Nicholas Kaldor

Nicholas Kaldor, Baron Kaldor (12 May 1908 – 30 September 1986), born Káldor Miklós, was a Hungarian economist.

He was educated in Budapest, as well as in Berlin, and at the London School of Economics, where he graduated with a first-class BSc (Econ.) degree in 1930.

He subsequently became an assistant lecturer and, by 1938, lecturer and reader in economics at the LSE.

He developed the "compensation" criteria called Kaldor–Hicks efficiency for welfare comparisons (1939), derived the cobweb model, and argued for certain regularities observable in economic growth, which are called Kaldor's growth laws.

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.

Káldor Miklós was born in Budapest, son of Gyula Káldor, lawyer and legal adviser to the German legation in Budapest, and Jamba, an accomplished linguist and "a well-educated, cultured woman".

Kaldor, however, had actually invented a fully coherent and highly realistic account of the business cycle in 1940.

He used non-linear dynamics to construct this theory.

Kaldor's theory was similar to Samuelson's and Hicks' as it used a multiplier-accelerator model to understand the cycle.

It differed from these theories, however, as Kaldor introduced the capital stock as an important determinant of the trade cycle.

This was in keeping with Keynes' sketch of the business cycle in his General Theory.

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:

Between 1943 and 1945, Kaldor worked for the National Institute of Economic and Social Research and in 1947 he resigned from the LSE to become Director of Research and Planning at the Economic Commission for Europe.

He was elected to a Fellowship at King's College, Cambridge and offered a lectureship in the Economics Faculty of the University in 1949.

Kaldor was invited by then Prime Minister of India—Jawaharlal Nehru—to design an expenditure tax system for India in the 1950s.

He became a Reader in Economics in 1952, and Professor in 1966.

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 Thomas Balogh, one of the intellectual authors of the 1964–70 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.

In 1969–1970, Kaldor was involved in a fierce debate with the so-called U.S. monetarist economist Milton Friedman.

While Friedman defended the exogenous money supply theory, according to which money is created by powerful central banks, Kaldor and Post-Keynesian economists claimed that money is created by second-tier banks through the distribution of credits to households and companies.

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.

On 9 July 1974, Kaldor was made a life peer as Baron Kaldor, of Newnham in the City of Cambridge.

In 1982, he published a book entitled The Scourge of Monetarism, deeply criticizing monetarist-inspired policies.

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.

After the publication of John Maynard Keynes' General Theory, many attempts were made to build a business cycle model.

The models that were built by American Neo-Keynesians such as Paul Samuelson proved unstable.

They could not describe why an economy should cycle through recession and growth in a stable fashion.

The British Neo-Keynesian John Hicks tried to improve the theory by imposing rigid ceilings and floors on the model.

But most people thought that this was a poor way of explaining the cycle as it relied on artificial, exogenous constraints.