CHAPTER

36
Pasinetti The Pasinetti Model of Prof ofit Growth Profit and Growth
THE MODEL
The Pasinetti model1 is an extension of the Kaldor model of distribution by incorporating workers profits as returns on their savings. It shows that there exists a distribution of income between profits and wages which keeps the system in a long-run equilibrium. Assumptions. The Pasinetti model is based on the following assumptions: 1. There is full employment. 2. National income (Y) consists of wages (W) and profits (P). 3. Wages are distributed to workers in proportion to the amount of labour they contribute and profits are distributed to capitalists in proportion to the amount of capital they own. 4. Each class saves a fixed proportion of its income and the capitalists propensity to save (sc) is greater than that of workers (sw). Given these assumptions, the national income identity is YW+P and P PC + PW Y = W+PW + PC
1. L.L. Pasinetti, Rate of Profit and Income Distribution in Relation to the Rate of Economic Growth, Review of Economic Studies, Vol. 29 (4), 1962, pp. 267-79

where, PC and PW relate to profits accruing to the capitalists and the workers respectively. The savings function of the workers and the capitalists are defined as SW = sw (W+PW ) and SC = scPC , so that S = sw(W+PW ) + scPC . We know that I=S or I = sw(W + PW ) + scPC But Y=W + PW + PC or W + Pw= YPC and I = sw(YPC ) + scPC (Q W+PW = Y PC ) = swYswPc+scPc = swY + (sc-sw)PC ...(1) Whence the ratio of investment to national income

or

P I = sw + c (sc sw) Y Y Pc I (sc sw) = sw Y Y Pc I sw 1 = Y sc sw Y sc sw

....(2)

or

I swY + (sc sw) Pc = This expression explains the distribution of income between capitalists and workers. Y Y Similarly, the ratio of investment to total capital can be,derived from (1). I swY + (sc sw) Pc = K K
or

or

I Y P = sw + c (sc sw) K K Y

or

Pc I Y (sc sw) = sw K K K Pc I sw Y 1 = K sc sw K sc sw K
....(3)

or

The expressions (2) and (3) refer to that part of profits which accrue to the capitalists alone. To show the distribution of income between profits and wages, we must add the share of workers profits into income PW /Y to both sides of equation (2) as this equation simply represents the share of capitalists profits in national income. Thus the distribution of income between profits and wages can be expressed as

P Pc Pw = + Y Y Y

....(4)

Similarly, equation (3) simply represents the ratio of capitalists profits to total capital and not

264

The Economics of Development and Planning

the ratio of total profits to total capital (rate of profit). So to find out the rate of profit, we must add the share of workers profit into capital PW/K to both sides of equation (3), so that ....(5) Pasinetti shows that there is a fundamental relation between profits and savings. In the long run, profits are distributed in proportion to the savings contributed by each category. In other words, profits are proportional to savings, and they are the same for both the workers and the capitalists. Thus

Pw Pc = Sw Sc

....(6)

This is based on institutional principle that profits are distributed in proportion to ownership of capital. To determine the actual value of the ratio of profits to savings for the whole system, substitute the saving functions into equation (6) so that

Pw P = c sw(W + Pw ) scPc

(S = sw (W + Pw ) and Sc = scPc

or sw(W+PW ) = scPC . . . (7) This equation can be interpreted by saying that, in the long run, when workers save, they receive an amount of profits (PW) which makes their total savings exactly equal to the amount that the capitalists would have saved out of workers profits (PW) if these profits remained to them. In other words, the workers will always receive an amount of profits proportional to their savings, whatever the rate of profit may be. Thus the rate of profit is indeterminate on the part of workers. On the other hand, there is a straight relation between savings and profits in the case of capitalists because their savings come out of profits. Thus for any given sc, there is only one proportionality relation between profits and savings which makes the ratio PC/scPC equal to PC /Sc. This proportionality relation can be nothing but sc, which will therefore determine the ratio of profits to savings for all the saving groups, and consequently also the income distribution between profits and wages for the whole system. To maintain full employment overtime, that amount of investment must be undertaken which is uniquely exogenously determined by technical progress and population growth. In this case, there is only one equilibrium rate of profit which is determined by the natural rate of growth divided by the capitalists propensity to save, independently of anything else in the model. This is expressed as

P n = K sc
It is only this rate of profit (P/K) that keeps the system on the dynamic path of full employment. The only condition for stability in such a system, where employment investments are
2. In terms of the Kaldor model, the only requirement for stability is

d(I / Y ) d (P / Y )

<

d (S / Y ) d (P / Y )
where

d(I / Y ) d (P / Y )
= O and

d (S / Y ) d (P / Y )
> O.

But this is only a short run condition.

The Pasinetti Model of Profit and Growth

265

carried out and prices are flexible with respect to wages, is sc >O.2 Pasinetti has given two implications of the model. First, in the long run, the workers propensity to save (sw) does not influence the rate of profit such that P/K=1/sc.I/K. Further, sw does not influence the distribution of income between profits and wages such that P/Y = 1/sc.I/Y. All this implies that the rate of profit and income distribution between profits and wages are determined independently of sw. Second, the proportion that profits bear to savings in the whole system is given by the capitalists propensity to save sc, and the decisions to save of workers do not count in this respect. The share of workers in total profits is predetermined and that cannot influence it at all. COMPARISON WITH THE KALDOR MODEL Pasinetti has extended the Kaldor model of distribution by incorporating workers profits as return on their savings in his model of profit and growth. By assuming workers savings as zero, the Kaldor model fails to distinguish between the two concepts of distribution of income: distribution of income between profits and wages, and distribution of income between capitalists and workers. When sw=O,the two concepts coincide. The Kaldor model is weak in that it attributes all profits to the capitalists which implies that workers savings are totally transferred as a gift to the capitalists. This is unrealistic because when an individual saves a part of his income, he must be allowed to own it, otherwise he would not save at all. In fact, the total stock of capital is owned by both the capitalists and the workers who save in the past. Since the workers save and own a part of the stock of capital like the capitalists, they also receive a share of the total profits. Thus total profits accrue both to the capitalists and the workers. This important aspect is missing in Kaldors model which Pasinetti tries to fill in his model. He thus clears the confusion between the two different concepts of distribution of income, and clearly distinguishes between distribution of income between profits and wages, and between capitalists and workers. Pasinetti establishes, a direct and simple relation between the rate of profit and the rate of growth based on the capitalists propensity to save. This is true for steady state even when workers save. This is more realistic than Kaldors assumption that workers propensity to save is zero. Further, he postulates that the saving propensities differ by class rather than by type of income and that the classes are stable. His steady state requires the distribution of ownership of capital between classes to be constant. And the only condition for stability in long-run equilibrium is that sc >O, whereas the stability conditions, sw < I/Y and sc > I/Y, of the Kaldor model are short-run conditions. Thus on all counts, the Pasinetti model is superior and more realistic than the Kaldor model.