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Nicholas Kaldor’s Theory of Distribution
1. Introduction
Nicholas Kaldor (1908–1986), a post-Keynesian economist, developed a macroeconomic theory of income distribution that focused on the relationship between savings, investment, and growth. Unlike Marx (who saw distribution as a result of class struggle) or Ricardo (who emphasized land and diminishing returns), Kaldor’s model explains how capitalists and workers share income based on their savings behavior and economic growth.
Key Features of Kaldor’s Distribution Theory:
✔ Based on Keynesian growth models.
✔ Wages and profits are determined by savings behavior.
✔ Assumes functional income distribution between capitalists and workers.
✔ Explains growth and income inequality in capitalist economies.
2. Kaldor’s Model of Functional Income Distribution
Kaldor’s model divides society into two main groups:
1️⃣ Workers – Earn wages (W) and have a low savings rate.
2️⃣ Capitalists – Earn profits (P) and have a high savings rate.
🔹 (1) Savings-Based Distribution Theory
✔ Key Assumption:
- Capitalists save a larger proportion of their income than workers.
✔ Savings Function: S=SwW+ScPS = S_w W + S_c P
Where:
- SwS_w = Savings rate of workers (low).
- ScS_c = Savings rate of capitalists (high).
- WW = Total wages.
- PP = Total profits.
✔ Key Result:
- Higher profit share leads to higher savings and investment, driving economic growth.
📌 Example:
- If capitalists reinvest a large share of their profits, the economy grows faster than if workers save more.
🔹 (2) Profit Share and Investment Link
✔ Kaldor’s Distribution Equation: PY=ISc\frac{P}{Y} = \frac{I}{S_c}
Where:
- P/YP/Y = Profit share in national income.
- II = Investment.
- ScS_c = Capitalists’ savings rate.
✔ Implication:
- Higher investment leads to a higher profit share in GDP.
- Economic growth is driven by profit reinvestment, not wage increases.
📌 Example:
- In economies with high investment rates (e.g., China, South Korea), capitalists earn more, but growth remains strong.
🔹 (3) Growth and Distributional Stability
✔ Kaldor’s Key Argument:
- As long as capitalists reinvest profits, growth continues.
- If savings fall or workers demand higher wages, profit share declines, reducing investment and slowing growth.
✔ Key Policy Lesson:
- Economic policies should support investment and high savings rates among capitalists.
📌 Example:
- Post-WWII growth in Europe followed Kaldor’s model—high savings, strong investment, and rapid expansion.
3. Comparison: Kaldor vs. Other Distribution Theories
| Feature | Ricardo | Marx | Kaldor |
|---|---|---|---|
| Key Factors | Land, wages, profits | Surplus value, class conflict | Savings, investment |
| Capitalism’s Future | Declining growth | Crisis & collapse | Growth continues with investment |
| Role of Wages | Subsistence level | Exploited for profit | Low wages increase profit and savings |
| Role of Profits | Decline due to rent | Extracted from labor | Drive investment and growth |
| Policy Implication | Protect landlords’ profits | Revolution against capitalists | Encourage capitalist savings |
4. Criticism of Kaldor’s Model
✔ Assumes Savings Cause Growth – Keynesians argue that demand, not savings, drives investment.
✔ Ignores Wage-Led Growth – Some economies grow by increasing wages, not just profits.
✔ Does Not Explain Income Inequality – High profits do not always benefit workers.
📌 Modern Example:
- US Income Inequality: Since the 1980s, profits have grown, but worker wages have stagnated, contradicting Kaldor’s model.
5. Conclusion
✔ Higher savings and reinvestment by capitalists lead to faster economic growth.
✔ Profit share increases when investment is high, while wages remain stable.
✔ Kaldor’s model works well in investment-driven economies but ignores wage-led growth models.