Download Steady-State Growth Equilibrium

Steady-State Growth Equilibrium
Throughout this process it looked at each stage as though the United States were in the
steady-state growth equilibrium as predicted by the economic growth model of chapter 4.
The rate of growth of the efficiency of labor in the United States in the post-World War II
period at some 2 percent per year. The capital stock per worker in the post-World War II
period grew at 2 percent per year as well, leaving the capital-output ratio unchanged.
More interesting, in the United States since--and before--World War II it appears as
though all of the benefits of productivity growth have gone to workers in increases in the
real wage, and none of the increases have gone to owners of the capital stock in the form
of an increasing rate of profit on capital. This is exactly what the growth model of chapter
4 would predict if you added to it the marginal productivity theory of distribution.
The marginal productivity theory of distribution is that each factor of production--labor
and capital--receives as the income paid to it its marginal product. Labor is paid wages
and salaries; capital is paid interest and profits. The marginal productivity theory of
distribution holds in a competitive economy--no monopoly or other forms of market
power--where the production function has constant returns to scale, so that doubling
factor stocks of labor and capital doubles output as well.
With the Cobb-Douglas production function, the marginal product of capital is equal to:
MPK 
Yt
Kt


t
Thus the growth model plus the marginal productivity theory of distribution predict that
in the long-run the capital-output ratio will converge to and remain at its steady-state
value  Thus the growth model and the marginal productivity theory of distribution
together predict that the rate of profit will be constant, and thus that all of the gains from
higher productivity will show up as increases in the level of real wages.
Details: Karl Marx and Long-Run Growth
The constancy of the rate of profit and the enormous increase in the wages of
labor during modern economic growth is a striking vindication of Robert Solow's
theory of economic growth in contrast to Karl Marx's theory of economic growth.
Marx was one of the very first to recognize the enormous potential multiplication
of productivity levels opened up by the industrial revolution and modern
economic growth, which had been:
"...the first to show what man’s activity can bring about. It has accomplished
wonders far surpassing Egyptian pyramids, Roman aqueducts, and Gothic
cathedrals; it has conducted expeditions that put in the shade all former Exoduses
of nations and crusades.... created more massive and more colossal productive
forces than have all preceding generations together. The subjection of nature's
forces to man, machinery, the application of chemistry to industry and agriculture,
steam-navigation, the railways, electric telegraphs, the clearing of entire
continents for cultivation, the canalization of rivers, the conjuring of entire
populations out of the ground—what earlier century had even a presentiment that
such productive forces slumbered in the lap of social labor?"
--Source: Karl Marx and Friedrich Engels (1848),
Manifesto of the Communist Party
But Marx's reading of past history, current events, and economic theory made him
doubt that the increases in productivity that modern economic growth promised
would do anything to raise the standard of living of the average worker. Instead,
Marx thought that all the gains would go to swell the incomes and standards of
living of the bosses, the owners of capital, the receivers of rent, profit, and
interest, the class he called the bourgeoisie. (Note that Marx was not, for his time,
clearly stupid; as economic historian George Boyer points out, as strong a liberal
and a believer in progress as John Stuart Mill could in the middle of the
nineteenth century say that is was unlikely that the industrial revolution had as of
yet benefited any worker.)
As Marx wrote in Wage Labor and Capital, he believed that the workings of
modern economic growth embedded in a market (rather than a collectivized
socialist) economy would produce a "forest of uplifted arms demanding work" as
technological progress created large-scale technological unemployment. And this
unemployment would put downward pressure on real wages: over time the "
forest of uplifted arms demanding work becomes ever thicker, while the arms
themselves become ever thinner…" Hence the necessity of socialist revolution to
overthrow the market economy and establish a truly human world with a fair-rather than an appallingly skewed--distribution of income. And Marx was very
optimistic about the prospects of such a revolution: he thought that modern
economic growth would bring ever more impoverished workers together in
situations where they could recognize their common interest in overthrowing a
system that kept wages from rising as productivity rose.
But the "immiserization" of labor did not happen. As large a share of total GDP is paid
out in wages, salaries, and fringe benefits now as a century ago--and total GDP per
worker is much, much greater.