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Ramesh Chandra On Nicholas Kaldor And Circular Cumulative Causation

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Ramesh Chandra has a recently released book Endogenous Growth In Historical Perspective: From Adam Smith To Paul Romer, and one of his chapters is on Nicholas Kaldor and circular and cumulative causation.

Chandra’s own views are different but I thought his description of Gunnar Myrdal and Nicholas Kaldor’s insights was amazing with the most appropriate quotes like the following (from page 201 in print/209 in pdf):

Gunnar Myrdal (1956, 1957) and Nicholas Kaldor (1978), on the other hand, argued that because of the operation of circular cumulative causation free trade led to interregional and international inequalities. Myrdal (1956) maintained that “if left to its own course, economic development is a process of circular and cumulative causation which tends to award its favours to those who are already well endowed and even to thwart the effort of those who happen to live in regions that are lagging behind” (quoted from Meier 1989, p. 385). Further, “on the international as well as national level trade does not by itself necessarily work for equality. A widening of markets strengthens often on the first hand the progressive countries whose manufacturing industries have the lead and are already fortified in surroundings of external economies, while the underdeveloped countries are in continuous danger of seeing even what they have of industry and, in particular, their small scale industry and handicrafts outcompeted by cheap imports from industrial countries, if they do not protect them” (ibid., p. 385). International trade does promote primary exports from developing countries but here they face adverse demand conditions or inelastic demand in world markets. Any technological improvements which reduce primary goods prices benefit the importing countries. Thus, “forces in the markets will in a cumulative way tend to cause even greater international inequalities between countries as to their level of economic development and average national income per capita” (ibid., p. 385).

Likewise, Kaldor (1978), in his paper “Nemesis of free trade”, thought that free trade may be good under constant costs but under increasing returns it benefitted some countries (or regions) at the cost impoverishment of others. He agreed with Myrdal that international trade perpetuated international inequalities, and developing countries would do well if they industrialized behind tariff and quantitative restrictions. Kaldor also stated that protectionism was good not only for developing countries but also for a developed country like Britain. In the initial stages of her growth, free trade suited Britain. But after Germany, France, USA, and Japan industrialized, Britain could not compete and one market after another became closed. Had Britain not been ideologically wedded to free trade, her living standards would have been much better.

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References

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Kaldor, Nicholas. 1978. Nemesis of free trade. In Further Essays on Applied Economics. London: Duckworth.

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Meier, Gerald M. 1989. Leading Issues in Economic Development. Oxford and New York: Oxford University Press.

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Myrdal, Gunnar. 1956. Development and Underdevelopment. Cairo: National Bank of Egypt Fiftieth Commemoration Lectures.

Myrdal, Gunnar. 1957. Economic Theory and Underdeveloped Regions. London: Gerald Duckworth

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The 2021 Nobel Prize, And Michał Kalecki On The Positive Effects Of Rise In Wages On Employment

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The Nobel Prize in economics this year was given in one half to David Card for his work for showing using “natural experiments” that “that increasing the minimum wage does not necessarily lead to fewer jobs”.

The profession has taken so much time to accept this. Also, many have pointed out that it’s not accurate and the prize press release itself indicates that it is for the experimental methodology and not much for the result.

At any rate, it is ridiculous that such a thing was known in the 1930s: Michał Kalecki wrote on it. The idea that increasing wages raises unemployment is an old dogma and so proving it wrong as some “credibility revolution” (as many economists claim) is a bit ridiculous.

Anyways, the point of my post is to highlight how Michał Kalecki had not only argued that increasing wages does not necessary have a negative effect, he went on to argue that it has a positive effect. He was arguing for wages in general, not just about a law on minimum wage, but the ideas are obviously similar: wages in general or the minimum wage.

The following are two quotes from 1939 and 1971 respectively. Correct me if I am wrong if someone had said this before him.

In Essays In The Theory Of Economic Fluctuations, 1939 in Collected Works Of Michał Kalecki, Vol. I:

Final remarks

1. There are certain ‘workers’ friends’ who try to persuade the working class to abandon the fight for wages in its own interest, of course. The usual argument used for this purpose is that the increase of wages causes unemployment, and is thus detrimental to the working class as a whole.

The Keynesian theory undermines the foundation of this argument. Our investigation above has shown that a wage increase may change employment in either direction, but that this change is unlikely to be important. A wage increase, however, affects to a certain extent the distribution of income: it tends to reduce the degree of monopoly and thus to raise real wages. On the other hand, ‘real’ capitalist incomes tend to fall off because of the relative shift of income from rentiers to corporations, which lowers capitalist propensity to consume.

In Class Struggle And The Distribution Of National Income, in Collected Works Of Michal Kalecki, Volume II. Capitalism: Economic Dynamics:

… a wage rise showing an increase in the power of the trade unions leads-contrary to the precepts of classical economics-to an increase in employment. Conversely, a fall in wages showing a weakening in their bargaining power leads to a decline in employment. The weakness of trade unions in a depression manifested in permitting wage cuts contributes to the deepening of unemployment rather than to relieving it.

If you find any quotes before these dates, please let me now. Could be from Michał Kalecki himself!

OECD’s ‘Understanding Financial Accounts’ On The Importance Of Stock-Flow Coherent Models

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International organisations such as the UN, IMF, OECD etc., publish some good guides on national accounts and the flow of funds. I just noticed that the 2017 edition of OECD’s book ‘Understanding Financial Accounts’ has a section in appreciation of stock-flow coherent (SFC) models with a history starting with the work of Morris Copeland.

From page 407-409:

  1. Uses of financial accounts and balance sheets in economic research

Financial accounts were first modelled by Morris A. Copeland …

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The fall of financial accounts and balance sheets and the work of Godley

In the 1960s and the 1970s financial accounts were at the centre of economic analysis. From the mid-1980s until the 2007-09 economic and financial crisis, interest in financial accounts and balance sheets more or less vanished, for a number of reasons: a growing focus on the micro-economic foundations of macroeconomics; the increasing role of monetary and credit aggregates for the conduct of monetary policy that implied a lower focus on the entire financial system; trust in the self-correcting market mechanism through price adjustments, while considering quantities – both flows and stocks – less important; the rational expectation critique of Keynesian models; a growing inclination among economists to separate monetary and real phenomena; and the problems of achieving full international harmonisation of statistics until the introduction of the 1993 System of National Accounts (SNA93).

In contrast, Wynne Godley never abandoned the idea that economic models should be founded on flows and stocks, and developed consistent models of the US economy and other countries. In his approach, modern economies have an institutional structure comprising (non-financial) enterprises, banks, governments and households. The evolution of economies through time is dependent on the way these agents take decisions and interact with one another (Godley and Lavoie [2007]) …

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References

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Godley, W. and M. Lavoie (2007), Monetary Economics: An Integrated Approach to Money, Credit, Income, Production and Wealth, Palgrave MacMillan, Basingstoke.

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Link

Marc Lavoie’s Lecture On Policy Response To The Pandemic From A Post-Keynesian Perspective

There’s a lecture (on Zoom) by Marc Lavoie hosted by Department of Economics at Kyungpook National University, from January this year which I only found recently.

The lecture is on some aspects of policies such as fiscal policy, large scale asset purchases by central banks (LSAP, or “QE”) during the pandemic and some comments on neochartalism or “MMT”. Basically distinguishing PKE and neochartalism.

Enjoy!

John Maynard Keynes On Import Controls

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I was rereading the article Keynes And The Management Of Real National Income And Expenditure by Wynne Godley from 1983 (page 157 in that book, footnote 20) and he reminds us of this letter from JMK published in The Collected Writings Of John Maynard Keynes, Volume XXVI, pages 287-289, that he thought that import controls work much better than movements in the exchange rates.

To J. M. FLEMING, 13 March 1944

Dear Fleming,

Your paper on quotas versus depreciation, sent me with your letter of February 14th, raises a very interesting question. But, for my own part, I am not one of the’ most economists’, to whom in paragraph 2 you attribute the view that disequilibrium ought, so far as possible, to be corrected by movements in the rate of exchange rather than by controls over commodity trade.

There is, first of all, to the contrary the simple-minded argument that, after all, restriction of imports does do the trick, whereas movements in the rate of exchange do not necessarily do so.

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A Concise History Of “Circular And Cumulative Causation” From Anthony Thirlwall

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In Anthony Thirlwall’s essay Nicholas Kaldor: A Biography, 1908–1986, (first published in 1987 and republished in 2015, [note: he has a full biography too]), there’s a para which has both the history of Kaldor’s thoughts on circular and cumulative causation and a short explanation:

As Kaldor grew older (and perhaps wiser?), he lost interest in theoretical growth models and turned his attention instead to the applied economics of growth. Two things particularly interested him: first, the search for empirical regularities associated with ‘interregional’ (country) growth rate differences, and secondly, the limits to growth in a closed economy (including the world economy). The distinctive feature of all his writing in this field was his insistence on the importance of taking a sectoral approach, distinguishing particularly between increasing returns activities on the one hand, largely a characteristic of manufacturing, and diminishing returns activities on the other (namely agriculture and many service activities). Kaldor’s name is associated with three growth ‘laws’ which have become the subject of extensive debate.73 The first ‘law’ is that manufacturing industry is the engine of growth. The second ‘law’ is that manufacturing growth induces productivity growth in manufacturing through static and dynamic returns to scale (also known as Verdoorn’s Law). The third ‘law’ states that manufacturing growth induces productivity growth outside manufacturing, by absorbing idle or low productivity resources in other sectors. The growth of manufacturing itself is determined by the growth of demand, which must come from agriculture in the early stages of development, and from exports in the later stages. Kaldor’s original view74 was that Britain’s growth rate was constrained by a shortage of labour, but he soon changed his mind in favour of the dynamic Harrod trade multiplier hypothesis of a slow rate of growth of exports in relation to the income elasticity of demand for imports, the ratio of which determines a country’s balance of payments constrained growth rate. Because fast growing ‘regions’ automatically become more competitive vis á vis slow growing regions, through the operation of the second ‘law’, Kaldor believed that growth will tend to be a cumulative disequilibrium process—or what Myrdal once called a ‘process of circular and cumulative causation’,—in which success breeds success and failure breeds failure. He articulated these ideas in several places, most notably in two lectures: his Inaugural Lecture at Cambridge in 1966,75 and in the Frank Pierce Memorial Lectures at Cornell University in the same year.76 Most of the debate concerning Kaldor’s growth laws has centred on Verdoorn’s Law and the existence of increasing returns. Kaldor drew inspiration for the theory from his early teacher, Allyn Young, and his neglected paper ‘Increasing Returns and Economic Progress’.77 Young, in turn, derived his inspiration from Adam Smith’s famous dictum that productivity depends on the division of labour, and the division of labour depends on the size of the market. As the market expands, productivity increases, which in turn enlarges the size of the market. As Young wrote ‘change becomes progressive and propagates itself in a cumulative way’, provided demand and supply are elastic. Hence increasing returns is as much a macroeconomic phenomenon as a micro-phenomenon, which is related to the interaction between activities, and cannot be adequately discerned or measured by the observation of individual industries or plants. Kaldor was convinced by theoretical considerations and by his own research, and that of others, that manufacturing is different from agriculture and most service activities in its ability to generate increasing returns in the Young sense.

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Notes

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  1. See A. P. Thirlwall (ed.), ‘Symposium on Kaldor’s Growth Laws’, Journal of Post-Keynesian Economics, Spring 1983.
  2. See Causes of the Slow Rate of Economic Growth of the United Kingdom (CUP, 1966).
  3. As note 74
  4. Strategic Factors in Economic Development (Cornell University, Ithaca, New York, 1967).
  5. Economic Journal, December 1928.

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I don’t see much reference to short book Strategic Factors In Economic Development anywhere and I wasn’t even aware of the book till I reread this passage again recently. Must get it. Although according to this review, there’s nothing much in addition to Causes Of The Slow Rate Of Economic Growth Of The United Kingdom.

I have never been able to appreciate Kaldor’s earlier models, perhaps he tried to unsuccessfully build a stock-flow coherent model.

Also, in recent times, Post-Keynesians have come to the realisation that trade elasticities are endogenous not fixed parameters. To me that the most crucial aspect of circular and cumulative causation, although the Verdoorn Law plays a role too.

Link

UNCTAD Trade And Development Report 2021

This year’s trade and development report is out, and it says Chapters 1 and 2 only but for some reason, the full report hasn’t been released yet. Maybe it only has two chapters.

The report warns of “unfavourable conditions for most developing regions” (Section 2.C.3).

There is an interesting projection of current account balances with explanations around this scenario leading to the pessimism.

Keynes, Robinson And Mercantilism

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Here’s an interesting insight from Joan Robinson on free trade. According to her, when Keynes rose to popularity, the thing that worried economists the most was actually that it was against free trade.

Keynes had a chapter on mercantilism in the General Theory, but is the most ignored. Perhaps economists don’t want you to find out!

The book The New Mercantilism (a lecture from 1965, first published 1966) starts off like this:

I began to read for the Tripos in the last decade in which the doctrine of the universal benefits of free trade was still dominant. It was imposed upon our young minds as a dogma. We were being received into the fraternity of economists, who knew that free trade is right, unlike the silly plain man who supposed that protection might do his country good, and the misguided politician who supported the vested interests of particular industries. In the dark age before the light of Adam Smith dawned, there had been mercantilists who were both misguided, because they thought it proper for a government to operate in favour of the economic interests of its own country, though at the expense of others, and silly because they thought that it was in a country’s interest to build up a trade surplus by restricting imports. When Keynes attacked the dominant orthodoxy, one of the things that grieved my teachers most was that he should try to rehabilitate the mercantilists, thus damaging the claim of the free-traders to superior benevolence and wisdom.

What is the “new mercantilism”? Joan Robinson says:

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Nowadays governments are concerned not just to maintain employment, but to make national income grow. Nevertheless, the capitalist world is still always somewhat of a buyer’s market, in the sense that capacity to produce exceeds what can be sold at a profitable price. Some countries have experienced spells of excessive demand, but this corrects itself only too soon. The chronic condition for industrial enterprise is to be looking round anxiously for prospects of sales. Since the total market does not grow fast enough to make room for all, each government feels it a worthy and commendable aim to increase its own share in world activity for the benefit of its own people.

This is the new mercantilism.

Joan Robinson On The Importance Of International Trade For Economic Dynamics

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A few important things to understand macroeconomics/political economy are: national accounts/flow of funds, fiscal policy, endogeneity of money—the financial system in general, the role of demand (or the reverse Say’s Law), behaviour of firms such as pricing, decisions to produce, decisions to hire labour, and international trade and globalisation.

After the economic and financial crisis which started in 2007, economists have conceded to some extent that they have been wrong and accepted some heterodox positions except the most important one: international trade.

Joan Robinson was in my opinion the first economist to truly understand all the issues need to make someone an economist of rank one.

Here’s the opening of a 1973 article:

Joan Robinson on international trade

In this article she tells the reader about how this problem leads to polarisation in the fortunes of nations:

We are now in the era of modern capitalism when every industrial country has a national economic policy of near-full employment and growth of GNP. Every industrial country wants a surplus on income account. ‘Export lead growth’ is the most convenient way of running modem capitalism. Who succeeds at any moment is accidental, largely depending upon historical circumstances and political and psychological influences. Success leads to success and failure engenders failure.

The most important point is that market mechanisms fail to resolve imbalances and this leads to divergence instead of convergence and causes a deflationary bias to the whole world. So in the absence of a market mechanism, an official mechanism is needed.

Link

The Levy Institute’s Macro-Modeling Team — The Pandemic, The Stimulus, And The Future Prospects For The US Economy

Dimitri B. Papadimitriou, Michalis Nikiforos and Gennaro Zezza have a new report on prospects for the US economy.

They argue that while the US economy would enjoy a boom in the near term because of the large fiscal stimulus, the danger is that because of the large trade imbalance because of the different growth rates of the US and its trading partners implies that the continuation would require a large fiscal deficit or the private sector becoming a net borrower.

In my opinion, soon enough when the US economy starts approaching full employment, there will be shouts to cut the fiscal stance because as Michal Kalecki argued captains of industry don’t like full employment. And/or: continuous growth would require high fiscal deficits but as the public debt will continue to rise relative to gdp, politicians will get nervous.

The US government could try to improve net exports by increasing competitiveness of US firms but such things take time. A combination of trying to improve net exports by industrial policy, tariffs and eventually removing the system of free trade is the way forward. It won’t be easy as economists are attached to dogmas.