Before Cambridge

Kaldor began the 1930s as an undergraduate student and ended it as one of the world’s leading young economic theorists. He was always a prolific writer. In Berlin, at the tender age of19, he had worked as a stringer for the Budapest press, a practice he continued for a while after his move to London. While still a research student, he was also co-translator of Friedrich von Hayek’s extended critique of underconsumption theory, which was published in the LSE house journal, Economica (Hayek 1931).

His own publications began in 1932 with a 12-page article in the Harvard Business Review on the Austrian economic crisis. Over the next eight years, he published 22 journal articles, eight substantial book reviews, and a translated book (again by Hayek). Kaldor’s interests covered the entire gamut of economic theory, and he also engaged with economic philosophy and policy. His 1934 paper on the nature of equilibrium theorising raised important questions of methodology, the full significance of which he only came to appreciate several decades later. In 1937, in the only article that he ever published in Econometrica, he defended the Austrian theory of capital. Then two major articles in 1939 established him as an original theorist of real stature. The first, drawing on Lionel Robbins’s critique of interpersonal comparisons of utility, set out the compensation principle as the foundation of a non-Benthamite approach to welfare economics, while the second dealt with the theory of money and finance and the macroeconomic consequences of speculative behaviour.

By now Kaldor had abandoned his earlier sympathy for Hayek’s Austrian approach to economic theory and had become a committed Keynesian. In 1940, as editor of the Economic Journal, Keynes published Kaldor’s paper on the trade cycle, which attempted to model the insights contained in chapter 22 of The General Theory. Kaldor did so in a characteristically informal manner, relying entirely on diagrams and without any algebra. He emphasised fluctuations in saving and investment, not monetary instability. Kaldor had already set out his attitude towards the quantity theory in a 1939 review of Arthur Marget’s Theory of Prices. Money influences the economy only indirectly, through changes in the rate of interest; changes in the money stock affect output and employment, not prices; the price level depends on the money wage rate, not on the stock of money. These principles would underpin Kaldor’s later objections to monetarism in theory and practice.

As already noted, Kaldor spent the war years in Cambridge. While he had become a British subject in 1934, and on the outbreak of war made enquiries about joining the civil service as an economic advisor, he was told that his Hungarian origins would disqualify him from anything other than menial duties in Whitehall. He therefore decided to stay in academia. Now based at Peterhouse, Kaldor was able to deepen old friendships and develop new ones. A war Circus of economists began to operate, named by analogy with the Cambridge Circus of young theorists who had interrogated Keynes in 1930-1931 after the publication of the Treatise on Money and helped to focus his mind on the revolutionary breakthrough of The General Theory. In addition to Kaldor, the war Circus included Joan Robinson, Piero Sraffa, and (when he could escape from official duties in London) Richard Kahn. Kaldor was particularly fond of Sraffa and also became a close friend and walking companion of Robinson.

Kaldor wrote extensively on the problems of the war economy and the prospects for post-war reconstruction, endorsing Sir William Beveridge’s proposals for the introduction of a comprehensive system of social security after the war. Kaldor also set out the fundamentals of Keynesian fiscal policy, anticipating what his old LSE friend Abba Lerner was to call the principle of ‘functional finance’: government spending and taxation and revenue should be set to produce full employment without demand inflation, and there should be no concern as to whether the budget was in surplus or deficit. This contrasted sharply with the traditional principle of ‘sound finance’, which required that the budget always be balanced, either annually or over the course of the trade cycle. Kaldor’s final contribution to the debate on post-war reconstruction was to apply the principle of functional finance to the problem of maintaining full employment after the war. This was the subject of the second Beveridge Report, Full Employment in a Free Society, which was published in 1944 and to which Kaldor contributed a lengthy technical appendix setting out a number of alternative fiscal scenarios.

Kaldor’s break with Hayek now had a political as well as a theoretical dimension. Significantly, Kaldor did not move back to London when the LSE returned there at the end of the war. Instead, he remained in Cambridge and commuted to carry out his teaching duties. In 1945 he was seconded to the United States Strategic Bombing Survey, and in the following year, he worked briefly at the Ministry of Defence as advisor to the British Bombing Survey. He also advised the Hungarian and French governments. In 1947 Gunnar Myrdal invited him to join the UNECE in Geneva. Kaldor was refused leave of absence from LSE, and so he resigned. While in Geneva, he largely wrote two of the Commission’s annual ‘Economic Surveys of Europe’, served as adviser to the United Nations Technical Committee on Berlin Currency and Trade, and wrote much of the ‘Report on National and International Measures for Full Employment’ for another United Nations expert committee.