Alternative Distribution Theories: Ricardo, Kaldor, Kalecki | Economics Optional Notes for UPSC PDF Download

Michal Kalecki

• It is one of the most popular theories of distribution. For a long time, people believed that all that he wrote in his book in 1933 were the ideas of Keynes, which Keynes edited in 1936.
• Kalecki also got an opportunity to be present in the international econometrics conference during the period of the first world war. Wherein, his paper was amongst one of the high standard papers.
• Adding to this, Michal Kalecki was also the deputy director of the UNOs economics department.
• In 1970, he got nominated for the Nobel prize. Without any degree of economics, Kalecki taught at Oxford University, Cambridge University, and more. Karl Marx influenced him, hence always tended to attack the capitalist.
• He believed that the great depression was because of the capitalists and hence quoted, ‘Capitalists are the masters of their own fates’.

Kalecki’s Theory of Distribution

• He believed that the relative share of profits and wages in the national outputs depends on the degree of monopoly in the economy. The formula to measure the degree of monopoly is = (P-MC)/P.
• Wherein, P represents the price and MC represents Marginal cost. According to Kalecki, the marginal cost includes the cost of raw material and the cost of labor ( only wages ). Also, in the short run, MC = AC.

Assumptions by Kalecki

1. Vertically Integrated Industry

• The industry under consideration is fully vertically integrated so that only costs are labor costs.
• All workers are directly productive labor.
• Costs are constant.
• Until we reach the full level of employment, MC=AC

Kalecki believes that in the model of the vertically integrated industry, the gross profit of the industry is equal to total revenue minus total cost. Here, Total Cost is exclusively wage costs. He further says that the income distribution in such an industry depends completely on the ability of the firms to charge a markup on their product. Kalecki says that, here, the monopoly power and the share of profits are directly proportional. This means, the higher the monopoly power, the higher the share of profits.

2. Non – Vertically Integrated Industry

• Labor costs are only of the directly productive labor workers minus the overheads.
• Costs are constant.
• Output rises for both the labor and the raw materials such that MC=AC.

In this case, Kalecki’s degree of monopoly is equal to (P-MC)/P or (P-AC)/P, because, MC=AC. And P – AC is the difference between the price of its products and the Average Cost of producing the said good.

• If we integrate over the whole economy to get the total profit in the economy, it is equal to Σ x.p.u = Σ x ( p – ac ) and the total output of a firm is x.p. However, the total output of the economy is not equal to national income. 
• The reason being, here intermediate costs are included, but in national income, the cost of the final good is taken. If the total national income is NI and the total wage bill in the economy is W. And NI – W gives us the total profit in the economy. 
• It must be noted that as the monopoly power of the firms in the economy rises, the share of the wages in the national income falls.
• And not to forget, the share of raw material in the AC is zero in case of a non vertically integrated industry.

David Ricardo

Assumptions by David Ricardo

• The Law of diminishing returns operates in agriculture. This means, as there is an increase in the employment of labor, the Average Product and the Marginal Product declines.
• He assumes the Malthusian law of population to hold good, that is if the wage rises above the subsistence level, the population will increase. if it falls, below the subsistence level, the population will decrease. In the long run, the rate of wages will be equivalent to the subsistence wage rates.
• Profits are necessary incentives for capital accumulation and capital accumulation is important for economic growth.
• Static technology.
• Full intersectoral capital and labor mobility.

Ricardian Model

• Only a two-sector economy, is agriculture and industry. The output and wages in agriculture are corn.
• The output of the industry is money goods, but the wages in the industry are corn.

Distribution Theory of Ricardo

Ricardo divided the national income into –

• Rent
• Profit and
• Wages

• In the above graph, Quad QPTR represents rent, OMLW represents wages, and WLTP represents profit. OM represents the employed labor and OW represents the subsistence wage.

Factors that determine the distribution of National Income

According to Ricardo, there are two factors that determine the distribution of National Income. The two factors are –

• Marginal Principle: The marginal principle helps us find rent. Ricardo says that the difference between aggregate and the cost is rent. In reference to the figure above, OM is the labor, and MR or OQ is the productivity of the labor. So the total Aggregate Production will be OMRQ. Now, the cost of production can be found by considering the marginal cost. Here, the marginal cost of production is OP and the labor is OM, so the total cost is OM*OP. The cost of production will be equal to OMTP. Therefore, the rent is AP – CP, ie. OMRQ – OMTP, which is equal to TRQP. So, TRQP is the rent, here.
• Surplus Principle: According to Ricardo, his principle is useful to find out the profit. Considering the above-mentioned graph, we know, PQRT = Rent So, OPTM is left. Within OPTM, the wage of the labor needs to be subtracted.
  Labor Wage = OM * OW = OMLW
  Therefore, after subtracting the rent and the labor wage, we can find out that the profit here is, WLTP.

Kaldor's Theory of Distribution

Assumptions of Kaldor

• Kennysion assumption – 2 sector model and ’ I ‘ is autonomous.
• Full employment exists.
• The MP remains constant.
• MP (wages) > MP (profits)

Kaldor’s Model of Distribution

• Kaldor distributed the national income into profit and wage. The profits here are defined by the property-owning class and thus, it includes ordinary profits, rent, and interest. And the wages include salaries, too.
• As discussed, Y = W + P, were Y is national income, W is wages and P is profit. In the case of equilibrium, the planned savings equal the planned investments or I = S. The total savings in society are equal to total savings out of wages plus total savings out of profits.
• Given the marginal propensities of labor and capitalists to save, the share of investment in Gross Domestic Product or GDP determines the share of profits. Here, income and profits are directly proportional to each other.
• In the condition of full employment, any increase in demand will only lead to an increase in prices. An increase in profits because the Keynesian framework says that wages lag behind prices. Also, if the demand will fall, the consumption will rise.

• The Y-axis represents the share given to the income and savings and the X-axis represents Profit. The profit here is constant. The savings and the investment cut the profit at the same point, that is, point E.
• The savings of the capitalist are more than the savings of the wage-workers, this leads to an increase in savings and investment. This brings us to find the second equilibrium, that is, at point F.

Criticisms

There are two main criticisms of the Kaldor model:

• It is not at all clear why the economy in this model has an automatic tendency to approach the level of full employment
• The promise that employment depends only on output and not on wage level denies that higher wages will induce the adoption of labour-saving inventions.

Conclusion

Kaldor’s model is not sufficiently comprehensive to show clearly how labour’s share in na­tional income is determined. Yet the model can be readily interpreted to suggest policy meas­ures for changing the pattern of income distribution in a capitalist economy.