Limits to Exhilarationism: Revisiting Kaldorian Dynamics

Abstract

It has been argued, in the context of modern economies that there are many margins of compensation that could serve to mask the demand side impact of the deteriorated income distribution. Investment Exhilarationism was seen as one such mechanism that served to mask the impact of deteriorating income distribution. In this paper we revisit the problem of interrelation between the distribution of income and the level of income in an increasing returns regime to understand the limits of an exhilarationist regime from a theoretical point of view. We propose a model where distributive shares are endogenously determined by assuming labour productivity to vary with the level of output/capacity utilization due to economies of scale. With an additional assumption of investment being determined by profit share we model a nice feedback loop between the level of output and distribution of income, i.e. as output increases, labour productivity will increase to bring about a rise in profit share, which, in turn, will increase the level of output through a higher level of investment. Is there a limit to such a cumulative process? Here we address this question purely from a functional distribution point of view without relying on exogenous mechanisms such as `ceiling/floor¿ capacity utilization ratios.