Kaldor, industry and productivity. In other words, without production there is no productivity…

1 September 20238 months ago babelfish

Let's go back to Micholas (or Nikolas) Kaldor, who considered industry and manufacturing as essential elements for the economic growth of a country and was directly involved in proposing policies aimed at its development.

Kaldor was involved in shaping UK industrial policy in the 1960s and 1970s, when he was an adviser to the Labor government of Harold Wilson and James Callaghan. Kaldor believed that the UK needed a selective industrialization strategy to increase growth and productivity, and to reduce the trade deficit and relative decline relative to other European countries. Some of Kaldor's proposals for industrial policy were:

Introduce a Selective Employment Tax (SET) to discourage the hiring of workers in the service sector and encourage the transfer of labor to the manufacturing sector.
Create a National Industrial Development Fund (NIDF) to finance public and private investment in the manufacturing sector, particularly in high-tech and high-value-added industries.
Adopt an income and price policy to control inflation and improve the competitiveness of exports, through a social pact between the government, trade unions and businesses.
Reform the tax system to incentivize growth, innovation and equitable distribution of income by introducing a progressive corporate tax, a capital gains tax and a negative income tax.

Each of the points mentioned above deserves not a chapter, but a book to be explored. In an era of computerization still in its infancy, services were seen as a sector in which productivity could grow in a limited way. Furthermore, even if it may annoy many today, a large part of well-being still derives from material goods that must be produced.

From a theoretical point of view, Kaldor's studies on empirical data led him to express three laws on economic growth , as current now as then, which explain how many clichés, especially on productivity, are false.

Kaldor's first law states that the growth rate of GDP is positively related to the growth rate of the manufacturing sector, or in other words, the more the industrial sector grows, the more the economy grows. This law is based on the empirical observation that industrial development is the main driver of productivity growth and improvement. Kaldor noted a strong correlation between the standard of living and the share of resources devoted to industrial activity, at least up to a certain level of income. Only a few countries, such as New Zealand, Australia and Canada, have become rich based mainly on agriculture.

Kaldor's first law can be expressed in terms of GDP growth being faster the larger the growth surplus of the industrial sector is compared to the growth of GDP: i.e. when the share of industry in GDP is increasing. This law implies that policies that promote industrialization can increase economic growth and productivity. Some of the factors that explain this relationship are:

The manufacturing sector has increasing returns to scale, i.e. average costs decrease as the size of the sector increases.
The manufacturing sector has effects of widespread know-how, ie production increases the experience and skills of workers and businesses.
The manufacturing sector generates technological progress, i.e. production stimulates innovation and the diffusion of new technologies.
The manufacturing sector favors capital accumulation, i.e. production induces investment in machinery and equipment.
The manufacturing sector expands the market, ie production creates demand for complementary goods and services.

Kaldor Verdoorn's law, or Kaldor's second law, describes the relationship between output growth and productivity growth in the manufacturing sector. According to this law, greater growth in production increases productivity thanks to the effects of scale, the growth and diffusion of know-how, technological progress, capital accumulation and market expansion. Kaldor Verdoorn's law was proposed by the Dutch scholar Petrus Johannes Verdoorn in 1949 and subsequently taken up by Kaldor in 1957 and 1966 ² .

Kaldor's second law or Kaldor-Verdoorn law is still relevant today because it highlights the role of aggregate demand in determining economic growth and productivity. According to this perspective, growth in demand stimulates industrial development, which in turn generates innovation and efficiency. This has a big political fallout. Productivity, or low productivity, is often cited by mass media and half-noted politicians as the stigma of Italy, but the answer should be obvious: what are these media or these politicians doing to increase the volumes of industrial production? Because this is, trivially, the best way to have greater productivity

Some empirical studies have confirmed the validity of Kaldor Verdoorn's law globally and for several developed and developing countries. However, Kaldor Verdoorn's law is not free from criticism, both from a theoretical and methodological point of view ⁵ . Some of the criticisms are:

It is not a true universal law, but only a statistical generalization that depends on the period and historical context considered.
It does not take into account the institutional, political and social factors that influence economic growth and income distribution.
It does not clarify the causal mechanism between manufacturing sector growth and productivity, nor the meaning and extent of increasing returns to scale.
It is not compatible with Solow's neoclassical model of growth, which assumes that technological progress is exogenous and independent of economic activity.

Kaldor's third law states that the productivity growth rate of the non-manufacturing sector is positively related to the growth rate of the manufacturing sector, or in other words, the more the industrial sector grows, the more it spreads to other sectors of the economy ¹ . This law is based on the empirical observation that industrial development generates positive external effects on the rest of the economy. Kaldor noticed a strong correlation between the level of productivity and the share of resources devoted to industrial activity, at least up to a certain level of income ² . Only a few countries, such as Switzerland, Belgium and the Netherlands, have become rich relying mainly on services ² . Kaldor proposed three laws about these empirical regularities, but we will concentrate here on the third.

Kaldor's third law can be expressed in terms of productivity growth of the non-manufacturing sector which is faster the greater the excess of growth of the industrial sector over the growth of GDP: i.e. when the share of industry in GDP is in increase ³ . This law implies that policies that promote industrialization can increase the productivity not only of the manufacturing sector, but also of other sectors. Some of the factors that explain this relationship are:

The manufacturing sector creates demand for complementary goods and services, such as infrastructure, transportation, communications, finance, education and health care.
The manufacturing sector transfers technology, knowledge and skills to other sectors, through collaboration, competition and the mobility of workers and businesses.
The manufacturing sector stimulates innovation and diversification of other sectors, through the creation of new markets and opportunities.
The manufacturing sector increases the income and purchasing power of other sectors, through the creation of employment and wages

Today manufacturing is almost forgotten by the economic policies, if they still resist, of almost all European countries, Italy in the lead, and yet in the years in which Kaldor and his school were advisers listened to, economic growth was galloping. Unfortunately, let's talk about the past: by now the budget and "climate" constraints have become so tight that it is almost no longer possible to improve our economic position.

Yet there was a way.

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The article Kaldor, industry and productivity. In other words, without production there is no productivity… it comes from Scenari Economici .

This is a machine translation of a post published on Scenari Economici at the URL https://scenarieconomici.it/kaldor-lindustria-e-la-produttivita-ovvero-senza-produzione-non-ce-produttivita/ on Thu, 31 Aug 2023 11:36:03 +0000.