthe " degree
of mofnopoly" and the elasticityof demand,and was contentwitha purelytautological
approachaccordingto whichthe ratio of priceto primecosts is definedsimplyas the
" degreeof monopoly". Propositionsbasedon implicitdefinitionsof thiskindmakeof
courseno assertionaboutrealityandpossessno explanatoryvalue. Unlessthe " degree
of monopoly" can be definedin termsof marketrelationshipsof some kind (as, for
example,in termsof the "cross-elasticities" of demandfor the productsof the different
firms)3andan attemptis madeto demonstratehow thesemarketrelationshipsdetermine
1 The original version appearedin Econometrica,April 1938. Subsequentversions appeared in
Essays in the Theoryof EconomicFluctuations(1938)ch. 1, Studiesin EconomicDynamics(1943)ch. 1,
and Theoryof DynamicEconomics(1954)Part 1.
2 The theoryof the "kinked" demandcurveis in fact niomorethana recognitionof the fact thatthe
demandcurve of the firm(in the sense requiredfor the purposeof derivingprice from the postulateof
profitmaximisation)is non-existent. Since the position of the " kink" dependson the price, it cannot
determinethe price; it thus leaves the profitmargincompletelyundetermined.
8 The" cross-elasticities" of demandindicatethe degreeof interdependenceof the marketsof different
firmsand arethusinverselyrelatedto monopolypowerin the usualsenseof the word.
ALTERNATIVETHEORIESOF DISTRIBUTION 93
the relationbetweenpricesand costs, the theorydoes not providea hypothesiswhich
couldbe affirmedor refuted.
Thereis no need, of course, to follow Kalecki in the attemptto lend spurious
precisionto the doctrinethroughimplicittheorizing-a vice which afflictsall theories
whichwe groupedtogetheras " neo-classical"in varyingdegrees. Fundamentally,the
propositionthatthe distributionof incomebetweenwagesandprofitsdependson market
structures,on the strengthor weaknessof the forcesof competition,is not a tautological
one; it assertssomethingaboutreality(whichmayin principlebe provedfalse)even if
that something" cannotbe givena logicallypreciseformulation. Justas the positive
contentof the marginalproductivitytheorycan be summedup by the statementthatthe
rateof profiton capital(andthe marginof profitin output)is governedby the needto
preventthecapital/outputratiofrombeingeithertoo largeortoo small,thepositivecontent
of the "degreeof monopoly" theorycan be summedup in the sentencethat "profit
marginsare what they are becausethe forcesof competitionprevenitthem from being
higherthan they are and are not powerfulenoughto makethemlowerthantheyare".
Uinfortunatelyneitherof these statementsgets us veryfar.
Dissatisfactionwith the tautologicalcharacterand the formalismof the "marginal
revenue-equals-marginalcost" type of pricetheoryled to the formulationof the " full
cost" theoriesof pricing,1accordingto whichproducersin imperfectmarketsset their
pricesindependentlyof thecharacterof demand,andsolelyon the basisof theirlong run
costs of production(includingthe " normal" rate of profiton their own capital). If
thesetheoriesassertedno morethanthatpricesin manufacturingindustryarenotdeter-
minedby the criterionof short-runprofit-maximization,and that profitmarginscan be
fairlyinsensitiveto short-periodvariationsin demand,2(the impacteffectof changesin
demandbeing on the rate of production,ratherthan on prices)they would providea
healthyantidoteto a greatdeal of facile theorising. When,however,they go beyond
this and assertthat pricesare determinedquiteindependentlyof demand,they in effect
destroyexistingprice theory without puttinganythingelse in its place. Quite apart
fromthe factthata "fullcost" theoryis quiteunableto explainwhysomefirmsshould
bemoresuccessfulinearningprofitsthanothers,thelevelof the" normalprofit"on which
the full cost calculationsare supposedto be basedis left quiteundetermined.Thevery
ationas an alternativeexplanationof the pricingprocessis an indicationof the sad state
of vaguenessandconfusioninto whichthe neo-classicalvaluetheoryhadfallen.
I Cf. Hall and Hitch, OxfordEconomicPapers,1939; P. M. S. Andrews,MantufacturingBlsiness
2 This, I believe,was the intentionof the originalHall-Hitcharticle. Cf. Marshall,Principles,Book
VI, ch. VIII,paragraph4: " We see then that thereis no generaltendencyof profitson the turnoverto
equality; buttheremaybe, andas a matterof factthereis, in eachtradeandin everybranchof eachtrade,
a moreor less definiterateof profitson the turnoverwhichis regardedas a " fair" or normalrate. Of
coursetheseratesarealwayschangingin consequenceof changesin themethodsof trade; whicharegener-
ally begunby individualswho desireto do a largertradeat a lowerrateof profiton the turnoverthanhas
beencustomary,but at a largerrateof profitperannumon theircapital. If howevertherehappensto be
no greatchangeof thiskindgoingon, thetraditionsof thetradethata certainrateof profiton the turnover
shouldbe chargedfor a particularclass of workareof greatpracticalserviceto those in the trade. Such
traditionsarethe outcomeof muchexperiencetendingto showthat, if that rateis charged,a properallow-
ance will be madefor all the costs (supplementaryas well as prime)incurredfor that particularpurpose,
and in additionthe normalrate of profitsper annumin that class of businesswill be afforded. If they
chargea pricewhichgivesmuchless thanthis rateof profiton the turnovertheycan hardlyprosper and
if they chargemuchmore they are in dangerof losing theircustom, siniceotherscan affordto undersell
them. Thisis the" fair" rateof profiton theturnover,whichanhonestmanis expectedto chargefor mak-
ing goods to order,whenno pricehas beenagreedon beforehand; and it is the ratewhicha courtof law
will allow in case a disputeshould arise betweenbuyerand seller." Cf. also Kahn, EconomicJournal,
94 REVIEWOF ECONOMICSTUDIES
IV THE KEYNESIANTHEORY
Keynes,as faras I know,wasneverinterestedin theproblemof distributionas such.
One may neverthelesschristena particulartheoryof distributionas " Keynesian"if it
canbe shownto be an applicationof the specificallyKeynesianapparatusof thoughtand
if evidencecan be adducedthat at some stagein the developmentof his ideas, Keynes
camenearto formulatingsucha theory.' Theprincipleof the Multiplier(whichin some
waywas anticipatedin the Treatisebut withouta clearviewof its implications)couldbe
alternativelyappliedto a determinationof the relationbetweenpricesand wages,if the
level of outputand employmentis takenas given, or the determinationof the level of
employment,if distribution(i.e., the relationbetweenpricesandwages)is takenas given.
The reasonwhy the multiplier-analysishas not beendevelopedas a distributiontheory
is preciselybecauseit was inventedfor the purposeof an employmenttheory-to explain
why an economic system can remainin equilibriumin a state of under-employment
(or of a generalunder-utilizationof resources),wherethe classicalpropertiesof scarcity-
economicsare inapplicable. And its use for the one appearsto excludeits use for the
other.2 If weassumethatthebalanceof savingsandinvestmentis broughtaboutthrough
variationsin the relationshipof pricesandcosts,we arenot onlybereftof a principlefor
explainingvariationsinoutputandemployment,butthewholeideaof separate" aggregate"
demandandsupplyfunctions-the principleof "effectivedemand"-falls to the ground;
wearebackto Say'sLaw,whereoutputas a wholeis limitedby availableresources,anda
fallin effectivedemandforone kindof commodity(in realterms)generatescompensating
increasesin effectivedemand(againin realterms)for others. Yet thesetwo usesof the
Multiplierprinciplearenotas incompatibleas wouldappearat firstsight: theKeynesian
technique,-asI hopeto show,canbe usedforbothpurposes,providedtheoneis conceived
as a short-runtheoryandtheotheras a long-runtheory-or rather,theone is usedin the
frameworkof a staticmodel,andtheotherin the frameworkof a dynamicgrowthmodel.3
1 I amreferringto thewell-knownpassageon profitsbeinglikenedto a " widow'scruse" in the Treatise
on Money, Vol. I, p. 139. "If entrepreneurschoose to spenda portionof their profitson consumption
(andthereis, of course,nothingto preventthemfromdoingthis) the effectis to increasethe profiton the
sale of liquid consumptiongoods by an amountexactlyequal to the amountof profitswhichhave been
thusexpended... Thushowevermuchof theirprofitsentrepreneursspendon consumption,the increment
of wealthbelongingto entrepreneursremainthe sameas before. Thusprofits,as a sourceof capitalincre-
ment for entrepreneurs,are a widow's cruse which remainsundepletedhowevermuch of them may be
devotedto riotousliving. Whenon the otherhand,entrepreneursaremakinglosses, and seek to recoup
theselosses by curtailingtheirnormalexpenditureon consumption,i.e., by savingmore,thecrusebecomes
a Danaidjarwhichcanneverbefilledup; for theeffectof thisreducedexpenditureis to inflicton the pro-
ducersof consumption-goodsa loss of an equalamount. Thusthe diminutionof theirwealth,as a classis
as great,in spite of theirsavings,as it was before." This passage,I think,containsthe trueseed of the
ideasdevelopedin the GeneralTheory-as well as showingthe lengthof the roadthat had to be traversed
beforearrivingattheconceptualframeworkpresentedinthelatterwork. Thefactthat" profits", "savings"
etc. were all definedhere in a special sense that was later discarded,and that the argumentspecifically
refersto expenditureon consumptiongoods, ratherthanentrepreneurialexpenditureingeneral,shouldnot
blindus to the factthathereKeynesregardsentrepreneurialincomesas beingtheresultantof theirexpendi-
turedecisions,ratherthan the otherway round-which is perhapsthe most importantdifferencebetween
"Keynesian" and " pre-Keynesian"habits of thought.
2 Althoughthisapplicationof Keynesiantheoryhasbeenimplicitin severaldiscussionsof the problem
of inflation. (Cf. e.g. A. J. Brown,TheGreatInflation,Macmillan,1955.)
3 I firstthoughtof usingthe Multipliertechniqueforpurposesof a distributiontheorywhenI attempted
the ultimateincidenceof profitstaxationunderfull employmentconditionsin a paperpreparedfor the
Royal Commissionon Taxationin 1951. The furtherdevelopmentof these ideas, and particularlytheir
relationshipto a dynamictheoryof growth,owes a greatdeal to discussionswith Mrs.Robinson,whose
forthcomingbook, TheAccumulationof Capital,containsa systematicexplorationof this field. I should
also like to mentionherethatI owe a greatdealof stimulusto a paperby Kalecki," A Theoryof Profits"
(EconomicJournal,June-Sept.1942)whoseapproachis in some waysreminiscentof the " widows'cruse"
of Keynes'Treatiseeven thoughKaleckiusesthe technique,not for an explanationof the shareof profits
in output,but for showingwhythe levelof outputandits flutctuationsis peculiarlydependenton entrepre-
neurialbehaviour. (In doing so, he uses the restrictiveassumptionthat savingsareentirelysuppliedout
of profits.) I have also beenhelpedby Mr. HarryJohnsonand Mr. Robin Marris,both in the working
out of the formulae and in generaldiscussion.
ALTERNATIVETHEORIESOF DISTRIBUTION 95
We shallassume,to beginwith,a stateof full employment(we shallshowlaterthe
conditionsunderwhicha stateof fullemploymentwillresultfromourmodel)so thattotal
outputor income(Y) is given. Incomemaybe dividedintotwo broadcategories,Wages
and Profits(W andP), wherethe wage-categorycomprisesnot only manuallabourbut
salariesas well, and Profitsthe incomeof propertyownersgenerally,and not only of
entrepreneurs; the importantdifferencebetweenthembeingin the marginalpropensities
to consume(or save),wage-earners'marginalsavingsbeingsmallin relationto thoseof
Y W+ P
S Sw + Sp.
Taking investment as given, and assuming simple proportional saving functions
SW= s,W,Wand Sp - spP, we obtain:
I = spP + SWW= s5P + Sw((Y-P) (sp-sw)P +" SvY
Whence (s=(,-s) -y + sw.(1)
P 1 1 Sw__
and -.(2)ad y sp swvY sp- s)v
Thus,giventhe wage-earners'and the capitalists'propensitiesto save, the shareof
profitsin income dependssimply on the ratio of investmentto output.
Theinterpretativevalueof themodel(asdistinctfromtheformalvalidityof theequa-
tions, or identities)dependson the " Keynesian" hypothesisthat investment,or rather,
the ratio of investmentto output,can be treatedas an independentvariable,invariant
withrespectto changesin thetwo savingspropensitiesspandSW.(Weshallseelaterthat
thisassumptioncanonlybe truewithincertainlimits,andoutsidethoselimitsthe theory
ceasesto hold). This,togetherwiththe assumptionof " full employment", also implies
thatthe levelof pricesin relationto the levelof moneywagesis determinedby demand:
a riseininvestment,andthusin totaldemand,willraisepricesandprofitmargins,andthus
reducerealconsumption,whilsta fall in investment,and thusin total demand,causesa
fall in prices(relativelyto the wagelevel)and therebygeneratesa compensatingrise in
realconsumption. Assumingflexibleprices(or ratherflexibleprofitmargins)thesystem
is thusstableat fullemployment.
The model operatesonly if the two savingspropensitiesdifferand the marginal
propensityto save from profitsexceedsthat from wages,i.e. if:
and Sp # SW
Sp > SW
Thelatteris the stabilitycondition. For if sp < sw,a fall in priceswouldcausea fall in
demandand thus generatea furtherfall in prices,andequally,a risein priceswouldbe
cumulative. Thedegreeof stabilityof thesystemdependson thedifferenceof themarginal
propensities,i.e., on whichmay be definedas the "coefficientof sensitivityof
Sp - Sv
incomedistribution", sinceit indicatesthechangein theshareof profitsin incomewhich
followsupona changein the shareof investmentin output.
' Thismaybe assumedindependentlyof any skewnessin the distributionof property,simplyas a con-
sequenceof the fact that the bulkof profitsaccruesin the formof companyprofitsand a highproportion
of companies'marginalprofitsis put to reserve.
96 REVIEWOF ECONOMICSTUDIES
If the differencebetweenthemarglnalpropensitiesis small,thecoefficientwillbelarge,
and small changesin - (the investment/outputrelationship)will cause relativelylarge
changesin incomedistribution and vice versa.
In thelimitingcasewheres,3C 0, theamountof profitsis equalto thesumof invest-
ment and capitalistconsumption,i,e,
Thisis the assumptionimplicitin Keynes'parableaboutthewidow'scruse-where a rise
in entrepreneurialconsumptionraisestheirtotal profitby an identicalamount-and of
Mr.Kalecki'stheoryof profitswhichcanbe paraphrasedby sayingthat"capitalistsearn
what they spend,and workersspendwhattheyearn."
Thismodel(i.e., the " specialcase" wheres, - 0) in a senseis the preciseopposite
of the Ricardian(or Marxian)one-here wages(not profits)are a residue,profitsbeing
governedby the propensityto investand the capitalists'propensityto consume,which
representa kind of "prior charge" on the nationaloutput. Whereasin the Ricardian
modelthe ultimateincidenceof all taxes(otherthantaxeson rent)fallon profits,herethe
incidenceof all taxes,taxes on incomeand profitsas well as on commodities,falls on
wages.' Assuminghoweverthat y ands, remainconstantovertime,the shareof wages
will also remainconstant-i.e., realwageswill increaseautomatically,yearby year,with
the increasein outputper man.
If s,, is positivethepictureis morecomplicated. Totalprofitswillbe reducedby the
amountof workers'savings,S, ; on theotherhand,thesensitivityof profitsto changesin
the levelof investmentwillbe greater,totalprofitsrising(or falling)by a greateramount
Thecriticalassumptionis thattheinvestment/outputratiois an independentvariable.
FollowingHarrod,we can describethe determinantsof the investment/outputratio in
termsof the rateof growthof outputcapacity(G)and the capital/outputratio,v:
= Gv .(3)
'The ultimateincidenceof taxescanonlytallonprofits(onthismodel)inso farastheyincreasesp,
thepropensityto saveout of netincomeaftertax. Incomeandprofitstaxes,throughthe" doubletaxation"
of savings,haveof coursetheoppositeeffect: theyreducesp,andtherebymaketheshareof netprofits
in incomelargerthaniit wouldbe in the absenceof taxation. On the otherhand,discriminatorytaxeson
dividenddistribution,or dividendlimitation,by keepingdown both dividendsand capitalgains,have the
effectof raisingsp. (All this applies,of course,on theassumptionthattheGovernmentspendstheproceeds
of the tax-i.e., that it aims at a balancedbudget. Taxes whichgo to augmentthe budgetsurpluswill
lowerthe shareof profitsin muchthe samewayas an increasein workers'savings.)
I I . -P
Thus ifsp = 10%, 10%,IO 20%,
will be 15%; but a risein Iyto 21% would raise;
to 17'5%, If on the otherhand sw = 0, withSp = 50%, Pwotld become40%, but an increasein
to 21% would only increase-pto 42%. The aboveformulaeassumethataverageand marginalpropen-
sities are identical. Introducingconstant terms in the consLumptionfunctions alters the relationship
p I P I.
between andl- and would reducethe elasicity of with respectto changesiny }'y
ALTERNATIVE THEORIES OF DISTRIBUTION
In a state of continuous full employment G must be equal to the rate of growth of the
"full employment ceiling ", i.e., the sum of the rate of technical progress and the growth
in working population (Harrod's " natural rate of growth "). For Harrod's second
we can now substitute equation (I) above:
s,) y +
Hence the "warranted " and the " natural" rates of growth are not independent of one
another ; if profit margins are flexible, the former will adjust itself to the latter through a
consequential change in -
This does not mean that there will be an inherenttendency to a smooth rate of growth
in a capitalist economy, only that the causes of cyclical movements lie elsewhere-not in
the lack of an adjustmentmechanismbetweens and Gv. As I haveattemptedto demonstrate
elsewhere1the causes of cyclical movements should be sought in a disharmonybetweenthe
entrepreneurs'desiredgrowthrate(as influencedby the degreeof optimism and the volatility
of expectations) which governs the rate of increase of output capacity (let us call it G')
and the naturalgrowth rate (dependenton technicalprogressand the growth of the working
population) which governs the rate of growth in output. It is the excess of G' over G-
not the excess of s over Gv-wliich causes periodic breakdowns in the investment process
through the growth in output capacity outrunning the growth in production.2
Problems of the trade cycle however lie outside the scope of this paper ; and having
describeda model whichshows the distributionof income to be determinedby the Keynesian
investment-savings mechanism, we must now examine its limitations. The model, as I
emphasized earlier, shows the share of profits--, the rate of profit on investment--, and
the realwage rate -L, as functions of y which in turn is determined independently of
or -. There are four different reasons why this may not be true, or be true only
within a certain range.
(1) The first is that the real wage cannot fall below a certain subsistence minimum.
Hence-y can only attain its indicatedvalue, if the resultingreal wage exceeds this minimum
rate, w'. Hence the model is subject to the restriction W- ', which we may write in
the form P Y - w'L
-Y--_ --- . * * . * * (4)y - (4)
Economic Journal, March 1954, pp. 53-71.
will thereforetend to equal G'v, not Gv. It may be assumedthat takingverylong periodsG' is
of G', sincetechnicalprogressand populationgrowthare both stimulatedby the degreeof pressureon the
" full employmentceiling", which dependson G'. The elasticityof responseof G to G' is not infinite
however: hencethe greaterG', the greaterwill be G(theactualtrend-rateof growthof theeconomyover
successivecycles)but the greateralso the ratio-C whichmeasuresthe strengthof cyclicalforces.G
98 REVIEWOF ECONOMICSTUDIES
(2) The secondis that the indicatedshareof profitscannotbe belowthelevelwhich
yieldsthe minimumrate of profitnecessaryto inducecapitaliststo investtheircapital,
and whichwe maycall the " riskpremiumrate", r. Hencethe restriction
-Y> r (5)
(3) Thethirdis thatapartfroma minimumrateof profiton capitaltheremaybe a
certainminimumrateof profiton turnover-dueto imperfectionsof competition,collusive
aggreementsbetweentraders,etc., andwhichwe maycall m, the "degreeof monopoly"
rate. Hence the restriction p
It is clearthatequations(5)and(6)describealternativerestrictions,of whichthehigher
rateof profit,forif it is, theinvestment/outputratioGvwillitselfbe dependenton therate
of profit. A certaindegreeof dependencefollows inevitablyfrom the consideration,
mentionedearlier,thatthevalueof particularcapitalgoodsin termsof finalconsumption
goodswill varywiththe rateof profit,2so that,evenwitha giventechniquev will not be
independentofy-. (We shallignorethis point). Thereis the furthercomplicationthaty
therelation - may affect v throughmakingmore or less " labour-saving"techniques
profitable. In otherwords,at anygivenwage-pricerelationship,the producerswilladopt
the techniquewhichmaximizestherateof profiton capital,-vY this will affect (at a
I P P 1
givenG)y, andhence,. Henceanyrisein- will reducev, and thus-y-andconversely,
anyrisein- willraisey If the sensitivenessof v to y is great,-7 can no longer be
regardedasbeingdeterminedbytheequationsof themodel; thetechnicalrelationbetween
v and - willthengovern- whereasthe savingsequation(equation(2) above)willdeter-
mine- and thus(givenG) the valueof V.3 To excludethis we have to assumethat v
is invariantto - 4 i.e.
'Where L = labourforce.
XCf. p. 90 above. In fact the wholeof theKeynesianandpost-Keynesiananalysisdodgestheproblem
of the measurementof capital.
8 This is wherethe " marginalproductivity" principlewould come in but it should be emphasized
that underthe conditionsof our modelwheresavingsare treated,not as a constant,but as a functionof
income distribution,-P'--thesensitivenessof v to changesin-pywouldhaveto be verylargeto overshadowy P~~~~~~
the influenceof G and of sp and of swon ye Assumingthat it is large,it is furthernecessaryto suppose
that.thevalueof - as dictated by this technicalrelationshipfalls within the maxinum and minimum
values indicatedby equations(4)-(6).
4 This assumptiondoes not necessarilymean that there are "fixed coefficients" as betweencapital
equipmentand labour-only that technicalinnovations(whichare also assumedto be " neutral" in their
effects)arefar moreinfluentialon the chosen v thanpricerelationships.
ALTERNATIVE THEORIES OF DISTRIBUTION 99
If equation(4) is unsatisfied,we are back at the Ricardian(or Marxian)model.
I- willsuffera shrinkage,andwillno longercorrespondto Gv,butto, say,ocvwherec.<G.
mechanismwill be in operation: the size of the " surplus" availablefor investment
determininginvestment,not investmentsavings. It is possiblehoweverthat owing to
technicalinventions,etc.,andstartingfroma positionof excesslabourand underemploy-
ment(i.e., an elastictotal supplyof labour)the size of the surpluswill grow; hence-
andacwillgrow; andhenceccmightriseaboveG(therateof growthof the" fullemploy-
mentceiling", giventhetechnicalprogressandthegrowthof population)so thatin time
theexcesslabourbecomesabsorbedandfullemploymentis reached. Whenthishappens
(whichwemaycallthestageof develoVedcapitalism)wageswillriseabovethe subsistence
level, and the propertiesof the systemwill then follow our model.
If equations(5)and(6) areunsatisfied,thefullemploymentassumptionbreaksdown,
andsowilltheprocessofgrowth; theeconomywillrelapseintoa stateofstagnation. The
interestingconclusionwlhichemergesfromtheseequationsis thatthismaybe theresultof
several distinctcauses. "Investmentopportunities" may be low because G' is low
relativelyto G, i.e., the entrepreneurs'expectationsare involatile,and/ortheyare pessi-
mistic; hencethey expecta lowerlevel of demandfor the futurethancorrespondsto
potentialdemand,governedbyG. Ontheotherhand," liquiditypreference" maybetoo
high,or the risksassociatedwithinvestmenttoo great,leadingto an excessiver. (This
is perhapsthe factoron whichKeyneshimselfset greateststoreas a causeof unemploy-
ment and stagnation.)Finally,lack of competitionmay cause " over-saving"through
excessiveprofitmargins; thisagainwillcausestagnation,unlessthereis sufficientcompen-
satingincreasein v (throughthe generationof "excesscapacity" underconditionsof
rigidprofitmarginsbutrelativelyfreeentry)to pushup Gv,andhence
and an inherenttendencyto fullemployment. Indeedthe two arecloselylinkedto each
other. Apartfromthecaseof a developingeconomyin theimmaturestageof capitalism
(whereequation(4) does not hold, but wherey<G), a tendencyto continuedeconomic
growthwill only exist whenthe systemis only stableat full employmentequilibrium-
i.e. whenG' > G.
Thisisa possibleinterpretationofthelong-termsituationinthe" successful"capitalist
economiesof WesternEuropeand North America. If G' exceedsG, the investment/
outputratio will not be steadyin time,evenif the trendlevelof this ratiois constant.
Therewillbe periodicbreakdownsin the investmentprocess,dueto thegrowthin output
but total outputwill fall, and outputwill be (temporarily)limitedby effectivedemand,
and not by the scarcityof resources. This is contraryto the mechanicsof our model,
butseveralreasonscan be adducedto showwhythe systemwillnot be flexibleenoughto
ensurefull employmentin the shortperiod.
(I) First,evenif "profitmargins" areassumedto be fullyflexible,in a downward,
as wellas an upward,directionthe veryfact that investmentgoods and consumergoods
are producedby differentindustries,withlimitedmobilitybetweenthem,willmeanthat
fullutilizationof resourcesin the consumptiongoodsindustries. A compensatingincrease
100 REVIEW OF ECONOMIC STUDIES
in consumptiongoodsproduction(followingupona fall in the productionof investment
goods) can only occuras a resultof a transferof resourcesfrom the otherindustries,
luredby the profitopportunitiesthere.
directionin the shortperiod(Marshall's" fearof spoilingthe market") even if theyare
flexiblein the long period,or even if they possessshortperiodflexibilityin an upward
Thisappliesof coursenotonlyto profitmarginsbutto realwagesaswell,whichinthe
shortperiodmaybe equallyinflexiblein a downwarddirectionat the attainedlevel,thus
or ratherpreventingan increasein
followingupon a risein theentre-
preneurs'desiredrateof expansionG'. Hencein the shortperiodthe sharesof profits
and wagestend to be inflexiblefor two differentreasons-the downwardinflexibilityof
P w- and the downwardinflexibilityof L--which thus tend to reinforcethe long-period
stabilityof theseshares,dueto constancyof y, resultingfromthelong periodconstancy
of Gv and G'v.
We have seen how the various"models" of distribution,the Ricardo-Marxian,
theKeynesianandtheKaleckianarerelatedto eachother. I amnotsurewhere"marginal
productivity"comesin in all this-except thatin so faras it has anyimportanceit does
throughan extremesensitivityof v to changesin .
Cambridge. NICHOLAS KALDOR.
'Cf. the quotationfrom Marshall,note 2, page 93 above.
2 This operatesthroughthe wage-pricespiralthat would follow on a reductionin real wages; the
preventionof sucha wage-pricespiralbymeansof investmentrationingof somekind,ora "creditsqueeze",
is thus a manifestationof downwardinflexibilityof