Complete information on Kaldor’s stylised facts of economic growth

Complete information on Kaldor’s stylised facts of economic growth

There are six statements about economic growth, proposed by Nicholas Kaldor. He described these as “a stylised view of the facts”, which coined the term stylised fact.

Nicholas Kaldor summarised the statistical properties of long- term economic growth in an influential 1957 paper. He pointed out the 6 following ‘remarkable historical constancies revealed by recent empirical investigations’:

The shares of national income received by labour and capital are roughly constant over long periods of time.

The rate of growth of the capital stock is roughly constant over long periods of time.

The role of growth of output per worker is roughly constant over long periods of time.

The capital output ratio is roughly constant over long periods of time.

The rate of return on investment is roughly constant over long periods of time.

The real wage grows over time.

Kaldor did not claim that any of these quantities would be constant at all times; on the contrary, growth rates and income shares fluctuate strongly over the business cycle. Instead, his claim was that these quantities tend to be constant when averaging the data over long periods of time.

His broad generalisations, which were initially derived from U.S. and U.K. data, but were later found to be true for many other countries as well, came to be known as ‘stylised facts’. These may be summarised and related as follows:

Output per worker grows at a roughly constant rate that does not diminish over time.

Capital per worker grows over time.

The capital/output ratio is roughly constant. (1+2).

The rate of return to capital is constant.

The share of capital and labour in net income are nearly constant.

Real wage grows over time. (2 + 4 + 5).

It is easy to lose faith in scientific progress…. In any assessment of progress, as in any analysis of macroeconomic variables, a long-run perspective helps us look past the short-run fluctuations and see the underlying trend. In 1961, Nicolas Kaldor stated six now famous “stylised” facts.

He used them to summarise what economists had learned from their analysis of 20th century growth and also to frame the research agenda going forward labour productivity has grown at a sustained rate.

Capital per worker has also grown at a sustained rate.

The real interest rate or return on capital has been stable.

The ratio of capital to output has also been stable.

Capital and labour have captured stable shares of national income.

Among the fast growing countries of the world, there is an appreciable variation in the rate of growth “of the order of 2-5 per cent.”

Redoing this exercise nearly 50 years later shows just how much progress we have made. Kaldor’s first five facts have moved from research papers to textbooks. There is no longer any interesting debate about the features that a model must contain to explain them.

These features are embodied in one of the great successes of growth theory in the 1950s and 1960s, the neoclassical growth model. Today, researchers are now grappling with Kaldor’s sixth fact and have moved on to several others.

One might have imagined that the first round of growth theory clarified the deep foundational issues and that subsequent rounds filled in the details. This is not what we observe.

The striking feature of the new stylised facts driving the research agenda today is how much more ambitious they are. Economists now expect that economic theory should inform our thinking about issues that we once ruled out of bounds as important but too difficult to capture in a formal model.

Here is a summary of our new list of stylised facts, to be discussed in more detail below:

Increases in the extent of ‘the market. Increased flows of goods, ideas, finance, and people via globalisation as well as urbanisation have increased the extent of the market for all workers and consumers.

Accelerating growth:

For thousands of years, growth in both population and per capita GDP has accelerated, rising from virtually zero to the relatively rapid rates observed in the last century.

“Variation in modern growth rates:

The variation in the rate of growth of per capita GDP increases with the distance from the technology frontier.

Large income and TFP differences:

Differences in measured inputs explain less than half of the enormous cross country differences in per capita GDP.

Increases in human capital per worker:

Human capital per worker is rising dramatically throughout the world.

Long-run stability of relative wages:

The rising quantity of human capital relative to unskilled labour has not been matched by a sustained decline in its relative price.

In assessing the change since Kaldor developed his list, it is important to recognise that Kaldor himself was raising expectations relative to the initial neoclassical model of growth as outlined by Solow and Swan. When the neoclassical model was being developed, a narrow focus on physical capital alone was no doubt a wise choice.

The smooth substitution of capital and labour in production expressed by an aggregate production function, the notion that a single capital aggregate might be useful, and the central role of accumulation itself were all relatively novel concepts that needed to be explained and assimilated. Moreover, even these small first steps toward formal models of growth provoked substantial opposition.

Such complementarities exemplify the value of the applied general equilibrium approach. They are the fundamental reason why we seek a unified framework for understanding growth. Going forward, the research agenda will surely include putting ingredients like those we have outlined in this paper together into a single formal model.

Further out on the horizon, one may hope for a successful conclusion to the ongoing hunt for a simple model of institutional evolution. Combining that with the unified approach to growth outlined here would surely constitute the economics equivalent of a grand unified theory a worthy goal by which we may be judged when future generations look back fifty years from now and quaintly revisit our “ambitious” list of stylised facts.