Tag Archives: nicholas kaldor

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


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.


A New Way To Learn Economics?

John Cassidy has a nice article titled A New Way To Learn Economics for The New Yorker on a new online introductory economics curriculum. produced by a lot of collaborators.

I went to the website which has the full book. Although there seems to be some progress, I have a strong reservation against it.

The chapter titled “Banks, money and the credit market” has a much better description on it than textbooks widely used, such as the ones by Paul Samuelson, Gregory Mankiw or Paul Krugman. On a cursory look, I didn’t find anything about the “money multiplier” model. Instead, the book says that central banks set short term interest rates and this has an effect on aggregate demand. If I missed something and if you find something orthodox, please let me know.

The chapter on fiscal policy looks like being written by fiscal hawks. There is a description of the government expenditure multiplier, which is not much different from other textbooks. There’s no mention of the more complicated nature of this process because of interactions between stocks and flows. For example, in stock-flow coherent (SFC) models, this one-step multiplier has a limited role.

Now, fiscal policy has strong effects and the book hardly does justice to any of this. It reads more like a defense of the establishment wisdom.

But it is in the area of international trade and globalization under the current rules of the game that the book is the most disappointing. The authors do tell students that it can produce “losers” but the problem of such an approach is that it doesn’t appreciate the fact that it leads to polarisation and divergences in fortunes of nations, instead of individuals. The assumption and conclusion (the same thing in most of economics!) is that if losers are compensated, fortunes of nations can converge.

This by Nicholas Kaldor, written in 1980, is change.

Not the new book, The Economy. 

As Morris Copeland emphasised, the root problem of economics is the total confusion of anyone and everyone on what money is. And his approach shows us that it’s not complicated. One just needs to study flow-of-funds or social accounting. There is hardly any emphasis of this in the book. Till then, students will remain confused and ignorant about the way the world works.

The Upshot NYT On The Kaldor-Verdoorn Law

Neil Irwin writing for The Upshot seems open to the idea that aggregate demand affects aggregate supply, quoting the work of J.W. Mason:

… But what if this is the wrong way of thinking about it? What if productivity growth is not so much an external force that proceeds in random fits and starts, but is rather deeply intertwined with the overall state of the economy and labor market?

It’s a chicken or egg problem: Does low productivity cause slow growth, or does slow growth cause low productivity?

Discussion of such matters was also welcomed by Narayana Kocherlakota on Twitter.

Recently, Simon Wren-Lewis also wrote recently in a post on his blog, Mainly Macro, titled, Why Recessions Followed By Austerity Can Have A Persistent Impact.

In standard economic theory, productivity rises explains the rise and fall of nations, although this shouldn’t really be happening because of the convergence promised by advocates of free trade!

In Kaldorian models, aka the principle of circular and cumulative causation, nations with higher competitiveness will see a large rise in production at the expense of other nations. Higher production leads to higher productivity, so the observed relation between success and productivity has a different story! Also, competitiveness has two aspects: price and non-price. Higher productivity does improve price-competitiveness. Further, I believe, competitiveness itself isn’t something fixed. Initial success feeds into higher competitiveness and the reverse for failure. So there’s a complicated story of causality.

John Maynard Keynes On Surplus Nations’ Obligations

Recently, The Economist‘s cover story declared that the government of Germany ought to expand domestic demand and its refusal to do so is a threat to the world economy. It also said, “Germany’s surpluses are themselves a threat to free trade’s legitimacy.”

Post-Keynesians have long recognized this problem with the world economy. Keynes himself said in 1941:

It is characteristic of a freely convertible international standard that it throws the main burden of adjustment on the country which is in the debtor position on the international balance of payments. … The contribution in terms of the resulting social strains which the debtor country has to make to the restoration of equilibrium by changing its prices and wages is altogether out of proportion to the contribution asked of its creditors. Nor is this all. … The social strain of an adjustment downwards is much greater than that of an adjustment upwards. … The process of adjustment is compulsory for the debtor and voluntary for the creditor. If the creditor does not choose to make, or allow, his share of the adjustment, he suffers no inconvenience. For whilst a country’s reserve cannotfall below zero, there is no ceiling which sets an upper limit. The same is true if international loans are to be the means of adjustment. The debtor must borrow; the creditor is under no such compulsion

– in Collected Works, Vol. XXV, pages 27-28.

Few things:

Keynes is building a narrative to argue that creditor nations have responsibilities, although at that time (and also at present), they have no obligation. This was the motivation for his plan for Bretton-Woods, where he proposed to impose fines on creditor/surplus nations and set out some responsibilities for them.

Also, although the above was written keeping in mind a new world order (at 1941), it’s still valid for the post-Bretton-Woods era. This is because, although floating exchange rates help making adjustments, their power is completely exaggerated.

It’s also important to keep in mind, that the world is more complicated now. Creditor/suprlus nations have achieved their status by making adjustments, i.e., by keeping wages and domestic demand low. So it’s not exactly or literally like what Keynes presented. It’s not the best of worlds in Germany or China.

Still, what Keynes said was highly insightful.

It’s also interesting that for The Economist, Germany’s behaviour is a “threat to free trade’s legitimacy.” Nicholas Kaldor also said the same in 1980:

In the absence of … 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.

– in Foundations And Implications Of Free Trade Theory

For The Economist, Germany’s behaviour is a threat to free trade. For Post-Keynesians, Germany’s behaviour is expected (and ought to be different) and is a good reason to reject free trade.

But it’s not a bad thing that The Economist recognizes Keynes’ insights.

Nicholas Kaldor On Say’s Law And The Principle Of Effective Demand

Recently, a U.S. politician Rick Perry cited Say’s Law:

Here’s a little economics lesson: supply and demand. You put the supply out there and the demand will follow.

Just saying that implicitly rejects the Keynesian principle of effective demand.

But it’s interesting to see that according to Nicholas Kaldor, the principle of effective demand is not a rejection of Say’s Law.

What is Say’s Law. Usually this paragraph—from Jean Baptiste Say’s bookA Treatise On Political Economy; Or The Production, Distribution, And Consumption Of Wealth, published in 1821, page 38—is referred:

It is worth while to remark, that a product is no sooner created, than it, from that instant, affords a market for other products to the full extent of its own value. When the producer has put the finishing hand to his product, he is most anxious to sell it immediately, lest its value should diminish in his hands. Nor is he less anxious to dispose of the money he may get for it; for the value of money is also perishable. But the only way of getting rid of money is in the purchase of some product or other. Thus, the mere circumstance of the creation of one product immediately opens a vent foi
other products.

In Keynesian Economics After Fifty Years, in the bookKeynes And The Modern World, ed. George David Norman Worswick and James Anthony Trevithick, Cambridge University Press, 1983, page 5, Kaldor says:

The Principle Of Effective Demand

The core of Keynes’s theory is the principle of effective demand which is best analysed as a development or refinement of Say’s law, rather than a complete rejection of the ideas behind that law.

Further, on page 6:

The originality in Keynes’s conception of effective demand lies in the division of demand into two components, an endogenous component and an exogenous component. It is the endogenous component which reflects (i.e., is automatically generated by) production, for much the same reasons as those given by Ricardo, Mill or Say — the difference is only that in a money economy (i.e. in an economy where things are not directly exchanged, but only through the intermediation of money) aggregate demand can be a function of aggregate supply (both measured in money terms) without being equal to it — the one can be some fraction of the other. To make the two equal requires the addition of the exogenous component (which could be one of a number of things, of which capital expenditure – ‘investment’ – is only one) the value of which is extraneously determined. Given the relationship between aggregate output and the endogenous demand generated by it (where the latter can be assumed to be a monotonic function of the former), there is only one level of output at which output (or employment) is in ‘equilibrium’ – that particular level at which the amount of exogenous demand is just equal to the difference between the value of output and the value of the endogenous demand generated by it. If the relationship between output and endogenous demand (which Keynes called ‘the propensity to consume’) is taken as given, it is the value of exogenous demand which determines what total production and employment will be. A rise in exogenous demand, for whatever reasons, will cause an increase in production which will be some multiple of the former, since the increase in production thus caused will cause a consequential increase in endogenous demand, by a ‘multiplier’ process.

Nicholas Kaldor, 1957. Photo via: NPR

and further on page 9:

A capitalist economy (for reasons explained below) is not ‘self-adjusting’ in the sense that an increase in potential output will automatically induce a correspond¬ing growth of actual output. This will only be the case if exogenous demand expands at the same time to the required degree: and as this cannot be taken for granted, the maintenance of full employment in a growing economy requires a deliberate policy of demand management … the mere existence of competition between sellers (‘firms’) will not in itself ensure the full utilization of resources unless all firms expand in concert. Any one firm, acting in isolation, may find that the market for its own products is limited, and will therefore refrain from expanding its production even when its marginal costs are well below the ruling price. Under these conditions involuntary unemployment could only be avoided if something – the growth of some extraneous component of demand – drives the economy forward.

So Say’s law is not wrong, it’s incomplete. Nonetheless, it’s not surprising that politicians like Rick Perry are going to use it, mislead and reject the Keynesian principle of effective demand.


Say’s law: supply creates demand.

Principle of effective demand: demand also creates its own supply. supply creating demand doesn’t mean the economy is running at full capacity.

What Is Equilibrium?

The new paper by Gennaro Zezza and Michalis Nikiforos for the Levy Institute, surveying the literature on stock-flow consistent models has a discussion on the concept of equilibrium:

In the short run, “equilibrium” is reached through price adjustments in financial markets, while output adjustments guarantee that overall saving is equal to investment. However, such “equilibrium” is not a state of rest, since the expectations that drive expenditure and portfolio decisions may not be fulfilled, and/or the end-of-period level for at least one stock in the economy is not at its target level, so that such discrepancies influence decisions in the next period.

In theoretical SFC models, the long-run equilibrium is defined as the state where the stock-flow ratios are stable. In other words, the stocks and the flows grow at the same rate. The system converges towards that equilibrium with a sequence of short-run equilibria, and thus follows the Kaleckian dictum that “the long-run trend is but a slowly changing component of a chain of short-run situations; it has no independent entity” (Kalecki 1971: 165). The adjustment takes place because stocks and stock-flow ratios are relevant for the decisions of the agents of the economy. If stocks did not feed back into flows, the model may generate ever-increasing (or decreasing) stock-flow ratios: a result that might be stock-flow consistent, but at the same time unendurable. The convergence towards the long-run equilibrium also depends on more conventional hypotheses regarding the parameters of the model.

So equilibrium is a state where stock-flow ratios are stable.

Of course equilibrium just means that and doesn’t automatically translate to full employment, for example. One can imagine stock-flow ratios such as public debt/gdp, private debt/gdp may converge to some level such as 80%, 50% respectively but with unemployment at, say, 5%.

Also, it’s worth mentioning—especially in open economies—there is in general no automatic/market mechanism which guarantees that stock-flow norms are converging to some stable ratios.

Let me offer an alternative viewpoint for the short run.

In the short run, there’s really no concept of equilibrium because there is no heavenly Walrasian auctioneer in most markets. As pointed out by Nicholas Kaldor, there are dealers who are both buyers and sellers simultaneously. Dealers quote bid/ask prices and the quantities they are willing to buy or sell. Since there is a mismatch in demand and supply of “outside buyers” and “outside sellers”, dealers accumulate inventories or stocks. Dealers make a business out of the bid-ask spread. In non-financial markets, the terminology is slightly different. You won’t find a board with bid/ask prices at a car dealer, but the concept is similar. Here even the producer has inventories in the goods market. In the services market, whatever is demanded is supplied (or put in queue or refused if capacity is reached).

So there’s no equilibrium to be reached in the short-run. It’s always in disequilibrium. Sometimes neoclassical authors make it look like accounting identities are violated in disequilibrium and satisfied in equilibrium arranged by the Walrasian auctioneer. But in SFC models, it’s illogical to have such a thing. Accounting identities must always be respected. At all times, between all time periods, even infinitesimally small.

In real life, especially because of complications of the open economy, there is no such thing as an equilibrium or a tendency to move toward any equilibrium via market forces.

Still, the concept of equilibrium is useful even in SFC models. One can start with a state with a stable stock-flow ratios and then study what happens if some parameter or some exogenous variable is changed or a set of them are changed simultaneously. The dynamics may or may not reach equilibrium in the long run but we can study what happens in the traverse.

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

Article 50 To Be Triggered. Nicky Kaldor Would Have Been Happy

The UK Prime Minister’s Twitter account tweeted this picture of Theresa May signing the letter to trigger Article 50 tomorrow, starting the process for the UK 🇬🇧 to leave the EU 🇪🇺.

click the picture to see the Tweet on Twitter

Nicholas Kaldor wrote a lot on this in the 1970s before the United Kingdom European Communities membership referendum in 1975. In his Collected Economics Essays, Volume 7, he wrote (Introduction, page xxvi, October 1977) :

The final section of this volume, Part III, reproduces papers written in the course of the “Great Debate” on the question of British Membership of the Common Market in 1970 and 1971, and includes as a postscript a lecture on Free Trade written in 1977. As this debate came to an end when Britain entered the market, a decision which was later confirmed in popular referendum with a 2:1 majority, the reproduction of these papers may strike as otiose and serving little purpose other than somewhat ignoble one of self-vindication in the eyes of future historians. However, if the long-run effects of our membership turn out to be as disastrous as I feared they would be in 1971—and nothing that has happened has caused me to change my views—I think it is of the utmost importance that the true arguments against membership should be accessible to successive generations of students, the more so since the political debate continues to be dominated by issues (such as our effects of membership on the cost of food, on our agriculture, or the net budgetary cost of membership) which I regard as secondary and which could be brushed aside if the long-run effects on Britain’s manufacturing industry and on our capacity to provide employment were favourable.


So Nicky Kaldor would have been happy, had he been alive today.

Economists’ predictions about leaving the European Union (“Brexit”) went wrong. Real GDP in the H2 2016 rose faster than H1, while they were predicting a recession. Not that the road will be simple ahead for Britain. Let’s see!

Robots, Globalization, Unemployment, Etc

Worker: I am losing my job because of globalization.

Economist: No, you are losing it because of automation.

[Plus calling them ‘losers’, such as by saying, “losers of globalization should be compensated”]

This is not just unhelpful but wrong too! Actually, saying it is wrong is underplaying it. It’s okay to be wrong sometimes—everyone is wrong sometimes—but how bad can getting it precisely the opposite every time? Anyone throwing darts at the dartboard can hit the bulls eye by fluke but what is it like throwing darts in the opposite direction?

Economists should be more modest and remind themselves of what Keynes said about workers in The General Theory:

… workers, though unconsciously, are instinctively more reasonable economists than the classical school

There is some irony to all this. Economists have played down the notion of technological unemployment. If production is constant and productivity rises, there’s a fall in employment because less labour is required to produce the same output. So output has to rise to keep employment from falling because of “automation”. In Post-Keynesian economics, the principle of effective demand matters both in the short run and the long run. So technological unemployment is a real possibility. New Consensus economists concede that John Maynard Keynes rules in the short run but assume that Jean-Baptiste Say rules in the long run. The irony hence is that New Consensus economists seem to show worry about automation these days.

In my opinion, this is because the sacred tenet of free trade must be defended by economists at all costs. So they make a concession about loss of employment to robots. Unfortunately that’s not right either. Globalization—both because of competition by international producers and offshoring of jobs via global supply chains—has led to the loss of livelihood for many in the Western world.

Political parties with fascistic tendencies have noticed this huge error at the heart of the New Consensus economics and the liberal political parties to whom these economists advise. They have understood that by pointing out that globalization—under the current rules of the game—can destroy jobs. They have seen support from people. It’s true that the political movement is not likely to deliver much but at the same time, liberal leaning political parties should try to understand this to regain lost ground.

Instead, we see writing such as The Productivity Paradox by Ryan Avent of The Economist. It’s only a paradox if you view it using the lens of the New Consensus Economics. He himself seems to appreciate others’ claims that:

the robot threat is totally overblown: the fantasy, perhaps, of a bubble-mad Silicon Valley — or an effort to distract from workers’ real problems, trade and excessive corporate power.

Not sure why the Silicon Valley gets the blame, and not economists themselves, but anyway, that is some conceding.

Remember the concept of technological unemployment is a race condition.

If productivity rises a lot and demand not much, we have unemployment. If the latter rises fast, we have more employment.

In fact productivity rises in the Western world has been quite low recently and we should embrace robots. This is because measured productivity is likely to rise if output rises. Productivity rise (as per the Kaldor-Verdoon Law) is due to two things: an exogenous component and an endogenous component which depends on the rise in output. Also, remember Keynes talked of autonomous and induced expenditures as component of effective demand, which drives output. So if governments around the world design policy in which demand rises fast, then “automation” can not just be welcomed, it will be a cause of it, i.e., higher production leading to more automation because of learning-by-doing. But economists will continue to get it backward!

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.