Nicholas Kaldor was one of the most prominent of the “Cambridge Keynesians” who defended and developed the revolutionary macroeconomics of John Maynard Keynes in the half-century after Keynes’s death (Pasinetti 2007).

He became an influential post-Keynesian critic of neoclassical theory, and was a lifelong advocate of democratic socialist economic policies.

Born in Budapest on 12 May 1908, Kaldor came to the London School of Economics in 1927 and remained there for 20 years, first as an undergraduate and then as a research student and lecturer.

After a brief post-war spell at the United Nations in Geneva he moved to Cambridge in 1949 as a Fellow of King’s College, and spent the rest of his life there; he was belatedly promoted to Professor in 1966. Active as a writer and controversialist until the very end of his life, he died 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 1960-89), supplemented by the posthumously published 1984 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).

Kaldor made many important contributions to economic theory. In the 1930s he wrote on capital theory and on the theory of the firm under imperfect competition; developed a penetrating critique of equilibrium theorizing, the full significance of which only became apparent decades later; produced the first published statement of the compensation principle in welfare economics; made a detailed analysis of the way in which speculative markets operate; and formulated an ambitious early Keynesian model of the business cycle. During the 1940s he wrote extensively on policy issues, including popular pieces suggesting social democratic solutions to post-war economic problems. He also arranged for his friend John von Neumann’s important paper on the theory of economic growth to be translated and published in the Review of Economic Studies (von Neumann 1945-46).

Kaldor was an enthusiastic advocate of William Beveridge’s proposals for the creation of a comprehensive welfare state. With his young Hungarian colleague Tibor Barna, he wrote a brilliant technical appendix to Beveridge’s 1944 report on Full Employment in a Free Society, exploring alternative fiscal policy measures for maintaining full employment without demand inflation after the war. He considered a range of taxation and expenditure options, with and without budget deficits, and also discussed issues related to fiscal sustainability. The entire analysis has an amazingly modern ring (see Buiter 2010: 60-61). In Geneva he also advised the United Nations on the international dimensions of policies to promote full employment.

On his return to academic life Kaldor re-established himself as a leading macroeconomic theorist. In the 1950s and early 1960s he published a series of formal models of economic growth, which combined severe criticism of neoclassical theory with a distinctively Keynesian approach to the distribution of income. Kaldor rejected as incoherent the neoclassical analysis of capital and the aggregate production function, and therefore also dismissed the marginal productivity theory of distribution. His extremely influential 1956 Review of Economic Studies paper on “alternative theories of distribution” set out a distinctive macroeconomic theory of relative shares in which everything depended on the ratio of investment to income and on the (very different) class propensities of workers

and capitalists to save out of wages and profits. Beginning in 1966 Kaldor produced some much less formal but equally provocative and original ideas on economic growth, emphasizing dynamic increasing returns to scale and the critical role of manufacturing in the process of economic growth. Here he anticipated subsequent mainstream thinking on “endogenous growth”.

Applying these ideas to the problems of economic growth in backward regions, Kaldor derived a “North-South” model of global development in which poor countries that relied heavily on exports of primary products were systematically disadvantaged in their trade with the rich industrialized countries.

He became a strong critic both of neoclassical trade theory and more generally of equilibrium theorizing in economics, which he believed to neglect dynamic increasing returns, the principle of cumulative causation, and the resulting path-dependence of many important macroeconomic variables. He came to regard exports as the only genuinely exogenous component of aggregate demand, since domestic consumption, investment and government expenditure were all, in the final analysis, determined by income. Thus Kaldor explained Britain’s relatively poor growth performance after 1945 in terms of its poor export performance, and inspired a substantial international literature on the theory of balance-of-payments- constrained growth (McCombie and Thirlwall 1994).

He was also heavily involved in policy debates. In 1950 he set out the fundamental principles of a prices and incomes policy to permit full employment to be maintained without the risk of serious cost inflation. After a flirtation with free market liberalism in the early 1930s, Kaldor was a lifelong supporter of moderate democratic socialism. He believed in a mixed economy, with progressive redistributive taxation (preferably levied on expenditure, not on income) rather than extensive nationalization as the most useful egalitarian measure open to a social democratic government. As an adviser to British Labour governments between 1964 and 1976 he grappled with the seemingly insoluble problems of slow economic growth, balance of payments deficits and accelerating inflation. He was never afraid to suggest unorthodox and controversial policies, including the short-lived Selective Employment Tax on jobs in the service sector; this was intended to promote growth in manufacturing, where he believed the prospects for productivity growth to be much greater. Kaldor consistently opposed membership of the then Common Market (now the European Union), on the grounds that through cumulative causation it would increase Britain’s economic disadvantages, rather than reducing them.

After 1979 he became the most influential intellectual opponent of monetarist ideas, rejecting Milton Friedman’s version of the quantity theory in favour of the post-Keynesian theory of endogenous money and fiercely criticizing the deflationary consequences of Margaret Thatcher’s monetarist experiment from the Labour benches in the House of Lords (he was made a life peer in 1974). The disastrous economic consequences of Mrs Thatcher, Kaldor maintained, could only be reversed by a return to the first principles of Keynesian macroeconomic management. To restore full employment he therefore urged a policy of low interest rates (“cheap money”) and an expansionary fiscal policy. Appropriate monetary and fiscal policies could be relied upon to restrain demand inflation, Kaldor believed. To control cost inflation he proposed a return to the centralized incomes policy that he had consistently advocated since 1950, and also argued for international agreement on commodity price stabilization schemes to prevent a repetition of the explosion in the prices of oil and grains that had generated high and increasing rates of inflation throughout the world in the 1970s (Kaldor 1996).

In endorsing these “Old Labour” policies Kaldor was swimming against a very strong neo-liberal tide, which was highly influential even in what professed to be parties of the Left. His fundamental critique of neoclassical economic theory was no more successful, and in the last decade of his life Kaldor was largely ignored by a mainstream economics profession that was increasingly intolerant of any dissent. However, he remains an inspiration to post-Keynesians, and to institutionalists, social economists and other dissident groupings in twenty-first century heterodox economics.

John E. King

Nicholas Kaldor was one of the most prominent of the “Cambridge Keynesians” who defended and developed the revolutionary macroeconomics of John Maynard Keynes in the half-century after Keynes’s death (Pasinetti 2007).

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