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R.I.P., Anthony Thirlwall

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Anthony Thirlwall has passed away. His work is highly important in Post-Keynesian economics. Here is what one of his ex-students Mohammed Nureldin Hussain said about the Thirlwall Law in The Implications Of Thirlwall’s Law For Africa’s Development Challenges in the book Growth And Economic Development: Essays In Honour Of A.P. Thirlwall:

The Professor started to work out the mathematics of his manuscript. The good old blackboard notwithstanding, the identities and equations of the model were animated, left-handedly, in a manner that competes easily with Bill Gates’ PowerPoint facilities. The model contained three basic equations representing the growth of imports, the growth of exports, and a dynamic expression of the overall balance of payments equilibrium. He substituted the first two equations into the third and the model was solved to yield an elaborate expression of the growth rate of real gross domestic product (GDP). When the terms of trade were assumed to be constant the elaborate equation collapsed into an expression containing three symbols: y = x/π. ‘The rate of growth (y) of any developed country in the long run is equal to the growth rate of the volume of its exports (x) divided by its income elasticity of demand for imports (π)’, he explained.

Our eyes were fixed on the blackboard, attempting to digest the meaning and internalize the implications of this tri-legged animal. That job was not easy. For the animal distilled volumes of legendary work in economic development, encapsulating all of them in a small-sized anti-underdevelopment pill. The teaching of Engel’s law, which implies that the demand for primary goods increases less than proportionally to increases in global income; the Harrod foreign trade multiplier which put forward the idea that the pace of industrial growth could be explained by the principle of the foreign trade multiplier;3 the Marshall– Lerner condition which implies that a currency devaluation would not be effective unless the devaluation-induced deterioration in the terms of trade is more than offset by the devaluation-induced reduction in the volume of imports and increase in volume of exports; the Hicks super-multiplier4 which implies that the growth rate of a country is fundamentally governed by the growth rate of its exports; the Prebisch–Singer hypothesis which asserts that a country’s international trade that depends on primary goods may inhibit rather than promote economic growth; the Verdoorn–Kaldorian notion that faster growth of output causes a faster growth of productivity, implying the existence of substantial economies of scale;5 Kaldor’s paradox which observed that countries that experienced the greatest decline in their price competitiveness in the post-war period experienced paradoxically an increase in their market share and not a decrease; the literature on export-led growth which asserts that export growth creates a virtuous circle through the link between output growth and productivity growth – all of these doctrines were somehow put into play and epitomized within this small-sized capsule. Not only that but the capsule was sealed by the novel and powerful ingredient of the balance-of-payments constraint: ‘in the long run, no country can grow faster than that rate consistent with balance of payments equilibrium on current account unless it can finance ever-growing deficits which, in general, it cannot’.

The time for class discussion came and all the debate seemed to linger around one basic query: if growth could be explained by a rule which contained two variables only, what was the relevance of the many other socio-economic variables that could also influence the growth process? What about the role of policies and economic management? What about the role of capital, labour and technical progress? The answers of the Professor were convincing to some students, but confusing to many others. In an attempt to relieve our baffled faces he concluded the discussion by saying, in a pleasant fusion of smile and speech: ‘Simple laws make good economics’. And as he was leaving the classroom, his smile turned gradually into a laugh that engulfed his remark: ‘if this rule came to be known as Thirlwall’s Law, I will retire’. Less than one year after the publication of the manuscript in 1979 the rule was crowned as ‘Thirlwall’s Law’. But, retire? He did not. I suppose genuine philosophers like this man will never retire even if they wanted to.

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NOTES

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  1. See Kaldor (1978).
  2. See McCombie (1985).
  3. See Kaldor (1975).

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REFERENCES

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Kaldor, N. (1975), ‘Economic Growth and the Verdoorn Law – A Comment on Mr. Rowthorn’s Article’, Economic Journal, 85(340), December, 891–6.

Kaldor, N. (1978), ‘The Effects of Devaluation on Trade in Manufactures’, in N. Kaldor, Further Essays on Applied Economics, London: Duckworth.

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McCombie, J.S.L. (1985), ‘Economic Growth, the Harrod Foreign Trade Multiplier and the Hicks Super-multiplier’, Applied Economics, 17(1), February, 55–72.

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Appreciated/referrred by Anthony Thilwall himself in his article Balance Of Payments Constrained Growth Models: History And Overview from the year 2012.

Paul Krugman And Free Trade As Mercantilism

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In a recent article How The West Is Strangling Putin’s Economy for The New York Times, Paul Krugman makes this point about international trade:

One final point: The effect of sanctions on Russia offers a graphic, if grisly, demonstration of a point economists often try to make, but rarely manage to get across: Imports, not exports, are the point of international trade.

That is, the benefits of trade shouldn’t be measured by the jobs and incomes created in export industries; those workers could, after all, be doing something else. The gains from trade come, instead, from the useful goods and services other countries provide to your citizens. And running a trade surplus isn’t a “win”; if anything, it means that you’re giving the world more than you get, receiving nothing but i.o.u.s in return.

That’s quite a deceit!

Now, he has some caveats but tries to minimise them. But the main point about imports, not exports being the point of international trade is something top corporations claim since they want to open markets in poor countries. This reminds of Joan Robinson’s quote that free trade is a subtle form of mercantilism. A poor country needs protection from foreign competition. In Post-Keynesian theory, exports/success of corporations in international markets is quite important. As Anthony Thirlwall in the paper Kaldor’s 1970 Regional Growth Model Revisited says about Nicholas Kaldor’s model (which I believe):

The first proposition of the model is that regional growth is driven by export growth. Kaldor regarded exports as the only true autonomous component of aggregate demand, not just at the regional level but also at the national level because consumption and investment demand are largely induced by the growth of output itself …

So that’s quite the opposite view from mainstream economics.

Biographies Of Nicholas Kaldor

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There’s a new short biography of Nicholas Kaldor titled Nicholas Kaldor’s Economics: A Review by Luis Gomes. The author reminds of Kaldor’s proposals for the world as a whole, something which is highly needed today more than ever (and something I regularly refer to):

In 1984 Nicholas Kaldor gave a series of lectures in Italy, which become a posthumous book in 1996. These lectures [“Causes of Growth and Stagnation in the World Economy” … ] presented an integrated set of policies with which to tackle economic problems. In this series of lectures, Nicholas Kaldor commented on the four basic principles for good macroeconomic administration: (i) it is needed a coordinated fiscal action which include a set of targets for a balanced balance of payments and a full employment budget; (ii) the interest rate should be the lowest possible: (iii) it is important to prevent the volatility of international commodity prices (via stocks and via an international currency) (iv) it is necessary to overcome chronic inflation trends under full employment, due to the system of adjusting wages via sectoral collective agreement …

There are many biographies (from short articles to full papers) and I thought I should list them:

  1. A short article titled Portrait: Nicholas Kaldor by Luigi Pasinetti, published in 1981 published in Challenge.
  2. Luigi Pasinetti’s Nicholas Kaldor: A Few Personal Notes, published in 1983.
  3. Anthony Thirlwall’s 1987 book titled Nicholas Kaldor,
  4. Anthony Thirlwall’s 1987 article Nicholas Kaldor 1908–1986. Republished 1991 in the book Nicholas Kaldor And Mainstream Economics Confrontation Or Convergence? and again in 2015 in the book Essays On Keynesian And Kaldorian Economics.
  5. Geoffrey Harcourt’s article Nicholas Kaldor, 12 May 1908–30 September 1986 published in 1988 in Economica and republished in the book Post-Keynesian Essays In Biography by Harcourt himself.
  6. Ferdinando Targetti’s 1992 book Nicholas Kaldor: The Economics And Politics Of Capitalism As A Dynamic System.
  7. Marjorie Shepherd Turner’s book Nicholas Kaldor And The Real World published in 1993.
  8. Anthony Thirwall’s section Nicholas Kaldor, A Biography in Nicholas Kaldor’s book Causes Of Growth And Stagnation In The World Economy published posthumously in 1996.
  9. Adrian Wood‘s entry Kaldor, Nicholas (1908–1986) in The New Palgrave Dictionary Of Economics published in 2008.
  10. John E. King’s book Nicholas Kaldor published in 2008.
  11. Luigi Pasinetti’s chapter Nicholas Kaldor (1908–1986): Growth, Income Distribution, Technical Progress in his book Keynes And The Cambridge Keynesians: A ‘Revolution in Economics’ To Be Accomplished, published in 2009.
  12. John E. King’s chapter Nicholas Kaldor (1908–1986) in the book Handbook On The History Of Economic Analysis Volume I published in 2016.
  13. John E. King’s chapter Nicholas Kaldor (1908–1986) in The Palgrave Companion To Cambridge Economics published in 2017. (h/t Marc Lavoie).

Apart from the above, following are useful to know about Nicholas Kaldor, although can’t be described as biography:

  • Introduction by Ferdinand Targetti and Anthony Thirlwall to the book The Essential Kaldor, a collection of papers of Kaldor, published in 1989.

Have I missed any?

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.

Endogeneity Of Income Elasticities Of Trade

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Robert Blecker and Mark Setterfield have a new book, Heterodox Macroeconomics: Models Of Demand, Distribution And Growth.

In that there’s a chapter, Balance-Of-Payments Constrained Growth II: Critiques, Alternatives And Synthesis. It has an interesting section where income elasticities of trade are themselves thought to be endogenous.

There are of course many critiques of balance-of-payments constraint growth and Thirlwall’s law but the better ones are more about improvements than anything damaging for the theory. The ideas of Nicholas Kaldor stand.

As emphasised by the authors themselves (page 485), the endogeneity of income elasticities itself is consistent with the Kaldorian idea of circular and cumulative causation. 

Till now, circular and cumulative causation was thought via price effects:

Higher production → higher productivity → higher price competitiveness

But there’s no reason that success can’t increase non-price competitiveness itself, i.e., income elasticities.

The book discusses some of the studies.

It’s interesting to note that it was Paul Krugman who first proposed the idea that income elasticities aren’t fixed and that growth can lead to change in the elasticities. But he refused to accept the causality as implied by Thirlwall’s law. The right causality is both ways. Circular and cumulative causation!

Link

Anthony Thirlwall — Thoughts On Balance-Of-Payments-Constrained Growth After 40 Years

ROKE (Review Of Keynesian Economics) has a special issue, Thirlwall’s Law At 40, celebrating Thirlwall’s law which Anthony Thirlwall discovered in 1979.

Thirlwall himself has an article in the issue.

Interesting, from the conclusion:

Structural change almost certainly requires a country to design an industrial policy embracing a national innovation system to facilitate the flow of technological knowledge across all sectors of the economy. The market mechanism itself is unlikely to bring about the required structural changes needed. I am attracted to the concepts of growth diagnostics (Hausmann et al. 2008) and self-discovery (Hausmann and Rodrik 2003). Growth diagnostics involves locating the binding constraints on a country’s economic performance and to target these directly, giving the most favourable outcome from the resources available compared to the ‘spray gun’ approach to economic policy-making which may not hit hard enough the binding constraints on growth that really matter. In the case of the BoP, it would involve targeting exports with growth potential, and identifying imports where there is import substitution potential. Government expenditure on R&D to enhance export quality could reap high returns. Self-discovery involves seeking out new areas of comparative advantage and then implementing the most appropriate policies to foster them. Hausmann and Rodrik point out that there is much randomness in the process of a country discovering what it is best at producing, and a lack of protection reduces the incentive to invest in discovering what goods and services they are. Governments need to encourage entrepreneurship and invest in new activities, but the first best policy is not by the traditional means of tariffs and quotas, but public sector credit and guarantees which reward the innovator (and not the copy-cats), and can be withdrawn if firms do not perform well after a certain period of time.

Anthony Thirlwall, via Wikipedia

Anthony Thirlwall — A Plain Man’s Guide To Kaldor’s Growth Laws

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An old article, worth your time.

Excerpt:

In the course of his Inaugural Lecture at Cambridge in 1966 on the causes of the U.K’s slow growth rate, Kaldor (1966) presented a series of “laws” to account, for growth rate differences between advanced capitalist countries; he later elaborated these laws in a lecture at Cornell University (1967). These laws, and their interpretation and validity, have been the subject of considerable scrutiny and debate, and Kaldor himself has clarified and modified his own position since their enunciation. The basic thrust of the model consists of the following propositions:1

  1. The faster the rate of growth of the manufacturing sector, the faster will be the rate of growth of Gross Domestic Product (GDP), not simply in a definitional sense in that manufacturing output is a large component of total output, but for fundamental economic reasons connected with induced productivity growth inside and outside the manufacturing sector. This is not a new idea. It is summed up in the maxim that the manufacturing sector of the economy is the “engine of growth.”
  2. The faster the rate of growth of manufacturing output, the faster will be the rate of growth of labor productivity in manufacturing owing to static and dynamic economies of scale, or increasing returns in the widest sense. Kaldor, in the spirit of Allyn Young (1928), his early teacher at the L.S.E., conceives of returns to scale as macroeconomic phenomena related to the interaction between the elasticity of demand for and supply of manufactured goods

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  1. The growth of manufacturing output is not constrained by labor supply but is fundamentally determined by demand from agriculture in the early stage of development and exports in the later stages. Export demand is the major component of autonomous demand in an open economy which must match the leakage of income into imports. The level of industrial output will adjust to the level of export demand in relation to the propensity to import, through the working of the Harrod trade multiplier:2 the rate of growth of output will approximate to the rate of growth of exports divided by the income elasticity of demand for imports (see Thirlwall, 1979).
  2. A fast rate of growth of exports and output will tend to set up a cumulative process, or virtuous circle of growth, through the link between output growth and productivity growth. The lower costs of production in fast growing countries make it difficult for other (newly industrializing) countries to establish export activities with favorable growth characteristics, except through exceptional industrial enterprise.

This catalogue of propositions is more or less the full Kaldor model of growth rate differences in advanced capitalist countries …

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Notes

  1. Some of the propositions are not as Kaldor originally stated them, but we shall
    return to the original argument later.
  2. For an exposition and an elaboration of the Harrod trade multiplier, see Kennedy and Thirlwall (1979) and Thirlwall (1982).

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References

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Kennedy, C, and Thirlwall, A. P. “Import Penetration, Export Performance and Harrod’s Trade Multiplier.” Oxford Economic Papers, July 1979.

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Thirlwall, A. P. “The Balance of Payments Constraint as an Explanation of International Growth Rate Differences.” Banca Nazionale del Lavoro Quarterly Review, March 1979.
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⸻, “The Harrod Trade Multiplier and the Importance of Export Led Growth.” Pakistan Journal of Applied Economics, 1(1), Summer 1982.

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Young, A. “Increasing Returns and Economic Progress.” Economic Journal, December 1928

Links:

  1. SpringerLink
  2. Google Books
  3. JSTOR
  4. Palgrave Macmillan
Link

Ashwani Saith: Ajit Singh Of Cambridge And Chandigarh – An Intellectual Biography Of The Radical Sikh Economist

Has interesting stories from Cambridge:

Anthony Thirlwall provides us with this aphoristic nugget that sums it all up: “The distinguished development economist Ajit Singh tells how, when he first went to Cambridge to study economics, Nicholas Kaldor taught him three things: first, the only way for a country to develop is to industrialize; second, the only way for a country to industrialize is to protect itself; and third, anyone who says otherwise is being dishonest!” (Thirlwall quoted in Hein 2014, p. 178, footnote 35).

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References

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Hein, E. (2014). Distribution and growth after Keynes: A post-Keynesian guide. Cheltenham: Edward Elgar.

Anthony Thirlwall On Nicholas Kaldor On Joining The European Union

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There’s a new book, The Elgar Companion To John Maynard Keynes, edited by  Robert W. Dimand, Harald Hagemann. Chapter 76 titled Nicholas Kaldor is written by Anthony Thirlwall.

Thirlwall reminds us of Kaldor’s dislike to enter the common market in the 70s:

The Labour Party lost power in 1970 and Kaldor had more time to campaign on two main public issues which concerned him greatly. The first was the acceptance by economists and policy-makers of the doctrine of monetarism which had spread with the virulence of a plague from the University of Chicago under the influence of Milton Friedman to infect policy thinking at the highest level in the UK. The second concerned the UK’s entry into the Common Market (now the European Union). With regard to monetarism, Kaldor led the intellectual assault worldwide against the monetarist view that inflation is always and everywhere a monetary phenomenon in a causal sense caused by excessive government expenditure financed by money creation. On the contrary, argued Kaldor, because money consists largely of credit, and credit only comes into existence if it is demanded, money is endogenous to an economy not causal in the determination of output and prices. The major cause of inflation, at least in mature industrial countries, is rising wages and other costs. Kaldor could find no evidence in the UK. or across countries, of any relationship between the size of countries’ budget deficits and measures of broad money (Kaldor 1980c). Kaldor lost the battle against monetarism in the UK, but won the war because the doctrine of monetarism is now dead.

On the issue of the UK joining the Common Market. Kaldor was highly sceptical of the alleged dynamic benefits stemming from a larger market for the export of goods and services. He argued that because imports are likely to grow faster than exports, as trade barriers come down, the UK would need to deflate the economy to preserve balance of payments equilibrium, and this would slow growth. In addition to this, the budgetary contribution would be huge, the price of food would rise leading to wage increases and Britain would be letting down the Commonwealth countries which had a preferential access to the UK market. The vote in 1975 against joining the Common Market was lost, but Kaldor appears to have been correct in his predictions. The dynamic benefits of having become a member of the European Union are nowhere to be seen. If anything, productivity growth has been slower post-1975 than pre-1975 (although other factors have also been at work).

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REFERENCES

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Kaldor, N (1980c), Memorandum of Evidence on Monetary Policy submitted to the House of Commons Select Committee on the Treasury and the Civil Service, 17 July, London: HMSO.

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Nicholas Kaldor, picture from Cambridge Journal Of Economics