The Existence of a Two-class Economy in the Kaldor and Pasinetti Models of Growth and Distribution

Abstract

By making these savings assumptions, Pasinetti ([2], p. 270) asserted he was remedying a logical slip in Kaldor's model. The latter postulates simple proportional savings functions Sw = sW Wand Sp = spP applying to wages and profits, regardless of the ownership of the profits. The implication of this, according to Pasinetti, is that even though workers save, they do not receive a share of the profits accrueing from their accumulated capital. It was subsequently maintained that Kaldor's model is not, in fact, logically defective, but is based on the assumption that different savings propensities apply to distinct classes of income (profits and wages) rather than to distinct socio-economic classes (capitalists and workers).3 To examine the implications of this assumption, this note first generalizes both the Kaldor and Pasinetti models by allowing the workers' propensity to save out of profits, spw, to differ both from their propensity to save out of wages, sww, and from the capitalists' propensity to save out of profits, spc(spc > Spw). It goes on to show that, if Sww> 0, Kaldor's implicit assumption that spw = Spc has the paradoxical result of making impossible the long-run coexistence of capitalist and worker classes, the validity of which is crucial for his model. If KC and KW are the capital stocks belonging to capitalists and workers, steady growth at the rate n implies that nKc = SC