A Model of the Trade Cycle Author(s): Nicholas Kaldor Source: The ...

82 TRE ECONOMIC JOURNAL [MARCHdrastically, and below a certain level of incorne they will benegative. When incornes are unusually high, people are likely tosave not only a higher amount, but also a larger proportion oftheir income.! These tendencies, for society as a whole, arelikely to be reinforced by the fact that when activity is at a lowlevel, an increasing proportion of workers' earnings are paid outof capitaI funds (in the form of unemployment benefits); whilewhen activity is at a high level, prices will tend to rise relativelyto wages, there will be a shift in the distribution of incomes infavour of profits, and thus an increase in the aggregate propensityto save.Rence ~~ will deviate from its normal level in themanner suggested in Fig. 4.yoFIG. 4.In what follows it· will be assumed that the two functionsconform to these criteria. But, as the reader will note, ouranalysis would remain valid even if on:ly one oj the two functionsbehaved in the manner suggested, while the other was lineare5. Given these assumptio11S about the behaviour ofthe savingsand investment functions, and assuming further that the normalvalue of ~~ is greater than the normal value of ~~, the situationwill be one of multiple equilibria, as shown in Fig. 5. A and B(in the diagram) are both stable positions, for at points belowA or B, 1>8, hence activity tends to expand; above it 8 >1, hellceactivity tends to contract. ° is an unstable position in bothdirections, and hence not a possible position of equilibrium. Thesignificance of point °is simply that if activity happens to beabove 0, there will be a process of expansion which will come to ahalt at B; if it happens to be below 0, there will be a process ofcontraction until equilibrium is reached at A. .1 Thus there is something like a " customary standard of Iiving" based onthe " normallevel " of incomes, and, corresponding to it, there is a certain normalrate of savings. If incomes are much beIow it, individuais will attempt to maintaintheir standard of living by consuming capitaI; if incomes are much above it,they will tend to save a disproportionate amount.x