Ricardian Debt/Taxation Equivalence in the Kaldor Theory of Profits and Income Distribution

Since Nicholas Kaldor published his seminal paper on a “Keynesian” theory of income distribution between ‘capitalists’ and ‘workers’ (Kaldor, 1956), the literature on this topic has grown enormously. The author himself contributed to this development by focusing on the implications for a long-run ‘Keynesian’ theory of the rate of profits (Pasinetti, 1962) – the major analytical result that was achieved is represented by the remarkable ‘Cambridge Theorem’ which states that on a long-run equilibrium-growth path, with two categories of savers (the capitalists and the workers), the rate of profits is determined by the natural rate of growth divided by the capitalists propensity to save, independently of anything else, and in particular, independently of technology and of the workers’ propensity to save. The considerable amount of literature that was generated by this theorem is characterised by two phases. The first phase was characterized by explorations of what happens outside the range within which the theorem holds. In the second phase, many authors proceeded to relax assumptions, trying out new hypotheses and introducing complications of all sorts. The aim of the present article is to explore the possible extensions of Kaldor’s profits and distribution theory when the problems of government taxation and expenditure are explicitly introduced. Republished in Tony Lawson, Gabriel T. Palma and John Sender (eds), Kaldor’s Political Economy, London: Academic Press Limited and San Diego, CA: Academic Press Inc. pp.25-45. Reprinted in: Lakis C. Kaounides and Geoffrey E. Wood (eds.), "Debt and Deficits", Vol. III: Debt Neutrality and the Theory of Fiscal Policy 1970s to 1990s, Aldershot: Edward Elgar Publ. Ltd., 1992.