Kaldor Model

Overview:

The Kaldor model, developed by Nicholas Kaldor, is a post-Keynesian model of growth. It highlights the relationship between income distribution, investment, and economic growth. Kaldor emphasized the role of industrialization and the increasing returns to scale that lead to sustained growth in a capitalist economy.

Assumptions

1. Propensity to Save:
   • Capitalists save a higher proportion of their income compared to workers.
2. Profit-Led Growth:
   • Higher profits lead to higher savings and investment, promoting growth.
3. Constant Returns to Scale:
   • Production follows a constant returns-to-scale framework.
4. Technological Progress:
   • Technological improvements are exogenous and enhance productivity.

Key Relationships

1. Savings Function:
   • Total savings depend on the distribution of income: S=sp⋅P+sw⋅W 
     • S: Total savings
     • sp​: Savings rate of profits
     • sw​: Savings rate of wages
     • P: Profits
     • W: Wages
2. Investment-Savings Equality:
   • For equilibrium, savings must equal investment: S=I 
3. Growth Rate of Capital:
   • The growth rate of capital stock depends on the ratio of investment to capital: g=I/K​
     • g: Growth rate of capital
     • K: Capital stock

Key Features

1. Dual Role of Income:
   • Income is divided between profits and wages.
   • Profits drive investment, while wages drive consumption.
2. Savings and Growth:
   • Savings are primarily generated from profits, as capitalists tend to save more than workers.
3. Functional Income Distribution:
   • Changes in income distribution impact the growth rate of the economy, with a higher share of profits promoting investment and growth.
4. Role of Technology:
   • Technological progress plays a role in improving productivity and sustaining growth.
5. Investment Function:
   • Investment decisions depend on the profitability of capital.

Implications

1. Income Distribution and Growth:
   • An economy with a higher share of income accruing to profits will experience faster growth due to increased savings and investment.
2. Savings-Driven Growth:
   • Economic growth is savings-led, with the savings rate influencing the rate of capital accumulation.
3. Policy Insights:
   • Policies that favor profit-led investment may stimulate growth but can also exacerbate income inequality.

Strengths

1. Focus on Distribution:
   • Explains the impact of income distribution on growth.
2. Dynamic Framework:
   • Accounts for interactions between savings, investment, and growth over time.
3. Relevance to Developing Economies:
   • Highlights the importance of profit-driven savings in promoting investment-led growth.

Limitations

1. Exogenous Technological Progress:
   • The model assumes technology improves independently without explaining its drivers.
2. Simplistic Savings Function:
   • Ignores complexities of modern financial systems and savings behavior.
3. Neglect of External Factors:
   • Does not consider trade, government policies, or global economic influences.