Abstract
Baranzini and Mirante consider here the basic issues of the second ‘Two-Cambridges controversy’ on income distribution and profit determination. It was sparked by Pasinetti in 1962; and the controversy saw him, Nicky Kaldor, Richard Kahn and Joan Robinson on the Cambridge UK side, and Samuelson, Modigliani, Stiglitz, Meade and even Frank Hahn on the Cambridge US side. This controversy has generated at least 400 papers in scholarly journals, numerous books and a ‘must’ reference in a large number of textbooks. Pasinetti’s paper has about 350 quotations in the Social Science Citation index. This chapter expounds the origins and the implications of the so-called Pasinetti’s Theorem (‘Cambridge equation’), as well as of the Anti-Pasinetti, or Dual, Theorem formulated by Samuelson and Modigliani in 1966.
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Notes
- 1.
One might say that it is not necessarily the most original and groundbreaking contribution of Pasinetti; but some of the most recent literature, especially in connection with Piketty’s (2014) analysis, has positively reassessed the relevance of the Kaldor-Pasinetti theorem of income and wealth distribution.
- 2.
On this point, see Pasinetti (1974a, p. 121).
- 3.
Geoff Harcourt has pointed out to us that ‘RCOM i.e. Robin Matthews is hardly a marginalist’. This may certainly be true, but Hahn’s and Matthews’ long and renowned survey on economic growth published in the Economic Journal in 1964, as well as their 1971 post-scriptum to the theory of economic growth, has a distinct marginalist blend. During his lectures given in Michaelmas Term 1971 at the Oxford Institute of Economics and Statistics, St. Cross Building, Robin Matthews gave indeed a marginal relevance to the post-Keynesian models of income distribution and capital accumulation that had been elaborated in Cambridge few years earlier. In fact, from 1949 to 1965 Matthews was a Cambridge lecturer in economics and fellow of St. John’s College. In 1965, he returned to Oxford to take up the Drummond Chair of Political Economy at All Souls College, before returning to Cambridge in 1975 as Master of Clare College (1975–93) and as Professor of Political Economy (1980–91).
- 4.
Joan V. Robinson wrote to Richard F. Kahn, who was in Geneva at that time, an account of this particular meeting on Wednesday, November 2, 1955. She wrote: ‘We had Nicky at Tuesday. His aim was to get his own theory clear before reading mine. It was quite a good evening, but he was a bit disappointed that he has not got any further. He set out to find a theory of the constant relative shares and after going over Ricardo, Walras etc. (this was quite fun) came down for the Widow’s Cruse theory that given p-to-consume [propensity to consume] out of wages and profits each separately the shares are determined by the rate of investment. But when about 11.15 I asked him how he got the share of investment constant he did not seem to have any views. I fear it will be a long time year before he has ‘figured out’ enough for it to be possible to argue about the fine points. Meanwhile I amuse myself explaining it to the research students’ (Letter from Joan V. Robinson to Richard F. Kahn, October 31, 1955, RKP 13/90/211-7; quoted in King 1998, p. 418).
- 5.
See Mari (2010, pp. 112–3). We provide a passage of Mari’s Ph.D. thesis:
Kaldor presented his Keynesian theory of income distribution at a meeting of the Secret Seminar that took place in Ruth Cohen’s rooms in Newham College on Monday the 31st of October 1955. [Footnote: The Secret Seminar, though it was also known as Tuesday Group, met on Mondays (Marris 1991, p. 203 and Pasinetti 2007, p. 74). Joan V. Robinson wrote to Kahn an account (see footnote 5 above) of this particular meeting on Wednesday, the 2nd of November 1955. Therefore, this seminar should have taken place the previous Monday, the 31st of October 1955.] To reconstruct what happened that evening of autumn of over fifty years ago, we found four accounts of it, those of Joan V. Robinson [1955, see her letter to R. F. Kahn quoted above], Anthony P. Thirlwall (1987) and Robin Marris (1991, 2003). They all, with the exception of Joan Robinson’s letter, rely on human memory, looking back many years. And we have to take into account that human memory can be fallible. At this meeting of the Secret Seminar were certainly present Nicholas Kaldor himself, Joan V. Robinson, Robin L. Marris, Harry G. Johnson and Ruth L. Cohen. Richard F. Kahn, who worked on several occasions for international organisations, was absent because he spent the year 1955 in Geneva as a member of the Research and Planning Division of the United Nations Economic Commission for Europe.
Mari then adds that in those years Robin Marris and Harry Johnson ‘were two of the most interesting exponents of the younger generation of Cambridge economists, both associated with King’s College. At that time, Marris was Assistant director of research, whereas Johnson was Lecturer and taught courses on ‘Money and Banking’ and ‘International Monetary Theory’ for the preliminary examination in economics and on ‘Advanced Theory of International trade’ and ‘Classes on Monetary Theory’ (with Joan Robinson) for the Economics Tripos Part II’. To this we may add that according to Thirlwall (1987, p. 165), quoted by Mari (2010, p. 114), ‘Harry Johnson, then Fellow of King’s, who was a Keynesian at the time, attended the seminar. Johnson saw immediately that if investment determines saving, and the propensity to save out of profits is different from (higher than) the propensity to save out of wages, the investment ratio must be associated with a unique distribution of income between wages and profits. Kaldor wrote up his paper in less than a week and submitted it to the Review of Economic Studies at the end of December [1955]’. This is why in 2003 the first author of this volume wrote to the then still living Robin Marris (1924–2012) asking if the role of himself and Harry Johnson had been crucial for the formulation of Kaldor’s equation. Marris replied in the following way: ‘The answer is yes and no. Date late fifties I think. Nicky produced his Great Rabbit, inverting the Keynesian income-determining theory into a distribution theory, at the SS [Secret Seminar], but said he needed another equation to close it. He didn’t. He was already there. Harry [Johnson] and I sent him notes to that effect and I sent a note on the first-order stability conditions. Nicky phoned me and said he couldn’t quite follow my note. I volunteered to come down to his rooms. But that was no good. He was on his way to a lecture.’
- 6.
In other words, the behaviour of the working class, as it is represented by their propensity to consume and to save, as well by their pattern of accumulation, does not interfere with the distribution of income between profits and wages, or with the determination of the profit rate (as well as the wage rate). In a certain sense, we find again the classical proposition: the capitalist class provides most of the savings held within the system and determines the path of capital accumulation of the whole society; through their behaviour, they heavily influence the distribution of income among factors of production. Of course, the non-entrepreneurial classes may, through their saving, consumption and accumulation behaviour, influence (as it seems logical) the distribution of income among classes and their accumulation of savings path. The decisions relative to investment and growth of the productive system then come to be taken by a sort of ‘entrepreneurial élite’. The case of our modern and post-industrial societies is quite illuminating: public authorities, via their fiscal and monetary policies, try to reach a predetermined ‘required’ rate of growth for the system that will allow them both to check public expenditure and to reach other economic policy goals.
- 7.
The staying at the MIT was arranged by Jim Mirrlees who had been there as visiting professor in the spring of 1976, and Cary Brown, then Chairman of the Department of Economics, kindly gave his consent. James S. Duesenberry, then Chairman of the Department of Economics, sponsored the staying at Harvard.
- 8.
The title of the article was initially suggested to the author by Walter A. Eltis, then Editor of the Oxford Economic Papers and Fellow of Exeter College.
- 9.
This version of the controversy has been confirmed by Paul Samuelson to the first author of this volume in a letter dated March 29, 2004.
- 10.
We exclude the case s w ˃ s c (P/Y) = I/Y for which the economy cannot be in a steady state, which is outside the scope of this type of analysis. In such a case, in post-Keynesian terms, the economic system would be in a situation in which there is a lack of effective demand and therefore continuing unemployment, which is inconsistent with the assumption of full employment that underlies this kind of analysis.
- 11.
As pointed out in Part I, Frank Hahn was most probably invited to join the discussion by Nicky Kaldor, but eventually did not send a paper. With James E. Meade (and to a lesser extent Robin Matthews), he would have been a sort of ‘fifth column’ of Cambridge US working in Cambridge UK.
- 12.
Apart from the already-quoted Meade (1963, 1966a), Hahn (1964), Meade and Hahn (1965) and Samuelson and Modigliani (1966a, b), we find, for instance, in chronological order, Sato (1966), Stiglitz (1967), Britto (1969, 1972, 1973), W. W. Chang (1969), Ferguson (1969, 1972), Ramser (1969, 1972), Uzawa (1969), Furono (1970), Mückl (1970), Balestra and Baranzini (1971), Hahn and Matthews (1971), Vaughan (1971, 1979, 1988), Guha (1972), Hu (1973), Bevan (1974), Folkers (1974a, b), Ng (1974), Campa (1975), Rau (1975), Schlicht (1975), Blattner (1976), Ramanathan (1976), Brems (1979), Woodfield and McDonald (1979, 1981, 1982), Bombach (1981), Domenghino (1982), Kano (1985), Fleck and Domenghino (1987, 1990), Miyazaki (1987a,b, 1988, 1991), Samuelson (1991).
- 13.
Nicholas Kaldor to Mauro Baranzini, February 15, 1982.
- 14.
Ibid.
- 15.
But see also Pasinetti (2000).
- 16.
In a different setting (which includes life-cycle saving and a tax system aiming at drastically reducing the inequality of wealth distribution), Mattauch, Klenert, Stiglitz and Edenhofer (2017), Taylor (2014) and Zamparelli (2015), inspired by Piketty (2014), consider also what they define the ‘Anti-Anti-Pasinetti case’, where workers do disappear from the economic system, since ‘there are more diverse uses and forms of capital and more possibilities to substitute capital for labor (e.g. replacing delivery workers by drones or self-driving trucks)’ as Piketty and Saez (2014) maintain, quoted in Mattauch, Klenert, Stiglitz and Edenhofer (2017, p. 4). The latter scholars (2017, p. 3) set themselves to prove that ‘depending on the value of the elasticity of substitution between capital and labor σ and on the level of the capital tax τ, three cases can occur. Either both classes co-exist (‘Pasinetti-state’), or the capitalists (“Anti-Pasinetti-state”) or the workers (“Anti-Anti-Pasinetti-state”) disappear’. It is, however, a complete different setting of analysis; but it shows how relevant is still Pasinetti’s Theorem after 56 years of its original formulation (1962–2018). On this issue see also Pasinetti (2000).
- 17.
The term ‘differentiated interest rate’ was first formulated by Balestra and Baranzini (1971). Later on, in Trinity Term of 1975, during his tutorials with the first author of this volume, James Mirrlees was puzzled with the term, and suggested that ‘different interest rate’ might do better.
- 18.
We came across Kahn’s contribution by reading the ‘Introduction’ of Panico and Salvadori (1993, p. xv). In fact, they write: ‘Besides, like Kaldor, Kahn recognised the importance of the questions related to the role of the State and of financial markets in the maintenance of steady growth conditions, and claimed that steady growth analysis should assume that the rate of interest is lower than the rate of profit, an assumption that will become crucial in the development of post Keynesian theory.’ Then Panico and Salvadori go on quoting Kahn as follows:
The fact that in a Golden Age capitalists’ expectations are realised in the broad does not exclude the risks involved in the vagaries of technical processes and of consumers’ behaviour. For these reasons, the risk-free rate of interest would even in a Golden Age lie below the rate of profit, with which yields on ordinary shares are more comparable since they involve the same kind of risks as physical investment. (Kahn 1959, p. 150)
Kahn’s article, published (in the Oxford Economic Papers) three years before Pasinetti’s 1962 paper (in The Review of Economic Studies), must have been familiar to the latter. In fact, it was Kahn who was behind the appointment of Pasinetti as a Fellow of King’s College in 1960. But strangely Pasinetti does not refer to the quoted passage of Kahn in his original work, and develops his model, leading to the Cambridge equation, by assuming, as we have already pointed out, that ‘in a long-run equilibrium model, the obvious hypothesis to make is that of a rate of interest equal to the rate of profit’ (Pasinetti 1962, pp. 271–2). Asked explicitly about this episode, Pasinetti replied that at that time he was well aware of Kahn’s article ‘Exercises in the Analysis of Growth’ when he drafted and redrafted his ‘Rate of Profit and Income Distribution in Relation to the Rate of Economic Growth’, but he didn’t recall the above passage when he discussed the relationship between the rate of profit and the rate of interest. Not even Kahn, who read the draft of the article leading to the Cambridge equation, as far as Pasinetti remembers, raised any specific question. Pasinetti recalls, however, that Kahn insisted that the paper (although freshly published in The Review of Economic Studies) should be added as an Appendix to his (Pasinetti’s) Cambridge Ph.D. thesis.
- 19.
See, for instance, Baranzini and Mirante (2016).
- 20.
Panico and Salvadori start their review of the Cambridge post-Keynesian theory on the ‘public sector and international trade’ by writing:
Some other extensions of the Post Keynesian theory of growth and distribution have examined the influence of government activity and international trade. An article published in 1972 by Steedman introduced government activity into a model of growth and distribution which used Pasinetti’s institutional distinction between workers and capitalists. Steedman moved from Meade’s analysis of the ‘Pasinetti’ and ‘dual theorem’ to argue that in the presence of government activity a ‘Pasinetti equilibrium’ is still possible but, in general, an equilibrium in which the capital/output ratio is independent of the methods of production is not. Steedman characterized government activity in terms of fiscal policy interventions, introducing into the analysis different forms of taxation, government consumption and transfer payments to the workers. He assumed that the government budget is always balanced, so that no problem arises related to monetary policy and to the existence of financial assets issued by the government. (Panico and Salvadori 1993, p. xxii)
- 21.
‘It is surprising that the various authors, while trying so many extensions, should have paid so little attention to the role of Government taxation and expenditure, a topic on which Kaldor worked so much in his life’ (Pasinetti 1989a, p. 26).
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Baranzini, M.L., Mirante, A. (2018). Pasinetti on Post-Keynesian Income Distribution and Growth Theory: The Basic Issues. In: Luigi L. Pasinetti: An Intellectual Biography. Palgrave Studies in the History of Economic Thought. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-319-71072-3_6
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