Limits on GrowthAuthor(s): Nicholas KaldorReviewed work(s):Source: Oxford Economic Papers, New Series, Vol. 38, No. 2 (Jul., 1986), pp. 187-198Published by: Oxford University PressStable URL: http://www.jstor.org/stable/2663140 .Accessed: 17/10/2012 15:23

Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at .http://www.jstor.org/page/info/about/policies/terms.jsp

.JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range ofcontent in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new formsof scholarship. For more information about JSTOR, please contact support@jstor.org.

.

Oxford University Press is collaborating with JSTOR to digitize, preserve and extend access to OxfordEconomic Papers.

http://www.jstor.org

Oxford Economic Papers 38 (1986), 187-198

LIMITS ON GROWTH*

By NICHOLAS KALDOR

I REGARD it as a great privilege to have been asked to give the second of the Special Lectures which the University of Oxford arranged as an annual event in honour of Professor Sir John Hicks. I do so for both personal and professional reasons.

For convenience of exposition, though not on account of its prime importance, I should like to speak of my personal reasons first. Sir John Hicks is one of my oldest friends in England, and I owe him an immense debt for all that he taught me at the time when my knowledge of economics was very rudimentary. He is four years my senior-a difference which is hardly worth a mention now, but was of enormous significance when we were both young and he was a fullly qualified teacher in economics when I was a first year undergraduate. John Hicks first came to the L.S.E. from Oxford as a lecturer in 1926. I arrived a year later, and began as a first-year student reading for an economics degree in October 1927.

I first got to know him when I attended his lectures on Advanced Economic Theory. I remember a great deal of that course since it gave an exposition of the theories of Walras and Pareto and how they compared with the partial equilibrium method of Marshall. After my graduation I was awarded a Research Studentship and I moved into a small unfurnished flat in Bloomsbury which, as it happened, was next door to the one occupied by John Hicks. It did not take long before we saw each other frequently- indeed almost daily, for meals in small Italian restaurants, and talked about economics incessantly. There was at least one occasion when we went on a joint continental holiday. This, in some ways idyllic, arrangement came to a halt (though only temporarily) with my marriage, closely followed by a Rockefeller Fellowship in the United States, while Hicks married a close L.S.E. friend and fellow graduate student, Ursula K. Webb (who died recently) who was the real founder of the Review of Economic Studies. When the Review first appeared it was treated by the professionals with considerable scorn. Hayek thought it could not last for more than a year. Keynes thought there was no real need for it since, as the editor of the Economic Journal, he believed he had never had to turn down an article that was worthy of publication on account of pressure on space. Fifty years later the Review is still going strong and nobody would say now that its existence has not been justified.

Though we never shared a university again, and lived in different cities and hence saw each other much less frequently our mutual friendship was never in question-even though the gaps in erudition between us, though they may have narrowed in the course of the years, were never closed. I

* The second annual Hicks Lecture, delivered in Oxford on November 28th, 1985.

(? Oxford University Press 1986

188 LIMITS ON GROWTH

never had the patience to learn mathematics; Hicks got a first in Maths Mods at Oxford, and taught himself a number of foreign languages sufficiently well to be able to read and enjoy treatises on economics that were not available in English. As a result he was able to cut himself loose from the narrow dogmatism of Robbins and Hayek, and in this I followed him eagerly. He recommended that I should read Wicksell and Myrdal as an antidote to Hayek. But I learnt most from him in connection with his early work on Money and on general equilibrium economics; and I believe I was allowed to read Value and Capital almost chapter by chapter as it was written.

Now, coming to the professional reasons, which are far more important, John Hicks is an economist in the great classical tradition: undoubtedly one of the greatest now living, not just in this country but in the Western World. He is a pure economist in the sense that his interest is in developing general economic theory by improving the framework of assumptions whenever the case for such an improvement is established, and in exploring their implications as fully as logical reasoning, aided by mathematics, makes possible. Unlike others, whose interest in economics is more pedestrian, Hicks' main aim is the pursuit of knowledge as such. He is not an advocate of particular economic policies: he allows his readers to make up their minds on such matters-his own views and preferences are on most occasions kept firmly in the background. In this he differs from some other famous economists who developed the subject for the sake of finding better arguments for their preferred policies for improving the performance of the economy.

Hicks of course is also primarily interested in exploring the limits on production and growth but without any preconceived objectives of support- ing one particular set of policies as against others. In this respect Hicks is nearer to the grand tradition of the Lausanne School of Walras and Pareto than to that of the English classical economists.

His main virtues are the virtues of the intellectual-they are found in the thoroughness and patience with which he explores the implications of particular assumptions to the last detail-I would almost say, to the "last unsuspected detail". Indeed the feature that impresses me most in reading his works is the scrupulousness with which he pursues the numerous aspects of a problem-aspects the existence of which would not have been suspected by a more impatient and less intellectually thorough economist like myself.

But the most impressive thing about Sir John Hicks is the sheer magnitude, I would indeed say, the incredible magnitude, of his written record. He is the author of three major treatises-Value and Capital, Capital and Growth, and Capital and Time, any one of which could be regarded as an ample testimony of the concentrated effort of a life-time. But in addition to these three treatises Hicks published a large number of important and famous books on particular topics, beginning with the Theory

NICHOLAS KALDOR 189

of Wages in 1932, his Contribution to the Theory of the Trade Cycle in 1950, the Theory of Economic History (which is my personal favourite), and various books on monetary economics down to his most admirable, though difficult, methodological essay on Casuality in Economics published in 1979, or 47 years after the appearance of his first book. In between he published at least three books containing papers on monetary theory, and this was followed by three large volumes of Collected Essays on Economic Theory which appeared in the last few years. I cannot say that I have read everything which Hicks has written, though in relation to any other author (with the possible exception of Keynes) my score of having read and studied Hicks is rather a high one, and the more one considers his books the more one marvels how one man could have accomplished all this, and at the same time made such an extensive and continuing study of the works of others, as is evidenced by the broad variety of his references in the footnotes which are adduced to support particular points in the text.

One of Hicks' most engaging qualities and a rare one among academics, is the readiness with which he is prepared to set aside his previous writings if in the light of further thought he sees a problem differently from the way he approached it before. Unlike lesser men, he never feels constrained by his past utterances. As he put it in the Introduction to Capital and Time, "it is just as if one were making pictures of a building; though it is the same building, it looks quite different from different angles. As I now realise, I have been walking round my subject, taking different views of it." (No such sentiments could be expressed by an author who writes a treatise entitled Principles of Economics.)

As John Hicks argues in his latest book, economics is on the edge of the sciences and also on the edge of history-it is on the borderline of both. The economist, unlike the historian, is primarily concerned with the present, and for the sake of the present, is also concerned with the past-with the historian it is the other way round. More generally I would say that economic theory embodying hypotheses concerning the causal relationship between events should help us to understand the forces which shape historical developments. Ideally one would like to see induction and deduction closely interwoven. This however is not generally possible. The main reason, I think, is that the results derived by deductive reasoning necessarily presuppose a whole framework of assumptions, some of which may be supported by empirical investigations, while others may turn out to be immaterial.

However, the critical assumptions underlying theoretical propositions are not known in advance; hence the applicability of a theory, its explanatory power, can only be properly gauged after the deductive process is completed.

I shall choose as the main theme today Hicks' interpretation of the prolonged post-war boom, and the causes of its breakdown after 1973. It is found in a long essay on "Monetary Experience and the Theory of Money"

190 LIMITS ON GROWTH

which first appeared in a volume of essays on Economic Perspectives in 1977, though it may have been written sometime before that. The main purpose of Hicks' paper is a review of monetary theories from Hume to Wicksell and to Keynes and to deal with the slow and uninterrupted inflation which characterised the whole of the post-war period but which proceeded at a moderate pace-the so-called "creeping inflation"-of the 1950s and 1960s. It only became more violent (in all industralised countries and not just in Britain) in the mid-seventies. After showing that the long post-war inflation-the moderate inflation-was an indispensable prerequi- site of fast economic growth and universal full employment (since it made it possible for the slow growing countries to prosper provided that inflation was large enough in the fast growing countries), the maintenance of full employment in the industrial or so-called "secondary" sectors of the world economy (and as Hicks says, it is this sector which Keynes in the General Theory mainly had in mind) critically depended on an adequate growth in supplies in the "primary" sector (i.e., in agriculture and mining) which provide the indispensable inputs for the secondary sector. The classical economists were well aware of this; the Law of Diminishing Returns is a consequence of the fact that land is in fixed supply, and "land" (meaning the natural environment) is the critical factor both in the production of food and in the provision of raw materials of all kinds as well as of sources of energy. Hence the basic pessimism of all classical economists concerning the long-term possibilities of economic growth. The accumulation of capital, in the classical view, is a necessary but not a sufficient condition for growth. The growth of production will be less than in proportion to the increase in 'resources' (meaning both capital and labour), it must therefore involve (given the level of wages as determined by the costs of subsistence) a falling rate of profit which is indeed (I am here quoting Ricardo) "checked at repeated intervals by the improvements in machinery, connected with the production of necessaries, as well as by discoveries in the science of agriculture". However, sooner or later the Law of Diminishing Returns must reassert itself. The motive for accumulation (I am quoting Ricardo again) "will diminish with every diminution of profit and will cease altogether when profits are so low as not to afford them [the manufacturers] an adequate compensation for their trouble and for the risks which they must necessarily encounter in employing their capital productively" .1

Sooner or later all avenues will inevitably lead to the long run equilibrium of the Stationary State. And on the way to it it appeared inevitable that a steadily rising proportion of resources should be absorbed in the procure- ment of food, leaving less available for everything else. This was the main lesson to be derived from the Law of Diminishing Returns.

As is the case with many of the long term predictions of economists, subsequent history not only failed to support the predictions but led quite

1 Principles, Sraffa edition, pp. 120 and 122.

NICHOLAS KALDOR 191

universally in the opposite direction. The proportion of resources of the world economy (or the world trading economy-as Hicks prefers to regard the real-world equivalent of the economist's motion of a "closed economy") which was required for the primary sector of production has steadily diminished with economic progress-indeed in the views of some it was the steady fall in the proportion of resources required for satisfying primary needs which made possible economic progress and rising living standards in a steadily growing number of countries or areas. The proportion of the annual labour force occupied in agriculture in Britain is estimated to have been around 50 per cent in the 17th century but less than 36 per cent in the early 19th century; 20 per cent by the middle of that century, 8 per cent by 1900 and only 2.5 per cent today. (Even the earliest figure-50%-is much lower than that of other European countries of the period, e.g. France. This indicates that even prior to the Industrial Revolution England was a relatively rich country in Europe, the reasons for which would deserve closer investigation than they have yet received.)

It is true that today home production covers only around 60 per cent of our food requirements (this is a higher figure than that of the early decades of this century). But even so, the proportion of labour and capital resources needed to provide food for the whole of the population is 5 per cent or less-less than one twentieth. This is consistent with the figures for other countries having a modern, commercialised agriculture-for example, in Australia the proportion of the labour force in agriculture is around 6' per cent, but two thirds of the output is exported, so the proportion required to provide food for the indigenous population is only around 2 per cent. This may be lower, but not much lower, than the figures for Western European countries as well as America, in all of which the agricultural work force fell dramatically since the Second World War. As far as one can tell, this process is by no means at an end.

But this is only the labour-saving measure of technical progress in agriculture, which tells us nothing of the rate of growth of output, and how it compares with the rate of growth of demand for primary products. For that we need another measure of technical progress, looked at from the "land-saving" or "natural resource saving" aspect. It is the latter aspect which is crucial for growth. I define a land-saving innovation as anything which increases the total yield of a given area, whether agricultural or mineral (including sources of energy), though it is impossible to say whether the innovation is the result of new knowledge or merely newly adopted knowledge. The same kind of haziness which Sir John Hicks found in the notion of an industrial production frontier which depended on capital and labour resources, also applies to the production frontier for primary products-we cannot really distinguish movements along the curve from outward shifts of the curve. Anyhow, the real issue is whether the growth of labour productivity in industry and services and the growth of land productivity in agriculture and mining (the latter including oil-extraction)

192 LIMITS ON GROWTH

are in an appropriate relationship to one another (which need not imply proportionality).2

As Hicks says, from the early 1970s on "the Keynesian identification of the limit to growth with Full Employment of Labour is called into question".3 During the Bretton Woods period full employment was the effective barrier but since then, the effective barrier has been different (quoting Hicks) "full employment cannot now be reached since the supplies of primary products that would be needed to support it are not available".4 As my lecture is mainly intended to cast doubt on this proposition, I think I ought to add that I was just as convinced of this as Hicks was5-indeed more convinced, since Hicks went on immediately to qualify his statement by saying that the experience of the early 1970s may have been a temporary one due to "the exceptional expansion of 1972-3 which imposed an exceptional strain". (This resulted, I presume, from the sudden relaxation or disappearance of the balance of payment constraint in a number of countries which followed the abandonment of Bretton Woods.)

Indeed, the year 1973 was unique for its fast economic growth-which was higher in that year in all industrial countries than in any previous year or any of the subsequent years. Manufacturing output rose by 9.5 per cent in the U.K. by 10.3 per cent in the seven main industrial countries (including the U.S.) and by 10 per cent in the OECD countries as a whole. These rates were at least 50 per cent higher than the average rate of growth of industrial production in the previous 25 years, and while it can readily be granted that they were not sustainable, given the rate of growth of the output of primary products, the shortage of primary products certainly cannot explain why the rate of growth of industrial production in sub- sequent years-that is to say, in the years 1973-1984-should have fallen so low-to 134 per cent a year in the European OECD countries as a group, as against the growth rate of 53 per cent a year achieved in the previous 25 years. Indeed, in the light of these figures it is in my view impossible to maintain that the Depression of the Seventies (and after), with the reappearance of heavy unemployment in the industrial countries, was a consequence of supply constraints, the effects of which would have been aggravated, not alleviated-as many people maintained at the time on both sides of the Atlantic-by the more deliberate use of Keynesian policies acting on effective demand. The most one can say is that uncoordinated measures of expansion by individual countries would have tended to

2 Strict numerical proportionality is not of course what is required, since the income elasticity of consumption demand for foodstuffs is less than unity and that for manufactures and services greater than unity-but the main point made in the text is valid in the sense that there is a "warranted" relationship between them at any particular level of real income.

3 Economic Perspectives, p. 98 4Ibid. p. 99. 5 cf., "Inflation and Recession in the World Economy", Economic Journal, December 1976,

pp. 704-708.

NICHOLAS KALDOR 193

aggravate the imbalances in international trade and payments. Indeed it was the disproportionality between import and export propensities of individual countries under conditions of fully liberalized trade which was the major cause of the well-nigh universal state of recession.

I think it is in this context that Sir John Hicks' distinction between fix-price and flex-price markets is important. The manufacturing sector is the archetypal case of fix-price market-at least in the present century- when manufacturers are almost invariably price-makers and quantity-takers, and not the other way round. The working of this system is by no means fully clarified. It generally involves some firm, or firms, assuming the role of a price leader which other manufacturers follow-hence from the con- sumers' point of view, there is not much difference whether he buys from a high cost firm or a low cost firm, the differences in efficiency are reflected, not in a difference in prices (for goods of the same quality), but in differences in profits per unit of sale of different producers which, as we know from various kinds of statistics, are very large indeed.

Everybody practices mark-up pricing, but it is the price-leaders' costs and mark-up which determines the permissible, or viable, mark-up of the others. In such markets supply tends to equal demand in the sense that the flow of actual production tends to approximate actual take-up, or consump- tion, but this is not "market clearing" in the economists' sense, since the actual production of the representative seller is below his optimum production at the prevailing price-below the level of production that would maximise his profits. Differences between demand and supply in this sense are mainly reflected in stock changes; a fall in demand leads to an undesired (or involuntary, as the Keynesian term goes) accumulation of stocks, and vice versa if demand exceeds supply. The market operates via changes in quantities rather than in prices; in the relation of actual stocks to desired stocks, which tend to get eliminated through the operation of the stock adjustment principle. In markets of this type uncertainties concerning the future growth of demand mainly affect the degree of utilization of capacity; it pays the manufacturers to maintain capacity in excess of demand and keep the growth of capacity in line with the growth of demand. They are in a position to do this precisely because in the absence of keen price competition their profits will be large enough to finance new investment on a continuing basis. Prices are changed too, but these happen mainly as a result of changes in costs, either of raw materials or of labour, or both.

In flex-price markets, on the other hand, markets operate far more closely to the text book manner; the individual producer has no control over prices and cannot benefit from withholding supplies. Prices fall when supply (in this case it is the true supply, which means the maximum amount that sellers are prepared to sell at any particular price) exceeds demand and vice versa. In these markets short-term stock changes are also important and they can exert an influence both in a price-stabilizing and also a price- destabilizing direction. The stocks are held, not just by producers and

194 LIMITS ON GROWTH

consumers but mainly by market dealers (intermediaries) who maintain "buffer stocks" to be able to buy or sell to their customers at any time they desire even if the timing of purchases and sales is not perfectly synchron- ised. They make their money on the "dealers' turn" between their buying and selling prices, which are both varied stimultaneously according as they perceive that their stocks are changing in one direction or another, contrary to the desired norm.

In performing these functions the dealers almost inevitably become speculators as well, who increase stocks on their own initiative when they expect prices to rise, and vice versa when they expect prices to fall. While their normal functions as dealers operate in a price-stabilizing direction, their speculative transactions have the opposite effect. As a combined result price movements normally continue until a point is reached when traders feel that prices are abnormally low (or high as the case may be), in which case their policy goes into reverse (they buy in the expectation of a rise, when they consider that prices have fallen "too far", and so on) which creates a turning point, followed by an equally rapid movement of prices in the opposite direction. So commodity prices in unregulated markets behave like a yo-yo, they move up and down by very large amounts, normally within a period of a year or less. Keynes, writing in 1938, calculated that the average annual difference between the highest and a lowest price, over a ten-year period, amounted to 67 per cent in the case of four commodities (rubber, cotton, wheat and lead).6 After 1945 the same kind of fluctuations continued, according to some authorities on an even larger scale, particu- larly after 1971,7 and rising and falling prices tended to alternate in two-year periods more often than within a single year. Thus the sharp rise in prices in 1972-73 (by 150 per cent in terms of the index of commodity prices) was followed by a sharp fall of the order of 25 per cent in 1974-75, and a sharp rise in prices in 1976 (by over 40 per cent), followed by a fall in 1977; a rise in 1978-79 of over 30 per cent followed by a sharp fall of 26 per cent in 1980-82, and again by a further 20 per cent in 1984-85.8

The working of flex-price markets is thus in fact very inefficient-it is attended by large fluctuations in prices which are not regular enough to be predictable in extent or timing, and which generate risks that act as a drag on production.9 Hence whenever a stabilization scheme succeeds, it is soon

6"The Policy of Government Storage of Foodstuffs and Raw Materials", Economic Journal, 1938.

7 According to Prof. Sylos Labini, the variations in raw material prices were three times as large in relation to changes in world industrial production, than before 1971. Cf., Sylos Labini, On the Instability of Commodity Prices and the Problem of Gold; cf., also the graph in Lloyds Bank Review, July 1983, p. 25.

8These figures relate to an index number of 12 commodities-they are not comparable therefore with Keynes' figures which related to a group of four commodities only.

9 It could be argued that competitive markets would be far less inefficient if dealers carried much larger stocks in relation to turnover as this would enable them to exert a far greater price-stabilising influence as part of their actual business. However, the stocks which they find profitable to carry are themselves related to the profit made on the "dealers' turn" which is itself kept down by competition. Thus the same forces of competition which made intermedia- tion relatively costless are in part responsible also for the large fluctuation of prices.

NICHOLAS KALDOR 195

followed by a rise in production which brings about a large accumulation of stocks (butter mountains or cocoa mountains) which give the impression to consuming countries that they are made to pay too high a price as a result of the price stabilization scheme, whereas the presumption is that without price stabilization the effective price paid for commodities over the average of high and low periods would have been considerably more and not less.

If the prices in commodity markets could be stabilized through interna- tional commodity price stabilization schemes, as Keynes advocated strongly (though unsuccessfully) during the War, it is highly probable that the long-term rate of growth of output of primary commodities would be sufficiently enhanced to equal or to exceed the requirements arising from any feasible rate of growth of industrial output.'0 For while there is no ultimate limit to industrial production in a world context, there is a limit to the rate at which output can grow, a limit given by the sequential character of production, as analysed in Capital and Time. Just as it takes nine months to produce a baby, and it cannot be done in less, so in a world where it needs steel to make machinery and iron and coal to make steel, and each of these processes takes time, there is a limit to the rate at which additional labour can be absorbed in productive activities.

In agriculture, or in primary production as a whole, the same limitation due to the sequential character of production applies but it need not impose any narrower limit provided that adequate stocks are carried to ensure the success of the price-stabilisation scheme. For the real difference between primary production and secondary production (that is to say, between agriculture and mining on the one hand and industrial production on the other hand) resides in the short term elasticities of supply. In industry, on account of the nature of competition and marketing, an increase in demand is likely to call forth an increase in output fairly smoothly without much delay or impediment. In agriculture and mining on the other hand production normally responds to increased demand with some delay, particularly in the case of minerals where increased capacity may require the sinking of new shafts, etc. Over a longer period, on the other hand, there is no reason to suppose that the elasticity of supply of primary products be any less-indeed, historical experience shows the opposite, since the prior requirements for primary products could be satisfied with a steadily falling proportion of labour and capital devoted to the primary sector. This is despite the fact that technological progress involves the substitution of primary products for labour-in the form of energy generated by fossil fuels in place of human muscle power-as well as the substitution of manufac- tured goods (machinery) for labour."

10 As was found with the pre-war "marketing boards" in African countries, the introduction of an assured price gave a very large encouragement to peasant production.

11 I am ignoring in the context of this lecture the truly long-term problem created by the exhaustion of reserves of non-renewable sources of energy and minerals which agitated some scientists (Meadows and Co. and the Club of Rome) some 15 years ago. The uncertainties surrounding this question are too large to enable worthwhile consideration of this problem. For

(continued overleaf)

196 LIMITS ON GROWTH

The basic requirement of continued economic growth is that the various complementary sectors expand in due relationship with each other-that is to say that general expansion is not held up by "bottlenecks" in key sectors. However, in the course of time, under the influence of technical progress, both of the natural-resource saving and labour-saving kind, the require- ments of expansion may become considerably modified. In the manufactur- ing sector which becomes more important as real incomes rise, there are considerable economies of scale, as a result of which manufacturing activities are subject to a "polarisation process"-they are likely to develop in a few successful centres, and their success has an inhibiting effect on similar developments in other areas. The realisation of these economies of scale normally requires also that numerous processes of production which are related to each other are carried out in close geographical proximity.

As a result different regions experience unequal rates of growth of output and of population. The industrial areas experience a growing demand for labour which may involve immigration from other areas once their own surplus labour is exhausted. Technological development in primary produc- tion on the other hand, tends to be more labour-saving than land-saving, so that the growth of output may go hand in hand with a falling demand for labour; and though output per head may grow fast in real terms, the level of wages will tend to remain low (and may even be falling)12 as a result of a growing surplus population. Since labour cost per unit of output is the most important factor in determining selling prices (at any rate under competitive conditions) the low wages prevailing, in terms of industrial products, will mean that the terms of trade will move unfavourably to primary producers, which may be the main factor, along with the low coefficient of labour utilisation, for their state of "under-development" characterised by low standards of living.

The important contrast-which I regard as a major factor in the growing inequality of incomes between rich and poor countries-resides in the fact that the benefit of labour saving technical progress in the primary sector tends to get passed on to the consumers in the secondary sector in lower prices, whereas in the industrial sector its benefits are retained within the sector through higher wages and profits. (The main reason for this

(Footnote 10 continued)

one thing, known reserves are no indication of total available reserves, since it becomes totally uneconomic to search for reserves where known reserves exceed 30-40 years current consumption. It must also be borne in mind that technical progress has generally succeeded in circumventing scarcities arising from the shortage or insufficiency of particular commodities (the best known example is Darby's invention of the coking of coal which made iron production independent of timber supplies at a stage when deforestation caused an acute shortage of timber) and there is no reason why this process should come to a halt. (Cf. W. Beckerman, 'Economists, Scientists and Environmental Catastrophe', Oxford Economic Papers, November 1972)

12 Sir Arthur Lewis had shown that the spectacular increase in both labour and land productivity in sugar production over 40 years coincided with a fall in wages in sugar plantations.

NICHOLAS KALDOR 197

difference lies in the differing manner of operation of perfect and imperfect competition.)

Industrial growth leads to both higher real wages and a higher volume of employment, which will mean a higher concentration of the population in urban areas. This may entail cumulative advantages through the spread of knowledge and education with favourable repercussions on progress thro- ugh the application of scientific knowledge to industry. These go well beyond the economies of large-scale production, though these economies, through their need for geographic concentration, may have been instrumen- tal in creating them. The reverse side of this (of which we have heard much recently) is found when the industrial sector, due to falling market shares in relation to other centres, becomes stagnant and then goes into a decline, causing unemployment which tends to be concentrated in the inner cities of large towns which fall into decay.

In the primary producing regions, by contrast, technical progress involves a combination of rising production and of falling demand for labour, resulting in both open and disguised unemployment, the natural corrective for which is the movement of populations from agricultural to industrial areas. However, actual mobility has never been large enough to even out the differences in the level and the rate of growth of real wages between agriculture and industry-not even within the same country, and much less so when the required movement is across political boundaries.

There is thus no effective tendency to level out the differences between the advanced industrial areas and the surplus-labour agricultural areas; on the contrary, if our analysis is correct, the benefits of technical progress of both sectors tend to accrue to the industrial sector. This means that the faster the growth of technical knowledge the more the "the terms of trade" will turn against the primary producing areas and the greater will be the inequality between rich and poor countries.

Hence contrary to the view expressed at the beginning, the fall in growth rates and the rise in unemployment levels in the advanced industrial countries after 1973 was not the inevitable consequence of shortages in primary products-the indications are that the supplies of food, raw materials and energy would have proved adequate to the needs of the advanced industrial countries-particularly so if their prices had been kept steady by stabilisation schemes, instead of showing the sharp movements due to changes in short-term market expectations, and if there had not been the rise in prices due to monopolistic restrictions such as the creation of the oil cartel.

Thus the physical limits on growth (as distinct from the actual limits which became increasingly dependent on a complex of policy objectives) have continued to be set by the availabilities of labour in the advanced industrial countries-just as was the case in the first 25 years after the Second World War. If the maintenance of full employment in the industrial countries came under increasing strain it was as a result of accelerated inflationary trends

198 LIMITS ON GROWTH

caused by the sharp rise in commodity prices after 1971-which are likely to have been largely speculative in origin, following America's abandonment of the gold standard. (This is shown by the fact that the movement of commodity prices closely followed the movement of the gold price13 and the repercussions of this on the cost of living and hence on the rate of money-wage increases which aggravated the process.) The reaction, almost universally, was to deal with the problem as if it had been caused by demand inflation, not by cost inflation-in other words, by tightening fiscal and monetary policies (though for reasons that are evident, it is very difficult for any single country to stand out against the prevailing trend- unless it isolates itself by quantitative controls over trade as well as strict control of foreign payments).

For Britain the lower growth rate of the world economy meant an actual fall in industrial production after 1973, the level of which has still not been regained. Despite recent Ministerial claims of five years of uninterrupted growth, current manufacturing output is still 12 per cent below 1973 and 7 per cent below 1979. The counterpart to this was a heavy increase in unemployment, the incidence of which was concentrated in old areas of manufacturing industry, which are often found in the decaying inner city areas of large towns, where prospects of finding alternative employment opportunities are virtually non-existent. Twelve years of industrial decline has thus created within Britain the same kind of contrasts between prosperous and depressed areas as exist in the world at large between developed and under-developed countries.

King's College, Cambridge, U.K.

13 Cf. the graph in OECD Economic Outlook, December 1973, p. 106.