Luigi Pasinetti’s theory of economic growth and distribution is a significant contribution to the field of economics, particularly in understanding the relationship between economic growth, income distribution, and structural change within an economy.

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Pasinetti’s work, often associated with the Cambridge Capital Controversy, provides insights into how the distribution of income affects the pace and pattern of economic growth. Here’s an overview of Pasinetti’s theory:

Two-Class Model:

Pasinetti’s theory is based on a simplified two-class model of the economy, comprising capitalists (owners of capital) and workers (providers of labor). This model focuses on the distribution of income between these two classes and its impact on economic dynamics.

Keynesian Growth:

Pasinetti’s approach is rooted in Keynesian economics, emphasizing the role of effective demand, investment, and capital accumulation in driving economic growth. He highlights the importance of aggregate demand and investment expenditure in determining the level of output and employment in the short to medium term.

Harrodian Growth:

Pasinetti also incorporates elements of Harrodian growth theory, which emphasizes the role of capital accumulation and capacity utilization in determining the long-term rate of economic growth. He explores how changes in the distribution of income affect saving and investment behavior, capital accumulation, and the rate of growth.

Distribution of Income and Growth:

Pasinetti argues that the distribution of income between capitalists and workers influences saving and investment decisions, capital accumulation, and the rate of economic growth. He examines how changes in income distribution affect the functional distribution of income (profits versus wages), savings rates, investment levels, and the rate of profit.
According to Pasinetti, a more equal distribution of income tends to lead to higher consumption by workers, which stimulates aggregate demand, investment, and economic growth. Conversely, a more unequal distribution, with a higher share of income going to capitalists, may lead to lower consumption and investment levels, potentially slowing down economic growth.

Technical Progress and Structural Change:

Pasinetti also explores the role of technical progress and structural change in driving economic growth and income distribution. He examines how changes in technology, productivity, and the composition of output affect the relative shares of income between capital and labor, as well as the distribution of income across different sectors of the economy.

Stability and Instability:

Pasinetti’s theory highlights the potential for both stable and unstable growth paths depending on the distribution of income and saving-investment behavior. A more equal distribution of income may lead to stable growth with high employment and output levels, while an unequal distribution may result in instability, underutilization of resources, and periodic economic crises.

Overall, Pasinetti’s theory of economic growth and distribution provides valuable insights into the complex interactions between income distribution, saving and investment behavior, capital accumulation, and economic growth. His work underscores the importance of considering income distribution dynamics in understanding the macroeconomic performance and long-term sustainability of an economy.