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Thirlwall 1983

The document summarizes Kaldor's growth laws, which propose that: 1) Faster growth of the manufacturing sector leads to faster overall economic growth. 2) Faster manufacturing growth leads to faster productivity growth in manufacturing due to economies of scale. 3) Faster manufacturing growth leads to the transfer of labor from other sectors to manufacturing, raising productivity in non-manufacturing sectors. As a result, faster manufacturing growth leads to faster overall productivity growth in an economy. However, as economies develop fully, the scope for transferring labor between sectors diminishes, slowing overall growth. Export demand, determined by international competitiveness, is the main driver of manufacturing growth, particularly in developed economies.

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142 views15 pages

Thirlwall 1983

The document summarizes Kaldor's growth laws, which propose that: 1) Faster growth of the manufacturing sector leads to faster overall economic growth. 2) Faster manufacturing growth leads to faster productivity growth in manufacturing due to economies of scale. 3) Faster manufacturing growth leads to the transfer of labor from other sectors to manufacturing, raising productivity in non-manufacturing sectors. As a result, faster manufacturing growth leads to faster overall productivity growth in an economy. However, as economies develop fully, the scope for transferring labor between sectors diminishes, slowing overall growth. Export demand, determined by international competitiveness, is the main driver of manufacturing growth, particularly in developed economies.

Uploaded by

Vinicius Ferreira
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A Plain Man's Guide to Kaldor's Growth Laws

Author(s): A. P. Thirlwall
Source: Journal of Post Keynesian Economics, Vol. 5, No. 3 (Spring, 1983), pp. 345-358
Published by: M.E. Sharpe, Inc.
Stable URL: http://www.jstor.org/stable/4537750 .
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Kaldor'sgrowth laws

A plain man'sguide to
Kaldor'sgrowth laws
A. P. THIRLWALL

In the course of his InauguralLectureat Cambridgein 1966 on


the causesof the U.K'sslow growthrate,Kaldor(1966) presented
a seriesof "laws"to account for growth ratedifferencesbetween
advancedcapitalistcountries;he later elaboratedthese laws in a
lecture at Cornell University(1967). These laws, and their inter-
pretationand validity, have been the subjectof considerablescru-
tiny and debate, and Kaldorhimselfhas clarifiedand modifiedhis
own positionsincetheirenunciation.The basicthrustof the model
consistsof the followingpropositions:1
i) The fasterthe rateof growthof the manufacturingsector,the
fasterwill be the rate of growthof GrossDomesticProduct(GDP),
not simplyin a definitionalsensein that manufacturingoutput is a
large component of total output, but for fundamentaleconomic
reasons connected with induced productivitygrowth inside and
outside the manufacturingsector. This is not a new idea. It is
summed up in the maxim that the manufacturingsector of the
economy is the "engineof growth."
ii) The faster the rate of growthof manufacturingoutput, the
faster will be the rate of growth of laborproductivityin manu-
facturingowing to static and dynamiceconomiesof scale, or in-
creasingreturnsin the widest sense. Kaldor,in the spiritof Allyn
Young (1928), his earlyteacherat the L.S.E.,conceivesof returns

The authoris Professorof AppliedEconomicsat the Universityof Kent at


Canterbury.
1Some of the
propositionsare not as Kaldororiginallystated them, but we
shallreturnto the originalargumentlater.

Journal of Post Keynesian Economics/Spring 1983, Vol. V, No. 3 345

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346 JOURNALOF POST KEYNESIANECONOMICS

to scale as macroeconomic phenomena related to the inter-


action between the elasticity of demandfor and supply of man-
ufacturedgoods. It is this strongand powerfulinteractionwhich
accounts for the positive relationshipbetweenmanufacturingout-
put and productivitygrowth,otherwiseknown as Verdoorn'sLaw
(1949).
iii) The faster the rate of growth of manufacturingoutput,the
faster the rate of transferenceof labor from other sectors of the
economy where there are either diminishingreturns,or where no
relationship exists between employment growth and output
growth. A reduction in the amountof labor in these sectorswill
raise productivitygrowth outsidemanufacturing. As a resultof in-
creasingreturnsin manufacturingon the one hand and induced
productivitygrowth in nonmanufacturing on the other, we expect
that the faster the rate of growth of manufacturingoutput, the
faster the rate of growth of productivityin the economy as a
whole.
iv) As the scope for transferringlaborfromdiminishingreturns
activitiesdriesup, or as output comes to depend on employment
in all sectors of the economy, the degreeof overallproductivity
growth induced by manufacturinggrowth is likely to diminish,
with the overallgrowthrate correspondingly reduced.
v) It is in this latter sense that Kaldorbelievesthat countriesat
a high level of development,with little or no surpluslaborin agri-
cultureor nonmanufacturing activities,sufferfrom a "laborshort-
age" and will experiencea decelerationof growth;not in the sense
that manufacturingoutput is constrainedby a shortageof labor,
which he suggestedin his InauguralLecturewas the U.K'sproblem
but now regretsand retracts(1978).
vi) The growth of manufacturingoutput is not constrainedby
labor supplybut is fundamentallydeterminedby demandfromag-
riculturein the earlystageof developmentand exportsin the later
stages.Exportdemandis the majorcomponentof autonomousde-
mand in an open economy which must match the leakageof in-
come into imports.The level of industrialoutput will adjustto the
level of export demand in relation to the propensityto import,
through the workingof the Harrodtrade multiplier:2the rate of

2 For an
exposition and an elaboration of the Harrod trade multiplier, see
Kennedy and Thirlwall (1979) and Thirlwall (1982).

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All use subject to JSTOR Terms and Conditions
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All use subject to JSTOR Terms and Conditions
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All use subject to JSTOR Terms and Conditions
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All use subject to JSTOR Terms and Conditions
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All use subject to JSTOR Terms and Conditions
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All use subject to JSTOR Terms and Conditions
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