THE MODEL

G.A. Feldman was a Russian economist who wrote an article On the Theory of National Income
Growth which was published in The Planned Economy, the journal of the Soviet State Planning
Commission (GOSPLAN) in 1928. It is a theoretical model which is concerned with long-run
planning.
1
Assumptions
The Feldman model is built around the following assumptions :
1. It assumes constant prices in the economy.
2. Capital is assumed to be the only limiting factor.
3. There are no lags in the growth process.
4. There is a closed economy.
5. There are two sectors in the economythe consumer goods sector and the capital goods
sector.
6. Production is assumed to be independent of consumption,
7. There is no government expenditure except on consumption and investment.
1. The Feldman Model has been translated and interpreted in English by Evcsy D Domar. Essays in the
Theory of Economic Growth (1957). Essay IX. Our analysis is based io Prof. Domars interpretation.
CHAPTER CHAPTER CHAPTER CHAPTER CHAPTER
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49
356 The Economics of Development and Planning
8. There are no bottlenecks in the economy.
9. The supply of labour is unlimited.
Given these assumptions, Feldman based his model on the Marxian division of the total output
of an economy (W) into category 1 and category 2. The former relates to capital goods meant for
both producer goods and consumer goods, while the latter category relates to all consumer
goods including raw materials for them. The production of each category is expressed as the
sum of constant capital (C), variable capital (wages), V, and surplus value S. It can be shown as
W
1
= C
1
+ V
1
+ S
1
+ = + +
= + +
W C V S
W C V S
2 2 2 2
The division of the economy between the two categories is complete, in the sense that no
existing capital can be transferred from one to another. Thus the rate of investment is rigidly
determined by the capital coefficient and the stock of capital in category 1. Similarly, the output
of consumer goods is determined by the stock of capital and the capital coefficient of category
2. Hence the division of total output between consumption and investment at any given moment
depends on the relative productive capacities of the two categories. The division of total
investment (that is, of output of category 1) between the two categories is, however, completely
flexible. Indeed the fraction of total investment allocated to category 1 is the key variable to the
model.
In this two-sector model he demonstrated that if
= the fraction of total investment allocated to category 1;
I = the annual rate of net investment allocated to the respective categories, so that I=I
1
+ I
2
;
t = the time measured in years;
V - the marginal capital coefficient for the whole economy;
V
1
and V
2
= the marginal capital coefficients of the respective categories;
C = the annual rate of output of consumer goods;
Y = the annual net rate of output of the whole economy or national income;
= the average propensity to save;
= the marginal propensity to save;
I
0
, C
0
and Y
0
=the respective initial magnitudes of these variables (when t = 0); the annual rate of
net investment allocated to category 1 is given by I
1
= I. And since only I
1
increases the capacity
of category 1, it is shown by
dl
dt
I
V
I
V
I I
t
= = =
1 1
1

[ ] Q
In time t, total investment will grow at an exponential rate
I = e
/v
t . . . (1)
In other words, total investment will grow at a constant exponential rate of / V
1-
Similarly, the annual rate of net investment allocated to category 2 is given by I
2
= (1)I. And
I
2
being the source of increased capacity in category 2,
dC
dt
I
V V
e I e
v t v t
= =

=
2
2 2
1
1 1
( )
[ ]
/ /

Q
The annual rate of output of consumer goods is given by
The Feldman Model 357
C C
V
V
e
v t
= +
F

0
1
2
1
1
1

( )
/
...(2)
The elements which determine the national income and the growth rate of the economy are
given by
Y = I + C
By substituting the values of I and C in the above equation
Y e C
V
V
e
v t v t
= + +
F

/ /
( )
1 1
0
1
2
1
1

[From (1) and (2)]
Y e C
V
V
e
v t v t
= + + +
F

/ /
( )
1 1
1 1
1
1
0
1
2

= + + +
F

( ) ( )
/ /
e C
V
V
e
v t v t

1 1
1 1
1
1
0
1
2

= + +
F

+ [ ] ( )
/
1
1
1 1
0
1
2
1
C
V
V
e
v t

Assuming I
0
= 1, the equation becomes
Y I C
V
V
e
v t
= + +

0 0
1
2
1
1 1
1

( )
/
or
Y Y
V
V
e
v t
= +

0
1
2
1
1 1
1

( )
/
[ ] QY I C
0 0 0
= +
The fundamental equation shows that C and Y each represent a sum of a constant and an
exponential in t. Their rates of growth will differ from /V
1
. The values of C and Y will.be
greater than the value of I. With the passage of time, the exponential e
/v
1
t
will dominate the
scene and the rates of growth of C and Y will gradually approach /V
1
. But this may take quite
a long time, unless of course it so happens that C
V
V
0
1
2
1
=
( )

in which case the constants
will vanish, and C and Y will grow at the rate of /V
1
from the very beginning.
COMPARISON WITH THE DOMAR MODEL
In the Domar model, the average propensity to save () is equal to the marginal propensity to
save (), i.e., = . But in the Feldman model = . To compare the Domar model with the
Feldman model, it is necessary to rework their results without the assumption that ,
treating as a constant. But since = , has now become a variable. The rate of growth of
investment will now be /v while that of income /v (by disregarding the difference between
and s : s being the reciprocal of v). The expression /v is the ratio of marginal propensity to
358 The Economics of Development and Planning
save to the overall capital coefficient. In Feldmans model, however, we have obtained /V
1
as
the growth rate of investment where is the fraction of investment allocated to category 1 and
V
1
is the capital coefficient of this category only. In the special case when V=V
1
, we obtain = ,
that is Feldmans fraction of investment allocated to category 1 and the marginal propensity to
save become, identical. If V
1
>V
2
, than >. When V
1
= V
2
, Feldmans and Domars are
closely related. But it is merely a reflection of the fact that if a certain fraction of increment in
national income () is to be devoted to investment, a corresponding fraction of investment ()
must be allocated to capital goods industries to make the production of this increment in
investment possible. In other words, in a growing economy some capital is used to make more
capital.
IMPLICATIONS FOR ECONOMIC DEVELOPMENT
The Feldman model has important implications for economic development. Since V
1
= V
2
, the
expressions I, C and in the model are all inverse functions of V
l
and V
2
. Feldman treated the
magnitudes of his capital coefficients as variables for the purpose of economic development. If
the purpose of economic development is maximisation of investment or national income at a
point of time, or of their respective rates of growth, or of integrals overtime, should be set as
high as possible. This is always true for investment and nearly always for income. The only
exception being when V
1
greatly exceeds V
2
and even then for a short period of time. A high
does not imply, however, any reduction in consumption. With capital assets assumed to be
permanent, even = 1 would merely freeze consumption as its original level. If assets were
subject to wear, consumption would be slowly reduced by failure to replace them. Finally, a
transfer of resources from consumption to investment industries would reduce consumption
still further, though the latter possibility is excluded from the Feldman model.
Summing up the Feldman model, Prof. Domar observes: it contains an important element of
truth, a closed economy without well-developed metal, machinery and subsidiary industries
(the complex of the so-called heavy industries) is unable to produce a sizable quantity of capital
goods and thus to invest a high fraction of its income, however, high its potential saving propensity
may be. In Soviet economic thinking the former consideration has been predominant; in our
recent literature the ability to save has been emphasized. This was because he felt that more
could be achieved with greater utilization of capital than from its expansion as happened in
Russia from 1924-25 through 1927-28. He, therefore, favoured a fall in the magnitudes of his
capital coefficients.
But his own analysis of data given in the optimal version of the First Five-Year Plan of Russia
indicated movement and variation in coefficients of specific industries, while the average for
the whole economy remained almost unchanged at 2.4 for every year for the period 1925-26 to
1932-33. However, in the two versions of his own long-run plan, he showed in the first an
almost constant capital coefficient at 2.4 for the period 1926 to 1932 which gradually rose to 3.3
in 1950; and in the second, a sharply declining coefficient to about 2.0 in 1930 which stabilised
at 1.4 over the period 1932-50. The purpose of working out such contrasting versions was to
illustrate the effect of the variation in the size of the capital coefficient on the growth rate of
national income.
Treating the capital coefficient as given, the variable y (the fraction of total investment allocated
to category 1) can be varied as an instrument of planning. Since there is complete intra-category
flexibility can vary between zero and one. But the choice of the optimum size of r will depend
on the objective of economic development.
The Feldman Model 359
But the Feldman model does not determine the magnitude of capital coefficient because no
attempt is made to relate it to any other variables, such as the desirability of the assets, the
length of the construction period, the supply of labour and of other factors like the magnitude,
composition and the rate of growth of investment and the industrial structure.
Moreover, it is difficult to distinguish clearly between consumer goods and capital industries,
when a large number of industries are in the nature of intermediate goods industries which
help produce both consumer goods and capital goods. For instance, metals, coal, transportation,
chemicals, petroleum, power, etc. are some of the industries whose goods and services are used
in both categories of Feldman. Perhaps Feldman could claim that in the Russia of his day,
practically all metals were used in category 1 only. But what would he say about the rest? Nor
would it help to divide an industry (like coal or transportation) between two categories, because
the respective proportions would by their very nature lack stability. Of course, any division of
an economy by industries, or even of output between consumption and investment, is difficult
and arbitrary but it is clear that Feldmans method creates special difficulties.