Boylan and O’Gorman’s “Kaldor on Debreu: The Critique of General Equilibrium Reconsidered”

Thomas A. Boylan and Paschal F. O’Gorman’s paper “Kaldor on Debreu: The Critique of General Equilibrium Reconsidered” (2009) makes rewarding reading.

Boylan and O’Gorman review Kaldor’s work on general equilibrium in, for example, Kaldor (1972) and (1985), in which Kaldor had argued that the repudiation of Walrasian general equilibrium theory, especially as newly expounded in the models of Debreu and others (e.g., see Debreu 1959), was a precondition for any proper and truly empirical economic science.

More than this, Kaldor thought Walrasian general equilibrium theory was the greatest obstacle to the development of economics as a science (Boylan and O’Gorman 2009: 448; Kaldor 1972: 1237).

Boylan and O’Gorman briefly mention Kaldor’s methodological critique of general equilibrium theory, which has been interpreted by Lawson (1989) as within critical realism.

But that is not their concern. They state the fundamental issue on which they focus as follows:

“In this paper we do not propose to revisit these debates, but rather to engage with an aspect of Kaldor’s call for the ‘demolition’ of general equilibrium theory. The aspect of the problem that arguably troubled Kaldor most profoundly arose from the colonization of economics by mathematics in the neo-Walrasian research programme that arose after the Second World War. According to Kaldor, economists sought to create a ‘mathematical crystal’ (the expression is borrowed from Heisenberg) a logical system ‘which cannot be further improved or perfected’ (Kaldor, 1985, p. 60).” (Boylan and O’Gorman 2009: 448).

This occurred after World War II and involved the application of Bourbakist formalism by Debreu to Walrasian general equilibrium theory, a process which was connected to the intellectual history of the first half of the 20th century and especially the philosophy of mathematics (Boylan and O’Gorman 2009: 448).

Kaldor himself argued that other Post Keynesians focused too much on criticisms of marginal productivity theory to the detriment of other important critiques of neoclassical theory (Boylan and O’Gorman 2009: 450).

Boylan and O’Gorman then turn to Nicholas Kaldor’s marvellous little monograph Economics without Equilibrium (Armonk, N.Y., 1985).

They point out that Kaldor’s critique extended to a fundamental attack on neoclassical price theory, which, when compared to the real world reality of cost-based mark-up prices, is shown to be a fiction. And real world supply and demand, in contrast to marginalist theory, tends to be equated by use of inventory stock and management of capacity utilisation (for a summary of Kaldor’s Economics without Equilibrium, see here).

General equilibrium (GE) theory was invented by Walras, but found one of its major 20th century developers in the French economist Gérard Debreu’s (1921–2004).

At the time when Kaldor was writing, Gérard Debreu’s Theory of Value: An Axiomatic Analysis of Economic Equilibrium (1959) was a notable exposition of the mathematised Walrasian general equilibrium theory. Debreu had adopted Cantorian set theory in his mathematisation and proof of general equilibrium (Boylan and O’Gorman 2009: 452).

Debreu was influenced by the Bourbaki school of mathematics that upheld mathematics as an autonomous discipline essentially divorced from the real world (Davidson 2009: 170). That Bourbakianism had in turn been influenced by the mathematical formalism of David Hilbert (see more on that here) (Boylan and O’Gorman 2009: 453). An interesting point is that mathematical formalism is anti-realist (which means that anti-realists think human beings invent mathematics or construct it in some sense: mathematical entities are therefore not independent of conscious rational minds capable of understanding and perceiving these concepts).

As Kaldor noted, Debreu’s book does not purport to be an empirical description of reality, as, for instance, in describing how prices are actually formed in the real world (Kaldor 1972: 1237).

GE theory is an example of the aprioristic or deductive method in economics: a formal system in which a set of theorems are logically deduced from certain assumptions (Kaldor 1972: 1237). But there is no real attempt to verify whether the assumptions are true, or whether its system of established equilibrium prices has any explanatory power or even relevance to actual market economies (Kaldor 1972: 1238).

As Boylan and O’Gorman rightly emphasise, the axiomatic and deductive method of mathematised Walrasian general equilibrium theory also begins with outrageously anti-empirical axioms (or starting assumptions), which are either unprovable or blatantly falsified by reality (Boylan and O’Gorman 2009: 450).

In this respect, although Boylan and O’Gorman do not mention this, the deductivist general equilibrium method is a type of apriorism. The ultimate end of apriorism as a method – when combined with the epistemology of Kant – is the insanity of Austrian praxeology, whose inferences are totally immune to any empirical refutation of any kind, as Ludwig von Mises (with a straight face) contended:

“Praxeology is a theoretical and systematic, not a historical, science. Its scope is human action as such, irrespective of all environmental, accidental, and individual circumstances of the concrete acts. Its cognition is purely formal and general without reference to the material content and the particular features of the actual case. It aims at knowledge valid for all instances in which the conditions exactly correspond to those implied in its assumptions and inferences. Its statements and propositions are not derived from experience. They are, like those of logic and mathematics, a priori. They are not subject to verification or falsification on the ground of experience and facts. They are both logically and temporally antecedent to any comprehension of historical facts” (Mises 2008: 32).

The theorems attained by correct praxeological reasoning are not only perfectly certain and incontestable, like the correct mathematical theorems. They refer, moreover, with the full rigidity of their apodictic certainty and incontestability to the reality of action as it appears in life and history. Praxeology conveys exact and precise knowledge of real things.” (Mises 2008: 39).

Was the formalist program of Hilbert (as passing into the Bourbaki school of mathematics and Debreu’s mathematised Walrasian general equilibrium theory) any better than the praxeological epistemology of Mises?

That is a tricky question, but at least Mises thought his starting axioms were true of the real world because he thought they were synthetic a priori – whereas mathematical formalism holds its axioms and derived theorems as an “empty or meaningless, purely formal system” (Boylan and O’Gorman 2009: 453).

In other words, this is an analytic a priori system with a purely abstract or imaginary character (even for starting axioms), whose application to the real world is not even actively asserted – let alone proved!!

A case in point was the use of the concept of “Cantorian actual infinity” derived by Debreu from Cantor’s set theory (Boylan and O’Gorman 2009: 455–458). This was used by Debreu to prove his general equilibrium solution, but Cantorian actual infinity is the very definition of a totally abstract, anti-empirical, and imaginary concept. It’s 100% pure mathematics which always, epistemologically speaking, remains an analytic a priori system.

Boylan and O’Gorman conclude:

“… there is no justification for this economic interpretation of Debreu’s ingenious piece of Cantorian pure mathematics. Debreu’s proof does not support this economic interpretation. Debreu’s so-called economic equilibrium exists only in the domain of Cantorian actual infinity, which transcends any process limited to socio-historical time. More precisely, since the method of the proof of existence is inherently non-constructive, i.e. cannot be carried out in a finite number of steps taken one at a time, Debreu’s equilibrium cannot be given either a finite or a potentially infinite interpretation. Debreu’s equilibrium point is merely shown to exist in a non-temporal, actual infinite Platonic domain, which cannot in any finite effective way be realized in the socio-historical world in which economic agents operate. Alternatively, in the language of the
Hilbertian formalist, there is no evidence to support the assumption that the logical possibility, established by Debreu’s proof of existence, could be realized in any socio-economic system where real historical time operates.” (Boylan and O’Gorman 2009: 458).

That is to say, Debreu’s equilibrium solution has validity only in the world of pure mathematics, nowhere else (Boylan and O’Gorman 2009: 459).

Clearly, this won’t do. In fact, the whole mathematical formalist program as spun out by Debreu as the foundation of modern Walrasian general equilibrium theory won’t do either as a method for an empirical science – it belongs in a lunatic asylum.

As Kaldor complained, such “pure theory is not [sc. even] intended to describe reality” (Kaldor 1972: 1238).

It is not often you discover an epistemological method more half-baked than Mises’ praxeology, but there you go.

But, to return to Kaldor, he identified the major unverified and plainly unrealistic assumptions of neoclassical theory as follows:

(1) that producers maximise profits;
(2) the existence of perfect competition;
(3) linear-homogenous and continuously differentiable production functions;
(4) impersonal market relations;
(5) information communicated by market clearing prices; and
(6) perfect knowledge of all relevant prices and perfect foresight. (Kaldor 1972: 1238).

Another delusional assumption is that real economies can approach, or are close to, a state of equilibrium (Kaldor 1972: 1239).

Yet another is that a convergence to an equilibrium state is governed by exogenous forces such as essentially unchanging production patterns over time (Kaldor 1972: 1244). But the reality is that important sectors are subject to increasing returns to scale (Kaldor 1972: 1244), as Kaldor’s teacher the Marshallian Allyn A. Young at the London School of Economics (LSE) had taught him (see Young 1928 and Sraffa 1926).

Once increasing returns to scale are assumed, a dynamic system has endogenous forces that can drive it away from equilibrium.

Kaldor rightly rejects all these neoclassical assumptions as untrue, and concludes that the main theorems of neoclassical theory “cannot possibly hold in reality” (Kaldor 1972: 1240). Boylan and O’Gorman (2009: 454) agree and charge that “Debreu’s Theory of Value, seen as a work aimed at attaining the highest standards of logico-mathematical rigour and precision, is a purely formal uninterpreted system having no connection whatsoever to any branch of reality in general or real economic processes in particular.”

The upshot of all this, Kaldor argued, is that an empirical economic science needs to be built on realistic starting assumptions such as “stylized facts” (Boylan and O’Gorman 2009: 451–452).

The subsequent fate of Walrasian general equilibrium theory was to construct models so bizarrely contrary to the real world that one can only stand in awe at its ability to be disconnected from reality in its insulated madhouse (for example, no real world money in its models!).

But this also has a long history in the West, and can be best described as Platonic mathematical mysticism – an intellectual tradition which thinks that the beautiful and eternal truths of mathematics or geometry reveal the true nature of reality, whereas the world of woe and pain we live in happens to be just an imperfect reflection of the Platonic Realm of the Forms. That is to say, mathematics is truth; everything else is just a pale reflection of it (as pointed out here).

(Admittedly the Platonists were mathematical realists, and mathematical formalists are anti-realists, but let us put this arcane point aside.)

If the real world does not work in the way that a neoclassical model predicts, then – for the committed neoclassical theologian – the real world economy must be wrong. If the real world does not conform to the beautiful and eternal truth of Walrasian theory, then it must be evil government intervention, or villainous trade unions, or inflexible wages and prices, or labour market regulations, or price controls, or something – anything that pollutes the truth of the model.

At any rate, Kaldor’s insightful complaint was “equilibrium theory has reached the stage where the pure theorist has successfully (though perhaps inadvertently) demonstrated that the main implications of this theory cannot possibly hold in reality, but has not yet managed to pass his message down the line to the textbook writer and to the classroom” (Kaldor 1972: 1240). Has anything really changed today?

Further Reading
Pilkington, Philip. 2012. “Divine Mathematics – Neoclassical Economics as Spiritual Meditation,” Naked Capitalism, August 21, 2012.
http://www.nakedcapitalism.com/2012/08/philip-pilkington-divine-mathematics-neoclassical-economics-as-spiritual-meditation.html

Syll, Lars P. “Axiomatic economics — the Bourbaki-Debreu Delusion,” 21 January, 2016.
https://larspsyll.wordpress.com/2016/01/21/axiomatic-economics-the-bourbaki-debreu-delusion/

BIBLIOGRAPHY
Boylan, Thomas A. and Paschal F. O’Gorman. 2009. “Kaldor on Debreu: The Critique of General Equilibrium Reconsidered,” Review of Political Economy 21.3: 447–461.

Davidson, Paul. 2009. John Maynard Keynes (rev. edn.), Palgrave Macmillan, Basingstoke.

Debreu, Gerard. 1959. Theory of Value: An Axiomatic Analysis of Economic Equilibrium. Wiley, New York and London.

Kaldor, Nicholas. 1972. “The Irrelevance of Equilibrium Economics,” Economic Journal 82: 1237–1252.

Kaldor, Nicholas. 1985. Economics without Equilibrium. M.E. Sharpe, Armonk, N.Y.

Lawson, T. 1989. “Abstraction, Tendencies and Stylized Facts: A Realist Approach to Economic Analysis,” Cambridge Journal of Economics 13: 59–78.

Mises, L. von. 2008. Human Action: A Treatise on Economics. The Scholar’s Edition. Mises Institute, Auburn, Ala.

Sraffa, P. 1926. “The Laws of Returns under Competitive Conditions,” Economic Journal 36: 535–550.

Young, A. A. 1928. “Increasing Returns and Economic Progress,” Economic Journal 38: 527–542.

A Fundamental point about Hayek’s Early Career

It is made here by David Laidler:

“In the 1920s and early 1930s, for example, as judged by the standards of the time, Hayek showed no aversion to mathematics. More substantively important, he was an exponent of and contributor to Walrasian general-equilibrium analysis, which he referred to as ‘the modern theory of the general interdependence of all economic quantities, which has been most perfectly expressed by the Lausanne School of theoretical economics’ (1929, tr. 1933, footnote on p. 42). The idea of competitive markets as being in a constant state of evolving disequilibrium as they process and disseminate information and incentives among agents, which we nowadays associate so strongly with Hayek, did not become central to his thought until after the appearance of his 1937 paper ‘Economics and Knowledge.’” (Laidler 1999: 31).

That is a very important point: the early Hayek was just as much a Walrasian general-equilibrium theorist as an Austrian, even though he did of course draw on Austrian capital theory and Mises’ trade cycle theory, and developed this uniquely “Austrian” theory which itself drew on Wicksell’s monetary equilibrium tradition.

I discuss the problems with Hayek’s trade cycle theory which stem from its use of Walrasian general-equilibrium here. Foremost amongst these problems is the role of expectations, a criticism which Myrdal (1933) made against Hayek a few years after Prices and Production (1931) was published.

Further Reading
“Hayek’s Trade Cycle Theory, Equilibrium, Knowledge and Expectations,” January 4, 2012

BIBLIOGRAPHY
Laidler, David E. W. 1999. Fabricating the Keynesian Revolution: Studies of the Inter-War Literature on Money, the Cycle, and Unemployment. Cambridge University Press, Cambridge.

Myrdal, G. 1933. “Der Gleichgewichtsbegriff als Instrument der geld-theoretischen Analyse,” in F. A. Hayek (ed.), Beiträge zur Geldtheorie. Springer, Vienna. 361–487.

Kaldor on the Irrelevance of Equilibrium Economics

Walrasian general equilibrium theory is the greatest obstacle to the development of economics as a science.

That is the bold contention of Nicholas Kaldor in his article “The Irrelevance of Equilibrium Economics” (Economic Journal 82 [1972]: 1237–1252), and it is undoubtedly true.

One can summarise Kaldor’s argument as follows:

(1) General equilibrium (GE) theory was invented by Walras, but found one of its major 20th century developers in the French economist Gerard Debreu.

At the time Kaldor was writing, Debreu’s Theory of Value: An Axiomatic Analysis of Economic Equilibrium (1959) was a notable exposition of the mathematised Walrasian general equilibrium theory.

Kaldor notes how the book does not purport to be an empirical description of reality, as, for instance, in describing how prices are actually formed in the real world (Kaldor 1972: 1237).

GE theory is an example of the aprioristic or deductive method in economics: a formal system in which a set of theorems are logically deduced from certain assumptions (Kaldor 1972: 1237). But there is no real attempt to verify whether the assumptions are true, or whether its system of established equilibrium prices has any explanatory power or even relevance to actual market economies (Kaldor 1972: 1238).

Amongst the unverified and plainly unrealistic assumptions of neoclassical theory are:

(1) that producers maximise profits;
(2) the existence of perfect competition;
(3) linear-homogenous and continuously differentiable production functions;
(4) impersonal market relations;
(5) information communicated by market clearing prices; and
(6) perfect knowledge of all relevant prices and perfect foresight. (Kaldor 1972: 1238).

Another delusional assumption is that real economies can approach, or are close to, a state of equilibrium (Kaldor 1972: 1239).

Kaldor rightly rejects all these neoclassical assumptions as untrue, and concludes that the main theorems of neoclassical theory “cannot possibly hold in reality” (Kaldor 1972: 1240).

(2) Kaldor argued that where modern economics went wrong – both in Classical political economy and neoclassical economics – was a fixation with the theory of value, or a deeply mistaken theory of prices, in which the question of how value and price are determined for factor inputs and products takes central stage (Kaldor 1972: 1241). The major flaw in this enterprise has been the assumption of constant returns to scale (Kaldor 1972: 1241).

But modern capitalism based on technology, innovation and mass production has increasing returns to scale as its fundamental trait in many industries (above all, manufacturing) (Kaldor 1972: 1242). Division of labour is not only applicable to working human beings, but also to labour-saving machinery and technology. When mass production occurs in industry and output is large, it pays to invest in or implement labour-saving machinery. The capital–labour ratio in production is therefore more a function of market scale than the prices of relative factor inputs (e.g., the price of labour versus machinery) (Kaldor 1972: 1242).

Kaldor sees these insights as revolutionary in their ability to overthrow neoclassical theory: once we assume that the production of most commodities is subject to increasing returns to scale, the whole notion of general equilibrium theory itself must be thrown side (Kaldor 1972: 1244). Why? Because a major assumption of neoclassical theory is that a convergence to an equilibrium state is governed by exogenous forces such as unchanging production patterns over time (Kaldor 1972: 1244).

But once increasing returns to scale are assumed, the dynamic system has endogenous forces that drive it in ways away from equilibrium.

(3) Kaldor moves on to another issue by the end of his paper, which is the nature of buffer stocks in modern economies.

In primary product markets, which tend to be a rough equivalent of competitive flexprice markets, stocks are carried by merchants who are independent of producers and consumers. These dealers carry stocks that act as buffers.

But in other markets where increasing returns to scale exist often producers carry their own stocks and adjust their output in response to demand (Kaldor 1972: 1250).

The ability to increase production in response to demand is achieved in modern capitalism by an endogenous money supply: a banking and monetary system where capital investment can be financed by new money.

Kaldor notes that

“This is the real significance of the invention of paper money and of credit creation through the banking system. It provided the pre-condition of self-sustained growth. With a purely metallic currency, where the supply of money is given irrespective of the demand for credit, the ability of the system to expand in response to profit opportunities is far more narrowly confined.” (Kaldor 1972: 1250).

BIBLIOGRAPHY
Debreu, Gerard. 1959. Theory of Value: An Axiomatic Analysis of Economic Equilibrium. Wiley, New York and London.

Kaldor, N. 1972. “The Irrelevance of Equilibrium Economics,” Economic Journal 82: 1237–1252.

Kaldor on Economics without Equilibrium

If one were state the difference between Post Keynesianism and mainstream neoclassical theory, it might be summed up with the idea that Post Keynesian theory is “economics without (Walrasian) equilibrium.”

Nicholas Kaldor wrote a short monograph called Economics Without Equilibrium (Armonk, N.Y., 1985), and it still makes rewarding reading. Now it is true that some of Kaldor’s observations apply more to the full employment era of 1946 to the 1970s (the golden age of capitalism), but there is much that is still highly relevant.

I summarise Kaldor’s arguments below.

I. Prices in the Real World versus Walrasian Equilibrium Theory
For Kaldor, we need empirical investigation of the real world market economies. If our received theories do not fit the facts, the theories need to be abandoned or properly modified.

In many markets in the real world, the “sellers are price-makers and quantity-takers, and not, as Walrasian equilibrium theory supposes, price-takers and quantity-makers” (Kaldor 1985: 31). Many prices are cost-determined, and demand has considerably less influence on prices than neoclassical theory supposes (Kaldor 1985: 31).

Kaldor identifies the major flaw in Walrasian neoclassical theory in relation to prices:

“… since Walras first wrote down his system of equations over 100 years ago, progress has definitely been backwards not forwards in the sense that the present set of axioms are far more restrictive than those of the original Walrasian model. The ship is no nearer to the shore, but considerably farther off, though in a logical, mathematical sense, the present system of derived tautologies is enormously superior to Walras’s original effort.

Perhaps for that reason general equilibrium theory retains its fascination for teachers and students of economics alike. Indeed, judging by the number of Ph.D. students working on the implications of the rational expectation hypothesis, it is gaining ground, at any rate, in America. One reason is the intuitive belief that the price mechanism is the key to everything, the key instrument in guiding the operation of an undirected, unplanned, free market economy. The Walrasian model and its most up-to-date successor may both be highly artificial abstractions from the real world but the truth that the theory conveys — that prices provide the guide to all economic action — must be fundamentally true, and its main implication that free markets secure the best results must also be true. (This second proposition was indeed demonstrated but under assumptions so restrictive that Professor Hahn turned the argument around and suggested, in his inaugural lecture, that the importance of general equilibrium theory lies precisely in showing how stringent the conditions must be for ‘free markets’ to secure the results in terms of welfare that are naively attributed to them. This may well be true, but if so, it is truth bought at a very high cost.)

But the basic assumption in all this — that prices are very important in the working of a market economy — is rarely, if ever, questioned. Yet it is precisely this over-emphasis on the role of the price system that I regard as the major shortcoming of modern neoclassical economics, particularly the Walrasian version of it.” (Kaldor 1985: 13—15).

The major flaw in neoclassical theory – and indeed in Austrian theory as well – is the failure to really understand the role of prices in market economies.

In many markets, changes in supply are caused by “quantity signals,” not price signals. A “quantity signal” can be one of the following:

(1) a change in the amount of the stock/inventory* a business carries,
(2) a change in demand: changes in the sales volume or orders, or
(3) a combination of (1) and (2). (Kaldor 1985: 23).

* Note that, for many producers, stocks consist of factor inputs and not just output stock.

What, generally speaking, induces changes in production is a “quantity signal”: changes in demand or in stock. In the latter case, when a producer’s stock falls, he has the incentive to raise production to restore his stock to a normal level (Kaldor 1985: 25), and, if demand changes are expected to be large and permanent, more labour and capital goods will be employed.

Kaldor’s conclusion is that in normal times (outside, say, a severe recession) “in actual adjustment of supply and demand, prices play only a very subordinate role, if any [sc. role]” (Kaldor 1985: 25; my emphasis). Moreover, for industries with increasing returns to scale, a large increase in demand can indirectly result in falling prices (Kaldor 1985: 25).

All this means that the fundamental neoclassical ideas must be rejected: the notion of a market economy where prices are entirely or mainly set by the dynamics of supply and demand curves is wrong. Prices are often not adjusted to clear supply by gravitating to some equilibrium, market-clearing level. The main process by which an economy is supposed to have a tendency to a general equilibrium state is thus shown to be a fiction – and this is before we get to theoretical problems with the idea that market-clearing prices exist for all markets, just waiting to be discovered by Walrasian tâtonnement.

II. Supply and Demand
The firm producing a commodity in a fixprice market relies on the carrying of stocks (whether of the finished good or stocks of its factor inputs) and its sales orders (that is, the demand for the firm’s output). Price signals are less important than neoclassical theory assumes.

The normal state of a capitalist economy is unused excess capacity and a certain level of idle resources: therefore production is mostly demand-constrained, not resource constrained (Kaldor 1985: 35). Even at the state Keynesians call “full employment” – which is not zero unemployment but somewhere in the order of less than 1% up to 4% unemployment – capitalist economies are still, generally speaking, demand constrained, not resource constrained. In the case of unemployment, even advanced capitalist economies have “disguised unemployment” in the sense that demand for more labour in manufacturing (or higher paid jobs) tends to pull people from low paid jobs in services, but the loss of employment here does not really result in any significant loss of output and certainly not if workers’ productivity can rise to compensate (Kaldor 1985: 36).

Kaldor does not deny that excessive demand can cause resource constraints in an advanced capitalist economy: it shows up in bottlenecks, delays in delivery and unavailability of certain goods (Kaldor 1985: 37).

But the economies faced with serious resource constraints are more likely to be developing nations, and historically in the 20th century were actually Communist command economies that began as developing nations and that tended to engage in a level of investment beyond their resources.

III. Inflation
The source of inflation is mainly higher factor input costs: a higher wage bill or other factor input bill tends to induce higher prices (Kaldor 1985: 53). Changes in demand and in selling volume, on the other hand, are overrated as causes of price fluctuations.

The general stability of mark-up policies of firms in fixprice markets is dubbed “mark-up rigidity” by Kaldor (Kaldor 1985: 41). The profit mark-up in fixprice markets is constrained by the fear that a producer has that his competitors will not raise prices and achieve greater sales at his expense (Kaldor 1985: 40). The mark-up can also be determined by the desire to improve on market share by choosing a low mark-up in relation to other firms.

Many firms need to take care of customer relationships with regular clients, so their pricing behaviour is also constrained by the need to build up and maintain a regular clientele which can rob them of the neoclassical motive of pure profit maximisation (Kaldor 1985: 26, 48).

An important cure for inflation is the use of buffer stocks of important factor inputs that can be used to stabilise the price of these commodities when short-term supply side factors influence prices. By means of this policy measure, there will be created the real expectation of long-run price stability (Kaldor 1985: 79). The other solution to inflation is to stop excessive increases in money wages in relation to productivity growth (Kaldor 1985: 79).

Obviously, the need to stop excessive demand during booms is also a factor, but probably the least important one in the arsenal of inflation-controlling policies.

IV. International Trade
Increasing returns to scale are an important characteristic of modern production (Kaldor 1985: 68). The advantages of economies of scale are largely confined to manufacturing (Kaldor 1985: 70).

Walrasian theory is flawed by its assumption of constant returns to scale, and is thus a flawed theory for analysing problems of international development and trade (Kaldor 1985: 75).

Kaldor contends that free trade may damage the growth of industry in some nations, and that free trade is not necessarily beneficial to all parties (Kaldor 1985: 71).


BIBLIOGRAPHY

Kaldor, Nicholas. 1985. Economics Without Equilibrium. M.E. Sharpe, Armonk, N.Y.