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CHAPTER

40
aldors Growth Kaldors Model of Growth
INTRODUCTION
Prof. Kaldor in his A Model of Economic Growth1 follows the Harrodian dynamic approach and the Keynesian techniques of analysis. The other neo-classical models treat the causation of technical progress as completely exogenous, but Kaldor attempts to provide a framework for relating the genesis of technical progress to capital accumulation. ASSUMPTIONS The basic properties or assumptions of Kaldors model are as follows: 1. It is based on the Keynesian full employment assumption in which the short-period supply of aggregate goods and services is inelastic and irresponsive to any increase in monetary demand. 2. It assumes that technical progress depends on the rate of capital accumulation. For this, Kaldor postulates the technical progress function which is a joint product of two tendencies: growth of capital and growth of productivity. The capital-output ratio will depend upon the relation between the two. In Fig. 1 TT is the technical progress function which is convex upwards
1. Economic Journal, Vol. 67, December, 1957. Also in Essays on Stability and Growth, 1960, pp. 258-60.

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The Economics of Development and Planning

but flattens out beyond a certain point, such as P in the figure, when capital per worker starts diminishing. The annual percentage growth in capital per worker at time t is

F 1 . dO
Ot dt

450 P T

F 1 . dk
k t dt

measured horizontally and the annual r O

percentage growth in income per worker at time t is

F 1 . dO
Ot dt

measured vertically. At point P, the

F 1 . dk
k Fig. 1
kt dt

percentage rate of growth of capital and the percentage rate of output (income) are equal. The behaviour of the capital-output ratio will depend upon the flow of new ideas, as re-presented by the shape and position of the TT curve and the rate of capital accumulation. If the rate of capital accumulation is less than the point of equality of the growth of capital and the growth of output, the capitaloutput ratio will be falling and there will be labour-saving inventions, and vice versa. If the rate of capital accumulation is less than OK or one happens to be to the left of P, output will be growing faster than capital, the rate of investment will be stepped and the rate of profit on new investment will increase. This will lead to a movement towards the right till point P is reached. On the contrary, if one happens to be to the right of, capital will be growing faster than output, the rate of investment will decline, so will the profit rate and a backward movement towards P will set in till the equilibrium point is reached. 3. Income consists of wages and profits, where wages comprise salaries and earnings of manual labour, and profits comprise income of entrepreneurs as well as property owners. 4. Total savings consist of savings out of wages and savings out of profits. 5. It is assumed that the share of profits in total income is a function of investment, given the propensity to save out of profits. 6. All macro-economic concepts of income, wages, profits, capital, saving and investment used in the model are expressed at constant prices. 7. Kaldor assumes an investment function which makes investment of any period partly a function of the change in output and partly of the change in the rate of profit on capital in the previous period. 8. Monetary policy plays a passive role in the model in that money wages may be rising faster than productivity or pari passu with productivity, or money wages may be constant. 9. It is assumed that there are no effects of a change in the share of profits and wages, and of a change in interest rates on the choice of techniques adopted. 10. The choice of techniques is assumed to alter with the accumulation of capital and the progress of techniques in the capital goods making industries.

THE MODEL
Given these assumptions, the model operates under two stages: (a) constant working population, and (b) expanding population. In the former, the proportionate growth rate of total real income will be the same as the proportionate growth rate of output per head. In the latter, the proportionate change in total real income in the sum of the pro-portionate change in output per head and the proportionate change in the total working population. We discuss these two versions of the model below.

Kaldors Model of Growth

287

(A) Constant Working Population. For the operation of the model, Kaldor postulates three functions: (i) the savings function, (ii) the investment function, and (iii) the technical progress function. The three functions are explained in terms of linear equations as under: (i) Savings function St = Pt + (Yt-Pt) ...(1) where, l>>=o In equation (1), savings (St) consist of savings () out of profits (Pt ) and savings () out of wages (YtPt ) in period t. The inequalities l > > =0 show that and lie between 0 and 1, and that (savings out of profits) is greater than (savings out of wages). (ii) Investment function

K t = ' Yt 1 + '
It = Kt+1-Kt

FP

t 1

K t 1

Yt 1

...(2) ... (2.1)

where, > 0 and ' > 0 Equation (2) shows that the stock of capital (Kt) at time t is a coefficient of the output of the previous period (Yt_1 ) and a coefficient of the rate of profit on capital of the period

FP

t 1

K t 1

multiplied by the output of the previous period (Yt_1). Equation 2.1 shows the investment function where investment in period t equals the stock of capital in the next period (Kt+1 ) minus the stock of capital in the current period (Kt ). The inequalities > 0, and > 0 reveal that the value of the coefficient and are greater than zero. (iii) Technical progress function

Yt +1 Y Yt

= "+ "

It Kt

...(3)

where, > 0, and 1 > > 0 Equation (3) shows that the rate of growth of income (and labour productivity) is an increasing function of the rate of net investment expressed as the proportion of the stock of capital (It /Kt ) in period t multiplied by the capital per head plus the coefficient of technical progress . Here the value of the coefficient of technical progress is greater than zero but of capital per head lies between 0 and 1. Given these functions, if we start from a point of time, t=l, the existing stock of capital K1 can be regarded as a datum, inherited from the past. Taking Y0 and K0 as the income and capital of the previous period, Y1 can be taken as the given income which the fully employed labour force (constant population) produces with the help of the capital stock K1. The technical progress function as given by equation (3) shows the growth of income and capital from period t1 onwards whereby the economy gradually moves from a short-period equilibrium to a long-period equilibrium of steady growth. Taking the identity St = It it is the level of profits which brings about the equality of saving and investment. For a stable equilibrium path, the following condition should be fulfilled.

> '

Yt Kt

....(4)

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The Economics of Development and Planning

This implies that the growth rate of savings should be greater than that of investment for the stable equilibrium. But this is only a necessary condition. The sufficient condition for the stable equilibrium path should be Pt Yt w ....(5)

Pt m Yt

....(6)

In fact, equations (5) and (6) are inequalities which act as constraints on the stability of the equilibrium path. Equation 5 indicates that the level of profits (Pt ) should not exceed income minus wages (Ytw). While equation 6 indicates that the rate of profit (Pt /Yt ) should be greater than the minimum margin of profits (m) so that the entrepreneurs should continue to make further investments. Equations (4), (5) and (6), imply that the equilibrium brought about by the equality of saving and investment through the mechanism of profits would not be a stable one. However, the steady growth path would depend on the technical dynamism of the economy, i.e., on the technical progress function, as given by the following condition:

G=

" 1 "

....(7)

of capial

FK

t +1

Kt Kt

Proportionate Growth of Income

where, G is the growth rate of output which is determined by the technical progress function, as given on the right of the equation. This is illustrated in Fig. 2 where the proportionate growth G
G2 G1 G3

is measured horizontally and the

450 T B

FY proportionate growth of income

t +1

Yt Yt

vertically.

Point G as determined by the technical progress function TT and the 45 line is one of steady growth where the proportionate growth of income equals the proportionate O I2 I3 I I1 growth of capital. Starting from period t1 where the growth K2 K3 K K1 of output G1 is greater than the growth of capital (I1/K1), the rate of investment will increase in the subsequent Proportionate Growth of Capital period so as to make I2/K2 equal G1 at A. This will, in turn, Fig. 2 raise the growth of output in period t2 to G2. The rate of investment will increase further to I3/K3 in period t3, so as to make I3/K3 equal G2 at B. Similarly, the growth of output in subsequent periods will rise till point G is reached. This process will be reinforced by changes in the rate of profit on capital (Pt/Kt). An associated change in Pt /Kt will make increase in It/Kt even greater. (B) Expanding Population. Leaving the assumption of constant working population, Kaldor studies the relation between growth in population and growth in income. Starting from the Malthusian contention that the growth rate of population is a function of the rate of increase of the means of subsistence, he assumes that: (a) For any given fertility rate, the percentage rate of growth in population cannot exceed a certain minimum however real income is rising; and

Kaldors Model of Growth

289

(b) the rate of population growth will rise moderately as a function of the rate of growth of income over some interval of the latter before that maximum is reached. Given these assumptions, the relation of population growth with the growth in income is expressed by Kaldor algebraically as under: (gt ) It = gt and It = (gt ) where, It is the percentage rate of growth of population, gt is the percentage rate of growth of income, and is the maximum rate of population growth. If gt < and so is It > , the rate of growth of 1 dL . income and population will continue to rise till the L dt 450 growth rate of population equals . This relation between population growth and income Y L E growth is represented in Fig. 3, where the

proportionate rate of growth of population is measured vertically and proportionate rate of P O Fig. 3

F 1 . dY growth of income
Y dt

F 1 . dY
Y dt

measured horizontally.

F1 . dL
L dt

OY is the growth path of income. PL is the curve of the growth rate of population. As the growth rate of income increases, the growth rate of population also rises till the curve becomes horizontal as a level where the rate of growth of income (OY) exceeds the former, as at point E. In the long run, population would grow at its maximum rate indicated by L portion of the dotted population-growth rate curve. This assumes that the shape and position of the technical progress function, as given by the coefficients and in equation (3) are not affected by the changes in population. This implies that there are constant returns to scale, that is, an increase in numbers, given the amount of capital per head, leaves output per head unaffected. But in an underdeveloped economy with a low capacity to absorb technical changes due to the scarcity of land and capital, the technical progress function will be lowered with the increase in the growth rate of population. In this situation, the technical progress function will cut the capital axis positively as at A in Fig. 4. This implies that in order to maintain output per head at a constant level, a certain percentage growth in capital per head will be required. We have therefore, two 1 , dO points of intersection P and P of the technical progress Ot dt function. Point P is of unstable equilibrium and point P P T of stable long-run equilibrium. If the rates of growth of T income and capital continue to diminish in the economy, both the output per head and capital per head may cease to grow. This may happen if the economy is to the left of point P. If this situation persists, the technical progress function TT may slip down as the dotted curve TT in P Fig. 4. In this situation, there will not be any long-run A 1 kK equilibrium. Rather, there may be stagnation in the , O Kt dt T economy. T Fig. 4 The conclusion emerges from the above analysis that the

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The Economics of Development and Planning

growth in population will lead to long-run equilibrium growth in income depending upon the relative strength of the following two factors: (i) the maximum rate of population increase and (ii) the rate of technical progress, which causes a certain percentage increase in productivity, in equation (3) above, when both population and capital per head are held constant. A CRITICAL APPRAISAL Kaldors model is based on the Keynesian tools of analysis and follows Harrods dynamic approach regarding the rates of change in income and capital as the dependent variables of the system. But his model is quite different from the Harrodian and other models. In Kaldors own words, his model is a piece of economics that tries to show that the ultimate causal factor was not saving or capital accumulation, but technical dynamismthe flow of new ideas and the readiness of the system to absorb them. Moreover, the model explains not only the steady growth path of the economy but also certain features of the growth process which are not explicitly dealt with by the other neo-classical model builders. Again, the division of the model into two stagesconstant population and expanding populationis an attempt to reconcile the Harrodian warranted and natural rates of growth by demonstrating the long-run tendency for the two to converge by mutual interaction. The expanding population version of the model is particularly useful in demonstrating the effect of population growth on the growth of income in underdeveloped countries.. One of the highlight of Kaldors model is the introduction of the technical progress function in place of the usual production function. The technical progress function relates technical progress to growth of productivity and capital accumulation, while the usual production function relates output per head to capital per head. Thus, the former is superior to the latter in that it brings in the role of income, wages, profits, capital, saving and investment. Further, the technical progress function can be equally applied to an underdeveloped economy, having low capacity to absorb technical change due to scarcity of capital and other resources. In such countries, the technical progress function will be at a level much below the usual TT curve shown in Fig. 1. However, with new discoveries and increase in the capacity of such economies to absorb technical changes, the technical progress function may rise gradually. Thus Kaldors growth model is more realistic than the earlier neo-classical models because it is equally applicable to developed as well as underdeveloped economies. Despite these virtues of the Kaldor model, it is not free from certain weaknesses. 1. No Explanation of Determination of Growth Rate. The Kaldor model does not explain the determination of the rate of growth of the economy, as has been explained in the Harrod-Domar models in terms of the volume of investment, saving-income ratio and the capital-output ratio. 2. No Reasons for Stability or Instability. Unlike the Harrod-Domar models, this model does not give the reasons for stability or instability in the economic system. Rather, it analysis certain features of the growth process which emphasise convergence and stability. 3. Ignores Disembodied Technical Progress. Kaldor has been criticised for ignoring the disembodied technical progress in his technical progress function. Kaldor defends himself by saying that it is mainly the rate of accumulation which governs the rate of technical progress. But in his growth model with Mirrlees, he admits that in addition to embodied technical progress there is some disembodied technical progress as well. Conclusion. But these drawbacks do not detract from the advance made by Kaldor in growth theory through this model which has been further elaborated and improved upon by him along with Mirrlees.2
2. N. Kaldor and J.A. Mirrlees, A New Model of Economic Growth, R.E.S., Vol. 29, 1961-62.

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