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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.