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Kaldor's Theory of Circular and Cumulative Causation and trade practices of firms and nations, part 4 in Understanding the Global Economy

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Econonic Guidance of Kaldor

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An essay by Candace Howe and Ann Markusen within the collective volume Trading Industries, Trading Regions dissects an $84 billion United States manufacturing trade deficit in 1990. Some $53 billion of the trade deficit is explained by the globalization of production due to the comparative advantages of low wage areas. The essay pinpoints the cause of the deficit further, citing that

    A chunk of the trade deficit, $40 billion with Asia and $13 billion with Latin America can be explained by neoclassical trade theory or its modern version, the ethic of the new international division of labor theory.

    The United States had imported low-wage consumer goods and labor-intensive electronics assemblies from Southeast Asia. Much of the trade between the United States and Mexico is automotive products and electronics sent to Mexico for assembly and fabrication and then shipped back to the United States. Consumer goods imports from Southeast Asia came about due to a native peoples development effort. The electronics and auto parts imports followed the corporate search for low-wage havens of blue-collar assembly.1

To say that the phenomena observed are explained by low wages is, to recall a point made above, to use explanation or cause in a weak sense. The low-wage scale abroad is not a sufficient explanation (cause) of the United States trade deficit. It might be the case, however, that the U.S. would stop all trade with low wage areas and, thus, make zero deficit. A complete list of the conditions that need to be met before the observed phenomenon, a $53 billion trade deficit, will be produced and would, therefore, include all the institutions, decisions and physical (brute) 2 facts that led to or allowed such trade. A complete causal explanation would also have to explain why in 1960 the deficit did not occur, even though the U.S. traded in those regions that used low-wage labor.

The main conclusion Howe and Markusen want to draw in the passage quoted is that a theory of globalization like that of Bluestone and Harrison sketches some main features of a plausible causal explanation of $53 billion of the 1990 United States manufacturing trade deficit. Nevertheless, as Howe and Markusen make clear in the sequel with regard to the remaining $29 billion, such a theory cannot possibly explain that remaining chunk of the deficit because that part of the deficit was in trade with high wage areas. The implication is that some other causes must be at work besides low wages. The suggestion is that we may need theories of a different type to understand international trade.

To this goal, Part IV will engage the economic ideas and processes such as circular and cumulative causation as applied by the late Nicholas Kaldor, a prominent 20th-century economist. Kaldor's major breakthroughs were to 1) distance himself from neoclassical economics by endorsing and proposing explanatory principles different from the neoclassical principles and 2) prescribe a series of Keynesian remedies for the ills of international trade.

IV.i. Kaldor's explanations

At least two types of causal explanation are characteristic of Kaldor's work. His two main explanations are inseparable. One is the principle of circular and cumulative causation, which Kaldor adopted from Gunnar Myrdal.3 It emphasizes that within international competition for markets that success tends to lead to more success, whereas failure tends to lead to more failure. The other inseparable twin explanations of Kaldor's theoretical basis is of a type that may be useful to call accounting causality, which is central in the work of the 20th century economist, Keynes. Unlike the neoclassical economists who tend to approach economics as a social physics, economists in the Keynesian tradition, such as Kaldor, tend to conduct economics as a social accounting.4

Kaldor does not deny that technology has played a causal role in history. Instead, he realized that technology and economics as market forces and growth are in constant interaction. Therefore, he understood that it is impossible to know how much historical change is due to one or the other.

Kaldor notes that Ricardo's theory of comparative advantage, as improved by Mill, Hecksher, Ohlin and Samuelson, is the mainstream international trade theory today. It implies that

  • every nation gains from free trade
  • due to trade, the poorer countries will gain most, while
    • the richer countries gain least and as trade increases,
    • real income per person will tend to be the same in all countries. Kaldor writes:

In the last two hundred years, international trade has increased in relation to the total world income. However, the trends in income per capita for have been the inverse. Disparities between wealthy countries and poor countries have widened much, which is the inverse of what the theory predicts.5

Kaldor's explanation of the growth of the difference between wealthy countries and poor countries is that business in the poor countries is inefficient in almost every way. Thus, integration into the global economy means that, for example, 1) farmers are driven out of business by cheap imported wheat, 2) local spinners lose to cheap imported textiles (the issue of Gandhi's movement against free trade) and 3) native artisans are unable to compete with less expensive goods from foreign factories. Kaldor writes:

Pre-developed countries are less efficient in production, which means that they require greater inputs per unit of output, which is not just in terms of one factor, but all factors.6

Because free trade eliminates local producers, it condemns the poorer countries to specialize in the production of raw materials and minerals. Sadly, the specialty production is capable of employing only a small fraction of the labor force. Kaldor writes:

The countries depending on the exports of primary products, thus, remained poor by comparison. The poverty was not a consequence of low production by labor in their export sectors. Instead, it is the limited employment capacity of their profitable industries.7

The inverse of the cumulative failure of the pre-developed people is that the success of free trade is cumulative. About 90% of the funds invested to expand manufacturing capacity come from retained earnings. Those who have earnings to reinvest in technical upgrades and greater economies of scale reap even greater earnings and create a cycle of greater efficiency. Thus, the wealth to poverty disparity escalates, largely unchecked, worldwide. An example, though not mentioned by Kaldor, of cumulative success in the global market is the pharmaceutical industry in the United States. Companies like Merck and Lilly have attained commanding leads in an industry that take enormous capital investment, great scientific expertise and long R&D lead times.

Thus far, at least, the low wage countries have been unable to challenge the United States and, to some extent, European technology lead in drugs.8 The process of circular and cumulative causation has, therefore, polarized wealth and poverty within nations as well as between nations. In Italy, for example, as Kaldor writes:

    The economic unification of Italy is a well known example of polarization. The unification occurred when the industries of the north of Italy had developed more than those of the South did. Though the difference was small, industrial productivity was near twenty percent higher in the North than in the South. The difference was sufficient to allow the free and guaranteed access by the northern industries to the southern markets and that inhibited the development of the South at the same time as it accelerated the industrial development of the North.9

With the polarization produced by free trade as prescribed by neoclassical economics, the world has seen a balancing trend, which is the spread of industrialization from one country to another. After Britain, which was the first country to industrialize, every other country starting with France, Germany and the United States has industrialized by violating the prescriptions of neoclassical economics. All nations that industrialized (except Britain) did so with the aid of protective tariffs, which were high enough to give home-produced goods the comparative advantage over imports.10 An effect of the causal processes at work in the world economy is that high wage countries wishing to remain as such need to focus upon export market leadership by developing products with that in mind. Kaldor writes:

The proper division of international trade in manufactures is not so much the traditional division between capital-intensive and labor-intensive trade, but rather between low-wage and leading technology trade. The high wage industrial countries need to export goods for which they have a technology lead over others. That lead is either the design and marketing of new products (such as high-tech and consumer electronics) or because of advanced manufacturing processes, which yield comparatively high productivity.11

Japan designed the best trade strategy to create technology leads. It succeeded in field after field. The success of that model has spurred the call for an industrial policy in the United States, which likewise would make product development and the conquest of export markets a concerted national effort. Japan's industrialization was motivated via military defense as it was for most nations that industrialized by design and with protective import restrictions. Without modern industry, Japan would be too weak to resist foreign domination. "Export or die!" was the slogan conceived by Kaldor's friends in post-WW II Britain. The slogan might well have been the motto of Japan.

Arguments for investment in growth industries derive strength from 1) the explanatory principle of circular and cumulative causation and 2) social accounting.

An accounting identity that Keynes found important is that as money circulates as a medium of exchange, the total of revenues must equal the total of expenditures. What is, from one person's point of view, a purchase is, from another person's point of view, a sale. One person's outlay is someone else's income. Every time money changes hands, the account of the spender is debited, as the account of the merchant is credited and, thus, debits equal credits. Disregarding subtleties, the overall result for society, after adding up all domestic transactions is that society has the same amount of money as it had before money merely changed hands.

At its best, the exchange process is a part of the technostructure in which society gains by way of produced and distributed goods and services. In theory, if money continues to circulate as the medium of exchange, an unimpeded flow of goods, services and joy follows.12 People, however, often keep accounts where they define success as ending up with more money than they started with. For this and other reasons, people are often inclined to treat money as a store of value by saving it instead of spending it, as Keynes writes

The psychology of the community is such that when aggregate real income is increased, aggregate consumption is increased, though not by so much as income. Hence, employers would make a loss if the total increased employment were devoted to satisfying the increased demand for immediate consumption. To justify any given amount of employment, there then must be an amount of current investment sufficient to absorb the excess of total output over what the community chooses to consume when employment is at the given level.13

For society as a whole, total revenue for time period x is greater than the total available for expenditures in time period x + 1 because some part of the revenue is saved instead of spent. Sales lag, for lack of effective demand, i.e. for lack of purchasing power coupled with the desire to spend. When sales lag all else lags because, as a rule, we produce goods and services to sell them. All would be well if each cent we saved we invested because investments are, from the investor's point of view, purchases of raw materials and labor and so forth. Therefore, investments are, from someone's point of view sales and, thus, income.

The Keynesian explanation justifies saying that government policy can cause, in Kaldor's terms: growth as opposed to stagnation. If the government takes those measures that result in the purchasing power being in the hands of those who want to spend it or to invest it, then its policy will cause growth. It will make society's books balance by compensating for people's tendency to save without investing. About this, Kaldor writes:

    In the years 1980-82, Britain's policies caused a deepening recession in Europe. I hold Britain mostly responsible for that recession because of the coincidence of North Sea oil and Mrs. Thatcher coming on stream more or less at the same time. Because of the North Sea oil, the balance of payments on current account had a turnaround of nearly nine billion dollars (from -1.4 to +7.5 billion) between 1979 and 1980 rising by 5.5 billion to 13.2 billion in 1981 The deflationary policies of the monetarist government of Mrs. Thatcher caused a turnaround of total real domestic demand by 6% of the gross domestic product, (+3% in 1979 to -3% in 1981) which caused a rise in unemployment of almost two million.14

The North Sea oil, thus, was an opportunity that Britain missed, as Kaldor writes:

The new source of income from oil should have been combined with a bold policy of expansion of both public and private investment. Instead, Britain's gain from oil was wholly offset by the 15% fall in her manufacturing output.15

Thatcher's policies caused growth to decline through a series of measures that restricted access to money, including higher interest rates. The lack of money caused demand to fall, which in turn caused unemployment to rise. In contrast, the policies Kaldor proposed would have made money available to finance public and private investment. This is an accounting causality as it operates by keeping track of the national accounts and then adjusting them through government or concerted private action. The accounts are adjusted at the macro-level in several ways. The intended result of policies advocated by Kaldor and others makes it easier for people to access money in their bank accounts to pay for consumer purchases and for investments. Having money in the bank is the power to perform certain actions. Therefore, a favorable adjustment to one's account coupled with a desire to spend or invest will generate purchases/sales, which produce employment and growth. In contrast, the Thatcher policies caused unemployment, stagnation and a loss of consumer confidence in most economic sectors in Britain and Europe.

By Kaldor's account of it, Thatcher's deflation resounded throughout Europe because a deflated British economy was not a good customer for the goods that her continental trading partners would have otherwise exported to her. Therefore, Europe's sales fell, so then its entire economy fell.

In a Kaldor world, accounting causality tends to support the need to attain and keep technology leads. A nation's policy should stimulate investments just to balance the national books, i.e. to keep money flowing. Given that investments in general ought to be stimulated, what better choice of investment could there be than one that 1) develops new products for export, 2) exploits and expands the nation's technology leads and 3) captures new export markets with its superior technologies.

IV.ii. Kaldor's prescriptions

The ethical basis of Keynesian economics differs little from those of neoclassical economics. Both schools advocate a competing means to the same end, which is the maximizing the satisfaction of the preferences of buyers while respecting the freedom of the individual. However, the Keynesians 1) are free of most bias in favor of decisions made by the market, the structure which cast suspicion on the ethic of government market intervention, 2) rarely let the premise of—what is natural is good filter into economic theory, the premise which casts unethical overtones on government programs designed to achieve objectives, in contrast with Rousseau and Locke and 3) reject the notion that the market is a fact of nature and that government is artificial with its actions as distortions of market prices resulting in imperfections in the market mechanisms.

Kaldor is among the unabashed activists who attack the neoclassical theorists not because they have wrong values, but because they have absurd theories. Backed by a better theory, Kaldor prescribes a different route to prosperity and freedom. He was a lifelong scholar and an activist who made many proposals for reshaping the global economy. Toward the end of his life, he proposed a four-point program for restructuring the associated economies of the Western powers. It is similar to his proposals for the global economy and the Keynesian option in the study by Piore and Sabel. Kaldor's four-point prescription summarizes as follows:16

  1. full employment, budgets coordinated with lower taxes and increased expenditure 17
  2. lower interest rates as coordinated internationally
  3. international price supports for basic commodities that suffer price slumps due to their competitive markets, as coordinated through a system of buffer stocks and
  4. an international agency that would buy commodities when their prices were low in order to increase their prices using an international reserve currency created for the purpose.

Kaldor concedes that the first three points would leave one important problem unresolved, one that Keynes left unresolved, too, which is the tendency to chronic inflation during full employment conditions.18 He views the control of inflation as a matter of curbing wages and using sound fiscal and monetary policy. In this respect, he advocates that we devise a system of consultation between the social partners—workers, management, and government—in order to arrive at a social consensus concerning the distribution of the national income that is considered fair and consistent with the maintenance of economic growth, near full employment and monetary stability. We might then presume the coordination of an international process in an effort toward a national wage consensus.19

The weight of academic and political opinion has turned against the Keynesian prescriptions such as the ones Kaldor presents. Expansionist prescriptions have led to increasing debt burdens, which is one reason for the advance of neoliberalism and the decline of the social democratic mandarins who managed capitalism to make it achieve social goals. Keynes' original idea of counter-cyclical-spending government budgets proved to be a fantasy in which 1) deficit spending must occur when business is down and, then 2) repayment of the debt via higher taxes must ensue when business thrives. This fact inspired negative confidence at home and abroad.

The legacy of Keynesian policies is continuous deficit spending. Therefore, Kaldor attributes the postwar boom from 1949 to 1971 to the United States deficit spending. After WW II, the United States created purchasing power in the world economy by running up huge public and private debts. It could afford to do this because until 1971 the dollar was the international currency. Foreign governments were content to hold reserves in the form of dollars. The United States credit was golden because it could print whatever amount of money it needed to pay its debts. When Europeans began demanding gold and deutschmarks instead of dollars, the United States currency ceased to be the world's reserve. Its ability to generate purchasing power on a world scale ended and with it, the postwar boom.20

Neoclassical economists and others, therefore, often oppose Kaldor's prescriptions as unworkable in the long term. Even though as Ross Perot stumped, "It is imperative to balance the budget and start paying the debt" 21 and even if fiscal decisions are, in fact, more effective in the private sector, we still may not have these key elements: 1) a viable alternative to Keynes' proposal to offset the tendency of capitalism toward stagnation by way of counter-cyclical spending. Therefore, the conclusion from the premise that Keynes was wrong may simply be that capitalism is chronically unstable, or 2) a better means to Kaldor's objective of growth than his means, which is the concerted national support of product development for export. Thus, one might support Kaldor's analysis of and conclusion about what needs to be done, though propose a different, perhaps better means to it.

Even if one agrees with a neoliberal critique of Keynes, thus, rejecting Kaldor's prescriptions for expanding economic activity, we still have two more dimensions of the analysis to consider. Therefore, we now decide whether we should (if possible) reject the goal of economic growth and launch a steady state economics that does not require growth.22 Kaldor believed that the present anti-Keynesian trend has, as its main motive, its wish to strengthen management and weaken labor by taking the issue of unfair wages off the national agenda.

Rejecting government macro-management of the economy invites a laissez-faire government and, therefore, it denies voters the opportunity to vote for wages and rights beyond those imposed by free market forces and property rights. To remove the government from the economy is to get the poor hand out of the rich pocket. Making the same point from the opposite direction, Jurgen Habermas argues in The Legitimation Crisis that the Keynesian management of the economy proves that the allotment of revenue between property and wages is a political contrivance determined by political power, not a natural fact.23

Similarly, advocates of industrial policy combine the advocacy of measures to increase national competitiveness with measures to increase social peace. Consensus on social issues among the social partners is good PR for the export trade. Well-distributed subsidies ensure that both the rich and the poor get some. Some sort of consensus-producing social bargaining is required for the smooth and uninterrupted functioning of the economy once the people of the state decide that a democratic (elected) government will manage it. Therefore, another ethical dimension of Kaldor's proposals is whether an activist industrial policy is viable as a way to put social issues onto a government's agenda.24

Kaldor's four-part program for economic recovery may not make it clear that his prescriptions were in principle global and permanent. He recognized that in today's world managing the economy through social accounting, if it is going to work, must function at the international level. In terms of related ideas ascribed to him, Kaldor 1) was confident that all nations could enjoy export-led growth by exporting to each other, 2) found shortcomings in Harrod's theory that a warranted rate of growth is sustainable, but he amended it to repair the shortcomings. Therefore, he was able to argue, in his critique of Marx as delivered in Peking in 1956 that—There can be no presumption of crisis based on a falling rate of profit and 3) he made major contributions to the theory and practice of taxation. He was confident about his approach to adjusting the heavy tax to be compatible with growth and the sustainable welfare of all.25

I critique the main features of Kaldor's prescriptions by assessing the concept of growth, which 1) balances the social books by making savings equal to investment and making supply equal to demand, 2) in theory, brings about progress and prosperity and 3) is the vital remedy for its alternative, the fate of which Kaldor cares to teach the world how to avoid, which is, in a word, stagnation.

The promise of growth cements the anticipated social consensus in which the government's action to achieve social justice had a majority support as a consensus from bankers, investors and entrepreneurs. Growth as an ideal may survive when Kaldor's prescriptions for pursuing growth are discredited as inflationary, inefficient and or leading to unsustainable debt. Pursued by other means, growth may survive as an ideal.

The most obvious objection to the ideal of growth is that it destroys the environment. It is impossible to continue indefinitely the present destruction of habitat by Homo sapiens. Therefore, it is a crime against posterity to attempt it.

The objection to the ideal of growth by green economists meets with valid criticism from Kaldor's close associate, Joan Robinson who writes—Those who protest growth should instead redefine it.26 Adding to that she writes —The greens should define growth so that the undesirable outcomes such as it pollutes, exterminates species and warms the atmosphere are given a name other than growth, e.g., pseudo-growth, anti-growth or toxic growth. Therefore, a true growth as the green growth would consist of desirable outcomes, which is that activist governments would pursue it instead of anti-growth.

Redefining and renaming growth, however, does not solve the problems for which Kaldor offers growth as a solution. Product development has to occur in order to maintain technology leads, which is never easy. To keep a lead in the market of exclusive green growth products would, thus, not always meet the outcome that product development has to achieve: the sales of products. To solve capitalism's problem, new products have to sell on a massive scale and reap the super-profits that would counteract what would otherwise be a falling rate of profit. Super-profits from the exports of new technology justify the super-investments needed to balance the social books. Kaldor writes:

    Technical progress is a continuous process that takes the form of development and marketing new products, which provide a new and preferable way of satisfying a need or want. Such new products, if successful, replace existing products that serve the same needs. Because of marketing, the heightened increase in demand for the new product is disproportionate to the normal increase in demand resulting from economic growth.27

The development of new products for which demand is disproportionate to normal demand does not stop, even if it is anti-growth that breaches ecological norms. Nor will it cease to be necessary to balance society's books. The process of new products development and market will persist as necessary if "islands" of high wages are to be preserved in a global "sea" of low wages, which is essential to the status quo. Thus, high effective demand and consumers who like to shop with their credit cards will still be necessary to keep employment at acceptable levels. Therefore, the most obvious objection to growth is a valid one and redefining and remaining growth does nothing to create the institutions and culture needed to guide us toward green growth.

Kaldor's prescriptions, workable or not, display the treadmill that ensnares humanity. It is necessary to go forward faster just to stay in place. The potential demand worldwide for new products determines the direction of movement. Meanwhile, we defer truth, beauty, justice, compassion, partnership with nature and other ideals. We may honor ideals, although merely as conditional and imposed by what we need to do to stave off economic collapse. Keynes writes:

For at least another century, we must pretend that fair is foul and foul is fair, because foul is useful and fair is not. Avarice, usury and precaution must be our goals for a bit longer, still. For only these can lead us from the tunnel of economic necessity, into daylight.28

Therefore, the caring and aware humans throughout the planet Earth are asking the questions, Why did we get on this treadmill? How can we get off of it? Graphical historiography of the treadmill, appendix A

IV.iii. Kaldor's metaphysics

Kaldor was a part of a generation for who the word metaphysical was a synonym for the unverifiable. In his polemics against his neoclassical opponents, he delighted in castigating their theories as at best a branch of metaphysics.29 Yet, Kaldor's world takes its form via the metaphysics of economic society described in section 1c, 2c and 3c.

The term metaphysics delineates the basic categories of a civilization by embracing its cosmology, ethics, epistemology and its view of human nature defining a worldview. It is what Plato, Aristotle, St. Aquinas and Kant 30 attempted. Kaldor is an adherent of modern philosophy and has kind words for Karl Popper's philosophy of science. Modern philosophy does articulate the metaphysics of economic society. It is not so much, however, Kaldor's explicit sympathy for a falsificationist philosophy of science and for modern ideas, as it is the implicit basis of his economics that makes Kaldor a participant in a world shaped and justified by metaphysical ideas.

First, I will extract the metaphysical assumptions that are latent in the explanations Kaldor makes about economic phenomena. The bases of his explanations are the basis of his prescriptions as well. Modern practices and discourses are at the core of Kaldor's thought and are that for which philosophers have composed rationales that serve the functions of traditional metaphysics, even when they describe their work as anti-metaphysical. I do not believe Kaldor disagrees, since he writes this:

    The study of economics is concerned with the problem of how, in a decentralized and undirected market economy, do scarce resources become allocated in proportions that give the highest satisfaction to consumers as a body. This is to say, in Pareto's sense, that no one could become richer with any alternative allocation without making someone else poorer.31
In such passages, Kaldor appears to acknowledge that economics is, so to speak, a local science that applies to recent centuries and to those parts of the world where the institutions, which it takes for granted, exist. Next, I will compare the traditional economic metaphysics with the modern metaphysics by using the conceptual distinctions that are inherent between, 1) Max Weber's traditional value rationality versus modern instrumental rationality, 2) Christopher Hill's the ancients versus the moderns who replaced them in the universities the early modern era and 3) final causes in relation to efficient causes.

Kaldor describes how a technology lead and, thus, a country's export lead proves that international trade cannot be explained by comparative advantages due to low wages. About this, he writes that:

The successful exporters are able to increase penetration both in foreign markets and in home markets because their products replace existing products. This is because they provide a new and preferable way of satisfying some existing want.32 That explanation works with the assumption that the new products are sold in markets conceived, as Schumacher put it populated by bargain-hunters with money, people who will buy a new, cheaper and better product when they find them.33

People do not always act as bargain-hunters, however, or are markets always open. In the 19th century, Japan declined to open its markets to European and United States exports. It took Admiral Perry's naval artillery to compel Japan to behave in a way consistent with economic theory.34 In general, the history of the expansion of markets for European exports is a history of conquest. A contemporary observer, John Locke described a process of circular and cumulative causation from a different view than did Myrdal and Kaldor. Locke writes that:

    With the money gained from foreign trade, England armed ships and paid soldiers and, thus, obtained the power to gain more money, which in turn it used to buy more power to acquire more money.35

The mines of South Africa are another case in point.

    Because the Africans had no monetary system, the British could not induce them to work in the mines for pay until the government imposed a tax on them, which had to be paid in money. The government, in collaboration with the mine owners, rounded them up and set them to work in the mines for wages so they could earn money to pay the tax. Therefore, the British conscripted Africans into the market.36

On the other hand, traditional peoples have, at times, allowed their ways of life to be seduced out of existence by cheap manufactured goods and wage labor. Cheap goods, colonialism and other factors of human weakness have all played roles in modernization, though I reaffirm that nothing natural or inevitable describes market behavior.

A logic of market behavior, nevertheless, does exist: the logic of the bargain-hunter. Moreover, a metaphysics of the market exists, which is the early modern Western philosophy of empiricism and rationalism, culminating in the philosophy of Kant and later, romanticism, Marxism and other philosophical movements. It rebelled against the metaphysics of the market. A similar point applies to the causal explanations derived from social accounting, as Keynes writes that:

The psychology of the community is such that when total real income increases, consumption also increases although not as much as income.37

In addition, Keynes assumes and / or accepts that 1) we are talking about a cultural structure where people meet their basic needs by exchanging money for products, 2) workers work for wages, while investors invest for profits and 3) as revealed in what Keynes does not say and the questions he does not ask—what people do with their money is their matter alone, which the social scientist observes and explains.

For Keynes, the just price theory of Aristotle and St. Aquinas had been dead four hundred years and forgotten for two hundred. The question—What ought to happen when incomes rise? is not a question an economist is entitled to ask, or one that deserves an answer. Thus, Keynes reports that—When aggregate real income increases as if he were an astronomer reporting on the gravitational attraction of a moon for its planet. Likewise when Kaldor, interpreting Keynes, writes that:

A private enterprise economy requires such an excess of revenue exceeding costs in which the receipts obtained from the sale of output must exceed the entrepreneurs' outlay on production. Hence, it is the external component of demand that will determine what the level of output in the aggregate will be.38

Kaldor is telling a story about the need for new external demands because the wages and profits paid in the aggregate will not yield enough to buy the products in the aggregate. The story includes words such as must and determine, which appear in mathematical theorems and in laws of natural science. This language tends to regard socially constructed realities as if they were natural realities.

This is not to say that it is rare to regard the socially constructed reality as if it were natural. Every culture does it. It does say that a comprehensive intellectual system that does it is a metaphysics. What is unusual about the recent Western metaphysics is the recognition of a sphere of social activity to which moral rules prescribing solidarity do not apply. That is what marks the thought of Kaldor, Keynes and other economists as participating in a metaphysics generally distinct from those of all the world's other great civilizations and most of the smaller entities known as cultures.

I do not exaggerate the extent to which the institutions and norms of recent Western civilization, which by expansion have defined the rules of the global economy, are historically and socially constant. Certain generalities are, nevertheless, plausible and, without exception, each of these generalizations normal to the recent Western civilization's definitive institution of the disembodied market. One such generality is Max Weber's concept of the rationalities. Weber held that social action, by which he meant action with a meaningful relationship to the behavior of others, could be oriented in four ways, which often overlap:

  1. Instrumental rationality  
  2. Value rationality: determined by values
  3. Affective rationality: emotive
  4. Traditional rationality.

The first rationality typifies modern society, which could not have come into being and would not function without a certain amount of it. Max Weber defines instrumentally rational social action:

    It is determined by expectations as to the behavior of objects in the environment and of other human beings. These expectations are used as conditions or means for the attainment of the actor's own rationally pursued and calculated ends.39

The purest form (although not the only kind) of instrumental rationality is that of capital accounting in which money quantifies the decision-making process.

From a purely technical point of view, money is the perfect means of economic calculation. That is, it is formally the most rational means of orienting economic activity.40

Within non-modern societies, the orientations of the value, the affective and the traditional rationalities predominate. Kaldor's example recognizes that, in his words:

    Modern economic life by its very nature has destroyed those other associations [i.e. other than the coercive power of law] which used to be the bearers of law and, thus, of legal guaranties. This has been the result of the development of the market. 41

The modern demeanor of the instrumental rationality is, thus, an essential feature to modern society's institutional structure. Hence, Weber's concept of rationalities helps to explicate what it means to locate the discourse of an economic theory such as Kaldor's in the broader context of the metaphysics of economic society.

An intellectual sea-change wrought Europe in the 16th and 17th centuries (documented by Hill, Macpherson, et al). It confirms the proposition that economics assumes an economic metaphysics, as Schumacher defines it: — Economics as a science accepts instructions from meta-economics.42 The causal mechanisms cited as explanatory principles by neoliberal, globalization of production and post-Keynesian economists include the following institutional features of modernity:

  • an expectation that people tend to act via calculated self interest
  • private property guaranteed by a modern legal system and
  • certain rights and certain freedoms.

Those features make it possible to speak of market forces and, thus, give a scientific explanation of the social phenomena in which market forces play the role of cause. They are articulated and included in the modern worldview developed first outside the universities, which then began to accept what now is academic orthodoxy. None are endorsed or supported by the traditional Western metaphysics centered on Aristotle, who was the academic orthodoxy at least until the middle of the 17th century and in some places long after that.

Economics did not create an economic metaphysics. If we date modern economics from the publication of Smith's Wealth of Nations in 1776, then it arrived nearly one-hundred and fifty years later than the philosophies of Hobbes and Descartes. They helped dismantle the old metaphysics and form a new one that was supposed to provide a scientific account of human action. In Leviathan (1651), Hobbes took Galileo's physics as a model for the social social.43 Equipped with an ideology borrowed from contemporary technology, mechanics and mathematics, Hobbes constructed a new philosophy using the fundamentals of natural rights, private property and market freedom.

It excluded the traditional distributive justice, which is the Judeo-Christian and Greek cultural ethic. The Hobbes philosophy was one that reflected the advancing spirit of the age. It was seminal to (among others) John Locke who was seminal to (among others) Smith's colleague David Hume.44 Professor of moral philosophy at Glasgow, Hume did not need to create either the institutional context or the metaphysical context of the political economy. Both had been created by 1776 from the evolution of society and by earlier thinkers.

Even if we think of modern economics as beginning before Smith, the sequence of the creation of modern economics is the 1) geographical extension of markets, 2) ethical philosophy justifying market institutions and 3) the scientific explanations of market phenomena.

The advent of the modern ideas upon which economics depends met with ferocious resistance in academic halls as well as on battlefields and from pulpits. Century-long battles waged at Oxford, Cambridge and other centers of learning, as the advocates for the ancient and the modern views fought for intellectual control. When rich merchants endowed new chairs, libraries and colleges, they did so (with, as a rule, diplomacy) to challenge and replace the reigning metaphysics. For example, Christopher Hill writes that:

    Sir Thomas Bodley founded his library to promote the struggle against poverty. The Bodleian was a pro-scientific, however and an anti-Catholic influence in Oxford. The frieze in the upper reading room shocked conservatives by including figures so strange to the university as Copernicus, Brahe, Paracelsus, Vesalius, Mercator and Ortelius. Thomas James, the first librarian of the Bodleian used the Roman Index for the purpose to, as he said, "So that we may know what books and editions to buy, their prohibition being a good direction to guide us therein."45

The existence of the economic metaphysics that Kaldor inherited is, therefore, visible through history. It attained the status of being obvious and assumed, which it enjoys today by its struggle against neo-Aristotelian scholasticism and by defeating it. The concept of final cause marks a metaphysical chasm that separates the ancients from moderns. The word final here names the word that is end in the sense of an objective or purpose: to what end. Aristotle had held that: The cause or principle (arche) of any given thing includes its end, its purpose and that toward which it aims.

According to the ancients, for humanity, the all-important final cause was humanity's objective, which was caritas, the participation in God's love, achieved through the salvation of the soul and good works. The moderns denied that final causes existed in nature. They insisted that a scientific explanation must be confined to that which in Aristotelian terms are efficient causes: the forces, factors, or independent variables that produce the phenomenon to be explained. The modern paradigm came to be the terrestrial and celestial mechanics of Sir Isaac Newton, whose Principia Mathematica (1687) is a story about vis: force from beginning to end, vis: the Latin rendering of the Greek dynamis, which is the term Aristotle used to name what in English we call an efficient cause.46 Failure to understand that the global economy conforms to an ideology that has banished final causes weakens many critiques of it, which includes critiques with the best of intentions. In the next examples, such critiques view the global economy as wrong because it.

  • rests on the premise that humans have a right to exploit the Earth
  • pursues the material accumulation of excess for a few instead of meeting the basic needs of all
  • rests on greed as a value, or because of its masculinist rather than feminist values
  • takes technological progress as an end in itself, or
  • deifies science in a way that excludes spirituality.

These critiques, despite their best of intentions, miss the mark because they fail to understand that the global economy, regarded as a system of efficient causes studied by economic science, does not have an objective. It is inadequate to argue that humanity has been pursuing the wrong objective and that the species could get back on course by pursuing the right objective. The global economy has a legal structure and an ideology that defends it in such a way that it has no objective at all.

The possibility of thinking of economics as a science developed in two steps. First, final causes were banished from nature, which came to be conceived as a great machine, moved by forces. Second, by analogy with nature, so conceived, the market was conceived as a machine, moved by market forces. Modern philosophers synthesized, as Hume had written—The experimental method of reasoning with the moral sciences,47 i.e., a science of efficient causes with an ethics of freedom. Therefore, they performed the social office of the metaphysician by unifying in a single discourse the languages of the technostructure and the command structure of society.

Theologians contributed to the social construction of the institutions that made economics possible, even before the philosophers. In the 15th and 16th century, when public discourse on social issues had to be conducted in religious terms because there were no other terms, religious reformers contributed to building the scientific and ethical basis of modern accounting and managerial rationality.48

The reformers then appealed to scripture to refute the established church and, in the process, distinguished revelation from natural reasoning. They recognized the independence of the supernatural as the revealed from the natural as the discovered. The natural, having nothing to do with the knowledge required for salvation, could safely be regarded as a system of efficient causes. Therefore, the natural sciences obtained a theological legitimacy and by extension, social science gained the legitimacy to discover the natural causes of prices. Therefore, a discursive space opened wherein political economy could occupy part of an area monopolized by the traditional synthesis of reason and revelation, which was conceived in terms of final cause and, thus, in terms of just price, common good, the good of the soul and divine will.

Somewhat later, when terrestrial and celestial mechanics arrived and when the laws of supply and demand had become recognized as their social homologues, theologians and orators added to the authority of political economy by asserting that God had created it. In 1795, Edmund Burke could write—The laws of commerce are the laws of nature and, thus, the laws of God.49

When Kaldor studied it, economics had long become independent of theology. In the disputes that preoccupied Kaldor and his fellow students at the London School of Economics in the 1920s, an assertion that God had ordained one law of commerce or another would detract from rather than add to its authority. The evolution of religious doctrines, however, did play essential roles in the process of constructing Kaldor's economic metaphysics.50


1. Helzi Noponen and other editors Trading Industries, Trading Regions. New York: Guilford Press, 1993, p. 21

2. The idea of physical facts, the brute facts, deserves criticism in that any observation is theory-laden and dependent on the framework of its interpretation. Some philosophers have argued that it is, nevertheless, possible and useful to distinguish facts that are relatively brute from those to be regarded as social constructs; they include: (1) Elizabeth Anscombe Causality and Determination, an Inaugural Lecture (London: Cambridge University Press, 1971) and (2) John Searle, The Construction of Social Reality  (New York, Free Press, 1995) p. 190 ff.

3. Gunnar Myrdal, Asian Drama, an Inquiry into the Poverty of Nations. New York: 20th Century Fund, 1968

4. Kenneth Boulding asserted that the Keynes theory depends on accounting identities. it can be seen from Keynes' basic equations, such as the following which he describes as the essence of his general theory of employment that d1 + d2 = d where d1 is what the community will likely spend on consumption where d2 is the amount will likely spend investment where D is aggregate demand. Keynes then goes on to write:

    d = f (n), i.e. that effective demand is a function of n, [the volume of employment], it follows as an accounting identity that d2 [investment] is determined once each of the other unknowns has an assigned value.

Those identities, set out in Part II herein, argue that orthodox economics errs by trying to predict wage levels using the math of the derivative (borrowed from mechanics), i.e., the marginal utility of labor and the marginal non-utility of employment. Later, in Part VI, Keynes puts some key accounting identities into words such as

  • income = value of output = consumption + investment.
  • savings = income - consumption. and, thus, savings = investment.

Keynes, The General Theory of Employment Interest and Money. New York: Harcourt Brace, 1936, p. 63

In spite of what would seem to be an obvious departure from the root metaphors of classical economics, economists have tried to synthesize Keynesian thought, with marginalism from the science of mechanics and with notions of equilibrium also from mechanics that are incompatible with it.

    The general theory is, however, independent of the concept of equilibrium, in the sense that it is founded methodologically on an analytical philosophy, which is completely alien to the neoclassical notion of equilibrium.

Fausto Vicarelli and Alain Barrere, eds., The Foundations of Keynesian Analysis. New York: St. Martin's Press, 1988, p. 113. It is crucial to Keynes' analytic framework that, in his words: A decision about whether to consume lies within the power of the individual. so does a decision about whether to invest.—Keynes

General Theory, op. cit. p. 65. Thus, the classical simplification of human nature, which is Homo economicus, the Homo who is predictable because he acts to maximize his gain is made a bit more complex by acknowledging the freedom of the individual as presupposed and honored by the legal and institutional frameworks of modernity.

5. Kaldor, Causes of Growth and Stagnation in the World Economy. Cambridge, UK: Cambridge University Press, 1996, p. 63

6. Ibid.

7. Ibid. Kaldor, Causes p. 65

8. Helzi Noponen, "Scale and Regulation Shape an Innovative Sector: Jockeying for Position in the World Pharmaceuticals Industry" in Helzi Noponen, et al eds., Trading Industries, Trading Regions

9. Kaldor, Causes p. 66

10. Ibid.

11. Kaldor, Causes p. 70

12. Marx makes this point in Capital: 1,  Part 2 when he says that selling thus to buy represented as Commodity-Money-Commodity, C-M-C, where someone exchanges something for money in order to use the money to buy something, is a process aimed at a concrete satisfaction, which is a use value. Marx cites Aristotle, who considered this process natural and gave it the name economics (oiko-nomos), which he distinguished from chrematistics: the pursuit of money for the sake of money, which Aristotle deemed to be unnatural.

13. Keynes, General Theory

14. Kaldor, Causes p. 83-84

15. Ibid.

16.  For another, somewhat similar, set of Keynesian prescriptions for the global economy, see Paul Davidson and Jan Kregel editors, Improving the Global Economy: Keynesianism and the Growth in Output and Employment. Cheltenham, UK: Edward Elgar, 1997. In this, Brazilian economist Fernanda Lopes de Carvalho accepts the Keynesian growth prescription, though in addition seeks what she calls structural policies that aid the poor. An excerpt from page 175, Lopes de Carvalho writes:

Economic growth alone is necessary, though not enough to solve the problem of the dreadfully poor in Brazil, to improve their living conditions and to bring them up from below the absolute poverty line.

17. Nicholas Kaldor, Causes p. 87

18. Ibid. Kaldor, Causes p. 88

19. Kaldor, Causes p. 90

20. Kaldor, Causes p. 78

21. Ross Perot spoke the view that "A nation cannot go on running up debt forever", which appears in Tony Chiu ed., Ross Perot in his own Words. New York: Warner, 1992

22. Kaldor, Causes p. 85

23. Jurgen Habermas, The Legitimation Crisis (Boston: Beacon Press,1975 in translation of Legitimations Probleme im Spatkapitalismus. Frankfurt: Suhrkamp, 1973)

24. See, for example, the testimony of Robert Reich before the United States House Subcommittee on Economic Stabilization, Is an Industrial Policy for America Necessary? Washington, DC: Government Printing Office, 1983

25. Anthony Thirlwall, Nicholas Kaldor. Brighton, UK: Wheatsheaf Books: 1987. p. 183

26. Joan Robinson and John Eatwel, An Introduction to Modern Economics. London: McGraw-Hill, 1973.

27. Kaldor, Causes ... p. 69

28. Keynes, quoted by E. F. Schumacher, Small is Beautiful. New York: Harper and Row, 1973. p. 20

29. Kaldor, quoted in Anthony Thirlwall, Nicholas Kaldor, p. 186.

Howard Richards, A Philosophy of Peace and Justice: letters from Quebec. San Francisco and London: International Scholars Press, 1995

Nicholas Kaldor, Causes p. 3

Ibid. Kaldor, Causes p. 69

Schumacher, Small is Beautiful, Part 1

Pat Barr, The Coming of the Barbarians: the Opening of Japan to the West.  New York: Dutton, 1967

John Locke, MS in Bodleian Library c. 30, f. 18, quoted by MacPherson, The Political Theory of Possessive Individualism: Hobbes to Locke. Oxford: Clarendon Press, 1962. p. 107. Locke writes:

    The chief end of trade is riches and power, which beget each other. Riches consists in plenty of movables that will yield a price to a foreigner, are not likely to be consumed at home and are especially plentiful in gold and silver. Power consists in the number of men and the ability to maintain them. Trade is conducive to both these by increasing your stock and your people and they each other.

36. J. S. Crush, South Africa's Labor Empire: a History of Black Migrant Labor into the Goldmines. Boulder, CO: Westview Press, 1991

37. Keynes, The General Theory of Employment Interest and Money. New York: Harcourt Brace, 1936, p. 27

38. Kaldor, Causes. cited in note 3 above, p. 32-33

39. Max Weber, Economy and Society: an Outline of Interpretive Sociology Berkeley: University of California Press, 1978, p. 24

40. Ibid. p. 86

41. Ibid. p. 337. Kaldor, using terms reminiscent of Weber, once writes that the real explanation of the failure of many poor countries to develop is to be found in their traditionalism as it contrasts to our rationalism. Thus, he acknowledged that the modern metaphysics in which economics is rooted is one worldview among many, and, indeed, one whose adoption by the poor countries he (at least at the time he writes) advocated. See his 1954 paper, Characteristics of Economic Development in Nicholas Kaldor, Essays on Economic Stability and Growth. New York: Holmes and Meier, 1960

42. E. F. Schumacher, Small is Beautiful. (cited in note 13, Part IV.ii, p. 47) Schumacher writes:

    We might say that economics does not "stand on its own feet," or that it is a derived body of thought from meta-economics.

As we have seen, economics is a derived science, which accepts instructions from what Schumacher called meta-economics. As the instructions change, so changes the content of economics. In Part V, we shall explore what economic laws and what definitions of the concepts economic and uneconomic result when the meta-economic basis of Western materialistic values decomposes and is replaced by the teaching of Buddhism.

43. Thomas Hobbes, Leviathan. (various editions, first edition 1651) Hobbes, following Galileo's physics, calls his method resoluto-compositive.

44. Macpherson, The Political Theory of Possessive Individualism: Hobbes to Locke. Oxford: Clarendon Press, 1962

45. Christopher Hill, Intellectual Origins of the English Revolution. Oxford: Clarendon Press, 1966, p. 24-25

46. Isaac Newton, Principia Mathematica (various eds., first edition 1687); Gideon Freudenthal, Atom and Individual in the Age of Newton: on the Genesis of the Mechanistic Worldview. Dordrecht: Kluwer Academic Publishers, 1986, German translation

47. Treatise of Human Nature (various eds., 1st in 1740) David Hume called it his an attempt to apply the experimental method of reasoning to the moral sciences.

48. See Hill, Intellectual Origins cited in note 45 and A Philosophy of Peace and Justice: Letters from Quebec. (cited above, note 30)

49. Edmund Burke, Thoughts and Detail on Scarcity, as quoted in Peter Stanlis,  Edmund Burke and the Natural Law. Ann Arbor: University of Michigan Press, 1958, p. 58. Burke writes:

    It is not in breaking the laws of commerce, which are the laws of nature and, thus, the laws of God, that we hope to soften the divine displeasure to remove any calamities under which we suffer.

50. In his early training in economics, Kaldor dwelled on questions that concerned the economists in his milieu at the time. He writes that:

    If we have increasing returns associated with expanding production, what prevents the loss of pure competition? If we have no pure competition, then how does the unseen hand work?

In 1943, he described his ethical views, writing that

    The ethic I uphold is based on a belief in human equality, which I regard as a postulate more in the nature of a religious belief, than the outcome of a rational philosophy.

Marjorie Turner, Nicholas Kaldor and the Real World. Armonk NY: M. E. Sharpe, 1993 p. 10, 15


1. By describing both, what relationship do you see between accounting causality and the theory of circular cumulative causation? p. 59,  p. 60

2. The factors of accounting causality: capital investment of retained earnings, research and development, expanded manufacturing capacity, technology leads and comparative advantage are processes to a goal. As you see it, what is the basic goal?    p. 62

3. The ethical basis of Keynesian economics differs little from those of neoclassical economics. What is the twofold ethical basis that the two economic systems share?   p. 64

b. What is the primary, though relatively subtle, difference between the two economic theories?  p. 65

4. National support of product development for export could replace the accounting causality as the means to foster growth. Product export could be more doable than accounting causality, even in the United States

What do you see that makes this statement true or false?   p. 62,  p. 66

b. What pros and cons do you see in this system?

c. Kaldor's four-point prescription led to increased debt, neo-liberalism and lost political support. Kaldor's idea of a national support for product development is what gave Japan comparative advantage in nearly every product market it touched.

d. What is your sense of United States economic policy and practice that policy that inhibits the United States or other countries from doing this?   p. 61

e. Do you see a vague yet intentional national product development strategy that was active in the United States, et al corporate welfare states?

f. If so, do you see other descriptive terms that would further identify the strategy?  p. 71

5. What elusive and/ or hidden human factors do you see or find that influence market growth in unexpected ways? p. 68

6. Kaldor's economic prescription points to the catch-22 of market growth, which, like a treadmill, makes it necessary to go forward at faster economic pace just to maintain. What are the main market forces, in your sense of it, that initiate the treadmill of growth?  p. 68

7. Kaldor observed that consumers as bargain hunters seek new and improved products. He attributes this as the reason for the success of export driven economies. What criteria do you see for the concept of new and improved that make a global economy more essential?  p. 70

8. Though the promise of growth strengthens social consensus for social justice, at the same time, growth destroys the environment.

What strategy, or way of life would you create to help you and others cope with this paradox? p. 67, p. 73,  p. 74

9. The global economy conforms to an ideology that has banished final causes. How and/ or why do you suppose that this shift in the economic metaphysics occurred? p. 70p. 74,  p. 75

10. Modernity is shaped by the instrumental rationality, rather than the traditional value rationality, which is still the active rationality within most indigenous cultures.

Based on the instrumental rationality of modernity, what scenario might you imagine in which modernity is sustainable and ethical?  p. 70  through  p. 75

Fig. 3 Circular and Cumulative Causation

Description: To what extent does Kaldor's theory of circular and cumulative causation and do the trade practices of firms and nations explain the rise and rule of the global economy? Part IV examines this next step in Understanding the Global Economy, as (1) an analysis of the scientific theories that explain the global economy, (2) an expose of the economic rise and rule of free trade as enforced by trade pacts between corporations and central governments, and (3) a resource for building an ethical, sustainable economy based on research, knowledge and so cio-cultural solidarity.


Part V: Theories of historical discontinuityTOCcover pagetop

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