Difference between Kaldor’s model of growth and Joan Robinson’s model of growth
Nicholas Kaldor is now known as one of the most renowned critics of the equilibrium economics. His stress on the increasing return and the cumulative causation has encouraged the growth of heterodox directions in the economics, such as that of post- Keynesians, Regulationists, as well as evolutionary economists.
However, in the 1930s, Kaldor was a member of the ‘Robbins Circle’ at the London School of Economics and Political Science (LSE). Recent researchers on Kaldor generally regard the early Kaldor in this period as a supporter of equilibrium economics such as Austrian economics and Lausanne economics.
Indeed, Kaldor recollected as follows: ‘Robbins’ economics was the general equilibrium theory of Walras and the method of presentation of Wick-sell and of Knight, Risk, Uncertainty and Profit.
Robbins as a young economist absorbed this theory- the keystone of which is the marginal productivity theory of distribution in its generalised form, as expounded by Wicksell and Wicksteed – with the fervour of a convert and propounded it with the zeal of a missionary.
It was thanks to him that I acquired a thorough grasp of that theory without being hampered by doubts and hesitations – which in other circumstances might have inhibited me from mounting the intellectual effort required to master its content’.
This recollection reveals Kaldor’s indebtedness to Robbins. However, it is not a sufficient evidence to conclude that all of the early Kaldor’s works in the 1930s are confined within the equilibrium economics.
In ‘The Equilibrium of the Firm’ ha focused on the indeterminateness that is significant to the entrepreneur’s role in the ‘coordination’ of the firm. Later, in a review of J. Robinson’s The Economics of Imperfect Competition, Kaldor proposed an ‘imagined demand curve’ that is perceived by dynamic anticipation of entrepreneurs.
These are realistic factors that are not dependent on an equilibrium concept. Further, in ‘Market Imperfection and Excess Capacity’, Kaldor referred on market imperfection. In his later recollection, Kaldor pararelled it with the Keynesian revolution:
‘The discovery that competition in a capitalist economy does not conform to the assumption of pure or perfect competition was, just as Keynes’s General Theory, the product of the intellectual ferment of the 1930’s’.
Kaldor’s theory of the firm contained a theoretical key to the cost controversy of the 1920s and 1930s. Kaldor’s is not generally considered as a participant in the cost controversy.
However, if we regard the theory of the imperfect or monopolistic competition of J. Robinson and Chamberlin as the solution of the cost controversy, we can extend the framework of the cost controversy so as to cover Kaldor’s reflection on J. Robinson’s The Economics of Imperfect Competition and his debate against Chamberlin.
By inquiring into this relationship, we will show Kaldor’s position in the cost controversy and clarify his critical contribution to equilibrium economics.
Joan Robinson’s Economics of Imperfect Competition was published as a solution to the cost controversy. She elucidated in it the puzzles of perfect competition in the case of increasing returns, excess capacity, differentiation and the representative firm.
Her theory of imperfect competition focused on the downward sloping demand curve for individual producers. An individual producer that maximizes his profit has to fulfil the double condition of the equality of marginal revenue and marginal cost as well as the equality of average revenue and average cost.
The equilibrium point is shown by a point of tangency between the individual producer’s demand curve and the downward-sloping average cost curve. The producer’s output is smaller than the optimal scale (the output at the minimum average cost). Robinson referred to it as an ‘excess capacity’.
Further, producers in the same industry have an identical cost curve and face an identical demand curve. Therefore, the industry is in equilibrium. This situation corresponds to Marshall’s stationary state.
Kaldor agreed with J. Robinson in respect to the ‘price differentiation’ and ‘mathematical and geometrical’ arguments, he criticised (a) the inconsistency between the title and the contents, (b) the marketing cost, (c) the application of marginal theory to imperfect competition problems among labour unions, exploitation and imperfect competition, and (v) the doubt concerning the competitive equilibrium: the industry’s equilibrium based on the producer’s equilibrium.
In reference to these critical points raised by Kaldor, we discuss the competitive equilibrium problem of (v). We separate Kaldor’s argument of (v) into (a) the concept of industry and (b) the concept of the individual producer, and explain one by one.
(a) The concept of industry :
J. Robinson’s concept of an ‘industry’ is based on the assumption that the products of different firms consist of a ‘chain of substitutes’ surrounded on each side by a ‘marked gap’.
There is no doubt that such a boundary exists for each individual producer. However, there is no reason to assume that this boundary is the same for any group of producers and that the sensitiveness of demand for the products of any particular producer is of the same order of magnitude with respect to the prices of any group of the producer’s rivals.
(b) The concept of individual producer :
Kaldor criticised J. Robinson’s individual demand curve as follows. The traditional ‘market demand curve’ for a certain product is not of the same type as the imagined demand curve that is relevant in determining the actions of an individual producer.
The market demand curve is a functional relationship between the price and the amounts bought from a particular producer. The imagined demand curve is the image of this functional relationship as it exists in the mind of the entrepreneur.
In brief, the imagined demand curve is more or less elastic and discontinuous, while the real demands curve. The reason that J. Robinson excludes this difference is that she assumed perfect knowledge and perfect information.
In Kaldor’s view, the central problem of the competition in an ‘imperfect market’ is based on the firm’s price-quantity strategies, which are given by their relationship with their rivals and their expectations. He found in J. Robinson’s analysis a negligence of the interdependence among firms in an oligopolistic situation.
In this manner, Kaldor criticised J. Robison’s argument by referring to the imagined demand curve. The imagined demand curve is a basic element of the coordination problem of a firm, since it is relevant to its decision-making and involves a dynamic character.
Thus, early Kaldor challenged the prevalent thinking of the equilibrium economics. In Kaldor’s view, J. Robinson’s theory of imperfect competition was still dominated by the concept of equilibrium, in settling the equilibrium of individual firms and the equilibrium of an industry.