Keynes’ Life: 1931

I give an account below of Keynes life in 1931.

January–May 1931
On 27 January 1931, Friedrich Hayek arrived in London at the London School of Economics (LSE). Hayek gave four evening lectures at 5 p.m. from 27 to 30 January 1931 on “Prices and Production” (Howson 2011: 196), and these lectures were later published in England as the book Prices and Production (September 1931), an exposition of the Austrian Business Cycle Theory (ABCT). Hayek himself had returned to Austria by 14 February 1930, but he moved to Britain to take up a visiting professorship at the LSE in October 1931. Keynes did not attend Hayek’s LSE lectures, but Nicholas Kaldor had been at the LSE since April 1927 (to undertake a BSc. in economics), and presumably attended.

From winter 1930–1931 and the spring of 1931, Keynes was involved in drafting the report of the Macmillan Committee (Moggridge 1992: 509). This report was signed by Keynes on 29 May and made available on the 13 July 1931 (Moggridge 1992: 511).

On 15 January 1931, in a radio broadcast, Keynes pointed to the problem of a lack of public and private spending as a major role in causing the depression, and urged increases in public and private spending to lower unemployment (Skidelsky 1992: 383–384).

Keynes helped to organise the merger of the New Statesman and the Nation in January–February 1931, and Keynes himself became chairman of the combined board in February until he died (Moggridge 1992: 508). On the 7 March 1931, Keynes published an article called “Proposals for a Revenue Tariff” in the New Statesman and Nation, which presented the case for protectionism in Britain (Moggridge 1992: 509). Keynes proposed a tariff of 15% on manufactured and semi-manufactured imports and 5% on foodstuff imports, mainly to reduce the need for budget cuts or tax increases (Moggridge 1992: 512–513). Lionel Robbins wrote a reply to Keynes’ case for protectionism, published on 14 March 1931 (Howson 2011: 198).

In late February Keynes became ill with tonsillitis and influenza (Skidelsky 1992: 389).

On 4 May 1931, Piero Sraffa was appointed as Marshall Librarian at Cambridge.

From May to July 1931, Nicholas Kaldor attended the summer term at the University of Vienna as part of his research studentship at the LSE (Thirlwall 1987: 23), and on 1 August 1931, Kaldor was first appointed to a temporary lecturing position at the LSE (Thirlwall 1987: 27; in October 1932, Kaldor became a permanent Assistant Lecturer).

June–11 July 1931: Keynes in America
On 30 May 1931, Keynes sailed for New York with his wife and his visit lasted from June–11 July 1931. Keynes spent two weeks in New York and met numerous officials and bankers including Walter Case and Eugene Meyer (president of the Federal Reserve Board) (Skidelsky 1992: 390).

Keynes had been invited to the Harris Foundation seminars at the University of Chicago (an annual event) where he was to give a talk called “Unemployment as a World Problem” (Moggridge 1992: 518), and he gave three lectures on 22 June, 26 June, 2 July 1931 (Skidelsky 1992: 391).

Keynes was in Chicago from 22 June to 2 July 1931 (Moggridge 1992: 518). Curiously, Keynes, at this stage in his thinking, did not advocate a large-scale public works program in America, but thought interest rate policy should be the main tool for fighting the depression (Moggridge 1992: 518), and Keynes found that some Chicago economists were more supportive of public works programs to bring down unemployment than he was (Skidelsky 1992: 392). Skidelsky has suggested that some Chicago school economists were more “Keynesian than Keynes” in 1931 (Skidelsky 1992: 392).

Keynes spent his last weekend in America in New Hampshire, and on 11 July 1931 Keynes and his wife left New York for England, and during his return voyage Keynes wrote a memorandum called “Economic Conditions in the United States” which was later circulated to the Prime Minister, the Economic Advisory Council (EAC) and the Bank of England (Moggridge 1992: 519).

18 July–December 1931
When Keynes returned to England on 18 July, the 1931 world financial crisis was in progress, and Keynes was generally at Tilton over the months from July to September. On 11 May 1931 (before Keynes had left for America), the Austrian bank Kreditanstalt had collapsed. By late May 1931, the financial crisis had spread to Germany, where the Reichsbank suffered from serious losses of reserves. On 20 June 1931, Herbert Hoover announced the Hoover Moratorium, which was a one year moratorium on German debt re-payments, approved by Congress and, after some initial resistance by France, by fifteen other nations. Hoover also provided $100 million for the Reichsbank. But this did not prove sufficient and by late June and early July a severe external run on foreign exchange hit Germany (Moggridge 1992: 521).

By 13 July 1931, Germany was forced to introduce a two-day bank and stock exchange holiday, after the collapse of the Danat Bank (Moggridge 1992: 521). Britain was also hit by a severe outflow of capital: from July to September the Bank of England lost over £200 million in reserves in its attempt to maintain the pound sterling on the gold exchange standard (Moggridge 1992: 522).

In response to a request for advice from the Prime Minister, Keynes replied on 5 August 1931, and opposed austerity measures and declared that it is “now nearly certain that we shall go off the existing gold parity at no distant date” (Moggridge 1992: 523).

The crisis was so serious that Ramsay MacDonald (British Prime Minister) returned from summer holidays on 11 August, and held emergency meetings and a full Cabinet meeting on 19 August 1931 (Moggridge 1992: 534). Remaining on the gold standard was now impossible for Britain as borrowing in foreign currencies required severe cuts to government spending and tax increases, as the price of borrowing from the Bank of France, the Federal Reserve of New York and J. P. Morgan was their demand to balance the budget (Skidelsky 1992: 395). The conflict within the Labour party also destroyed the Labour government, as the Cabinet voted by 15 to 5 in favour of a revenue tariff, and also a majority would not support more than £56 million of budget cuts (Skidelsky 1992: 395).

In August 1931, there appeared the first of a two-part review of Keynes’ A Treatise on Money by Friedrich von Hayek in the journal Economica. The second part appeared in February 1932. Keynes did reply to Hayek, but the criticisms of Hayek were mostly irrelevant since Keynes soon came to repudiate many of the ideas in the Treatise.

On 24 August 1931, Ramsay MacDonald formed a National Government with the Conservatives, Liberals and a new National Labour group.

The history of governments in Britain in these years can be summarised as follows:

5 June 1929–24 August 1931 – Labour government with Ramsay MacDonald as British Prime Minister
24 August–27 October 1931 – First National Government with Ramsay MacDonald as British Prime Minister with Conservatives, Liberals and a new National Labour group
27 October 1931 – United Kingdom general election
5 November 1931–7 June 1935 – the Second National Government
7 June 1935–28 May 1937 – Stanley Baldwin is Prime Minister of Britain.

On 27 August, the new National coalition government decided to implement a program of austerity, with expenditure cuts and tax increases, and by 10 September 1931 it began to implement these measures.

On 16 September, Keynes addressed a group of MPs in the House of Commons, and he condemned the austerity budget as folly (Skidelsky 1992: 395–396).

But none of the measures adopted by the new National government stopped the capital flight from Britain, and when the Bank of England lost over £18 million on 18 September, it was decided to suspend the gold convertibility of the pound sterling after noon on 19 September 1931 (Moggridge 1992: 527).

On 20 September the government announced that Britain would abandon the gold exchange standard the next day, which then happened on Monday (21 September 1931) when a Gold Standard (Amendment) Bill was passed in Parliament (Moggridge 1992: 527).

Keynes went to London and stayed from 21 September to 10 October 1931, when he attended three meetings of the Economic Advisory Council’s Committee on Economic Information as well as a meeting of the Other Club (Moggridge 1992: 528). Keynes dined with the Prime Minister on 5 October 1931 and then visited Lloyd George at Churt (Skidelsky 1992: 400).

On 30 September, Keynes recorded a British Movietone newsreel, where he defended the suspension of the gold standard and predicted that British trade would benefit from the currency depreciation that resulted (Moggridge 1992: 528). This newsreel was screened in October 1931 and Keynes appeared in many cinemas in Britain, and can be seen here:



It was also in September 1931 that Ludwig von Mises visited London for an annual meeting of the British Association for the Advancement of Science, and Mises attended a dinner held for him at the LSE on 24 September (Howson 2011: 210). In September 1931, Friedrich Hayek also published Prices and Production.

From autumn 1931, a number of students and economists at Cambridge began to meet informally in Richard Kahn’s rooms in King’s College, Cambridge, to analyse and discuss Keynes’ A Treatise on Money. These included Piero Sraffa, Richard Kahn, Austin Robinson, James Meade, Joan Robinson, and Dennis Robertson (Moggridge 1992: 531).

By Lent term 1932 (January–March 1932), these meetings became a formal seminar held in the Old Combination Room of Trinity College, Cambridge, and were known as the “Circus,” though Keynes himself did not attend these meetings and Richard Kahn acted as an intermediary for Keynes (Moggridge 1992: 531–532).

On 5 October 1931, Hayek began teaching at the London School of Economics (LSE) as a visiting professor (Howson 2011: 206). Hayek and his family lived in Constable Close in Hampstead Garden Suburb (Howson 2011: 206).

From late October to November 1931 (in the course of the Michaelmas term at Cambridge), Keynes was ill with heart problems (Skidelsky 1992: 432–433).

Late in the year on 5 November 1931, Philip Snowden stood down as Chancellor of the Exchequer and was replaced by Neville Chamberlain (Chancellor of the Exchequer from November 1931–May 1937). On 27 November 1931, Keynes’ book Essays in Persuasion was published, which included many of his writings and essays from the 1920s onwards.

On 13 December 1931, Keynes addressed a socialist group on “The Dilemma of Modern Socialism.”

BIBLIOGRAPHY
Howson, Susan. 2011. Lionel Robbins. Cambridge University Press, New York.

Moggridge, D. E. 1992. Maynard Keynes: An Economist’s Biography. Routledge, London and New York.

Skidelsky, Robert. 1992. John Maynard Keynes: Volume Two. The Economist as Saviour 1920–1937. Macmillan, London.

Thirlwall, A. P. 1987. Nicholas Kaldor. Wheatsheaf, Brighton.

Kaldor on Austrianism versus Friedmanite Monetarism

An interesting passage from Kaldor’s classic article “The New Monetarism” (1970):

“[sc. in Milton Friedman’s monetarism] Money cannot change ‘real’ things, except temporarily, and in the manner of throwing a spanner into the works—a ‘monkey-wrench into the machine’, to use Friedman’s more homely expression—at the cost of painful adjustments afterwards. There is a unique real equilibrium rate of real interest, a unique real equilibrium real wage, an equilibrium level of real unemployment. By monkeying around with money, these things can temporarily be made to change—interest reduced, unemployment cut, the real wage cut (or raised, I am not sure which)—only by making, in each case, reverse changes (abnormally high interest rates, abnormal unemployment, etc.) the inevitable sequel.

All this part of the Friedman doctrine is closely reminiscent of the Austrian school of the ’twenties and the early ’thirties—the theories of von Mises and von Hayek—a fact which so far (to my knowledge) has received no acknowledgment in Friedmanite literature. (Very few people these days know the works of the Mises-Hayek school; unfortunately, I am old enough to have been an early follower of Professor Hayek, and even translated one of his books, and there is nothing like having to translate a book, particularly from the German language, to force you to come to grips with an argument.) Friedman differs from Mises and Hayek in being more liberally spiced with the new empiricism. On the other hand, he misses some of the subtleties of the Hayekian transmission mechanism, and of the money-induced distortions in the ‘structure of production.’” (Kaldor 1970: 3).

This is an interesting point about the similarities and differences between Milton Friedman’s monetarism and the Austrian business cycle theory (ABCT).

In essence, the monetarist story was similar to the ABCT but

(1) without the assumption of the alleged unsustainable “lengthening of the structure of production”;

(2) without the hostility to fractional reserve banking, and

(3) with the assumption that flexible wages and prices will, in the long run, take care of any problems induced by money supply changes through a tendency to market clearing.

More importantly, Kaldor had arrived in England in 1927 and began to study at the London School of Economics (LSE), and, when Hayek arrived at the LSE in 1931, Kaldor fell briefly under his spell. From May to July 1931, Kaldor even spent time at the University of Vienna (Thirlwall 1987: 23; Klausinger 2012: 3).

As Kaldor says here, he had actually translated Hayek’s Geldtheorie und Konjunkturtheorie (1929) along with H. M. Croome, and this appeared as Monetary Theory and the Trade Cycle (1933) (which can be read in Hayek 2008: 1–130). Hayek also had other early supporters at the LSE such as John Hicks, Abba P. Lerner, Lionel Robbins, and George L. S. Shackle, so that some of the early founding fathers of Keynesianism – both the neoclassical and Post Keynesian varieties – had been well aware of Hayek’s business cycle theory and the Austrian tradition, but abandoned it because they found it unconvincing in light of Keynes’ work and other critiques. Kaldor, for example, had abandoned this flirtation with Austrian economics by the mid-1930s (King 2009: 17), and some of his earliest work (Kaldor 1939; 1940; 1942) involves criticisms of Hayek’s ABCT.

BIBLIOGRAPHY
Hayek, F. A. von, 2008. Prices and Production and Other Works: F. A. Hayek on Money, the Business Cycle, and the Gold Standard. Ludwig von Mises Institute, Auburn, Ala.

Howson, Susan. 2011. Lionel Robbins. Cambridge University Press, New York.

Kaldor, N. 1939. “Capital Intensity and the Trade Cycle,” Economica n.s. 6.21: 40–66.

Kaldor, N. 1940. “The Trade Cycle and Capital Intensity: A Reply,” Economica n.s. 7.25: 16–22.

Kaldor, N. 1942. “Professor Hayek and the Concertina-Effect,” Economica n.s. 9.36: 359–382.

Kaldor, N. 1970. “The New Monetarism,” Lloyds Bank Review (July): 1–17.

King, J. E. 2009. Nicholas Kaldor. Palgrave Macmillan, Basingstoke and New York.

Klausinger, Hansjoerg (ed.). 2012. The Collected Works of F. A. Hayek. Volume 8. Business Cycles. Part II. University of Chicago Press, Chicago.

Thirlwall, Anthony P. 1987. Nicholas Kaldor. Wheatsheaf, Brighton.

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.