A two-class economy from the multi-sectoral perspective: the controversy between Pasinetti and Meade–Hahn–Samuelson–Modigliani revisited

Abstract

We examine the Pasinettian multi-sectoral two-class model with a microfoundation of a capitalist and a worker. The microfoundation assumed in this study is an infinitely lived agent and an agent whose behaviour follows the overlapping generations model. We consider two combinations of the microfoundation of capitalists and workers: one is that both capitalists and workers act as infinitely lived agents and the other is that capitalists act as infinitely lived agents and workers act as in the overlapping generations model. We exclusively analyse the steady states and focus on the switches of equilibria from the Pasinetti equilibrium to the dual equilibrium and vice versa, together with the paradoxes in capital theory. The relationship between the rates of economic growth and profit obtained in Pasinetti equilibrium is independent of technology and the combination of the microfoundation. The relationship obtained in dual equilibrium is dependent on technology and differs, depending on the combination of microfoundation. A numerical example shows the simultaneous analysis of the switch of equilibria, income distribution, and capital theory paradoxes. The result indicates that it is necessary to reconsider the importance of capital as a bundle of reproducible and heterogeneous commodities to construct an alternative model analysing the distribution of income and capital (wealth), which is unaccountable by the standard neo-classical models with capital as the primary factor of production.