Kaldor: The Irrelevance of Equilibrium Economics

Kaldor, Nicholas. (1972). The Irrelevance of Equilibrium Economics (Vol. 82, 1237-1255): Blackwell Publishing for the Royal Economic Society.

Economic theory that posits that there are equilibriums that market behavior will seek and find is fallible because it is empirically false. Kaldor traces this back to the notion of value in Smith’s Wealth of Nations. Here, he sees a theory of constant costs and returns to scale as being a foundational problem that eventually brought about this focus on economic equilibrium.

Equilibrium also assumes exogenous factors in its determination. For example, preference ordering is a crucial aspect of market equilibrium facilitation, but it is entirely exogenously determined. “When every change in the use of resources…creates the opportunity for a further change which would not have existed otherwise, the notion of an ‘optimum allocation of resources…becomes a meaningless and contradictory notion: the pattern of the use of resources at any one time can be no more than a link in the chain of an unending gsequence and the very distinction, vital to equilibrium economics, between resource-creation and resource-allocation loses its validity” (1245). Short term efficient allocation of resources may still be feasible, but only in closed-system theorizing.

“…it is evident from our analysis that the ‘self-sustained growth’ of decentralized economic systems, largely directed, not by exogenous factors, but the growth and the constellation of demand, is a fragile thing which will only proceed in a satisfactory manner if a number of favorable factors are present simultaneously: such as merchants who are ready to absorb stocks in the short run rather than allow prices to fall too far—because experience has taught them that market prices have some long-=run stability—and manufacturers who respond to the stimulus of growing sales with an expansion of productive capacity, because experience has taught them that over a period markets are growing and not stable. IT also requires a ‘passive’ monetary and banking system which allows the money supply to grow in automatic response to an increased demand for credit” (1252).

This article was read with an eye to Kaldor’s understanding of equilibrium vis-à-vis economic systems. It is quite rich and should be re-evaluated for the treatment of other substantial topics.