Assessing the practicability of the condition used for dynamic equilibrium in Pasinetti theory of distribution

TL;DR

This paper critically assesses Pasinetti's condition for dynamic equilibrium in distribution theory, revealing its limitations, practical restrictions, and implications for economic growth and savings behavior.

Contribution

It provides a detailed critique of Pasinetti's condition, showing it cannot be universally applied as a dynamic equilibrium and proposing a more nuanced understanding.

Findings

Pasinetti's condition enforces zero savings propensity as wages approach zero.

The condition is valid only under specific wage and income scenarios.

Implementation may lead to impractical constraints on savings and growth.

Abstract

In this note an assessment of the condition \(K_w/K=S_w/S\) is made to interpret its meaning to the Passineti's theory of distribution\cite{pasinetti1962rate}. This condition leads the theory to enforce the result \(s_w\rightarrow0\) as \(P_w\rightarrow 0\), which is the Pasinetti's description about behavior of the workers. We find that the Pasinetti's claim, of long run worker's propensity to save as not influencing the distribution of income between profits and the wage can not be generalized. This claim is found to be valid only when \(W>>P_w\) or \(P_w=0\) with \(W\ne0\). In practice, the Pasinetti's condition imposes a restriction on the actual savings by one of the agents to a lower level compared to its full saving capacity. An implied relationship between the propensities to save by workers and capitalists shows that the Passineti's condition can be practiced only through a contract for a constant value of \(R=s_w/s_c\), to be agreed upon between the workers and the capitalists. It is showed that the Passineti's condition can not be described as a dynamic equilibrium of economic growth. Implementation of this condition (a) may lead to accumulation of unsaved income, (b) reduces growth of capital, (c)is not practicable and (d) is not warranted. We have also presented simple mathematical steps for the derivation of the Pasinetti's final equation compared to those presented in \cite{pasinetti1962rate}