Growth and Distribution PDF
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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.
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