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Nicholas Kaldor, Baron Kaldor (12 May 1908 – 30 September 1986), born Káldor Miklós, was a Hungarian-born British economist. He developed the "compensation" criteria called Kaldor–Hicks efficiency for welfare spending comparisons (1939), derived the cobweb model, and argued for certain regularities observable in economic growth, which are called Kaldor's growth laws.Kaldor, N. (1967) Strategic Factors in Economic Development, New York, Ithaca Kaldor worked alongside Gunnar Myrdal to develop the key concept Circular Cumulative Causation, a multicausal approach where the core variables and their linkages are delineated.
From 1964, Kaldor was an advisor to the Labour government of the UK and also advised several other countries, producing some of the earliest memoranda regarding the creation of value added tax. Inter alia, Kaldor was considered, with his fellow-Hungarian people Thomas Balogh, one of the intellectual authors of the 1964–1970 Harold Wilson's government's short-lived Selective Employment Tax (SET) designed to tax employment in service sectors while subsidising employment in manufacturing. In 1966, he became professor of economics at the University of Cambridge. On 9 July 1974, Kaldor was made a life peer as Baron Kaldor, of Newnham in the City of Cambridge.
In 1969–1970, Kaldor was involved in a fierce debate with the U.S. Monetarism economist Milton Friedman. While Friedman defended the exogenous money supply theory, according to which money is created by powerful Central bank, Kaldor and Post-Keynesian economists claimed that money is created by Bank through the distribution of credits to Household and Company. In the Post-Keynesian framework, central banks only refinance second-tier banks on demand, but they are unable to properly create money. Despite insightful contributions, Kaldor could not initially win the debate, as monetarist policies where implemented by most central banks. He would, however, later be vindicated by empirical findings and policy, with money creation now being generally agreed to be mostly endogenous.Reichart Alexandre 2022, ' A Reappraisal of the Friedman-Kaldor Debate in the Light of the Great Recession', SocioEconomic Challenges 6(4), pp. 60-79McLeay Michael, Radia Amar and Thomas Ryland 2014, ' Money Creation in the Modern Economy, Bank of England In 1981, he was one of the 364 economists who signed a letter to The Times condemning Geoffrey Howe's 1981 Budget. In 1982, he published a book entitled The Scourge of Monetarism, deeply criticizing monetarist-inspired policies.
Kaldor was invited by then Prime Minister of India—Jawaharlal Nehru—to design an expenditure tax system for India in the 1950s. He also went to India's Centre for Development Studies (CDS) in 1985 to inaugurate and deliver the first Joan Robinson Memorial Lecture. Owing to these links, the Kaldor family donated his entire personal collection to the CDS Library. There are 362 books in the collection and they cover a wide range of titles on economic theory, classical political economy, business cycles and history of economic thought.
Kaldor was married to Clarissa Goldschmidt, a history graduate from Somerville College, Oxford and Frances Stewart the economist and Mary Kaldor the political scientists are thir children.
Following Keynes, Kaldor argued that investment depended positively on income and negatively on the accumulated capital stock. The idea that investment depends positively on the growth of income is simply the idea of the accelerator model that holds that in periods of high income growth and hence demand growth, investment should rise in the anticipation of high income and demand growth in the future. The intuition lying behind the negative relationship to the accumulation of the capital stock is due to the fact that if firms have a very large amount of productive capacity accumulated already they will not be as inclined to invest in more. Kaldor was in effect integrating Roy Harrod's ideas about unbalanced growth into his theory.
In the standard accelerator model that stood behind Samuelson's and Hicks' business cycle theories investment was determined as such:
This states that investment is determined by exogenous investment and lagged income multiplied by the accelerator coefficient. Kaldor's model modified this to include a negative coefficient for the capital stock:
Kaldor then assumed that the investment and savings functions are non-linear. He argued that at the peaks and troughs of the cycle the marginal propensity to save shifts in opposite ways. The intuition behind this is that during recessions people will cut their savings to maintain their standard of living while at high levels of income people will save a larger proportion of their income. He also argued that at the peaks and troughs of the cycle the marginal propensity to invest shifts. The intuition behind this is that at the trough of the cycle there will be a large amount of excess capacity and so businessmen will not want to invest more, while at the peak of the cycle rising costs will discourage investment. This creates non-linear dynamics in the economy that then drive the business cycle.
When Kaldor combines these components we get a clear six-stage model of the business cycle. In the first stage the economy is in equilibrium position. Investment is taking place and the capital stock is growing. In the second stage the growth in the capital stock leads to a downward shift in the investment curve as businessmen decide their factories become overfull. In the third stage (which overlaps with the second stage) the high growth in income causes higher saving which pushes the savings curve upwards. At this point the two curves become tangential and the equilibrium becomes unstable which generates a recession. In the fourth stage the same dynamics kick in but this time moving in the opposite direction. By the sixth stage the equilibrium is again unstable and a boom is produced.
Kaldor also noted the importance of income distribution in his theory of the business cycle. He assumed that savings out of profits were higher than savings out of wages; that is, he argued that poorer people (workers) tend to save less than richer people (capitalists). Or:
Kaldor believed that the business cycle had an inherent mechanism built into it that redistributed income across the cycle and that these mitigated "explosive" results. As we have seen, in a cyclical upswing where planned investment begins to outstrip planned savings prices will tend to rise. Kaldor assumed that those who set prices have more power than those who set wages and so prices will tend to rise faster than wages. This means that profits must also rise faster than wages. Kaldor argued that due to the different savings propensities of capitalists and workers this will lead to higher savings. This will then dampen the cycle somewhat. In a recession or depression Kaldor argued that prices should fall faster than wages for the same reasons that Keynes laid out in his General Theory.The General Theory of Employment, Money and Interest, 1936, Chapter 19 This meant that income would be redistributed to workers as real wages rose. This would lead savings to fall in a recession or depression and so would dampen the cycle.
Kaldor's model assumes wage and price flexibility. If wage and price flexibility are not forthcoming the economy may have a tendency to either perpetual and rising inflation or persistent stagnation. Kaldor also makes strong assumptions about how wages and prices respond in both inflations and depressions. If these assumptions do not hold Kaldor's model would lead us to conclude that the cycle might give way to either perpetual and rising inflation or stagnation.
Kaldor's non-linear business cycle theory overcomes the difficulty that many economists had with Roy Harrod's growth theory. Many of the American Neo-Keynesian economists thought that Harrod's work implied that capitalism would tend toward extremes of zero and infinite growth and that there were no dynamics that might keep it in check. Robert Solow, who eventually created the Solow Growth Model in response to these perceived problems, summarised this view as such:
In fact, Kaldor's 1940 paper had already shown this to be completely untrue. Solow was working with an erroneous and underdeveloped theory of the business cycle that he had taken over from Samuelson. By the time Solow was working on his growth theory, the Cambridge UK economists had already satisfactorily laid out a self-limiting theory of the business cycle that they thought was a reasonable description of the real world. This is one of the reasons that the Cambridge economists were so hostile in their reaction to Solow's growth model and went on to attack it in the Cambridge Capital Controversy of the 1960s. The ignorance on the part of the American economists' knowledge of Kaldor's model also explains why the Cambridge Post-Keynesian economists found the ISLM model favoured by the American Neo-Keynesians to be crude and lacking.
He died in Papworth Everard, Cambridgeshire.
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