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Home Theories of Economic Growth Kaldor - Mirrlees Model of Economic Growth

 

Kaldor - Mirrlees Model of Economic Growth:

 

Kaldor presented his first model of economic growth in 1957 and second model in 1962. But here we will present that model which he presented in 1962 along with collaboration of Mirrlees.

 

Features of the Model:

 

The salient features of Kaldor - Mirrlees Model of Economic Growth are as:

 

(i) By making the saving rate flexible a constant growth rate of the economy can be attained.

 

(ii) Contrary to neo-classical economists, the capital - output ratio remains fixed and constant.

 

(iii) This model rejects the production function approach. Rather, it introduced the function of technical progress.

 

(iv) In neo-classical model the investment function has not been introduced. But this model also presents the investment function which depends upon that investment which is linked with one laborer.

 

(v) In this model the assumptions of full employment and perfect competition have been dropped.

 

This model starts with this hypothesis that national income (Y) is the sum of wages (w) and profits (p). It is as:

 

Y = W + P

 

The total savings (S) consist of savings made out of wages (Sw) and the savings made out of profits (Sp). It is as:

 

S = Sw + Sp

 

Where Sw = SwW and Sp = spP, then putting them in the above equation:

 

S = swW + SpP

 

Where sw = marginal propensity to save of wage earners, and sp = marginal propensity to save of profit earners. The sw and sp are assumed constant. It means that their average and marginal values will remain the same. Thus, as:

 

Y = W + P or Y - P = W and S = swW + spP

 

Then putting the value of W:

 

S = sw (Y - P) + spP

 

S = swY - swP + spP

 

S = spP - swP + swY

 

S = (sp - sw) P + swY

 

As at Equilibrium S = I, then putting the value of S:

 

I = S

 

I = (sp - sw)P + swY

 

Dividing both sides by Y:

 

  I   = (sp - sw) (P) + swY

                                                                Y          Y                Y

 

  I   - swY = (sp - sw)   (P)

                                                                Y      Y                      Y

 

 I   - sw = (sp - sw)   (P)

                                                                 Y                            Y

Solving for P/Y:

 

 

The last equation shows the ratio between profits (P) and the level of income (Y). The stability of the model requires that:

 

0 sw sp 1

 

The flexibility of savings in Kaldor-Mirrlees model can be obtained with the help of different propensities with respect to wages and profit. If we are having the values of sp and sw (which can be obtained with the help of income distribution in a country) we can tell that what are the determinants of 1/Y and P/Y. If we assume that  sw = 0, then the last equation will assume following shape:

 

 P =     1     .    I    -       0      

                                                             Y     sp - 0      Y       sp - 0

 

P =     1     .  I    

                                                                      Y        sp      Y      

 

If capital-output ratio (K/Y) is considered constant, (as it was assumed in H - D model), then the above equation is multiplied by (Y/K).

 

  P  (Y/K) =     1     .   I   (Y/K) 

                                                              Y                 sp       Y

 

P/K = (1/sp) . (I/K)  

 

If P/K is shown by V which represents profit on capital, and I/K is shown by J which represents capital accumulation the above equation will be as:

 

V= 1/sp . (J) or (sp) (V) = J

 

If sp = 1, then V = J

 

If the natural growth rate is shown by 'n' and it is assumed as given, then the above equation will be as:

 

V = J = n

 

The equation shows that the growth rate is associated with the rate of profits, and it is determined by propensity to profit.

 

Criticism:

 

(i) According to Prof. Pasinetti there exists a logical defect in Kaldor's arguments as he permits the laboring class to make the savings, but these savings are neither ploughed in capital accumulation, nor they generate income. He further says that if any country lacking the investing class and there are no profits, then how the growth rate will be determined.

 

(ii) Kaldor assumes that the saving rate remains fixed. But assuming so he ignores the effects of 'Life-Cycle' on savings and work.

 

(iii) Kaldor model fails to describe that behavioral mechanism which could tell that distribution of income will be such like that the steady growth is automatically attained.

 

Relevant Articles:

 

Adam Smith's Model of Economic Growth
Ricardo's Model of Economic Growth
Classical Model of Economic Growth
Marxian Model of Economic Growth
J.E. Meade's Model of Economic Growth
Schumpeter Model of Economic Growth
Secular Stagnation - Hansen's Thesis
Kaldor - Mirrlees Model of Economic Growth
Golden Rule of Economic Growth
Neo-Classical Theory of Economic Growth
 

Principles and Theories of Micro Economics
Definition and Explanation of Economics
Theory of Consumer Behavior
Indifference Curve Analysis of Consumer's Equilibrium
Theory of Demand
Theory of Supply
Elasticity of Demand
Elasticity of Supply
Equilibrium of Demand and Supply
Economic Resources
Scale of Production
Laws of Returns
Production Function
Cost Analysis
Various Revenue Concepts
Price and output Determination Under Perfect Competition
Price and Output Determination Under Monopoly
Price and Output Determination Under Monopolistic/Imperfect Competition
Theory of Factor Pricing OR Theory of Distribution
Rent
Wages
Interest
Profits
Principles and Theories of Macro Economics
National Income and Its Measurement
Principles of Public Finance
Public Revenue and Taxation
National Debt and Income Determination
Fiscal Policy
Determinants of the Level of National Income and Employment
Determination of National Income
Theories of Employment
Theory of International Trade
Balance of Payments
Commercial Policy
Development and Planning Economics
Introduction to Development Economics
Features of Developing Countries
Economic Development and Economic Growth
Theories of Under Development
Theories of Economic Growth
Agriculture and Economic Development
Monetary Economics and Public Finance

History of Money
 

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