Kaldor on rational expectations metaphysics

1 Aug, 2014 at 20:32 | Posted in Economics | 3 Comments

It is now claimed by this group of American monetarists that the … proper cognition of the economy enables rational expectations to be formed which will prevent all but ‘surprise’ departures from an equilibrium path and will, therefore, render nugatory any attempt to reduce unemployment below its ‘natural’ level even in the short run. NPG x104756; Nicholas Kaldor, Baron Kaldor by Antony Barrington BrownThe centrepiece of this argument is that both workers and employers realise that the quantity theory of money is correct and that wages and prices must rise in the same proportion as the money supply. As a result, it is argued that increased expenditure will cause increases in wages and prices directly without affecting real variables such as output, employment or the real wage rate. They contend that they will base their expectations not on a projection of past trends in the price level or one of its time derivatives (such a procedure would usually be ‘irrational’) but on the ‘correct’ understanding of the economy which takes changing trends into account …

This rational expectations theory goes beyond the untestable basic axioms of the theory of value, such as the utility-maximising rational man whose existence can be confirmed only by individual introspection. The assumption of rational expectations which presupposes the correct understanding of the workings of the economy by all economic agents—the trade unionists, the ordinary employer, or even the ordinary housewife—to a degree which is beyond the grasp of professional economists is not science, nor even moral philosophy, but at best a branch of metaphysics.

Nicholas Kaldor & James Trevithick


  1. In July 1970 Nicholas Kaldor wrote an article in the Lloyd’s Bank Review in which he questioned Milton Friedman´s whole methodology and the empirical assertions behind the Chicago School and Monetarism and it´s explanation of the causes of the great depression, ( according to Nicholas Kaldor, the figures show that the stock of high powered base money increased by 10% between 1929 and 1931). Milton Friedman replied in the same journal in October, in Chicago School manor, and tried to drag the dispute in to a narrow question about technicalities and numbers and wrote:
    “Asking how Professor Kaldor would explain the existence of essentially the same relation between money and income… for the UK as for the US, Yugoslavia, Greece, Israel, India, Japan, Korea, Chile and Brazil?”

    Kaldor responded in his book ‘The Scourge of Monetarism’:

    “The simple answer to this is that Friedman’s assertions lack any factual foundation whatsoever. They have no basis in fact, and he seems to me to have invented them on the spur of the moment. I had the relevant figures extracted from the IMF statistics for 1958 and for each of the years 1968 to 1979, for every country mentioned by Friedman and a few others besides… Though there are some countries (among which the US is conspicuous) where in terms of the M3 the ratio has been fairly stable over the period of observation, this was not true of the majority of others.”
    Kaldor, N. 1982. The Scourge of Monetarism. Oxford University Press, Oxford and New York.

    Kaldor summed this up well in a speech to the House of Lords regarding this little ‘blunder’ on the 16th April 1980. There he said:
    “Professor Friedman, as on some other WELL-KNOWN OCCASIONS, invented the facts to clinch the argument, and relied on his reputation as an expert for being taken on trust without anyone bothering to check the figures.”

    source:The UK Forum for Post Keynesian Economics
    Keynes Seminar in Cambridge
    Professor Richard Kahn on The Scourge of Monetarism (11 December 1987)

  2. To Richard Kahn, M. Friedman did point out in his book on the ‘Monetary History of the US’ that the banks that failed in 1929 were unsupervised.

  3. Concerning Kaldor’s statement above, Nassim Talib recently wrote a book, ‘Antifragile.’ The diagrams in the text indicate that Black Swans have an incredibly low probability but the payoff for a predicted Black Swan is high. So, the conclusion might be drawn that once a Black Swan is predicted, that is, that a low probability event with a high payoff is predicted, that the relevant conditions for the event are then attempted to be put into place or applied!

    As Kaldor notes, the problem with rational expectations is the surprise event, so if the surprise event can be imagined and implemented while everyone is following their rational expectations, then those imaginative individuals will gain.

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