Keywords

1 Introduction

Nicholas Kaldor was part of an astonishingly talented generation of Hungarian economists born in the early years of the twentieth century that included Thomas Balogh, William Fellner, George Katona, John von Neumann, and Tibor Scitovsky. The son of a prosperous Jewish lawyer, Kaldor was born in Budapest on 12 May 1908. He was educated at the University of Berlin and the London School of Economics (LSE), where he spent 20 years (1927–1947) as undergraduate, research student, and Lecturer. After two years at the United Nations Economic Commission for Europe (UNECE) in Geneva he returned to academic life in October 1949 as Fellow of King’s College, Cambridge. Kaldor was appointed to a personal Chair in 1966. He retired in 1975 but remained very active in research and policy advocacy right up to his death in Cambridge on 30 September 1986. The core of Kaldor’s voluminous writings can be found in the nine volumes of his selected economic essays (Kaldor 1960–1989), supplemented by the posthumously published 1984 Raffaele Mattioli Lectures (Kaldor 1996); an excellent sample of his work is provided by Targetti and Thirlwall (1989). There are three intellectual biographies (Thirlwall 1987; Targetti 1992; King 2009), and details of the Cambridge context of his work are provided by Harcourt (2006), King (2002), and Pasinetti (2007).

In terms of institutional affiliation, Kaldor was a Cambridge economist only for the last 37 years of his life. Intellectually, though, his affiliation with Cambridge can be traced back to the late 1930s, when he came under the influence of The General Theory and began to discuss the new macroeconomics with Keynes’s younger disciples. Geographically, Kaldor became a Cambridge economist in September 1939, on the outbreak of the Second World War, when the Aldwych premises of the LSE were taken over by the Ministry of Works and its entire staff and student body moved to Cambridge. But the focus of this chapter will be on the period after his arrival at King’s in 1949.

The chapter begins with a brief discussion of Kaldor’s work before 1949 (in Section 2). This is followed by the three principal sections, dealing with his theories of growth and distribution (Section 3); his writings on economic policy, first for developing countries and then for Britain, including his attack on monetarism (Section 4); and his broad-based post-1970 critique of mainstream economic theory (Section 5). In the brief conclusion (Section 6), I assess Kaldor’s contribution as a Cambridge Post Keynesian economist.

2 Before Cambridge

Kaldor began the 1930s as an undergraduate student and ended it as one of the world’s leading young economic theorists. He was always a prolific writer. In Berlin, at the tender age of 19, he had worked as a stringer for the Budapest press, a practice he continued for a while after his move to London. While still a research student, he was also co-translator of Friedrich von Hayek’s extended critique of underconsumption theory, which was published in the LSE house journal, Economica (Hayek 1931).

His own publications began in 1932 with a 12-page article in the Harvard Business Review on the Austrian economic crisis. Over the next eight years, he published 22 journal articles, eight substantial book reviews, and a translated book (again by Hayek). Kaldor’s interests covered the entire gamut of economic theory, and he also engaged with economic philosophy and policy. His 1934 paper on the nature of equilibrium theorising raised important questions of methodology, the full significance of which he only came to appreciate several decades later. In 1937, in the only article that he ever published in Econometrica, he defended the Austrian theory of capital. Then two major articles in 1939 established him as an original theorist of real stature. The first, drawing on Lionel Robbins’s critique of interpersonal comparisons of utility, set out the compensation principle as the foundation of a non-Benthamite approach to welfare economics, while the second dealt with the theory of money and finance and the macroeconomic consequences of speculative behaviour.

By now Kaldor had abandoned his earlier sympathy for Hayek’s Austrian approach to economic theory and had become a committed Keynesian. In 1940, as editor of the Economic Journal, Keynes published Kaldor’s paper on the trade cycle, which attempted to model the insights contained in chapter 22 of The General Theory. Kaldor did so in a characteristically informal manner, relying entirely on diagrams and without any algebra. He emphasised fluctuations in saving and investment, not monetary instability. Kaldor had already set out his attitude towards the quantity theory in a 1939 review of Arthur Marget’s Theory of Prices. Money influences the economy only indirectly, through changes in the rate of interest; changes in the money stock affect output and employment, not prices; the price level depends on the money wage rate, not on the stock of money. These principles would underpin Kaldor’s later objections to monetarism in theory and practice.

As already noted, Kaldor spent the war years in Cambridge. While he had become a British subject in 1934, and on the outbreak of war made enquiries about joining the civil service as an economic advisor, he was told that his Hungarian origins would disqualify him from anything other than menial duties in Whitehall. He therefore decided to stay in academia. Now based at Peterhouse, Kaldor was able to deepen old friendships and develop new ones. A war Circus of economists began to operate, named by analogy with the Cambridge Circus of young theorists who had interrogated Keynes in 1930–1931 after the publication of the Treatise on Money and helped to focus his mind on the revolutionary breakthrough of The General Theory. In addition to Kaldor, the war Circus included Joan Robinson, Piero Sraffa, and (when he could escape from official duties in London) Richard Kahn. Kaldor was particularly fond of Sraffa and also became a close friend and walking companion of Robinson.

Kaldor wrote extensively on the problems of the war economy and the prospects for post-war reconstruction, endorsing Sir William Beveridge’s proposals for the introduction of a comprehensive system of social security after the war. Kaldor also set out the fundamentals of Keynesian fiscal policy, anticipating what his old LSE friend Abba Lerner was to call the principle of ‘functional finance’: government spending and taxation and revenue should be set to produce full employment without demand inflation, and there should be no concern as to whether the budget was in surplus or deficit. This contrasted sharply with the traditional principle of ‘sound finance’, which required that the budget always be balanced, either annually or over the course of the trade cycle. Kaldor’s final contribution to the debate on post-war reconstruction was to apply the principle of functional finance to the problem of maintaining full employment after the war. This was the subject of the second Beveridge Report, Full Employment in a Free Society, which was published in 1944 and to which Kaldor contributed a lengthy technical appendix setting out a number of alternative fiscal scenarios.

Kaldor’s break with Hayek now had a political as well as a theoretical dimension. Significantly, Kaldor did not move back to London when the LSE returned there at the end of the war. Instead, he remained in Cambridge and commuted to carry out his teaching duties. In 1945 he was seconded to the United States Strategic Bombing Survey, and in the following year, he worked briefly at the Ministry of Defence as advisor to the British Bombing Survey. He also advised the Hungarian and French governments. In 1947 Gunnar Myrdal invited him to join the UNECE in Geneva. Kaldor was refused leave of absence from LSE, and so he resigned. While in Geneva, he largely wrote two of the Commission’s annual ‘Economic Surveys of Europe’, served as adviser to the United Nations Technical Committee on Berlin Currency and Trade, and wrote much of the ‘Report on National and International Measures for Full Employment’ for another United Nations expert committee.

3 Growth and Distribution

When he returned to academic life in late 1949, at the age of 41, Kaldor was in mid-career. He was well known and well respected as an original theorist in both microeconomics and macroeconomics and had also made significant contributions in applied economics and to policy debates. His first major paper as a Cambridge economist was devoted to his original and controversial macroeconomic model of income distribution. It appeared in 1956, the same year as Joan Robinson published her magisterial (but seldom read) Accumulation of Capital, and has to be seen as part of the Cambridge project to ‘generalise The General Theory’ by extending Keynesian macroeconomics to the long period and replacing the remaining elements of Marshallian theory with something that was not subject to the logical defects that were beginning to emerge in the neoclassical theory of capital (see the Chapters 27, 30 and 31 in this volume).

In his distribution paper Kaldor explicitly repudiated both the marginal productivity of relative shares and Michał Kalecki’s degree of monopoly theory (which he regarded as tautological). His own model was explicitly Keynesian in its focus on the relationship between investment, saving, and the share of profits in national income that was required for macroeconomic equilibrium. It had been foreshadowed by Keynes himself in the well-known ‘widow’s cruse’ parable in the Treatise on Money and also by Kalecki in a wartime article (Kalecki 1942), and something similar was hinted at in Robinson’s book. But the details of the model were original to Kaldor.

In a simple two-class Keynesian model with no foreign sector and no government, in which investment (I) drives saving (S), and the savings propensity of the capitalists (s c) is greater than that of the workers (s w ), the profit share is determined by the ratio of investment to income and the share of wages is a residual. In the simplest case, where workers save nothing (so that s w = 0), macroeconomic equilibrium requires that

$$ I=S={s}_c.P $$
(33.1)

where P is total profits. Dividing both sides of Equation (33.1) by Y and rearranging terms, we have

$$ P / Y= \left(1 / {s}_c\right).\left(I / Y\right) $$
(33.2)

In Kaldor’s own numerical example, I/Y = 20%, s c = 0.5, and the profit share P/Y = 40% (so that the wage share, W/Y, is 60%). Since nothing is saved by wage earners, capitalists must get 40% of total income so that, when they save half of it, savings and investment are both equal to 20% of Y. If I/Y were to rise to 21%, the profit share must increase to 42%, and the wage share must fall to 58% (Kaldor 1955–1956: 96, fn. 2). If the propensity to save out of wages is positive (or negative, as in the lead-up to the sub-prime mortgage crisis in the USA in 2006–2007), Kaldor’s algebra is slightly more complicated, but the underlying principle remains the same.

It is, however, subject to a rather obvious difficulty. If workers save, they also acquire capital, from which they derive an income, but no account is taken of this additional income in Kaldor’s algebra. In 1962, Luigi Pasinetti showed that this problem could be overcome by a simple reformulation of the model, leaving the underlying Kaldorian conclusion unchanged: relative income shares still depend on the ratio of investment to income and on the capitalists’ propensity to save. The workers’ propensity to save is irrelevant, whether they have income from ownership of capital or not (Pasinetti 1962). An extensive literature emerged on the Kaldor–Pasinetti macroeconomic distribution theory, much of it by Italian scholars, extending the model to an open economy with a government sector and with rentiers as well as capitalists. The microeconomic implications also began to be teased out, with the appearance of oligopoly pricing models in which the size of the markup over variable costs of production was determined by the company’s need for retained earnings to finance its investment plans (see Chapter 9 in this volume).

This points, however, to an empirical problem with the Kaldor–Pasinetti model. It is best suited to a world of managerial capitalism, characterised by the separation of ownership and control, in which the behaviour of the modern corporation can be summarised as: ‘retain and reinvest’. This is the world described by Berle and Means in their classic The Modern Corporation and Private Property (1932), published at a time when the power, prestige, and moral authority of financial markets were at an all-time low, and the autonomy of professional managers was correspondingly large. In the twenty-first century, financialisation—more accurately, the continuing process of refinancialisation that began in the 1970s—has undermined this autonomy, restoring ‘shareholder value’ as the driving force underpinning corporate behaviour and enforcing a new guiding principle: ‘distribute and downsize’. Macroeconomic equilibrium still requires that Equations (33.1) and (33.2) be satisfied, but the causal relationships between the variables are no longer obvious.

The profit share has in fact increased in almost every advanced capitalist economy since about 1980, but this has not been the result of a sustained increase in I/Y; instead, s c has decreased—a possibility not seriously considered by Kaldor, though the reverse phenomenon (increased working class militancy generating a rising wage share and a corresponding increase in s c) had been suggested by Maurice Dobb (1929). Institutionalists and Marxians would conclude from all this that Kaldor had ignored the broader social and political determinants of class shares, which in practice were more important than the abstract macroeconomic relations that he had emphasised.

None of this was obvious in 1957 when Kaldor published his first formal model of economic growth. This was his initial contribution to the ‘generalisation of The General Theory’ to the long period by tracing out the implications of positive net investment and the resulting increase in the capital stock. The Oxford economist Roy Harrod (1939) had led the way with his demand-driven (more precisely, investment-driven) growth model, in which the ‘warranted’ (or equilibrium) rate of growth (g w) depended on the ratio of investment (and hence saving) to income (s) and the technically determined ratio of capital to output \( (v):{g}_{\mathrm{w}}=s / v \). However, the maximum or ‘natural’ rate of growth (g n) depended on two supply-side factors, the rates of growth of population and of labour productivity, with the latter being determined exogenously by technical progress. Harrod noted that there was no guarantee that g w would be equal to g n, or that either would equal the actual growth rate (g). He concluded that any initial inequality between g w, g n, and g would give rise to substantial and continuing macroeconomic instability in the form of steadily rising unemployment or accelerating demand inflation. This was the notorious ‘Harrod knife-edge’.

In practice, capitalist economies were not wildly unstable, and Kaldor believed that his distribution model helped to explain why. The aggregate savings propensity (s) was not constant, as Harrod supposed, but variable. As we have seen, for Kaldor it was closely related to the distribution of income, and in his 1957 growth model changes in the shares of wages and profits served as an indispensable source of macroeconomic stability. In other respects, Kaldor’s model was similar to Harrod’s. They were both one-sector models, with no distinction being made between agriculture, manufacturing, and services, and they both assumed a closed economy. Unlike the canonical neoclassical Solow–Swan model, first published in the previous year (Solow 1956; Swan 1956), in Kaldor’s 1957 model growth was demand-determined, with investment driving savings rather than savings driving investment. There was no aggregate production function, no question of capital–labour substitution in response to relative prices, and hence no possibility of v being variable, which was the mechanism that provided stability in the neoclassical growth model.

In one crucial respect, however, Kaldor broke with Harrod. He argued that technical progress was endogenous: it depended on investment, through what came to be known as the ‘vintage effect’ (referring to the superiority of old wine and new technology). The higher the ratio of investment to income, Kaldor maintained, the lower the average age of the capital stock and the greater the proportion of machines that embodied more recent, and therefore more productive, technology. Kaldor introduced a ‘technical progress function’ that made productivity growth a positive function of I/Y and gave an additional reason to expect macroeconomic stability, since an increase in g w could now be expected to induce a corresponding increase in g n. He went even further, claiming that sustained growth was consistent only with continuous full employment, a strangely anti-Keynesian notion that led Paul Samuelson to describe him sardonically as ‘Jean-Baptiste Kaldor’.

Kaldor was no mathematician, and his 1957 growth model was itself a low-tech affair, which must have contributed to the neglect that it suffered outside Cambridge. Five years later, he published a much more sophisticated version, the mathematics being provided by his young co-author, the future Nobel Laureate James Mirrlees. Kaldor’s 1962 model made an even sharper break with neoclassical growth theory, since there was no longer any mention of the capital stock, only its rate of increase: everything now depended on the rate of investment. Possibly this reflected the influence of Sraffa’s Production of Commodities by Means of Commodities, which had appeared two years previously and cast serious doubt on the coherence of neoclassical capital theory. By this time, Kaldor had fallen out with Joan Robinson, whom he now accused of being excessively neoclassical in her own approach to the theory of growth.

In one respect, though, he was becoming dissatisfied with his own analysis. The 1962 model, like that of 1957, was a one-sector affair, and this seemed to Kaldor to shed little light on the poor growth performance of the post-war British economy by comparison with the rapid growth that had been achieved in many parts of Continental Europe. In his 1966 Inaugural Lecture, Causes of the Slow Rate of Economic Growth of the United Kingdom, he developed what was effectively a third model of economic growth, now emphasising the crucial difference between the primary and secondary sectors. The British economy had matured early, he argued, in the sense that primary production now accounted for a very small proportion of total employment, and the scope for productivity gains by transferring labour from agriculture to industry was correspondingly low. This meant that manufacturing output was growing more slowly in Britain than in countries like France, West Germany, and Italy, where there remained a large reservoir of low-productivity agricultural labour that could move to industrial employment. This was a very important point, since there were dynamic increasing returns to scale in manufacturing, as revealed by Verdoorn’s Law (discovered by Kaldor’s former colleague at UNECE, the Dutch economist P.J. Verdoorn): productivity growth is a positive function of the rate of growth of output. So the relatively immature Continental economies were enjoying much faster productivity growth than was possible in Britain, or for that matter in the USA.

Kaldor’s 1966 model was not recognisably Keynesian, and indeed it was almost neoclassical in its emphasis on the supply of labour to manufacturing industry as the fundamental constraint on growth. It was also once again an informal, low-tech affair, almost devoid of algebra, but (he believed at the time) both more realistic and more useful than his earlier efforts had been. Once again, however, he soon became dissatisfied with it. This time he focused on its neglect of the external sector. By 1970 Kaldor had come to see exports as the only genuinely exogenous source of effective demand and the balance of payments as the binding constraint on growth. This reflected his frustrations as an adviser to the British government after 1964, where recurrent balance-of-payments difficulties gave rise to a ‘stop-go’ economy, and characteristically he never developed the arguments in any systematic way. However, the subsequent formalisation of Kaldor’s insights by John McCombie and Tony Thirlwall has generated a substantial international literature on balance-of-payments-constrained growth.

Two final points should be noted in relation to Kaldor’s growth models. First, they anticipated what later came to be known in the mainstream literature as ‘endogenous growth’ theory, and he is sometimes given credit for this by economists who are otherwise unsympathetic to his approach to economics more generally. Second, they have significant implications for the analysis of economic development on a global scale, as Kaldor acknowledged in the ‘North–South models’ that he produced in the final decade of his life.

4 Economic Policy

Kaldor’s interest in development economics had begun much earlier, in the aftermath of the post-war decolonisation and the emergence of what Kalecki had termed ‘intermediate regimes’, like those in India and Indonesia, which were neither communist nor fully committed to free market capitalism. Kaldor belonged to a generation of economists who believed that the problems of what were then termed the ‘under-developed countries’ (in today’s language, the ‘global South’) were profoundly different from those of the North, and that the same policies (and even, to some extent, the same theory) could not be applied uncritically to them. This marks a big difference from the intellectual world of the so-called Washington Consensus that emerged in the neoliberal world of the 1970s, and even from the post-Washington Consensus that subsequently replaced it.

In this sense—and only in this sense—Kaldor was sympathetic to Marxism, since he accepted the principle that economic theory should be historically and socially specific, not universal and timeless. In every other respect, however, he was highly critical of Marxian political economy, which (as he told a Beijing audience in a 1956 lecture) he believed to be relevant only to the unreformed capitalism of the mid-nineteenth century. He had no sympathy for the economically inefficient and politically repressive system of the Soviet Union and Eastern Europe in the post-1945 era (and indeed had relatives who suffered under the communist regime in his native Hungary).

He did, however, have a strong interest in economic policy and a taste for offering advice to governments, which could not be fully satisfied in Britain during the ‘thirteen wasted years’ of Tory rule between 1951 and 1964 (Morgan 1990: 236). Instead, he turned to the Third World, travelling widely and serving as a consultant to several governments. Between 1956 and 1962 he visited India, Ceylon (now Sri Lanka), Mexico, Ghana, British Guiana (now Guyana), and Turkey, and his writings on the problems of economic development can be found in five of the nine volumes of his Collected Economic Essays (all of volume 8 and parts of volumes 3, 4, 6, and 9). His influences included the Dutch social democrat Jan Tinbergen, other former colleagues from UNECE, and Latin American structuralists like Raul Prebisch. Economic development was a major interest of many Cambridge economists in the 1950s and early 1960s, and Kaldor will certainly have discussed the central issues with Joan Robinson (though he never shared her interest in or enthusiasm for Mao’s China).

Kaldor recognised that the unemployment problem in backward areas was enormous. It was also chronic and structural rather than cyclical and almost certainly not susceptible to rapid reduction through Keynesian policies of aggregate demand management. Similarly, one-sector growth models of both the Harrod–Domar and Solow–Swan varieties, which ignored the distinction between primary and secondary activities, were of very doubtful relevance to the problems of the poorest countries. Kaldor was stating the (almost) obvious when he asserted (in 1964) that the key to an accelerated growth of the underdeveloped areas of the world lay in bringing about fundamental changes in both the mental outlook and the technical knowledge and skill of their peasant populations. He pointed to the survival, especially in agriculture, of a traditionalist outlook that discouraged risk-taking and profit-making. He concluded that the problem of economic development could not be left to the economists, since it required an explanation of how different mental attitudes came to develop in society, why at certain stages of a society’s development traditionalism had given way to rationalism, and hence would benefit from the integration of economics and sociology.

However, Kaldor also had some sympathy for the American Marxist Paul Baran, who, in his 1957 The Political Economy of Growth, had emphasised the role of social stratification in the countryside, rather than the backwardness of an undifferentiated rural population. Latin American countries, in particular, had a tremendous burden to carry in the form of maintaining the idle rich: the detrimental effects of what Kaldor graphically described as the unbridled greed of an oligarchical ruling class were very serious. The rulers enjoyed a larger share of total income than their more productive counterparts in the advanced capitalist countries, were much less subject to progressive taxation, and spent a much larger proportion of their income on wasteful luxury consumption, much of it on imported goods.

All this had serious implications for economic policy. Kaldor argued that there was a strong case for increasing taxes on land in developing countries. This would enlarge the supply of foodstuffs to urban areas by encouraging landlords to bring some of their idle land into cultivation, and thus expand the amount of employment that could be offered outside agriculture without creating inflation. It would also encourage the more efficient use of land, in part because it would lead to the transfer of land ownership from relatively inefficient to efficient cultivators. While land reform was necessary, however, it was not sufficient. In a controversial report to the Government of India on taxation reform, Kaldor concluded that both equity and efficiency considerations required that progressive taxes be imposed also on income, capital gains, new wealth, personal expenditure, and gifts. Like his recommendations to the governments of Ghana, Guyana, Mexico, and Turkey, these proposals aroused strong opposition from the rich and were never likely to be implemented.

On other aspects of economic policy, Kaldor took an even less orthodox position, revealing his sympathies with structuralists like Prebisch. The virtues of stable and uniform exchange rates, currency convertibility, low tariffs, non-discrimination, and the prohibition of export subsidies were genuine enough, Kaldor maintained, when applied to the conduct of the industrialised countries in their trading relations with each other. But they were much less evident when applied to the underdeveloped countries. He was a forceful critic of many aspects of the Washington Consensus, although he was always suspicious of import-substitution industrialisation and wherever possible favoured export-led growth.

As already noted, Kaldor’s interest in economic policy for Britain began in the early stages of the Second World War and continued through his co-authorship of the technical appendix to the 1944 Beveridge Report and his spell at UNECE in 1947–1949. But he was unable to exercise the influence that he would have liked on British government policy after 1945, being too young (and perhaps also too foreign) to serve as a senior adviser to the Attlee government and too left-wing for the Tories. Thus Kaldor came into his own as a policy adviser only after the Labour Party’s election victory in 1964.

He was in close contact with younger Labour politicians like Anthony Crosland and Hugh Gaitskell, and he did produce some impressive policy work before Labour returned to power. His 1951 paper on incomes policy remained unpublished until 1964, when he visited Australia and applied it to the problem of combating inflation in this small open economy. Convinced of the importance of cost-push inflation, in which the rate of increase of money wages played a central role, Kaldor argued that a national wages policy was essential to maintain price stability under conditions of full employment. To maintain the existing income shares of labour and capital, this required that money wages increase, on average, at the same rate as labour productivity.

Kaldor maintained that this average rate of wage growth should be applied throughout the economy so that industries with above-average productivity growth should be forced to reduce prices, offsetting price increases in industries with below-average productivity improvement. He was opposed to the suggestion that wages might be allowed to increase more rapidly in high-productivity growth sectors, on the grounds that this involved the workers in less progressive industries subsidising their employers’ inefficiency. Thus he was not a supporter of what later came to be known as ‘productivity bargaining’ at the level of the industry or the individual company (in Australian parlance, ‘enterprise bargaining’). Kaldor’s ideas were taken up by Eric Russell and Wilfred Salter and formed the basis of the influential Russell–Salter rule for national wages policy in Australia.

In 1951, which proved to be the final year of the Attlee Labour government, Kaldor had been appointed a member of the Royal Commission on the Taxation of Profits and Income. While he had no influence over the taxation policy of the incoming Conservative government, the experience did encourage him to write a 250-page book on the issues considered by the Commission. In An Expenditure Tax (1955), Kaldor argued the case for a progressive tax on ‘spending power’ rather than income. Earlier proponents of expenditure taxation, who included Mill, Marshall, Pigou, and Fisher, had emphasised the advantages of exempting saving from tax. Kaldor made the same point from a different angle, focusing on the need to tax dis-saving. In the ‘age of austerity’ that characterised the British economy in the late 1940s and early 1950s, wealthy people had been able to maintain their standard of living by running down their capital, an option that was not available to poor people. This, Kaldor argued, was patently unfair. Income taxation was also inefficient since it penalised saving and productive enterprise. Thus an expenditure tax would be both more equitable and more efficient than the existing system.

The book was favourably reviewed by eminent tax theorists like Richard Musgrave and Carl Shoup, but there was never any prospect of Kaldor’s proposals (which included a marginal tax rate of 300% on annual expenditure in excess of £5,000) being implemented by the Conservative government of the day. However, he continued to develop his ideas on policy issues. In 1959 Kaldor, like his Cambridge colleague Richard Kahn, made a detailed submission to the Radcliffe Committee on the Working of the Monetary System. In written and verbal evidence, he repeated his earlier objections to monetarism. There was no evidence that the velocity of circulation was constant, Kaldor maintained, and hence no basis for the belief that the volume of expenditure was determined by the quantity of money in circulation. In fact, the velocity of circulation was a variable that depended on the course of monetary policy: thus attempts to restrict the money supply would be frustrated by the resulting increase in velocity. Monetary policy would work, if at all, only indirectly, through changes in interest rates, and there was very little evidence to support the use of higher interest rates as an anti-inflationary measure.

Kaldor came into his own as a policy adviser during the eight years of Harold Wilson’s Labour governments (1964–1970 and 1974–1976). He served as Special Adviser to two Chancellors of the Exchequer, James Callaghan and Dennis Healey, and was at last able to see some of his ideas put into practice. The most celebrated and controversial measure was the Selective Employment Tax (SET), introduced in the 1966 budget to encourage the growth of employment in manufacturing at the expense of the service sector. In the following year, the proceeds were used to fund a Regional Employment Premium (REP), a subsidy to jobs in manufacturing in regions of high unemployment that was (as Kaldor noted) in effect a devaluation confined to the depressed areas of the UK. The intention was to exploit Verdoorn’s Law by promoting faster output growth in the secondary sector, thereby improving productivity growth, increasing the country’s competitiveness in export markets and permitting a faster rate of growth of the entire economy.

In this way Kaldor’s growth theory was applied directly to macroeconomic policy. It was always controversial, and its critics regarded it as at best an irrelevance and at worst an impediment to the performance of those sectors of the British economy (above all financial services) with the best prospects of future expansion. He would have responded that the new tax and subsidy measures were long-term policies that were not given the chance to work; SET was abolished by the Conservatives in 1972, and REP was sacrificed four years later by the Labour government in the first wave of monetarist-inspired public expenditure cuts that Kaldor strongly opposed.

Kaldor was at odds with the majority of opinion in the Labour Party on another important economic policy issue, British membership of the European Union (then known as the Common Market). In the early 1970s this opposition was not confined to the anti-immigration populist right, but extended across the political spectrum to include elements of the left and (like Kaldor) the centre of the Labour Party. Kaldor objected that membership of the Common Market would benefit capital at the expense of labour, would adversely affect all sections of British society through the higher food prices imposed by the Common Agricultural Policy, and—this was his crucial argument—disadvantage British manufacturing industry by subjecting it to unrestricted competition from the faster-growing Continental countries that were benefitting from Verdoorn’s Law. Instead, he urged Britain to retain a degree of national sovereignty, above all on the currency and the exchange rate. Had the issue arisen in his lifetime, Kaldor would certainly have been strongly opposed to British membership of the European Currency Union and the proposed adoption of the euro in place of sterling.

In his Euroscepticism, Kaldor had something in common with Margaret Thatcher. On every other issue he was a stern critic of the new neoliberalism. He was resolute in his opposition to the Thatcher government’s economic and social policies, using his position in the House of Lords (to which he had been appointed in 1974) to attack the class war that the Conservatives were waging against organised labour and to denounce the huge and quite unnecessary costs of their efforts to overcome inflation. In 1983, 20 of his speeches were published in a slim volume entitled (with an obvious bow to Keynes’s 1926 attack on Winston Churchill) The Economic Consequences of Mrs Thatcher. He did not worry unduly about causing offence. Thatcher’s economic policies could be compared, Kaldor believed, with the deflationary measures introduced by Philip Snowden and Ramsay MacDonald in 1931; her administration was as bad as the disastrous Brüning government that had paved the way for Hitler’s rise to power in the Germany of the early 1930s. Moreover, his attack on ‘the scourge of monetarism’ (Kaldor 1982) was now increasingly linked to criticism of mainstream economic theory as a whole.

5 Economic Theory

As early as 1966, in his comments on the defence of the marginal productivity theory of distribution by Paul Samuelson and Franco Modigliani, Kaldor had criticised neoclassical economic theory for its intellectual sterility. Quite apart from their highly questionable assumption of a well-behaved, linear homogeneous aggregate production function, neoclassical economists were unable to deal with increasing returns to scale, learning by doing, oligopolistic competition or uncertainty, all important features of the real world, which Kaldor described as being ‘non-Euclidean’ in nature. He developed these themes in subsequent critical work, including his 1972 Presidential Address to the Royal Economic Society, the Prefaces that he wrote in the late 1970s and early 1980s to the various volumes of his collected essays and in the Raffaele Mattioli Lectures that he gave in Milan in 1984, two years before his death. Kaldor emphasised several themes: the methodological problems that were raised by the use of equilibrium theorising, in particular for the theory of economic growth; the macroeconomic implications of a non-perfectly competitive economy; international issues, including the theory of trade and the prospects for global economic development; and the analytical and policy issues posed by the theory of endogenous money.

Kaldor regarded the habits of thought engendered by equilibrium theorising as a major obstacle to the development of economics as a science. They required assumptions that were either unverifiable or directly contradicted by the evidence and distorted the focus of economic analysis, moving it away from the dynamic, creative functions of markets to a concentration on their static allocative functions. These errors were closely related to the assumption of constant rather than increasing returns to scale, which had led economists to ignore the forces of cumulative causation emphasised by his former UNECE colleague Gunnar Myrdal. Thus they had led them also to neglect history.

Once increasing returns to scale were allowed for, Kaldor maintained, the forces making for continuous change must be viewed as endogenous, and equilibrium states must be seen as path-dependent so that the end-state itself was no longer independent of the route taken towards it. This cast doubt on the entire Walrasian project, which had also gone astray by exaggerating the role of substitution and playing down the essential complementarity between different factors of production and different types of economic activity. Complexity theory and agent-based modelling were still in their infancy when Kaldor died, but he would probably have been intrigued by both projects.

There were significant implications also for macroeconomic analysis, not least for the theory of growth. The phenomena of increasing returns, cumulative causation, and path dependency reinforced Kaldor’s insistence on the endogenous nature not only of technical change but also of the supply of labour and capital. This endogeneity was inconsistent with Harrod’s notion of a ‘natural’ rate of growth that was given by the supposedly exogenous growth rates of the labour force and of technical progress. Here, Kaldor was on firm ground. His interpretation of the short-period macroeconomic consequences of increasing returns is less easy to justify. Unduly influenced by the Harvard theorist Martin Weitzman, he came to believe that the Keynesian principle of effective demand required imperfect competition and so was inconsistent with Keynes’s own assumption of perfectly competitive product markets. In effect, this was an endorsement of New Keynesian microfoundations for macroeconomic theory, though Kaldor himself never used the term. He would certainly have objected to the dynamic stochastic general equilibrium (DSGE) models with sticky prices that have come to dominate the New Keynesian variant of the New Neoclassical Synthesis in the three decades since his death.

Kaldor’s hostility to equilibrium theorising also made him increasingly critical of the orthodox theory of international trade, with its presumption that protection was always welfare-reducing. This was true under constant returns to scale, he conceded, when free trade would benefit all participants. It was a different matter under increasing returns, when trade would tend to enlarge differences in comparative costs instead of reducing them. Thus free trade might be disadvantageous to poor countries, and to poor regions within rich countries, leading to an increasing gap between prosperous and depressed areas. Applied to the world as a whole, this led him to reassert his earlier views on global economic development in the form of a North–South model in which primary producers, who enjoyed neither increasing returns nor oligopolistic product market power, tended to fall further and further behind the industrialised countries, which benefited from both.

Kaldor’s initial attack on the new monetarism came in a public lecture in March 1970, which was published four months later in the widely circulated Lloyds Bank Review. He raised strong objections to Milton Friedman’s econometrics and his interpretation of US economic history but now emphasised a fundamental theoretical question: the endogeneity of the stock of money. The rate of change of the money supply, Kaldor argued, was not under the direct control of the monetary authorities, as the monetarists maintained. On the contrary, changes in the money supply were determined by the rate of change of money incomes, and thus depended on the factors that influenced this magnitude: on changes in the pressure of demand (including domestic investment, exports, and fiscal policy) and on the rate of wage inflation. Even more clearly than in his evidence to the Radcliffe Committee, Kaldor now insisted that the direction of causation in the quantity equation \( \left(MV=PT\right) \) ran from right to left, not from left to right: changes in the price level (P) and the level of output (proxied by T, the volume of transactions) caused changes in the stock of money (M) and in the velocity of circulation (V).

Ten years later, with the Thatcher government in power and what Kaldor described as ‘the scourge of monetarism’ now being wielded against the British working class, he drew one of the most influential diagrams of the era. Monetarism assumed a vertical money supply curve, with the stock of money as a fixed multiple of the quantity of reserves. Kaldor’s theory of endogenous money entailed a horizontal curve, with the supply of money being perfectly elastic at the prevailing interest rate set by the monetary authorities. This was a remarkably original contribution to the debate on monetarism. Not even severe critics of Friedman’s approach, like the American Post Keynesians Paul Davidson and Basil Moore, had gone this far.

With the benefit of hindsight it can be seen that Kaldor won the battle but lost the war. British and American experience in the 1980s proved that the stock of money could not be controlled by the authorities, for precisely the reasons that Kaldor had given: it was an endogenous, not an exogenous, variable. The Taylor rule established the rate of interest as the critical—indeed, the only—instrument of monetary policy, just as Kaldor had always insisted. But the New Neoclassical Synthesis that emerged in the decade after his death would have been abhorrent to him for several reasons, including its abandonment of any explicit commitment to full employment, its rejection of fiscal policy, and the requirement that central banks be ‘independent’—independent of democratic control by parliament, he would have complained, but increasingly and dangerously dependent on financial markets.

Kaldor repeated many of these arguments in the Mattioli Lectures, which were the closest that he ever came to writing a theoretical treatise, along the lines of Keynes’s General Theory or Robinson’s Accumulation of Capital. As he himself admitted, his views were constantly changing and never sufficiently coherent or systematic to be put down in a single lengthy work. Still less did he ever contemplate writing an undergraduate textbook (in view of the commercial and intellectual failure of the 1973 Robinson–Eatwell An Introduction to Modern Economics, this was probably no bad thing). But his ideas on theoretical questions were always interesting and often original and provocative, as even a strong opponent like Frank Hahn conceded, after Kaldor’s death (Hahn 1989).

6 Conclusion

Along with Joan Robinson and Richard Kahn, Kaldor was one of the most eminent of the Cambridge Post Keynesians. He was appointed to the Academic Board of the Journal of Post Keynesian Economics when it was established by Paul Davidson and Sidney Weintraub in 1977—a purely honorary position, but also a prestigious one—and six years later the journal published a symposium on his work. But Kaldor was also his own man, and he never fitted into any of the more or less coherent and distinctive sub-schools of Post Keynesian thought. He was certainly not a Fundamentalist Keynesian like Davidson, but neither was he a Kaleckian with a Sraffian tinge like Robinson, and he showed little or no interest in Hyman Minsky’s financial instability hypothesis. This stubborn independence of thought is reflected in his academic publications, which numbered 140 in all; just four of them were co-authored.

By the time of Kaldor’s death in 1986, the decline of Cambridge Post Keynesianism was well advanced. The full story of the neoclassical renaissance in Cambridge has yet to be told, and it is therefore impossible to make any confident assessment of Kaldor’s share of the responsibility for it. In all probability, it was the inevitable result of the global transformation of academic economics that began in the USA after 1945 and in subsequent decades spread, more or less rapidly, to the rest of the non-communist world. That said, it might perhaps have been attenuated or delayed somewhat if the leading Cambridge Post Keynesians had been less egoistic, more inclined to cooperate with each other, and more adept at the administrative manoeuvres that were needed to ensure that their generation of dissident economists was succeeded by younger scholars more in sympathy with their mode of thought than the likes of Hahn.

These criticisms should not be allowed to obscure Kaldor’s substantial and enduring achievements. Some indication of the abiding influence of his work can be seen in the recent, authoritative two-volume Oxford Companion to Post Keynesian Economics (Harcourt and Kriesler 2013). One entire chapter, by Mark Setterfield, is devoted to ‘Endogenous Growth: A Kaldorian Approach’, and much of Robert Blecker’s chapter on growth in open economies is concerned with Kaldor’s treatment of export-led growth and the balance-of-payments constraint on growth. There are references to Kaldor in 19 of the remaining 44 chapters and (of course) in the editors’ introduction, including several citations of his 1956 income distribution paper, his various articles on endogenous money and the scourge of monetarism, and his writings on equilibrium, business cycles, and wages policy. Apart from Keynes himself, only Michał Kalecki (with two chapters devoted to him, and references in 17 other chapters) and Joan Robinson (references in 20 chapters) come anywhere close. Thus Kaldor remains an essential source of ideas and inspiration for twenty-first-century Post Keynesian economists.