A Plain Man’s Guide to Kaldor’s Growth Laws

In the course of his Inaugural Lecture at Cambridge in 1966 on the causes of the U.K’s slow growth rate, Kaldor (1966) presented a series of “laws” to account, for growth rate differences between advanced capitalist countries; he later elaborated these laws in a lecture at Cornell University (1967). These laws, and their interpretation and validity, have been the subject of considerable scrutiny and debate, and Kaldor himself has clarified and modified his own position since their enunciation. The basic thrust of the model consists of the following propositions:1 i) The faster the rate of growth of the manufacturing sector, the faster will be the rate of growth of Gross Domestic Product (GDP), not simply in a definitional sense in that manufacturing output is a large component of total output, but for fundamental economic reasons connected with induced productivity growth inside and outside the manufacturing sector. This is not a new idea. It is summed up in the maxim that the manufacturing sector of the economy is the “engine of growth.” ii) The faster the rate of growth of manufacturing output, the faster will be the rate of growth of labor productivity in manufacturing owing to static and dynamic economies of scale, or increasing returns in the widest sense. Kaldor, in the spirit of Allyn Young (1928), his early teacher at the L.S.E., conceives of returns to scale as macroeconomic phenomena related to the interaction between the elasticity of demand for and supply of manufactured goods.