Misplaced Pages

#981018

42-435: A Kaldor–Hicks improvement , named for Nicholas Kaldor and John Hicks , is an economic re-allocation of resources among people that captures some of the intuitive appeal of a Pareto improvement , but has less stringent criteria and is hence applicable to more circumstances. A re-allocation is a Kaldor–Hicks improvement if those that are made better off could hypothetically compensate those that are made worse off and lead to

84-428: A + w ( Y t − 1 − Y t − 2 ) {\displaystyle I_{t}=I_{a}+w(Y_{t-1}-Y_{t-2})} This states that investment is determined by exogenous investment and lagged income multiplied by the accelerator coefficient. Kaldor's model modified this to include a negative coefficient for the capital stock: I t = I

126-414: A + w ( Y t − 1 − Y t − 2 ) − j K {\displaystyle I_{t}=I_{a}+w(Y_{t-1}-Y_{t-2})-jK} Kaldor then assumed that the investment and savings functions are non-linear. He argued that at the peaks and troughs of the cycle the marginal propensity to save shifts in opposite ways. The intuition behind this

168-459: A Pareto-improving outcome. The compensation does not actually have to occur (there is no presumption in favor of status-quo) and thus, a Kaldor–Hicks improvement can in fact leave some people worse off. A situation is said to be Kaldor–Hicks efficient , or equivalently is said to satisfy the Kaldor–Hicks criterion , if no potential Kaldor–Hicks improvement from that situation exists. If an outcome

210-498: A book entitled The Scourge of Monetarism , deeply criticizing monetarist-inspired policies. Kaldor was invited by then Prime Minister of India— Jawaharlal Nehru —to design an expenditure tax system for India in the 1950s. He also went to India's Centre for Development Studies (CDS) in 1985 to inaugurate and deliver the first Joan Robinson Memorial Lecture. Owing to these links, the Kaldor family donated his entire personal collection to

252-423: A downward shift in the investment curve as businessmen decide their factories become overfull. In the third stage (which overlaps with the second stage) the high growth in income causes higher saving which pushes the savings curve upwards. At this point the two curves become tangential and the equilibrium becomes unstable which generates a recession. In the fourth stage the same dynamics kick in but this time moving in

294-646: A former London Borough of Islington Labour councillor, Katharine Hoskyns, who has stood as a Labour candidate for Westminster City Council , Frances Stewart , Professor of Economic Development at the University of Oxford , and Mary Kaldor , Professor of Human Security at the London School of Economics . He died in Papworth Everard , Cambridgeshire. Tibor Scitovsky Scitovsky was born in Hungary in 1910. As

336-445: A recession or depression and so would dampen the cycle. Kaldor's model assumes wage and price flexibility. If wage and price flexibility are not forthcoming the economy may have a tendency to either perpetual and rising inflation or persistent stagnation. Kaldor also makes strong assumptions about how wages and prices respond in both inflations and depressions. If these assumptions do not hold Kaldor's model would lead us to conclude that

378-524: A situation where an outcome A is an improvement (according to the Kaldor criterion) over outcome B, but B is also an improvement over A. The combined Kaldor–Hicks criterion does not have this problem, but it can be non-transitive (though A may be an improvement over B, and B over C, A is not thereby an improvement over C). [REDACTED] Quotations related to Kaldor–Hicks efficiency at Wikiquote Nicholas Kaldor Nicholas Kaldor, Baron Kaldor (12 May 1908 – 30 September 1986), born Káldor Miklós ,

420-451: A stable fashion. The British Neo-Keynesian John Hicks tried to improve the theory by imposing rigid ceilings and floors on the model. But most people thought that this was a poor way of explaining the cycle as it relied on artificial, exogenous constraints. Kaldor, however, had actually invented a fully coherent and highly realistic account of the business cycle in 1940. He used non-linear dynamics to construct this theory. Kaldor's theory

462-588: Is a Kaldor–Hicks improvement, most Kaldor–Hicks improvements are not Pareto improvements. In other words, the set of Pareto improvements is a proper subset of Kaldor–Hicks improvements. This reflects the greater flexibility and applicability of the Kaldor–Hicks criterion relative to the Pareto criterion. The Kaldor–Hicks methods are typically used as tests of potential improvements rather than as efficiency goals themselves. They are used to determine whether an activity moves

SECTION 10

#1732855206982

504-606: Is created by second-tier banks through the distribution of credits to households and companies . In the Post-Keynesian framework, central banks only refinance second-tier banks on demand, but they are unable to properly create money. Despite insightful contributions, Kaldor could not initially win the debate, as monetarist policies where implemented by most central banks. He would, however, later be vindicated by empirical findings and policy, with money creation now being generally agreed to be mostly endogenous. In 1982, he published

546-420: Is due to the fact that if firms have a very large amount of productive capacity accumulated already they will not be as inclined to invest in more. Kaldor was in effect integrating Roy Harrod 's ideas about unbalanced growth into his theory. In the standard accelerator model that stood behind Samuelson's and Hicks' business cycle theories investment was determined as such: I t = I

588-444: Is that during recessions people will cut their savings to maintain their standard of living while at high levels of income people will save a larger proportion of their income. He also argued that at the peaks and troughs of the cycle the marginal propensity to invest shifts. The intuition behind this is that at the trough of the cycle there will be a large amount of excess capacity and so businessmen will not want to invest more, while at

630-507: Is the highest it could possibly be, it is called a Hicks-optimal outcome. A Hicks optimal outcome is always Pareto efficient. A reallocation is said to be a Pareto improvement if at least one person is made better off and nobody is made worse off. However, in practice, it is almost impossible to take any social action, such as a change in economic policy, without making at least one person worse off. Even voluntary exchanges may not be Pareto improving if they make third parties worse off. Using

672-422: Is unclear why the capacity of the winners to compensate the losers should matter, or have moral or political significance as a decision criteria, if the compensation is not actually paid. At a more technical level, various versions of the Kaldor–Hicks criteria lack desirable formal properties. For instance, Tibor Scitovsky demonstrated that the Kaldor criterion alone is not antisymmetric : it's possible to have

714-575: The Solow Growth Model in response to these perceived problems, summarised this view as such: Keep in mind that Harrod’s first Essay was published in 1939 and Domar’s first article in 1946. Growth theory, like much else in macroeconomics, was a product of the depression of the 1930s and of the war that finally ended it. So was I. Nevertheless it seemed to me that the story told by these models felt wrong. An expedition from Mars arriving on Earth having read this literature would have expected to find only

756-486: The University of Cambridge . On 9 July 1974, Kaldor was made a life peer as Baron Kaldor , of Newnham in the City of Cambridge . In 1969–1970, Kaldor was involved in a fierce debate with the so-called U.S. monetarist economist Milton Friedman . While Friedman defended the exogenous money supply theory, according to which money is created by powerful central banks , Kaldor and Post-Keynesian economists claimed that money

798-794: The de indicates, he was born into a noble family; his father, Tibor Scitovszky , held the post of Foreign Minister. He was educated at the Pázmány Péter University (from which he held an undergraduate degree in law), University of Cambridge , and the London School of Economics . He came to the United States on a traveling fellowship. He enlisted in the United States Army during World War II , in counter-intelligence. Because he still had family in German-allied Hungary he changed his name during this time to Thomas Dennis. After

840-708: The 1960s. The ignorance on the part of the American economists' knowledge of Kaldor's model also explains why the Cambridge Post-Keynesian economists found the ISLM model favoured by the American Neo-Keynesians to be crude and lacking. Kaldor was married to Clarissa Goldsmith, a prominent figure in Cambridge city life and a history graduate from Somerville College, Oxford . They had four daughters: Penny Milsom,

882-551: The CDS Library. There are 362 books in the collection and they cover a wide range of titles on economic theory, classical political economy, business cycles and history of economic thought. After the publication of John Maynard Keynes ' General Theory , many attempts were made to build a business cycle model. The models that were built by American Neo-Keynesians such as Paul Samuelson proved unstable. They could not describe why an economy should cycle through recession and growth in

SECTION 20

#1732855206982

924-465: The Hicks criterion is that an activity moves the economy toward Pareto optimality if the maximum amount the losers would pay the gainers to forgo the change is less than the minimum amount the gainers would accept to so agree. Thus, the Kaldor test supposes that losers could prevent the arrangement and asks whether gainers value their gain so much they would and could pay losers to accept the arrangement, whereas

966-475: The Hicks test supposes that gainers are able to proceed with the change and asks whether losers consider their loss to be worth less than what it would cost them to pay gainers to agree not to proceed with the change. After several technical problems with each separate criterion were discovered, they were combined into the Scitovsky criterion, more commonly known as the "Kaldor–Hicks criterion", which does not share

1008-454: The Kaldor–Hicks criterion because it is equivalent to requiring that the benefits be enough that those that benefit could in theory compensate those that have lost out. The criterion is used because it is argued that it is justifiable for society as a whole to make some worse off if this means a greater gain for others. Perhaps the most common criticism of the Kaldor-Hicks criteria is that it

1050-784: The LSE. Between 1943 and 1945, Kaldor worked for the National Institute of Economic and Social Research and in 1947 he resigned from the LSE to become Director of Research and Planning at the Economic Commission for Europe . He was elected to a Fellowship at King's College, Cambridge and offered a lectureship in the Economics Faculty of the University in 1949. He became a Reader in Economics in 1952, and Professor in 1966. From 1964, Kaldor

1092-401: The accumulated capital stock. The idea that investment depends positively on the growth of income is simply the idea of the accelerator model that holds that in periods of high income growth and hence demand growth, investment should rise in the anticipation of high income and demand growth in the future. The intuition lying behind the negative relationship to the accumulation of the capital stock

1134-489: The business cycle had an inherent mechanism built into it that redistributed income across the cycle and that these mitigated "explosive" results. As we have seen, in a cyclical upswing where planned investment begins to outstrip planned savings prices will tend to rise. Kaldor assumed that those who set prices have more power than those who set wages and so prices will tend to rise faster than wages. This means that profits must also rise faster than wages. Kaldor argued that due to

1176-708: The core variables and their linkages are delineated. Káldor Miklós was born in Budapest , son of Gyula Káldor, lawyer and legal adviser to the German legation in Budapest, and Jamba, an accomplished linguist and "a well-educated, cultured woman". He was educated in Budapest, as well as in Berlin, and at the London School of Economics , where he graduated with a first-class BSc (Econ.) degree in 1930. He subsequently became an assistant lecturer and, by 1938, lecturer and reader in economics at

1218-401: The criterion for Kaldor–Hicks improvement, an outcome is an improvement if those that are made better off could in principle compensate those that are made worse off, so that a Pareto improving outcome could (though does not have to) be achieved. For example, a voluntary exchange that creates pollution would be a Kaldor–Hicks improvement if the buyers and sellers are still willing to carry out

1260-528: The cycle might give way to either perpetual and rising inflation or stagnation. Kaldor's non-linear business cycle theory overcomes the difficulty that many economists had with Roy Harrod 's growth theory. Many of the American Neo-Keynesian economists thought that Harrod's work implied that capitalism would tend toward extremes of zero and infinite growth and that there were no dynamics that might keep it in check. Robert Solow , who eventually created

1302-400: The different savings propensities of capitalists and workers this will lead to higher savings. This will then dampen the cycle somewhat. In a recession or depression Kaldor argued that prices should fall faster than wages for the same reasons that Keynes laid out in his General Theory. This meant that income would be redistributed to workers as real wages rose. This would lead savings to fall in

Kaldor–Hicks efficiency - Misplaced Pages Continue

1344-435: The economy toward Pareto efficiency. Any change usually makes some people better off and others worse off, so these tests consider what would happen if gainers were to compensate losers. The Kaldor criterion is that an activity moves the economy closer to Pareto optimality if the maximum amount the gainers are prepared to pay to the losers to agree to the change is greater than the minimum amount losers are prepared to accept;

1386-501: The opposite direction. By the sixth stage the equilibrium is again unstable and a boom is produced. Kaldor also noted the importance of income distribution in his theory of the business cycle. He assumed that savings out of profits were higher than savings out of wages; that is, he argued that poorer people (workers) tend to save less than richer people (capitalists). Or: S w < S p {\displaystyle S_{w}<S_{p}} Kaldor believed that

1428-421: The peak of the cycle rising costs will discourage investment. This creates non-linear dynamics in the economy that then drive the business cycle. When Kaldor combines these components we get a clear six-stage model of the business cycle. In the first stage the economy is in equilibrium position. Investment is taking place and the capital stock is growing. In the second stage the growth in the capital stock leads to

1470-407: The same flaws. The Kaldor–Hicks criterion is widely applied in game theory 's non-zero sum games, such as DOTMLPF , welfare economics , and managerial economics . For example, it forms an underlying rationale for cost–benefit analysis . In cost–benefit analysis, a project (for example, a new airport) is evaluated by comparing the total costs, such as building costs and environmental costs, with

1512-531: The time Solow was working on his growth theory, the Cambridge UK economists had already satisfactorily laid out a self-limiting theory of the business cycle that they thought was a reasonable description of the real world. This is one of the reasons that the Cambridge economists were so hostile in their reaction to Solow's growth model and went on to attack it in the Cambridge Capital Controversy of

1554-408: The total benefits, such as airline profits and convenience for travelers. (However, as cost–benefit analysis may also assign different social welfare weights to different individuals, e.g. more to the poor, the compensation criterion is not always invoked by cost–benefit analysis.) The project would typically be given the go-ahead if the benefits exceed the costs. This is effectively an application of

1596-465: The transaction even if they have to fully compensate the victims of the pollution. Kaldor–Hicks does not require compensation actually be paid, merely that the possibility for compensation exists, and thus need not leave each at least as well off. Under Kaldor–Hicks efficiency, an improvement can in fact leave some people worse off. Pareto-improvements require making every party involved better off (or at least none worse off). While every Pareto improvement

1638-458: The wreckage of a capitalism that had shaken itself to pieces long ago. Economic history was indeed a record of fluctuations as well as of growth, but most business cycles seemed to be self-limiting. Sustained, though disturbed, growth was not a rarity. In fact, Kaldor's 1940 paper had already shown this to be completely untrue. Solow was working with an erroneous and underdeveloped theory of the business cycle that he had taken over from Samuelson. By

1680-413: Was a Hungarian-born British economist. He developed the "compensation" criteria called Kaldor–Hicks efficiency for welfare comparisons (1939), derived the cobweb model , and argued for certain regularities observable in economic growth, which are called Kaldor's growth laws . Kaldor worked alongside Gunnar Myrdal to develop the key concept Circular Cumulative Causation , a multicausal approach where

1722-618: Was an advisor to the Labour government of the UK and also advised several other countries, producing some of the earliest memoranda regarding the creation of value added tax . Inter alia, Kaldor was considered, with his fellow- Hungarian Thomas Balogh , one of the intellectual authors of the 1964–1970 Harold Wilson 's government's short-lived Selective Employment Tax (SET) designed to tax employment in service sectors while subsidising employment in manufacturing. In 1966, he became professor of economics at

Kaldor–Hicks efficiency - Misplaced Pages Continue

1764-417: Was similar to Samuelson's and Hicks' as it used a multiplier-accelerator model to understand the cycle. It differed from these theories, however, as Kaldor introduced the capital stock as an important determinant of the trade cycle. This was in keeping with Keynes' sketch of the business cycle in his General Theory. Following Keynes, Kaldor argued that investment depended positively on income and negatively on

#981018