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  1. 1. 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 Accessed: 26/10/2010 16:42 Your use of the JSTOR archive indicates your acceptance of JSTOR's Terms and Conditions of Use, available at http://www.jstor.org/page/info/about/policies/terms.jsp. JSTOR's Terms and Conditions of Use provides, in part, that unless you have obtained prior permission, you may not download an entire issue of a journal or multiple copies of articles, and you may use content in the JSTOR archive only for your personal, non-commercial use. Please contact the publisher regarding any further use of this work. Publisher contact information may be obtained at http://www.jstor.org/action/showPublisher?publisherCode=resl. Each copy of any part of a JSTOR transmission must contain the same copyright notice that appears on the screen or printed page of such transmission. JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact support@jstor.org. The Review of Economic Studies Ltd. is collaborating with JSTOR to digitize, preserve and extend access to The Review of Economic Studies. http://www.jstor.org
  2. 2. 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 theireffectson prices. 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 umbrella. 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, 1945-46,Vol.XIII(1))whosetechniqueshowscertainaffinitieswithWalraseventhoughtheirbasicassump- 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. 3 Preface(myitalics). 83
  3. 3. 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 exhibitsthereaction-mechanismofthesystemtllroughthechoiceofastrictlylimitednumber 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. Theagriculturalsideofthepicturecanbeexhibitedintermsofasimplediagram(FIG.1), 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 extensive,margin)the differencebetweenaverageandmarginallabourproductivitywhich dependson the elasticityof the p-Ap curve, i.e., the extent to which diminishing returnsoperate. 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 andland,variablecoefficients.
  4. 4. ALTERNATIVE THEORIES OF DISTRIBUTION 85 | ]~~~A PROFITS WAGES LABOUR whichRicardoassumedtobeconstantintermsofcorn. Inmodernparlance,theRicardian 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.
  5. 5. 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 (pushingthehorizontalline WKupwards).' For any givenM, profitsarethusa residue,arisingfromthe differencebetweenthe marginalproductof labourandtherateofwages. Theresultingratio,Wages determines Wages' the rateof profitpercenton thecapitalemployed; it is moreoverequalto thatratio,on the assumptionthat the capitalis turnedoveronce a year,so that the capitalemployed isequalto theannualwages-bill.(Thislatterpropositionhoweverismerelyasimplification, 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 otherwiseanychangeintherelationbetweenindustrialandagriculturalpriceswillalterreal wages(in termsof commoditiesin general)so thatthe sizeof the "surplus", andtherate of profiton capitalgenerally,is no longerderivablefromthe "cornrateof profit"-the relationshipbetweentheproductof labourandthecostof labourworkingonmarginalland. Assumingthat("corn") agriculturalproductsarewage-goodsandmanufacturedproducts arenon-wagegoods(i.e.,ignoringthatsomeagriculturalproductsareconsumedbycapital- ists,andsomenon-agriculturalproductsbywage-earners),thewholecorn-output(thearea OCDMinthediagram)canbetakenastheannualwagesfund,ofwhich0 WKMisemployed 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, p. xxxi.).
  6. 6. ALTERNATIVETHEORIESOF DISTRIBUTION 87 of all accumulation)and thus slow downthe rateof growth.' Similarlyall taxes,other thanthoseleviedonland,mustultimatelyfallon,andbepaidoutof, profits,andthusslow down the-rate of accumulation. Taxation and agriculturalprotectionthus tend to acceleratethetendency(whichis inanycaseinevitable-unlesscontinuedtechnicalprogress 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 toperformthework. Marxassumedthatascapitalistenterpriseprogressesattheexpenses 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 wage labour. 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. xxxii-xxxiii.)
  7. 7. 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. 1 Cf. in particular,JoanRobinson,AnEssayin MarxianEconomics,pp. 75-82. 2 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 by side.
  8. 8. ALTERNATIVE THEORIES OF DISTRIBUTION III THE NEO-CLASSICAL THEORIES (A) MARGINALPRODUCTIVITY 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. 89
  9. 9. 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 economiesanddiseconomies. 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.' Whilstlandcanbemeasuredinacres-per-yearandlabourin man-hours,capital(asdistinct 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 distributionaltogether.4 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.
  10. 10. 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 measure.3 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.
  11. 11. 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. Oncloserinspection,however,theelasticityof thedemandcurvefacingtheindividual 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.
  12. 12. 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 factthatthesefullcosttheoriesshouldhavereceivedsuchwidespreadandseriousconsider- 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 (1949). 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, 1952,p. 119.
  13. 13. 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.
  14. 14. 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 capitalists.' WritingSWandSpforaggregatesavingsoutof WagesandProfits,wehavethefollowing incomeidentities: Y W+ P I S 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) y P 1 1 Sw__ and -.(2)ad y sp swvY sp- s)v *******.......(2 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.
  15. 15. 96 REVIEWOF ECONOMICSTUDIES If the differencebetweenthemarglnalpropensitiesis small,thecoefficientwillbelarge, I and small changesin - (the investment/outputrelationship)will cause relativelylarge P changesin incomedistribution and vice versa. In thelimitingcasewheres,3C 0, theamountof profitsis equalto thesumof invest- ment and capitalistconsumption,i,e, P=I.p SP, 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 thanthechangeininvestment,owingto theconsequentialreduction(orincrease)inworkers' savings.2 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: I = 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 I Thus ifsp = 10%, 10%,IO 20%, P 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 y 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
  16. 16. 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 equation: I -Y s we can now substitute equation (I) above: I P --y = (s -- s,) y + w. 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 p consequential change in - y. 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 p p emphasized earlier, shows the share of profits--, the rate of profit on investment--, and WI I the realwage rate -L, as functions of y which in turn is determined independently of P W 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. P Hence-y can only attain its indicatedvalue, if the resultingreal wage exceeds this minimum W 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. 2 y will thereforetend to equal G'v, not Gv. It may be assumedthat takingverylong periodsG' is largelygovernedbyGbutovershorterperiodsthetwoarequitedistinct,moreoverGitselfis notindependent 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 97
  17. 17. 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 p -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 .>,. .(6) It is clearthatequations(5)and(6)describealternativerestrictions,of whichthehigher willapply. (4) Thefourtbisthatthecapital/outputratio,v.shouldnotinitselfbeinfluencedbythe 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 P independentofy-. (We shallignorethis point). Thereis the furthercomplicationthaty p 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. V-v ..(7) '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 P 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.
  18. 18. 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. y Hencethesystemwillnotproducefullemployment; outputwillbelimitedbytheavailable capital,andnotbylabour; atthesametimetheclassical,andnottheKeynesian,reaction- 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- I 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 I Ifhoweverequations(2)-(6)areallsatisfiedtherewillbeaninherenttendencytogrowth 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 capacityoutrunningthepossiblegrowthinoutput; whenthathappens,notonlyinvestment, 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 profitmarginsintheconsumnptiongoodsindustrieswillnotfallbelowthelevelthatensures fullutilizationof resourcesin the consumptiongoodsindustries. A compensatingincrease
  19. 19. 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. (2)Second,andmoreimportant,profit-marginsarelikelyto beinflexibleinadownward directionin the shortperiod(Marshall's" fearof spoilingthe market") even if theyare flexiblein the long period,or even if they possessshortperiodflexibilityin an upward direction.' Thisappliesof coursenotonlyto profitmarginsbutto realwagesaswell,whichinthe shortperiodmaybe equallyinflexiblein a downwarddirectionat the attainedlevel,thus compressing I or ratherpreventingan increasein I followingupon a risein theentre- y ~~~~~~y 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 yL 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 w