Quotes from “The Irrelevance of Equilibrium Economics”

By Nicholas Kaldor (1972)

• The careful accumulation and sifting of statistics and the development of refined methods of statistical inference cannot make up for the lack of any basic understanding of how the actual economy works.#
  Methodology
• For [Adam] Smith the existence of a “social economy” and the existence of increasing returns were closely related phenomena.#
  EconomicsIncreasing Returns
• The extent to which capital is used in relation to labour is predominantly a matter of the scale of operations—the capital/labour ratio in production is a function of the extent of the market rather than of relative factor prices.#
  EconomicsIncreasing Returns
• The very notion of “general equilibrium” carries the implication that it is legitimate to assume that the operation of economic forces is con- strained by a set of exogenous variables which are “given” from the outside and stable over time. It assumes that economic forces operate in an environment that is “imposed” on the system in a sense other than being just a heritage of the past-one could almost say an environment which, in its most significant characteristics, is independent of history.#
  EconomicsMethodologyEquilibrium
• Once we allow for increasing returns, the forces making for continuous changes are endogenous—”they are engendered from within the economic system”—and the actual state of the economy during any one “period” cannot be predicted except as a result of the sequence of events in previous periods which led up to it.#
  EconomicsIncreasing Returns
• Competitive markets are inconceivable without intermediaries—merchants or “dealers”—who are both buyers and sellers at the same time (at different prices) and who carry stocks so as to make “a market” that enables producers to sell and consumers to buy.#
  Economics
• What differentiates a merchant from other economic agents (such as a “producer”) is that his natural response to “outside” influences is to vary the size of his stock—to absorb stocks in the face of excess supplies and to release stocks in the face of excess demand. The merchants’ function in other words is to create and preserve an “orderly” market which they can only do through their willingness to act as a shock-absorber: through their readiness to enlarge their commitments when prices are sagging and to curtail commitments when they are rising. The very notion of “merchanting” or “commercial” activities involves therefore the assumption that there is a certain elasticity of demand for holding stocks by the traders: an elasticity which is ultimately governed by the traders’ expectations concerning prices and selling opportunities in the future.#
  EconomicsExpectations
• It is a hen-and-egg question whether historically it was the growth of commerce which continually enlarged “the size of the market” and thereby enabled increasing returns to be realised, or whether it was the improvement of techniques of production and the improvement in communication which led to the growth of commerce. In the process of the development of capitalism the two operated side by side. And it involved a tendency for a continual rise in the value (and not just the volume) of stock carried by traders in the markets, which meant in turn that the growth of production resulting from any favourable change on the supply side led to a growth in incomes which in turn generated an increase in effective demand for commodities.#
  EconomicsIncreasing Returns
• 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. #
  EconomicsBanking
• The sharp distinction made by Keynes between a “full employment” situation where real income is confined by resource-endowment, and an unemployment situation where it is limited by effective demand, disappears in the presence of increasing returns.#
  EconomicsIncreasing Returns
• If indivisibilities were the sole cause of increasing returns, there would always be some level of production at which such scale economies were exhausted and “optimum scale” production reached.#
  EconomicsCapitalIncreasing Returns
• There is no reason to suppose that “economies of scale” become inoperative above certain levels of production.#
  EconomicsCapitalIncreasing Returns
• The existence of a non-linear relationship between costs and capacity is inherent in the nature of space, and there is nothing “indivisible” about space as such.#
  EconomicsIncreasing Returns