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Profit-sharing versus interest-taking in the Kaldor-Pasinetti theory of income and profit distribution

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  • Usamah Uthman

Abstract

This paper reformulates the Kaldor-Pasinetti model of income and profit distribution by introducing the interest rate from the very outset of the model but maintaining other Kaldor-Pasinetti assumptions intact. It is shown that the profit rate and the share of profits in national income are not independent from either the capitalists' or workers' propensity to save. Many contributors to the theory of income and profit distribution have erred in attributing a potentially positive impact of the interest rate upon profits. The interest rate is always and everywhere a tax on functional and personal incomes together. This result explains Schumpeter's observation that 'Interest acts as a tax upon profit.' In an alternative model, workers receive a share of profits instead of fixed contractual interest. It is shown that the profit rate and share are not independent from either propensity to save. Furthermore, the workers' share of profits has a positive impact on the rate and share of profits. This implies that a profit sharing regime could be more conducive to capital accumulation and job creation. It is found that Pasinetti's Cambridge Equation is more akin to a profit sharing regime.

Suggested Citation

  • Usamah Uthman, 2006. "Profit-sharing versus interest-taking in the Kaldor-Pasinetti theory of income and profit distribution," Review of Political Economy, Taylor & Francis Journals, vol. 18(2), pages 209-222.
    • Handle: RePEc:taf:revpoe:v:18:y:2006:i:2:p:209-222
    DOI: 10.1080/09538250600571387
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    References listed on IDEAS

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    1. Baranzini, Mauro, 1991. "A Theory of Wealth Distribution and Accumulation," OUP Catalogue, Oxford University Press, number 9780198233138.
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    6. repec:bla:econom:v:40:y:1973:i:159:p:311-13 is not listed on IDEAS
    7. Paul A. Samuelson & Franco Modigliani, 1966. "The Pasinetti Paradox in Neoclassical and More General Models," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 33(4), pages 269-301.
    8. Pietro Balestra & Mauro Baranzini, 1971. "Some Optimal Aspects In A Two Class Growth Model With A Differentiated Interest Rate," Kyklos, Wiley Blackwell, vol. 24(2), pages 240-256, May.
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