Nicholas Kaldor

The Restless Hungarian Who Fought Monetarism

Nicholas Kaldor was born Miklos Kaldor on May 12, 1908, in Budapest, then one of the twin capitals of the Austro-Hungarian Empire and a city at the peak of its intellectual and cultural brilliance. His father was a prosperous lawyer, and the family belonged to the assimilated Jewish bourgeoisie that had contributed disproportionately to Budapest’s remarkable efflorescence in science, mathematics, and the arts during the early twentieth century. The young Kaldor grew up in an atmosphere of cultivated cosmopolitanism — he spoke Hungarian, German, and French before he learned English — and the breadth of his intellectual interests, which ranged from economics to history to technology to political strategy, bore the stamp of that upbringing throughout his life.

Kaldor came to England in 1927 to study at the London School of Economics, intending to stay for a year or two. He remained in Britain for the rest of his life. At the LSE, he studied under Lionel Robbins and absorbed the Austrian economics that dominated the department in the early 1930s — Friedrich Hayek was his teacher, and Kaldor initially accepted the Hayekian framework of business cycle theory. But the experience of the Great Depression and his encounter with the work of Keynes gradually transformed his views. By the mid-1930s, Kaldor had broken decisively with the Austrian school and embraced the Keynesian revolution with the convert’s characteristic energy. The break with Hayek was intellectual but also personal; Kaldor later said that convincing himself that Hayek was wrong had been one of the most important intellectual exercises of his youth, precisely because Hayek’s arguments were so subtle and his personality so compelling.

From LSE to Cambridge

Kaldor taught at the LSE from 1932 to 1947, making important early contributions to trade cycle theory, welfare economics, and the theory of the firm. His 1939 paper “Welfare Propositions of Economics and Interpersonal Comparisons of Utility,” co-developed with John Hicks, proposed the Kaldor-Hicks compensation criterion — a test for economic efficiency that asked whether the winners from a policy change could, in principle, compensate the losers, even if they did not actually do so. The criterion became a standard tool in cost-benefit analysis, though it was also criticized for its willingness to declare changes “efficient” even when they made some people worse off without actual compensation.

In 1949, Kaldor moved to Cambridge, joining the Faculty of Economics and Politics, and it was there that he produced the work for which he is best remembered. Cambridge in the postwar period was the center of an intense intellectual ferment, with Joan Robinson, Piero Sraffa, Richard Kahn, and Luigi Pasinetti developing a distinctly post-Keynesian approach to economics that challenged the neoclassical synthesis being constructed at MIT by Paul Samuelson. Kaldor became a central figure in this Cambridge school, contributing both theoretical innovations and a combative public presence that made him one of the most visible economists in Britain.

The Stylized Facts of Growth

Kaldor’s most enduring theoretical contribution may be his 1961 articulation of the “stylized facts” of economic growth — a set of broad empirical regularities that any adequate theory of growth should be able to explain. The facts were deceptively simple: output per worker grows over time at a roughly constant rate; the capital-to-output ratio is approximately constant; the rate of return on capital is approximately constant; the shares of national income going to labor and capital are approximately constant; there are wide differences in growth rates across countries; and economies with higher shares of investment in output tend to grow faster.

The concept of stylized facts was itself an important methodological innovation. Kaldor was not claiming that these regularities held exactly or in every country at every time. He was arguing that they represented the broad patterns that a useful growth theory should reproduce and that a theory which could not account for them — or which was inconsistent with them — was failing at the most basic level of empirical adequacy. The neoclassical growth model that Robert Solow had developed in 1956 could explain some of these facts but not all of them, and Kaldor used the discrepancies as leverage to develop his own alternative approach.

The Kaldor-Verdoorn Law and Cumulative Causation

Central to Kaldor’s alternative was the relationship between output growth and productivity growth — what became known as the Kaldor-Verdoorn law, building on earlier work by the Dutch economist P. J. Verdoorn. The law states that productivity growth is positively related to the rate of growth of output, particularly in the manufacturing sector. The faster an economy’s industrial output grows, the faster its labor productivity improves. This was not merely a statistical regularity; Kaldor argued that it reflected fundamental features of manufacturing — increasing returns to scale, learning by doing, the embodiment of technical progress in new capital equipment, and the division of labor made possible by the extent of the market (an insight reaching back to Adam Smith).

The Kaldor-Verdoorn law was the building block for Kaldor’s theory of cumulative causation, which drew on the earlier work of the Swedish economist Gunnar Myrdal. The argument was that economic growth is a self-reinforcing process: rapid growth leads to rapid productivity improvement, which leads to greater competitiveness, which leads to expanding market share, which leads to further growth. Conversely, slow growth leads to slow productivity improvement, declining competitiveness, and further deceleration. Regions and nations that got ahead tended to stay ahead, while those that fell behind tended to fall further behind — not because of inherent differences in resources or culture, but because of the dynamics of the growth process itself.

This was a direct challenge to the neoclassical prediction that economies should converge over time, with poorer countries growing faster than richer ones as they adopted existing technology. Kaldor argued that convergence was the exception rather than the rule, and that the persistence of massive global inequalities was not a puzzle but a predictable consequence of cumulative causation. The implications for development economics were profound: if growth was self-reinforcing, then industrial policy — deliberate government action to promote manufacturing — was not a distortion of the market but a rational strategy for breaking into virtuous circles of growth.

Distribution: Profits as Residual

Kaldor’s theory of income distribution, developed in the 1950s and 1960s, offered a strikingly different account from the neoclassical marginal productivity theory. In Kaldor’s model, the distribution of income between profits and wages was determined not by the technical conditions of production but by the rate of investment and the savings behavior of different classes. Workers, Kaldor assumed, saved a lower fraction of their income than capitalists. Given the level of investment, the economy had to generate enough profits to finance that investment through capitalist savings. If investment was high, the share of profits in national income had to be high as well. Profits, in effect, were the residual that adjusted to make the system’s saving equal to its investment.

This approach — which Kaldor shared, in its essentials, with Kalecki — placed the class structure of the economy at the center of macroeconomic analysis. It also implied that policies which increased investment (or reduced workers’ savings propensity) would shift income toward profits, while policies that reduced investment would shift income toward wages. Distribution was not a technical outcome but a macroeconomic one, shaped by the interaction of investment decisions, savings behavior, and the institutional arrangements governing each.

The War on Monetarism

Kaldor was not content to remain in the seminar room. He was a passionate and pugnacious participant in public debate, and from the late 1960s onward, his primary target was Milton Friedman and the monetarist doctrine that the quantity of money determined the price level and that controlling the money supply was the key to controlling inflation. Kaldor’s critique was fundamental: he argued that the money supply was not an exogenous variable controlled by the central bank but an endogenous variable determined by the demand for credit. Banks created money by making loans in response to the demand from creditworthy borrowers, and the central bank accommodated this process rather than controlling it. Attempting to control inflation by targeting the money supply would therefore fail — and when the Thatcher government attempted exactly this in the early 1980s, the resulting chaos appeared to vindicate Kaldor’s position.

The Kaldor-Friedman rivalry was one of the great intellectual battles of postwar economics: two brilliant, combative, supremely confident men arguing about the most consequential questions in macroeconomic policy. Kaldor published The Scourge of Monetarism in 1982, a polemical attack on the Thatcher experiment that drew on his theoretical work to argue that monetarism was both intellectually incoherent and practically destructive.

Tax Advisor and Public Servant

Kaldor was also a prolific and influential advisor on tax policy, serving as a consultant to numerous governments in both the developed and developing world. His most distinctive proposal was the expenditure tax — a tax on consumption rather than income — which he argued in An Expenditure Tax (1955) would be both more equitable and more efficient than the income tax. By taxing only what people took out of the economy through consumption, rather than what they put in through saving and investment, the expenditure tax would encourage capital accumulation without the economic distortions created by taxing returns to saving. The proposal was never fully implemented in Britain, though it influenced tax debates for decades and anticipated contemporary discussions about consumption-based tax reform.

Nicholas Kaldor was elevated to the peerage as Baron Kaldor of Newnham in 1974 and died on September 30, 1986, in Cambridge. His legacy is that of an economist who refused to accept the limitations of formal equilibrium analysis, insisting instead that economics must grapple with the messy, dynamic, historically contingent processes through which real economies actually grow, distribute income, and generate — or fail to generate — prosperity. In an era when the profession was moving toward ever greater formalism and abstraction, Kaldor remained stubbornly committed to the idea that the point of economics was to explain the world, not to construct elegant models that assumed its most important problems away.