Classical Economic Theories of Growth and Distribution
Ricardo
Production Function and Diminishing Returns
Ricardo’s production function, like Smith’s, acknowledges diminishing marginal productivity. This arises from the fixed supply and varying quality of land. As cultivation extends to less fertile land due to population growth, the same capital and labor yield smaller returns. The rate of this decline is influenced by the pace of innovation. While industry experiences increasing returns due to technological progress and economies of scale, agriculture’s diminishing returns eventually offset these gains, slowing growth in expanding economies and accelerating decline in regressing ones.
Natural and Human Resources
Ricardo considered land supply fixed. Diminishing marginal productivity affects not only land but also capital and labor as less fertile land is cultivated. The natural wage, similar to Smith’s living wage, is the minimum necessary for worker subsistence. Market wages above this level increase population, while those below discourage it. This natural wage depends on socio-cultural factors and the marginal productivity of land. Wages are determined by market forces of labor supply and demand: higher demand relative to supply increases wages, and vice-versa.
Capital Accumulation
Technological progress influences the rate of diminishing returns. Capital accumulation occurs through increased income or reduced consumption. Factors governing accumulation include the ability and desire to save. Influential elements include zero net surplus, a drop in the rate of gain to the minimum, utility’s dependence on wages, and the impact of increased wages on utility.
Kaldor
Kaldor’s model assumes full employment, with total revenue divided into wages (W) and profits (P). Savings from wages (Sw) and profits (Sp) are proportional. The model functions if the propensity to save from profits exceeds that from wages. If Sw is zero, the profit rate equals investment plus capitalist consumption. If a pricing mechanism exists where demand determines prices and money wages, and if entrepreneurial expectations (En) exceed Sw, income distribution and the profit rate not only exist but also tend to stabilize.
Pasinetti
Pasinetti identified a flaw in Kaldor’s model: individuals save to retain property. The capital stock belongs to those who saved in the past, earning them interest. If workers save, they also receive a portion of total profits. Kaldor’s model, by attributing all profits to capitalists, implies workers’ savings are donated to capitalists. In the long run, workers’ propensity to save affects income distribution between workers and capitalists, but not the overall distribution between profits and wages, nor the profit rate. Long-term profits are distributed proportionally to savings.