(kaldor) productivity and growth

8/10/2019 (Kaldor) Productivity and Growth

1/8

The Suntory and Toyota International entres for Economics and Related Disciplines

Productivity and Growth in Manufacturing Industry: A ReplyAuthor(s): Nicholas KaldorSource: Economica, New Series, Vol. 35, No. 140 (Nov., 1968), pp. 385-391Published by: Wileyon behalf of The London School of Economics and Political Scienceand The

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2/8

1968]

Productivity and Growth in Manufacturing

Industry: A Reply

By

NICHOLAS KALDOR

Professor Wolfe attacks

me

(in

the

May,

1968

issue of Economica) for

being

obscure

and

unconvincing

in the

inaugural

lecture

which I gave

at Cambridge.1In this lecture I attempted to put forward a complex

thesis concerning the causes

of

high

and

low rates of economic growth

under

capitalism,

and

this

was

necessarily somewhat

scanty;

there is a

limit

to the

material

one can

pack

into a

single lecture. Such a treatment

could

only

be successful

if

received

with

imagination

and some

goodwill;

Professor Wolfe

has

picked

on a

large

number

of

individual points

(many

of them trivial

in

substance) without attempting to come to

grips with

the

thesis as a whole.

I

propose

to

publish a more compre-

hensive

statement

of the

theory

in

due

course.2

Meanwhile rather than

follow the negative approach of answering each point in turn-which

would

be both tedious and unconstructive-I

shall concentrate on the

main points which have clearly

not been

understood.

Foremost

among

these is

my

notion

of

economic

maturity .

This is

not

some vague

notion which

can be defined in

terms

of

a

situation

in

which

there is

relatively

small

employment

in

agriculture .

In

my

lecture

I

defined

it

explicitly

as

a

state

of

affairs where real income

per

head

had reached

broadly

the

same level

in the

different

sectors of

the

economy .

I could have

added,

to

convey

its

significance better,

that

''economic maturity

could also

be defined

as the

end

of the

dual

economy ;

or a situation

in

which

surplus

labour

is

exhausted;

or one

in

which growth

with

unlimited

supplies

of

labour

(to

use Arthur

Lewis'

phrase)

is

no

longer possible.

The

neo-classical

framework

of

thought

cannot accommodate

no-

tions

like

disguised unemployment ,

the dual

economy ,

or the

distinction

between

capitalist

and

pre-capitalist enterprise.

For

neo-classical

theory

assumes that

the structure of

demand determines

the distribution of resources between different uses; that competition

and

mobility

assures that

factor

prices

tend to

equality

in

all

employ-

ments;

that

profit

maximization

ensures

equality

of

factor

prices

with

the

value

of

the

marginal products

of

factors;

subject

only

to

friction

1

J.

N. Wolfe, Productivity

and Growth

in

ManufacturingIndustry:

Some

Reflections

on Professor

Kaldor's Inaugural

Lecture , Economica, vol.

XXXV

(1968), pp.

117-26;

N.

Kaldor,

Causesof the

Slow Rate of EconomicGrowth

of the

UnitedKingdom,Cambridge

University

Press,

1966.

2 A

somewhat more

extended

exposition

was

given

in

three lectures

(subse-

quently published)

at Cornell

University: cf. Strategic

Factors in Economic

Development, thaca, New York, 1967.

385

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3/8

386

ECONOMICA

[NOVEMBER

etc.,

each factor

will tend to be used where

is makes the

greatest

contribution

to the

national

product.

It

would be generallyagreed

that these

assumptions

are

at their

most

inappropriate

n

the

case of an

under-developed

country,

or

a

country

in

the

earlier stages

of industrialization.

In such countries high

and

low

earnings

sectors

exist side

by

side;

there

are vast amounts

of

surplus

labour

or disguised unemployment

in

the

low-productivity

sectors,

so

that labour can

be withdrawn from

them without adverse

effects

on

the

output

of

those

sectors;

and the

supply

of labour in the

high-

productivity,

high-earnings

sector

is

continually

in

excess of the

demand,

so

that

the

rate

of

labour-transference

rom

the

low to the

high

produc-

tivity sectors is governed only by the rate of growth of the demand for

labour

in the latter.

In fact the

size

of the labour force in the

non-

industrial

sector

is

a

residual-entirely

determinedby

the total

supply

of

labour

on the

one

hand and the

requirements

or

labour

in

the

industrial

sector

on

the other hand.

The best definition

I could suggest for

the

existence

of labour

surplus

in

this

sense

is

one which is analogous

to

Keynes'

definition

of

involuntary unemployment :

a

situation

of

labour

surplus

exists when a

faster

rate

of increase

in

the

demand for

labour

in the

high-productivity

sectors

induces a faster rate

of

labour-

transferenceeven when it is attendedby a reduction,andnot an increase,

in

the

earnings-differential

etween

the

differentsectors.

For

reasons that

I

explained

in

my lecture,

the rate

of

growth

of

industrialization

fundamentallydepends

on

the

exogenous

components

of demand

(a

set

of

forces extending far beyond

the

income

elasticities

of demand

for manufactured

goods).

The higher the rate

of

growth

of

industrial

output

which

these demand conditions

permit,

the faster will

be

the

rate

at which labour

is

transferred

rom the surplus-sectors

to

the

high productivity sectors. It is my contention that it is the rate at which

this transfertakes place

which determines

the

growth

rateof productivity

of

the

economy

as a whole. The

mechanism by which this

happens

is

only

to

a

minor extent

dependent

on

the absolute differences

n

the levels

of

output per

head

between

the labour-absorbing

sectorsand the

surplus-

labour sectors.

The

major

part

of the mechanism

consists

of

the

fact that

the

growth

of

productivity

is accelerated as

a

result

of

the

transfer

at both

ends-both

at

the

gaining-end

and at the losing-end;

in the

first,because,

as a

result of

increasing

returns,

productivity

in industry will

increase

faster, the faster output expands; in the second because when the

surplus-sectors

lose

labour,

the

productivity

of the remainder

of the

working population

is

bound

to

rise.'

In

the

literature,

the

surplus

labour

sector is generally

thought

of

'Indeed,

the

existence f

disguised

nemployment

s

by itself

capable

f explain-

ing

theseresults, ven

in the absence

of increasing

eturns,

incethe

increase n

industrial utput,

brought

boutby labour

ransference,

ill be

a net addition

o

the GNP-there

will

be

no

compensating

reduction in output elsewhere.

As

a

matter

of historical fact,

I

am

convinced,

however,

that the growth

of productivity

resulting from increasingreturns (both internal and external) has been a very

important

part of

the picture.

(On this see below.)



4/8

1968]

PRODUCTIVITY/GROWTH

N MANUFACTURING

INDUSTRY 387

as agriculture.

This

is

because

in the

early

stages

of

capitalist

develop-

ment

much

the

greater part

of the

population draws its living

from agri-

culture. However, disguised

unemployment

in services

had been just

as prevalent-in Victorian England (as in present-day India or Latin

America)

there

were vast numbers of

people

who eked out

a

living

in

urban

areas

as

hawkers, petty

tradesmen,

servants,

etc.

on

very low

earnings.'

In the field

of

services

however (unlike

in

agriculture)

there

are two

contrary

processes

at work: on the one hand

industrialization

absorbs labour

from services on

a

large

scale;

on the other hand, the

growth

of

industry

itself

gives

rise to the

growth

of

services

of

various

kinds

which

are

both

complementary

and

ancillary

to

industrial

activities (by ancillary I mean that the demand for these services,

e.g. transport,

distribution,

accountancy,

banking services, etc. are

derived

from,

but cannot

generate,

industrial

activities).

As

a result

the

total

employment

in

services tends

to rise

during

the

process

of

indust-

rialization though

less

(in

relation

to the

growth

of total

output) when

the growth

in total

output

is

relatively

fast.

While

it has

long

been known that labour

has

no

opportunity

cost

in

an

under-developed

country-the absorption

of

labour

through the

growth

of

industry involving

no

reduction

in

output

elsewhere-it has

not been generally recognized that the same applies to most of the so-

called

advanced countries with

relatively

high

incomes

per

head.

The

view that

growth

rates,

even

in advanced

countries,

are

dependent

on

the

rate at

which

labour is transferred nto

manufacturing

from

other

sectors

would

find

confirmation,

in the

first

place,

if

over-all

growth

rates

are

positively

associated

with rates of increase

in

employment

in

manufacturing.

This

is shown

for the

group

of

twelve

advanced

countries

given

in

Table 3 of my lecture for the period 1953/4-1963/4 by the following

:2

(1)

6

=2-665+

1-066,M

R2=.828

(015)

where

G

is

the rate

of

growth

of

GDP

and

PM

is the rate

of

growth

of

employment

in

manufacturing.

This

result

confirms

my general

hypothesis

unless

it

could

be shown

that

growth

rates

in

manufacturing employment

are

themselves

closely

relatedto growth rates of total employment so that the former could be

regarded

as a

proxy

for the latter.

Such

positive

association seems

1

This relates

to both

self-employed

and

employees

alike.

In the

population

Census

of

1891,

15-8

per

cent.

of

the

occupied population

of Britain were classified

as domestic

servants.

In

the

Census

of

1961

the

figure

was

14

per

cent. This

reduction

cannot

be

explained

n terms

of

a shift

in

consumer

preferences

or

by

the

assumption

that

domestic

service is an inferior

good

with a

negative

income-

elasticity

of

demand;

it

can

only

be

explainedby

the

growing absorption

of

surplus

labour

in

the

economy

which resulted

in a rise in

wages

in

domestic service which

was

much

in

excess

of

the

general

rise in

wages.

2

The sources for this and the following equations are given in the statistical

tables of

my

lecture.



5/8

388

ECONOMICA

[NOVEMBER

ruled out,

however, by the fact

that

there is no association

at all between

rates

of

growth

of

GDP

and rates

of

growth

of total employment:

(2) G=4-421 +O043

Eg

R2=*018

(0.994)

whereEg

is the

rate

of

growth

of total

employment.

The

positive

correlation

in

Eq.

(1) could only be consistent

with

the

absence

of

any

correlation

in

Eq. (2)

if rates of

growth

in over-all

productivity

are

positively

associated with rates

of

growth

of

employ-

ment

in

manufacturing and negatively

associated with

rates

of

growth

of

employment

outside

manufacturing.

This is duly

confirmed

by

the

following three equations:

(3) Pg=

1868

+0991

EM

R2=

677

(0-216)

(4) Pg

=

4 924

-1

8OONM

R2-=

427

(0.660)

(5)

Pg=2 899+0821 EM-1-183

ENM

R2=842

(0.169)

(0.387)

where

Pgdenotes

growth

rates of

GDP per person

in

civilian

employ-

ment,

andEM

and

ENM

denote

growth

rates

of

employment

n

manufac-

turing and

non-manufacturing

respectively.

It

follows

from the above also that

in

a mature economy

it

would be

idle to

look

for evidence

of

a labour constraint

in

manufacturing

either

in terms of a differentialrise

in

wages

in

manufacturing

or

in

the

relative

incidence

of

unemployment

and unfilled vacancies

in the different

sectors.

Since

the

supply

of

labour

to

industry

does

not become

inelastic

until wages in the restof the economy have risen to levels comparableto

those

in

industry,

an

effective labour

constraint

in

manufacturing

would

manifest

itself

in

a

general

increase

in

wages

throughout

the

economy,

and

in

low levels of

unemployment

in

all sectors.

In

a

situation

of

approaching

abour

shortage

one

would

expect

the

unemployment

rate

to

be

falling,

and

wages

to rise faster

in the

non-manufacturing

sectors

than

in

manufacturing.1

One

would expect,

furthermore,

that

in

a

mature economy con-

strained

by

a labour

shortage,

the

average

level of

unemployment

would

be higherin the manufacturingsector than in the rest of the economy,

and

not lower. This is because

such an

economy

is

almost

inevitably

1

This has characterized

he recent situation in the

United States where,

pari

passu

with a

large

increase

in

employment

in the

manufacturing

ector

(of

2-8

per

cent. a year in the last five

years), wages rose fasterin the low-paid sectors (whole-

sale and retail distribution

and agriculture)than in manufacturing. Cf. Annual

Report of the Councilof EconomicAdvisers,

Washington,D. C., 1968,pp. 109-10.)

It should also be pointed

out that

in

the United States

(where he level of unemploy-

ment

has been much

greater

han

in

the United Kingdomthroughout

the

post-war

period) earnings

in

manufacturing

are much higher

in relation to the national

average (and particularlyin relation to agriculture and the distributive trades)

than

in the

United Kingdom.



6/8

1968] PRODUCTIVITY/GROWTH

N MANUFACTURING

INDUSTRY

389

subject

to

a

stop-and-go

cycle;

variations

in the pressure

of

demand

induced by

fiscal

and

monetary policies

affect demand and

employment

in industry

far more

than

in the non-industrial

sectors.

There

is finally

the

question

of the existence

of

increasing

returns to

scale

in

manufacturing

ndustries.

I

emphasized

in my

lecture

that this is

a

.macro-phenomenon

which (in

the

words of

Allyn

Young)

cannot

be discerned adequately

by

observing

the effects

of variations

in the size

of

a

particular

firm

or of

a

particular

industry .

Studies relating

to

the

cost

and

size of individual

plants

are not thereforenecessarilyrelevant;

though

there

is a growing body

of

empirical

evidence relating

to

individual

industries

which tends

to confirm

its

importance.-

Nor do recent studies which fit production functions by means of

linear multiple regressions

lead

to

any

confirmation

that

the

parameters

of a Cobb-Douglas

function

conveniently

add

up

to

unity.

Indeed in all

recent

studies

the

Cobb-Douglas

function

was assumed

to

be a con-

stantly

shifting

one,

of

the form

AectKaLb

nd

not AKaLb,

as

indicated

by

Wolfe;

and

in

many

of these studies

the result

a

+

b

=1

is a

tautolo-

gical

one which

gives

no indication

whatever

of the

presence

or

absence

of

economies

of

scale.2

Wolfe

was

mistaken

in

suggesting

that

the constant in the

regression

equation of output on employment is an errorterm . It is a constant

term,

which

reflects

explanatory

variables

that

were

excluded,

one of

which

may

be an autonomous

time trend.

It does not

follow, therefore,

that

the

introduction

of further

explanatory

variables

(such

as

capital

investment)

would

necessarily

reduce

the value of the

regression

coeffi-

cient

on

employment-if

the two

variables are

not

inter-correlated,

the

introduction

of a

capital

term should reduce

the

constant

term,

and

not

the

regression

coefficient

on

employment.

Since

owing

to the accelera-

tion principlethere is always some inter-correlationbetween the rate of

growth

of

employment

and

investment

activity,

one would

expect

a

multiple

regression

of

output

on

employment

and

capital

investment

to

show

lower

coefficients on

employment

than

a

simple

regression:

but

there

is no reason

to

expect

that

the

sum

of the

two

coefficients

in

the

one

case

should be

lower than

the

single

coefficient

in the other case. I

have

indeed

computed multiple

regressions

of

output

on

employment

and

investment,

and

they

show

that even

when the role

of

capital

is

taken

into

account,

the

regression

coefficient

of

output

on

employment

remains significantlygreater than one.3

I

See for

example,

J.

S.

Bain,

Barriers to

New

Comnpetition;

. Pratten and

R.

M.

Dean,

The

Economies

of

Large

Scale

Produiction

n

British

Industry-an

Introductory

tudy;

J. W.

Kendrick,

Productivity

Trends n

the

United

States;

as

well

as

the

sources quoted

in E.

F. Denison, Why

Growth

Rates Differ, chapter

on

Economies

of Scale.

2

The

existenceof

a

linear-homogeneous

production

function

is derived

not

from

observation

but

from

a

priori

reasoning (i.e. profit

maximization

underconditions

of perfect

competition)

and the parameters

are

either

restricted o

as to add

up

to

unity,

or else are directly

estimated from

factor

shares

which

by

definition

add

up to unity.

3

These multiple regressions

were

unfortunatelynot

completed

in

time to be



7/8

390

ECONOMICA

[NOVEMBER

It would

be

wrong

to

suppose

that the

regression between

output and

employment

showing

a coefficient that is

significantly greater than unity

is a reflection

of

short-term

or

cyclical

influences. The

figures

in

my

inter-country studies related to averages of ten-yearly periods, taking

two-year

averages

for both the

base-year

and the

end-year.

This

virtu-

ally

eliminates

short-period

or

cyclical

influences.

The

short-period

relationship

between

output

and

employment-showing

in

some

cases

a

5:1 relationship-largely

reflects

changes

in

the

degree

of

utilization of

capacity.

But the fact that there is short

period relationship

of

5:

1

does

not

exclude

a

long-period relationship

of

1'5: 1.

It

certainly provides

no

support

for

assuming

that the

long-period

relationship

must be

smaller

than 1:1.

Nor

is

it

correct

to

suppose

that more than a

small

part

of

the

Verdoorn

Law can be

explained by

embodied technical

progress

coupled with

the association

of a

relatively high

level of

investment in

fast-growing

industries,

in the

absence

of

increasing returns.

Unless

one

assumes

that the

rate of

technical

progress

on

successive

vintages is

itself

accelerated as

a

result of a

larger

volume

of

investment

(as

in

Arrow's

learning function ,

which comes to the same

thing

as

increas-

ing returns)

the mere

postulate

of

embodied technical

progress

does

not

entail that the average rate of growth of productivity should be signifi-

cantly

faster in the

faster-growing

industries.'

Differences

in

saving propensities

(as

measured

by

differences

in

the

investment/output ratio)

cannot

account for more

than a

small

proportion

of the

observed

differences

in

growth

rates.

Wolfe is

correct

in

saying

that

I do not

regard

the

supply

of

capital

as

a

serious

limita-

tion

on economic

growth .

This is because

savings

and

capital

accumula-

tion

in

a

capitalist economy

do not

represent

an

independent

variable

-a faster

rate of

growth

induces

a

higher

rate of

investment;

it

also

brings

about

a

higher

share of

savings

to

finance

that

investment,

through

its effect on the share

of

profits.

It is therefore more

correct to

say

that a fast rate of

capital

accumulation is

a

symptom

of

a

fast

rate

of

growth

than

a

cause

of

it.

I shall refrain

from

comment

on the last

sections

of

Professor

Wolfe's

paper

concerning policy

recommendations ,

where he

charges

me

with

several

sins of both omission and

commission.

My

lecture

was concerned

with

the

question

why growth

rates differ between different

countries.

The SelectiveEmployment Tax, public sector expenditure,immigration,

birth

control,

etc.

were

outside

its

scope

and none of

these was

mentioned.

included in the statistical notes

appended to my inaugural

ecture;

they are, how-

ever, included in the American

version, Strategic

Factors in Economic Develop-

ment, op. cit.,

pp. 81-3. (In

these equations

the

capital

term is measured by the

investment/outputratio in industry, which gives-under

the assumption that the

marginal capital/output ratio is greater than unity-a

lower limit to the capital

term

of a

Cobb-Douglas

function. Direct measurementof

the

rate of growth of

the capital

stock

would

have

been impossible statistically

and pretty meaningless

theoretically.)

'

The reasons for this cannot be gone into here; theyare set out in a forthcoming

paper by

W. A.

H.

Godley.



8/8

1968]

PRODUCTIVITY/GROWTH N MANUFACTURINGINDUSTRY

391

Finally, I would commend to Professor Wolfe

the

following lines

from Pope's Essay oz

Criticisnm:

A perfectJudgewill read each work of Wit

With the same spirit that its author

writ;

Survey he WHOLE,nor seek slight faults to find

Wherenaturemoves, and rapturewarms he

mind;

....

In

wit, as nature,what effects our hearts

Is not th'exactnessof peculiarparts;

'Tis

not a lip,

or

eye, we beautycall,

But

the

joint

force

and

full

result

of

all.

King's College, Cambridge.

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