Economic Policy

Kaldor’s interest in development economics had begun much earlier, in the aftermath of the post-war decolonisation and the emergence of what Kalecki had termed ‘intermediate regimes’, like those in India and Indonesia, which were neither communist nor fully committed to free market capitalism. Kaldor belonged to a generation of economists who believed that the problems of what were then termed the ‘under-developed countries’ (in today’s language, the ‘global South’) were profoundly different from those of the North, and that the same policies (and even, to some extent, the same theory) could not be applied uncritically to them. This marks a big difference from the intellectual world of the so-called Washington Consensus that emerged in the neoliberal world of the 1970s, and even from the post-Washington Consensus that subsequently replaced it.

In this sense—and only in this sense—Kaldor was sympathetic to Marxism, since he accepted the principle that economic theory should be historically and socially specific, not universal and timeless. In every other respect, however, he was highly critical of Marxian political economy, which (as he told a Beijing audience in a 1956 lecture) he believed to be relevant only to the unreformed capitalism of the mid-nineteenth century. He had no sympathy for the economically inefficient and politically repressive system of the Soviet Union and Eastern Europe in the post-1945 era (and indeed had relatives who suffered under the communist regime in his native Hungary).

He did, however, have a strong interest in economic policy and a taste for offering advice to governments, which could not be fully satisfied in Britain during the ‘thirteen wasted years’ of Tory rule between 1951 and 1964 (Morgan 1990: 236). Instead, he turned to the Third World, travelling widely and serving as a consultant to several governments. Between 1956 and 1962 he visited India, Ceylon (now Sri Lanka), Mexico, Ghana, British Guiana (now Guyana), and Turkey, and his writings on the problems of economic development can be found in five of the nine volumes of his Collected Economic Essays (all of volume 8 and parts of volumes 3, 4, 6, and 9). His influences included the Dutch social democrat Jan Tinbergen, other former colleagues from UNECE, and Latin American structuralists like Raul Prebisch. Economic development was a major interest of many Cambridge economists in the 1950s and early 1960s, and Kaldor will certainly have discussed the central issues with Joan Robinson (though he never shared her interest in or enthusiasm for Mao’s China).

Kaldor recognised that the unemployment problem in backward areas was enormous. It was also chronic and structural rather than cyclical and almost certainly not susceptible to rapid reduction through Keynesian policies of aggregate demand management. Similarly, one-sector growth models of both the Harrod-Domar and Solow-Swan varieties, which ignored the distinction between primary and secondary activities, were of very doubtful relevance to the problems of the poorest countries. Kaldor was stating the (almost) obvious when he asserted (in 1964) that the key to an accelerated growth of the underdeveloped areas of the world lay in bringing about fundamental changes in both the mental outlook and the technical knowledge and skill of their peasant populations. He pointed to the survival, especially in agriculture, of a traditionalist outlook that discouraged risk-taking and profit-making. He concluded that the problem of economic development could not be left to the economists, since it required an explanation of how different mental attitudes came to develop in society, why at certain stages of a society’s development traditionalism had given way to rationalism, and hence would benefit from the integration of economics and sociology.

However, Kaldor also had some sympathy for the American Marxist Paul Baran, who, in his 1957 The Political Economy of Growth, had emphasised the role of social stratification in the countryside, rather than the backwardness of an undifferentiated rural population. Latin American countries, in particular, had a tremendous burden to carry in the form of maintaining the idle rich: the detrimental effects of what Kaldor graphically described as the unbridled greed of an oligarchical ruling class were very serious. The rulers enjoyed a larger share of total income than their more productive counterparts in the advanced capitalist countries, were much less subject to progressive taxation, and spent a much larger proportion of their income on wasteful luxury consumption, much of it on imported goods.

All this had serious implications for economic policy. Kaldor argued that there was a strong case for increasing taxes on land in developing countries. This would enlarge the supply of foodstuffs to urban areas by encouraging landlords to bring some of their idle land into cultivation, and thus expand the amount of employment that could be offered outside agriculture without creating inflation. It would also encourage the more efficient use of land, in part because it would lead to the transfer of land ownership from relatively inefficient to efficient cultivators. While land reform was necessary, however, it was not sufficient. In a controversial report to the Government of India on taxation reform, Kaldor concluded that both equity and efficiency considerations required that progressive taxes be imposed also on income, capital gains, new wealth, personal expenditure, and gifts. Like his recommendations to the governments of Ghana, Guyana, Mexico, and Turkey, these proposals aroused strong opposition from the rich and were never likely to be implemented.

On other aspects of economic policy, Kaldor took an even less orthodox position, revealing his sympathies with structuralists like Prebisch. The virtues of stable and uniform exchange rates, currency convertibility, low tariffs, nondiscrimination, and the prohibition of export subsidies were genuine enough, Kaldor maintained, when applied to the conduct of the industrialised countries in their trading relations with each other. But they were much less evident when applied to the underdeveloped countries. He was a forceful critic of many aspects of the Washington Consensus, although he was always suspicious of import- substitution industrialisation and wherever possible favoured export-led growth.

As already noted, Kaldor’s interest in economic policy for Britain began in the early stages of the Second World War and continued through his coauthorship of the technical appendix to the 1944 Beveridge Report and his spell at UNECE in 1947-1949. But he was unable to exercise the influence that he would have liked on British government policy after 1945, being too young (and perhaps also too foreign) to serve as a senior adviser to the Attlee government and too left-wing for the Tories. Thus Kaldor came into his own as a policy adviser only after the Labour Party’s election victory in 1964.

He was in close contact with younger Labour politicians like Anthony Crosland and Hugh Gaitskell, and he did produce some impressive policy work before Labour returned to power. His 1951 paper on incomes policy remained unpublished until 1964, when he visited Australia and applied it to the problem of combating inflation in this small open economy. Convinced of the importance of cost-push inflation, in which the rate of increase of money wages played a central role, Kaldor argued that a national wages policy was essential to maintain price stability under conditions of full employment. To maintain the existing income shares of labour and capital, this required that money wages increase, on average, at the same rate as labour productivity.

Kaldor maintained that this average rate of wage growth should be applied throughout the economy so that industries with above-average productivity growth should be forced to reduce prices, offsetting price increases in industries with below-average productivity improvement. He was opposed to the suggestion that wages might be allowed to increase more rapidly in high-productivity growth sectors, on the grounds that this involved the workers in less progressive industries subsidising their employers’ inefficiency. Thus he was not a supporter of what later came to be known as ‘productivity bargaining’ at the level of the industry or the individual company (in Australian parlance, ‘enterprise bargaining’). Kaldor’s ideas were taken up by Eric Russell and Wilfred Salter and formed the basis of the influential Russell-Salter rule for national wages policy in Australia.

In 1951, which proved to be the final year of the Attlee Labour government, Kaldor had been appointed a member of the Royal Commission on the Taxation of Profits and Income. While he had no influence over the taxation policy of the incoming Conservative government, the experience did encourage him to write a 250-page book on the issues considered by the Commission. In An Expenditure Tax (1955), Kaldor argued the case for a progressive tax on ‘spending power’ rather than income. Earlier proponents of expenditure taxation, who included Mill, Marshall, Pigou, and Fisher, had emphasised the advantages of exempting saving from tax. Kaldor made the same point from a different angle, focusing on the need to tax dis-saving. In the ‘age of austerity’ that characterised the British economy in the late 1940s and early 1950s, wealthy people had been able to maintain their standard of living by running down their capital, an option that was not available to poor people. This, Kaldor argued, was patently unfair. Income taxation was also inefficient since it penalised saving and productive enterprise. Thus an expenditure tax would be both more equitable and more efficient than the existing system.

The book was favourably reviewed by eminent tax theorists like Richard Musgrave and Carl Shoup, but there was never any prospect of Kaldor’s proposals (which included a marginal tax rate of 300% on annual expenditure in excess of ?5,000) being implemented by the Conservative government of the day. However, he continued to develop his ideas on policy issues. In 1959 Kaldor, like his Cambridge colleague Richard Kahn, made a detailed submission to the Radcliffe Committee on the Working of the Monetary System. In written and verbal evidence, he repeated his earlier objections to monetarism. There was no evidence that the velocity of circulation was constant, Kaldor maintained, and hence no basis for the belief that the volume of expenditure was determined by the quantity of money in circulation. In fact, the velocity of circulation was a variable that depended on the course of monetary policy: thus attempts to restrict the money supply would be frustrated by the resulting increase in velocity. Monetary policy would work, if at all, only indirectly, through changes in interest rates, and there was very little evidence to support the use of higher interest rates as an anti-inflationary measure.

Kaldor came into his own as a policy adviser during the eight years of Harold Wilson’s Labour governments (1964-1970 and 1974-1976). He served as Special Adviser to two Chancellors of the Exchequer, James Callaghan and Dennis Healey, and was at last able to see some of his ideas put into practice. The most celebrated and controversial measure was the Selective Employment Tax (SET), introduced in the 1966 budget to encourage the growth of employment in manufacturing at the expense of the service sector. In the following year, the proceeds were used to fund a Regional Employment Premium (REP), a subsidy to jobs in manufacturing in regions of high unemployment that was (as Kaldor noted) in effect a devaluation confined to the depressed areas of the UK. The intention was to exploit Verdoorn’s Law by promoting faster output growth in the secondary sector, thereby improving productivity growth, increasing the country’s competitiveness in export markets and permitting a faster rate of growth of the entire economy.

In this way Kaldor’s growth theory was applied directly to macroeconomic policy. It was always controversial, and its critics regarded it as at best an irrelevance and at worst an impediment to the performance of those sectors of the British economy (above all financial services) with the best prospects of future expansion. He would have responded that the new tax and subsidy measures were long-term policies that were not given the chance to work; SET was abolished by the Conservatives in 1972, and REP was sacrificed four years later by the Labour government in the first wave of monetarist-inspired public expenditure cuts that Kaldor strongly opposed.

Kaldor was at odds with the majority of opinion in the Labour Party on another important economic policy issue, British membership of the European Union (then known as the Common Market). In the early 1970s this opposition was not confined to the anti-immigration populist right, but extended across the political spectrum to include elements of the left and (like Kaldor) the centre of the Labour Party. Kaldor objected that membership of the Common Market would benefit capital at the expense of labour, would adversely affect all sections of British society through the higher food prices imposed by the Common Agricultural Policy, and—this was his crucial argument—disadvantage British manufacturing industry by subjecting it to unrestricted competition from the faster-growing Continental countries that were benefitting from Verdoorn’s Law. Instead, he urged Britain to retain a degree of national sovereignty, above all on the currency and the exchange rate. Had the issue arisen in his lifetime, Kaldor would certainly have been strongly opposed to British membership of the European Currency Union and the proposed adoption of the euro in place of sterling.

In his Euroscepticism, Kaldor had something in common with Margaret Thatcher. On every other issue he was a stern critic of the new neoliberalism. He was resolute in his opposition to the Thatcher government’s economic and social policies, using his position in the House of Lords (to which he had been appointed in 1974) to attack the class war that the Conservatives were waging against organised labour and to denounce the huge and quite unnecessary costs of their efforts to overcome inflation. In 1983, 20 of his speeches were published in a slim volume entitled (with an obvious bow to Keynes’s 1926 attack on Winston Churchill) The Economic Consequences of Mrs Thatcher. He did not worry unduly about causing offence. Thatcher’s economic policies could be compared, Kaldor believed, with the deflationary measures introduced by Philip Snowden and Ramsay MacDonald in 1931; her administration was as bad as the disastrous Bruning government that had paved the way for Hitler’s rise to power in the Germany of the early 1930s. Moreover, his attack on ‘the scourge of monetarism’ (Kaldor 1982) was now increasingly linked to criticism of mainstream economic theory as a whole.