Tag Archives: anthony thirlwall

Anthony Thirlwall On How He Became A Kaldorian

There was a conference last year in honour of Nicholas Kaldor organized by Corvinus University of Budapest.

The papers by the speakers has now been published by Acta Oeconomica in their September issue.

Anthony Thirlwall’s paper Nicholas Kaldor’s Life And Insights Into The Applied Economics Of Growth (Or Why I Became A Kaldorian) is notable. You can access it here if you can’t access the journal.

photo via Alberto Bagnai

Excerpt:

The second paper which struck an intellectual chord was Kaldor’s address to the Scottish Economic Society in 1970 entitled ‘The Case for Regional Policies’ (Kaldor, 1970). Here, at the regional level, he switches focus from the structure of production in a closed economy to the role of exports in an open regional context in which the growth of exports is considered the major component of autonomous demand (to which other components of demand adapt) which sets up a virtuous circle of growth working through the Verdoorn effect – similar in character to Gunnar Myrdal’s theory of circular and cumulative causation in which success breeds success and failure breeds failure (Myrdal, 1957). This is one of his challenges to equilibrium theory that free trade and the free mobility of factors of production will necessarily equalise economic performance across regions or countries.

Anthony Thirlwall’s Lecture At Kaldor Conference

There was a conference in honour of Nicholas Kaldor on 30th September last year at the Cornivus University in Budapest, Hungary 🇭🇺. Kaldor was born in Budapest. Anthony Thirlwall gave the keynote lecture at the conference. The video has been made available now.

click to see the video on YouTube

Noah Smith On Free Trade

In an article The Man Who Made Us See That Trade Isn’t Always Free for Bloomberg View, Noah Smith says this about David Autor:

So, I asked, how should trade policy be changed? Autor’s answers again surprised me. He suggested that the process of admitting China to the World Trade Organization back in 2000 should have been slowed down significantly. That would have given American workers and industries time to prepare for, and adjust to, China’s competitive onslaught.

He told me that the U.S. government should focus attention on manufacturing industries, and even use industrial policy to bolster the sector.

Traditionally, economists have looked down their noses at “manufacturing fetishism,” but Autor says he thinks the sector is underrated.

Of course, heterodox economists have known this for long. As Nicholas Kaldor said in his 1980 articleFoundations And Implications Of Free Trade Theory, written in Unemployment In Western Countries (probably my most favourite quote in this blog):

Owing to increasing returns in processing activities (in manufactures) success breeds further success and failure begets more failure. Another Swedish economist, Gunnar Myrdal called this’the principle of circular and cumulative causation’.

It is as a result of this that free trade in the field of manfactured goods led to the concentration of manufacturing production in certain areas – to a ‘polarization process’ which inhibits the growth of such activities in some areas and concentrates them on others.

Of course Smith saying all this isn’t exactly heresy as economists are known to make mea culpa all the time and then backtrack. Nonetheless, this article is still revealing. Smith also talks of the importance of empirical work. In heterodox literature, there is of course the work of Anthony Thirlwall, John McCombie and others. See Models Of Balance of Payments Constrained Growth: History, Theory And Empirical EvidenceSoukiazis, E., Cerqueira, P. (Eds.).

There’s also evidence from Ricardo Hausmann and César A. Hidalgo of Harvard University. See this Nature article.

John McCombie in the above quoted book, Models of Balance Of Payments Constrained Growth, in his chapter, Criticisms and Defences Of The Balance Of Payments Constrained Growth Model: Some Old, Some New, recognizes the work of Hausmann, Hidalogo, et al. :

Hausmann et al., (2007) have also stressed the importance of the sophistication of a country’s exports for its rate of output growth. They measure the sophistication of a particular export in terms of an index of the weighted per capita income of the countries that export that good, where the weights correspond to the revealed comparative advantage of the countries producing that good (PRODY). Then the average productivity of a country’s export basket is measured using this productivity index together with the relative shares of exports of the country concerned (EXPY). They found that EXPY was a statistically significant explanatory variable of per capita GDP growth in a regression which also included control variables.

These theoretical and empirical works go so much against the economist case for free trade, the most sacred tenet in economics.

The World Balance Of Payments Constraint: Nicholas Kaldor Explaining The Way The World Works

Thirlwall’s Law is counter-intuitive and comes across as shocking. It says that the growth of a nation’s economy is directly proportional to the rate of exports and inversely related to the income elasticity of imports.

The reason it comes as shocking and difficult to believe is that our planet, with all inhabitants and institutions considered resident cannot export (unless there are non-residents such as aliens), but the world still grows.

Now there are several pitfalls in this argument. First, Thirlwall’s law doesn’t fail because the expression for growth rate is indeterminate. Rate of exports is indeterminate and the income elasticity of imports is indeterminate.

So we have

growth = inderminate/indeterminate

Second, the world does not have a central government. So the world as a whole is not comparable to a closed economy with a government.

There is a way in which the world as a whole is balance-of-payments constrained. The argument is by Nicholas Kaldor. In his 1980 article Foundations And Implications Of Free Trade Theory, written in Unemployment In Western Countries – Proceedings Of A Conference Held By The International Economics Association. At Bischenberg, France, Kaldor makes the argument for the world balance-of-payments constraint.

Nicholas Kaldor On Free Trade

Nicholas Kaldor on free trade

In a recent article on the ‘Causes of Growth and Recession in World Trade’,1 T. F. Cripps has demonstrated that a country is not ‘balance of payments constrained’ if its full employment imports, M*, are less that its import capacity M̅ (as determined by its earning from exports). Such a country is free to choose the level of domestic demand which it considers optimal for its own circumstances,2 whereas the other countries from whom M* > M̅, must, under conditions of free trade, reduce their output and employment below the full employment level, and import only what they can afford to finance. He then shows that the sum of imports of the ‘unconstrained’ countries determine the attainable level of production and employment of the ‘constrained’ countries, and the remedy for this situation requires measures that increase the level of ‘full-employment’ imports or else reduce the export share of the ‘unconstrained countries’. The ‘rules of the game’ which would be capable of securing growth and stability in international trade, and of restoring the production of the ‘constrained’ countries to full employment levels, may require discriminatory measure of import control, of the type envisaged in the famous ‘scarce currency clause’ of the Bretton Woods agreement.

In the absence of such measures all countries may suffer a slower rate of growth and a lower level of output and employment, and not only the group of countries whose economic activity is ‘balance-of-payments constrained’. This is because the ‘surplus’ countries’ own exports will be lower with the shrinkage of world trade, and they may not offset this (or not adequately) by domestic reflationary measures so that their imports will also be lower. Provided that the import regulations introduced relate to import propensities (i.e. to the relation of imports to domestic output) and not to the absolute level of imports as such, the very fact that such measures will raise the trade, production and employment of the ‘constrained’ countries will mean that the volume of exports and domestic income of the ‘unconstrained’ countries will also be greater, despite the downward change in their share of world exports.3

Footnotes:

1Cambridge Economic Policy Review (March 1978), pp, 37-43.

2Owing to the widespread view according to which a given increase in effective demand is more ‘inflationary’ in its consequences if brought about by budgetary measure than if it is the result of additional investment or exports (irrespective of any limitations of import capacity) the inequality or potential inequality in its payments balance may cause a surplus country to regard a lower level of domestic demand as ‘optimal’ in the first case than in the second case.

3In other words, if countries whose ‘full employment’ balance of payments shows a surplus because M* < α W (where M* is the level of full employment imports, α is the share of a particular country’s exports of in world trade W) after a reduction of α to α̂ (α̂ < α) through the imposition of discriminatory measures, the country will still be better off if α̂ W* > α W where W* is the volume of world trade generated under full employment conditions.

[boldening mine]

What Kaldor is saying that because of balance of payments constraint of economies, the world as a whole has a slower growth because surplus nations do not expand domestic demand to the level needed. He is also saying that import controls raise imports rather than reduce them (this because of higher national income) and the exporters’ exports will also increase (even though their share is reducing.).

So the world as an built-in deflationary bias in the way it works.

Neochartalism, Balance Of Payments And Mainstream Economics

There have been many critiques of Neochartalism. Almost all of them, simply ignore the most important issue which makes Neochartalism the so-called “Modern Monetary Theory”, a chimera. A delusion.

Bill Mitchell has written a post on his blog about the balance-of-payments constraint, which among other things makes fun of physical appearance of Nicholas Kaldor. In that he correctly recognizes Nicholas Kaldor as the main proponent of this idea. Mitchell rightly represents Kaldor’s views:

In fact, Kaldor thought that exports were the only true ‘exogenous’ source of income growth, given that household consumption and business investment are considered to be ‘endogenously’ driven by fluctuations in (national) income itself.

In the post, Bill Mitchell doesn’t offer any argument as to why the literature behind it is supposedly wrong. He quotes Australia’s example but doesn’t recognize that Australia’s growth rate fits Thirlwall’s law. Had Australia grown much faster, its international indebtedness would grow to a much bigger size than now, which means its growth is limited by the balance of payments constraint.

Instead, Mitchell’s main point is:

While Thirlwall adopted a Keynesian position, the ‘balance of payments constraint’ he defined has underpinned the obsession with export-led growth strategies. It is a case where the IMF and others have co-opted the ‘Keynesian’ literature to impose neo-liberal solutions on nations.

In part, this is because ‘Keynesian’ literature was flawed.

Supposedly, its the Kaldorians who succumb into policies of the IMF because of their confusions! This is quite funny, given that Nicholas Kaldor was quite opposed to free trade which imposes a huge constraint on nation’s fortunes. In fact Kaldor and his colleagues at Cambridge were advocating import controls for Britain, which is obviously not a right-wing solution and was opposed by all.

One of my favourite articles is Foundations And Implications Of Free Trade Theory by Nicholas Kaldor, written in Unemployment In Western Countries – Proceedings Of A Conference Held By The International Economics Association. At Bischenberg, France. 

Nicholas Kaldor On Free Trade

Nicholas Kaldor on free trade

 

Kaldor main point in the essay is a major opposite to the doctrine of free trade. Free trade is a policy of international organizations such as the IMF. So it’s not Nicholas Kaldor and others who are being fooled by the IMF, but Neochartalists themselves who think that if nations simply float their currencies, they get rid of their external constraint.

Here’s Kaldor:

Owing to increasing returns in processing activities (in manufactures) success breeds further success and failure begets more failure. Another Swedish economist, Gunnar Myrdal called this’the principle of circular and cumulative causation’.

It is as a result of this that free trade in the field of manfactured goods led to the concentration of manufacturing production in certain areas – to a ‘polarization process’ which inhibits the growth of such activitiesin some areas and concentrates them on others.

So as you see, there is an opposition to the “consensus” view. But according to Neochartalists, there is no problem with free trade: just expand domestic demand by fiscal policy. Imports are benefits, exports are costs according to them!

The main point of the post is that it is Neochartalists whose views are orthodox, not other Post-Keynesians following the work of Nicholas Kaldor. It’s funny of them to assert the other way. Look at it this way: opposition to free trade requires import controls, tariffs and things such as that. Is that the mainstream view – to put tariffs? However it is funny if you see a Neochartalist arguing against free trade as it would mean an inconsistency. If fiscal policy alone can bring full employment, why oppose free trade?

y = x/π

‘The rate of growth (y) of any developed country in the long run is equal to the growth rate of the volume of its exports (x) divided by its income elasticity of demand for imports (π)’, he [Anthony Thirlwall] explained.

Our eyes were fixed on the blackboard, attempting to digest the meaning and internalize the implications of this tri-legged animal. That job was not easy. For the animal distilled volumes of legendary work in economic development, encapsulating all of them in a small-sized anti-underdevelopment pill. The teaching of Engel’s law, which implies that the demand for primary goods increases less than proportionally to increases in global income; the Harrod foreign trade multiplier which put forward the idea that the pace of industrial growth could be explained by the principle of the foreign trade multiplier; the Marshall– Lerner condition which implies that a currency devaluation would not be effective unless the devaluation-induced deterioration in the terms of trade is more than offset by the devaluation-induced reduction in the volume of imports and increase in volume of exports; the Hicks super-multiplier which implies that the growth rate of a country is fundamentally governed by the growth rate of its exports; the Prebisch–Singer hypothesis which asserts that a country’s international trade that depends on primary goods may inhibit rather than promote economic growth; the Verdoorn–Kaldorian notion that faster growth of output causes a faster growth of productivity, implying the existence of substantial economies of scale; Kaldor’s paradox which observed that countries that experienced the greatest decline in their price competitiveness in the post-war period experienced paradoxically an increase in their market share and not a decrease; the literature on export-led growth which asserts that export growth creates a virtuous circle through the link between output growth and productivity growth – all of these doctrines were somehow put into play and epitomized within this small-sized capsule. Not only that but the capsule was sealed by the novel and powerful ingredient of the balance-of-payments constraint: ‘in the long run, no country can grow faster than that rate consistent with balance of payments equilibrium on current account unless it can finance ever-growing deficits which, in general, it cannot’.

– Mohammed Nureldin Hussain, The Implications Of Thirlwall’s Law For Africa’s Development Challenges in Growth And Economic Development Essays In Honour Of A.P. Thirlwall, 2006 

Kaldor’s Footnote And Kaldor On Sraffa

The world is more Kaldorian than Keynesian. After the crisis, Keynes became popular again but his Cambridge descendent Nicholas Kaldor is hardly remembered by the economics community. Even his biographers have some memory loss of him.

😉

Anthony Thirlwall and John E. King are biographers of Nicholas Kaldor. Superb books.

There’s a chapter Talking About Kaldor: An Interview With John King in Anthony Thirlwall’s book Essays on Keynesian and Kaldorian Economics. There’s an interesting discussion on money endogeneity (Google Books link):

J.E.K.  … I wonder if Kaldor would have gone as far as Moore in arguing that the money supply curve is horizontal.

Anthony Thirlwall replies saying he would have argued that the supply of money is elastic with respect to demand, instead of quoting him. Here’s Nicholas Kaldor stating explicitly in a footnote in Keynesian Economics After Fifty Years, in the book, Keynes And The Modern World, ed. George David Norman Worswick and James Anthony Trevithick, Cambridge University Press, 1983, on page 36:

Diagrammatically, the difference in the presentation of the supply and demand for money, is that in the original version, (with M exogenous) the supply of money is represented by a vertical line, in the new version by a horizontal line, or a set of horizontal lines, representing different stances of monetary policy

[italics: mine]

Anthony Thirlwall is one of the commenter in the book chapter. The book is proceedings of a conference on Keynes.

But that’s not enough. Turn to page 363 of the book.

A.P.T.  He had a very high regard for Sraffa but he never wrote on this topic.

J.E.K.  Not something that would really have concerned him very much? Too abstract and too removed from reality?

A.P.T.  Probably, yes. It is quite interesting that Sraffa was his closest friend, both personal and intellectual, and they used to meet very regularly – almost every day when Sraffa was alive. But there’s no evidence that they ever discussed Production of Commodities by Means of Commodities.

J.E.K.  That’s amazing. There’s certainly no evidence that he ever wrote anything on those questions.

A.P.T. There’s no evidence that he wrote anything, or that indeed he really understood Sraffa. Well, he had the broad thrust, but I don’t know that he ever read it carefully, or understood the implications.

In Volume 9, of Kaldor’s Collected Works, there are two memoirs. One of Piero Sraffa and the other on John von Neumann.

Kaldor-On-Sraffa

Nicholas Kaldor on Piero Sraffa

Interestingly the editors and F. Targetti (another biographer) and A.P. Thirlwall!

I guess if you know a person so closely – like the biographers do, of Kaldor- you tend to forget a few things about them.

Krugman’s 45 Degree Rule

Recently, Paul Krugman reminded us of his “45 degree rule” on his blog Conscience Of A Liberal. This was a reference to his paper in 1989 which was a rediscovery of Thirlwall’s Law from 1979 [1] which states that the long run rate of growth of any country is constrained by the rate of growth of exports divided by the income elasticity of imports. Krugman rediscovered this law but interpreted the causality in the opposite way. This shouldn’t be surprising because in neoclassical economics, growth is explained by a production function and it is then difficult to interpret the causality in Thirlwall’s way. In an essay [2], John McCombie explains:

Krugman (1989) rediscovered Thirlwall’s Law, which he termed the 45-degree rule, as empirically ε/π = y/z or, when the (log) of the former is regressed on the (log) of the latter, the coefficient is unity or the slope of the line is 45-degrees. (Krugman provides some empirical evidence providing further confirmation of this empirical relationship). Like McCombie and Thirlwall (1994), he rules out sustained changes in the real exchange rate as a factor in bringing the balance of payments into equilibrium. Consequently, it is necessary to explain why the rule holds. The Keynesian explanation is that it is growth rates that adjust to maintain the balance of payments in equilibrium, but this is rejected by Krugman on “a priori grounds” that it is “fundamentally implausible.” He continues that “we all know that differences in growth rates among countries are primarily determined in the growth rates of total factor productivity, not differences in the rate of growth of employment; it is hard to see what channel links balance of payments due to unfavourable income elasticities to total factor productivity growth” (Krugman, 1989, p. 1037).

The Krugman article is instructive because it goes to the heart of the question about the direction of causation. Drawing on new trade theory, monopolistic competition, and the importance of increasing returns, he argues that faster growth leads to increased specialisation and the production of new goods for sale in overseas markets. Thus high “export elasticities of demand” are due to a dynamic supply side and rapid growth, rather than vice versa.

[x is the growth of the volume of exports, π is the domestic income elasticity of demand for imports, ε is the world income elasticity of demand for exports, and z is the growth of world income]

For a more forceful defence of Thirlwall’s Law, see McCombie’s paper.

In my opinion, the causality runs in both directions. However I am more sympathetic to Thirlwall and McCombie. And because the causality runs in both directions, there is still a balance-of-payments constraint. Complex economic dynamics still benefit richer nations and immiserate others. To an extent, this is already present in Kaldorian models. Growth brings in rise in productivity and this effects price competitiveness and hence beneficial to balance of payments generally. However, I also consider the income elasticity as being affected by growth at home and abroad.

References

  1. Thirlwall, A. P. (1979) ‘The Balance of Payments Constraint as an Explanation of International Growth Rate Differences’, Banca Nazionale del Lavoro Quarterly Review, March.
  2. McCombie, J.S.L. (2011) ‘Criticisms and defences of the balance-of-payments constrained growth model: some old, some new ‘, PSL Quarterly Review, vol. 64 n. 259 (2011), 353-392. (Can be previewed on Google Books here)

Kaldor’s Vision Of The Growth And Development Process According To Thirlwall

Anthony Thirlwall’s new book Essays on Keynesian and Kaldorian Economics is out. It has a nice chapter (chapter 11) originally written by Thirlwall himself from 1991 titled Kaldor’s Vision Of The Growth And Development Process. The description from introduction (pdf from Palgrave’s website) is a good summary:

Essay 11 outlines Kaldor’s vision of the growth and development process – a topic that concerned him for most of his academic life after the Second World War. The Essay covers his growth laws; his export-led growth model incorporating the notion of ‘circular and cumulative causation’, and his two-sector model of the interrelationship between the agricultural (primary product) and industrial sectors of the world economy. Central to Kaldor’s vision was the distinction to be made between increasing returns activities on the one hand (manufacturing industry) and diminishing returns activities on the other (land-based activities such as agriculture and mining). This distinction lies at the heart of his three growth laws that (i) manufacturing is the engine of growth because of (ii) static and dynamic returns to scale in industry (also known as Verdoorn’s law), and (iii) increases in productivity outside of manufacturing as resources are drawn from diminishing returns activities. The question, of course, is what determines industrial growth in the first place. Kaldor’s answer was that it is the prosperity and growth of the agricultural sector in the early stages of development, and then export growth in the later stages. In an open economy, exports are the only true [exogenous] component of aggregate demand. Consumption and investment are largely endogenous.

This view of the role of exports is the basis of his ‘regional’ export-led growth model with cumulative features which has four structural equations: (i) output growth as a function of export growth; (ii) export growth as a function of changing competitiveness and income growth outside the region; (iii) competitiveness as a function of productivity growth, and (iv) productivity growth as a function of output growth (Verdoorn’s Law). Depending on the parameters of the model, regional growth rates may diverge or converge (see Essay 12). It is also possible to introduce a balance of payments constraint into the model which, if relative prices (or real exchange rates) don’t change in the long run, leads to the result that growth will approximate to the rate of growth of exports relative to the income elasticity of demand for imports, which is the dynamic analogue of the static Harrod foreign trade multiplier, which Kaldor argued was a more important multiplier than the Keynesian closed economy multiplier for understanding the pace and rhythm of growth in open economies.

In a closed economy, however, growth by definition cannot be determined by exports. The world as a whole is a closed economy, and Kaldor lectured in Cambridge for many years on a two-sector model of world growth in which the growth of the industrial sector of the world economy is fundamentally determined by the rate of land-saving innovations in agriculture as an offset to diminishing returns in that sector. The model shows that if growth is to be maximised, there must be an equilibrium terms of trade between the two sectors, otherwise growth will be demand constrained if agricultural prices are ‘too low’, or supply constrained if agricultural prices are ‘too high’. Kaldor himself never brought the model to fruition in published form, but attempts have been made to formalise it by Targetti (1985) and myself (see Essay 13).

Google Books preview below.

Anthony Thirlwall’s New Book On Keynesian And Kaldorian Economics

During the global economic and financial crisis Keynes became popular again but Nicholas Kaldor’s ideas and the mention of the man himself didn’t take off as much. It’s unfortunate, as Kaldor played a huge role in the development of Keynesian economics itself. Kaldor’s own ideas are a subject of its own. Anthony Thirlwall is releasing a new collection of essays on Keynes and Kaldor in a book titled Essays on Keynesian and Kaldorian Economics to be published by Palgrave Macmillan.

Book website here

Anthony Thirlwall - Essays On Keynesian And Kaldorian Economics

Description:

This volume of essays contains sixteen papers that the author has written over the last forty years on various aspects of the life and work of John Maynard Keynes and Nicholas Kaldor. The essays cover both theoretical and applied topics, and highlight the continued relevance of Keynesian and Kaldorian ideas for understanding the functioning of capitalist economies. Kaldor was one of the first economists to be converted to the Keynesian revolution in the mid-1930s, and he never lost the faith, so there was a strong affinity between them. But while Keynes revolutionised employment theory, Kaldor’s major concern in the latter part of his life was with the theory and applied economics of economic growth. The papers on Keynes mainly relate to defending Keynesian economics against his classical and monetarist critics and showing how Keynesian ideas relate to developing economies and the functioning of the world economy in general. The papers on Kaldor give a sketch of his life and role as policy advisor, and outline his vision of the growth and development process within regions; within countries, and also the world economy as a whole.

Table of Contents

Introduction

  1. Keynesian Economics after Fifty Years; N. Kaldor
  2. A ‘Second Edition’ of Keynes’ General Theory (writing as John Maynard Keynes)
  3. Keynesian Employment Theory is Not Defunct
  4. The Renaissance of Keynesian Economics
  5. The Relevance of Keynes Today with Particular Reference to Unemployment in Rich and Poor Countries
  6. Keynes, Economic Development and the Developing Countries
  7. Keynes and Economic Development
  8. A Keynesian View of the Current Financial and Economic Crisis in the World Economy (an interview with John King)
  9. Nicholas Kaldor: A Biography
  10. Kaldor as a Policy Adviser
  11. Kaldor’s Vision of the Growth and Development Process
  12. A Model of Regional Growth Rate Differences on Kaldorian Lines (with R. Dixon)
  13. A General Model of Growth and Development on Kaldorian Lines
  14. A Plain Man’s Guide to Kaldor’s Growth Laws
  15. Testing Kaldor’s Growth Laws across the Countries of Africa (with Heather Wells)
  16. Talking about Kaldor (an interview with John King)

Anthony-P-ThirlwallAnthony Thirlwall