Growth and Distribution

370 Pages·1973·32.74 MB·English

by  W. A. Eltis (auth.)

GROWTH AND DISTRIBUTION
By the same author
ECONOMIC GROWTH: ANALYSIS AND
POLICY
GROWTH
AND
DISTRIBUTION
W. A. Eltis
Fellow and Lecturer in Economics
Exeter College, Oxford
Macmillan
© W. A. Eltis 1973
Softcover reprint ofthe hardcover 1st edition 1973 978-0-333-14610-1
All rights reserved. No part of this publication may be
reproduced or transmitted, in any form or by any means,
without permission
First published 1973 by
THE MACMILLAN PRESS LTD
London and Basingstoke
Associated companies in New York Dublin
Melbourne Johannesburg and Madras
SBN 333 14610 7
ISBN 978-1-349-01799-7 ISBN 978-1-349-01797-3(eBook)
DOI 10.1007/978-1-349-01797-3
Contents
Preface vii
PART I
NEOCLASSICAL AND NEO-KEYNESIAN GROWTH THEORY
1 Marginal Productivity and Growth 3
2 Steady Growth 20
3 Vintage Growth Theory 39
4 Keynesian Growth Theory 72
5 Some Problems in Capital Theory 93
PART II
A MODEL OF EQUILIBRIUM GROWTH
6 The Determination of the Rate of Technical Progress 129
7 The Influence of Technical Progress Functions on Steady
Growth Relationships 155
8 The Rate of Profit and Investment 177
9 Profits and Growth 202
10 The Determination of the Share of Investment, the Rate
of Profit and the Rate of Growth 220
PART III
DISEQUILIBRIUM GROWTH
11 Economies of Scale and Growth 251
12 The Relationship between Actual Growth and
Equilibrium Growth 273
13 The Problem of Distribution 300
14 Implications for Policy 320
References 351
Index 359
Preface
GROWTH theory has several objectives. At the practical level it is
concerned with the explanation of the growth of the world's
economies, and explanation can lead to prescription once the reasons
for slow growth are understood. At the theoretical level growth
theory must play a crucial role in any general theory of the working
of economies. This must be dynamic if it is to be wholly satisfactory,
which means that the relationships between investment, the potential
for technical advance and growth must be fully taken into account.
These relationships have a pervasive influence, and they will certainly
have important effects on capital intensity, the profitability of firms
and the distribution of the National Income. Ideally, growth theory
will provide a plausible explanation of both historical growth rates
and interconnections between the major economic variables.
The potential gain to economics from a satisfactory account of
the growth process would obviously be very great, but economists
are very far from this. Recent work on capital theory has undermined
or at any rate questioned the theoretical foundations of neoclassical
growth theory (and most modern econometric work on growth rests
on this), while an alternative theoretical framework that is capable of
producing a testable account of the growth process has not yet
emerged.
There are several possible starting points for the work on growth
theory which is now needed, for there are a number of elementary
propositions about growth that are well known and understood - it
is their relevance to the growth of real economies that is in doubt.
For instance, if it is assumed that an economy produces a single
good in conditions of perfect competition and constant returns to
scale, then the fundamental neoclassical results that are outlined in
Chapters 1 and 2 of the present book follow. The results of Chapter 3
follow with the further assumption that modern plant is technically
superior to old plant, the efficiency of plant depending on the year
of its construction or 'vintage'. Some fundamental Keynesian pro
positions about growth are outlined in Chapter 4 and these must
play a part in a complete theory of growth, but they do not by them
selves take the argument very far.
viii PREFACE
The unreal assumptions in the simple accounts of growth in these
chapters cannot all be relaxed at the same time, for a theory that
accurately reflects all the chaos of the real world must be as chaotic
as the real world, but some of the unreal assumptions can be relaxed.
Unfortunately, where particular assumptions are relaxed, others
cannot be, so what will turn out to be the best way of making growth
theory more realistic is very much an open question. Some of the
effects of relaxing the assumption that an economy produces a single
good are outlined in Chapter 5. This is the assumption in elementary
neoclassical theory that has aroused most current controversy (it is
not needed for the Keynesian theory of Chapter 4), and it is shown
in Chapter 5 that certain basic neoclassical propositions will not
necessarily follow (though they mostly will) once it is assumed that
output is produced by a series of capital goods which are themselves
manufactured in specified ways. While this may lead to reswitching
in particular circumstances, 'orthodox' results should still follow in
most cases. The assumption of heterogeneous capital and consumer
goods greatly increases the complexity of the argument and especially
its mathematical complexity, and this means that almost the entire
scope for greater realism that is available from the relaxation of
the assumptions of the early chapters must be devoted to the relaxa
tion of the one-good assumption. A great deal of work is now being
done on sophisticated models with heterogeneous capital goods, and
much is likely to be achieved in this direction in the next decade.
Testable propositions will need to emerge from such models if they
are to be of real value, and it is to be hoped that these will be
found.
It is obviously desirable to relax the one-good assumption, but this
is not the only way in which growth theory can proceed. A possible
alternative approach to a more realistic theory of growth is outlined
in Part II of the present book where two of the unsatisfactory
assumptions in elementary growth theory are relaxed, and the conse
quences of alternative assumptions worked through in a vintage
model. The assumptions that are questioned are those that relate to
the determination of the economy's rate of technical progress and its
share of investment, which are both assumed to be exogenously
given in elementary neoclassical theory. It is argued in the present
book that an economy's rate of technical progress will vary with its
share of investment in the National Income with the result that an
economy with a higher share of investment will have a higher equili-
PREFACE ix
brium rate of growth. 1 It is also argued that an economy's equilibrium
rate of capital accumulation will depend on its rate of profit and
the preferences of its entrepreneurs and wealth owners between
capital accumulation and current consumption. In consequence, the
economy's rate of technical progress and its share of investment in
the National Income will both become variables and not exogenously
given constants. The central feature of the growth model that follows
with these new functions is that the economy's equilibrium rate of
profit and its equilibrium rate of growth are simultaneously deter
mined by the investment function and an investment opportunity
function that is derived from the technical progress function and
other relationships. It is shown that an economy with greater
technical opportunities for growth than another will (cet. par.) have
a higher equilibrium rate of growth and a higher rate of profit, while
an economy with a stronger investment function will have a faster rate
of growth and a lower rate of profit. Higher profits are associated
with higher investment and faster growth, and there is a strong inter
relationship between profits, investment and growth. The model
makes use of both neoclassical and neo-Keynesian propositions, but
these are really classical results, and it is shown in Chapter 9 that
Malthus's view of the growth process was very similar.
The model outlined in Part II is an equilibrium growth model, and
it can only be used to make comparisons between economies in
steady growth with different parameters. In Part III the model is
extended to take account of problems in disequilibrium growth. The
effects of increasing returns to scale are analysed in Chapter 11, and
it is shown that these will apply a multiplier to growth from any other
source, and they will also generally lead to a falling share of profits
and a falling capital-output ratio. After this, the relationship between
actual and equilibrium growth is analysed and it is argued that actual
growth paths will often correspond quite closely to equilibrium
growth paths. The various propositions about income distribution
are brought together in Chapter 13 to produce a theory which owes
much to both neoclassical and Keynesian theory. In this, distribution
is influenced by technical factors, the market power of labour and
capital, and Keynesian effective demand. The book concludes with
1 In his review of R. M. Solow, Growth Theory: An Exposition (Oxford U. P.,
1970), M. lnagaki suggests that precisely this change should be made to make
neoclassical theory more realistic. (Journal of Economic Literature, vol. x, June
1972, p. 469.)
A*
X PREFACE
an account of some of the policy implications of the argument, which
include some new propositions about the taxation of profits and
wealth which follow from the analysis of wealth owners' preferences
and their influence on the investment function in Part II.
Whether the model's principal innovations, the technical progress
function, the investment function and the analysis of increasing
returns to scale, are useful is something that only rigorous testing
can show. Certainly the model passes the crude test of 'stylised' facts
which Kaldor has suggested that all growth models should pass. 1
In Kaldor's version of the stylised facts, all models should produce
constant capital-output ratios, constant shares of profit and constant
rates of profit, but the share of profits has fallen fairly continuously
in the U.S.A. and the U.K. since 1900, and the capital-output ratio
has fallen fairly continuously in the U.S.A. 2 To keep in line with
these stylised facts, a model should ideally produce a falling capital
output ratio and a falling share of profits, and in addition, it should
be capable of explaining the well-known evidence that fast-growing
economies have higher shares of investment, higher shares of profit
and lower capital-output ratios than slow-growing economies. 3
These results all follow from the model that is outlined in this book.
A problem which all authors of books on growth theory must face
is how much mathematics to use. In this book I have avoided the
use of anything more difficult than partial differentiation in most of
the chapters in the hope that this will make the book widely acces
sible, and many of the main propositions are established diagram
matically. There are, however, a few problems, especially those
associated with vintage growth theory and reswitching, where the use
of more difficult (or more tedious) mathematics is inevitable. The
passages in question (in Chapters 3, 5, 7, 10 and 11) are preceded by
an asterisk, and some readers may prefer to omit them. They will
only lose a small fraction of the argument if they do this. An equally
difficult problem is how much basic knowledge of growth theory to
take for granted. I have decided to provide an exposition of very
basic neoclassical and nco-Keynesian growth theory in the early
chapters, which should be particularly useful to those who are not
already thoroughly familiar with growth theory. Those who are will
1 SeeN. Kaldor, 'Capital accumulation and economic growth', in F. A. Lutz
and D. C. Hague (eds.), The Theory of Capital (Macmillan, 1961) pp. 178-9.
z Seep. 266 below.
3 See Kaldor, op. cit., who cites some of these further relationships, and p. 215
below.