Changes in the Rate of Profit and Switches of Techniques

This ("Cambridge") theory of income distribution was originally presented by Nicholas Kaldor in 1956, with the (perhaps inappropriate) name of ‘Keynesian’ Theory of income distribution. The adjective was inappropriate in the sense that, in Keynes’s writings, such a theory cannot be found anywhere. Yet, its characteristic is that it may be appropriately intended as a continuation of the theory of the Classical economists (and as such is revealed to be in opposition to the prevalent neoclassical theory). The main characteristic of this theory is that it upturns Ricardo’s causal link in the theory of income distribution, traditionally considered by Classical economists and made up of three stages (1st stage: the determination of Rent in the ‘so called’ Ricardian manner, that is as a net gain of the owners of fertile lands with respect to the owners of the least fertile lands; 2nd stage: determination of Wages – essentially at the subsistence level: 3rd stage: determination of Profits as all that remains as a surplus, which is thus absorbed by the capitalists). Kaldor, with his theory, was the first to upturn the order of succession between profits, and wages anteceding profits, destined for the most part to the accumulation of capital, i.e. to investments, and leaving wages last. In this manner – when there is technical progress – it is the workers that benefit from the whole process of technological expansion and innovation. The analytical formulation of Kaldor’s theory of income distribution was originally rather complicated. Nevertheless, it had the property of taking up a very simple and thus immediately evident version in the extreme (Classical) case, in which the workers spend all their wages on consumer goods with no savings whatsoever. In this case – in Kaldor’s model – the so called ‘Cambridge equation’ becomes quite simple: rate of profit = rate of growth, divided by the propensity to save of the capitalists. The neoclassicals criticised this equation by claiming that – in a modern capitalist economy – one cannot accept considering a situation in which only capitalists save, while workers remain permanently at the level of pure consumption and absolutely no savings. However, in 1962, LLP demonstrated the validity of the ‘Cambridge equation’ not only for the extreme Classical case, but also for the general case – that is to say: for the case in which both the capitalists and the workers have a positive propensity to save. Later on. professors Samuelson and Modigliani, in a well-known debate in 1966, decided to call such a result ‘The Pasinetti Theorem’.