The Making of a Post-Keynesian Economist: Cambridge Harvest

9780230_284692_01_prex.indd i 12/23/2011 4:54:18 PM 9780230_284692_01_prex.indd ii 12/23/2011 4:54:18 PM The Making of a Post-Keynesian Economist: Cambridge Harvest Selected Essays of G. C. Harcourt

G. C. Harcourt Emeritus Reader in the History of Economic Theory, University of Cambridge; Emeritus Fellow, Jesus College, Cambridge; Professor Emeritus, University of Adelaide; Visting Professorial Fellow, University of New South Wales

9780230_284692_01_prex.indd iii 12/23/2011 4:54:18 PM © G. C. Harcourt 2012 Co-authors © Stephanie Blankenburg, Avi J. Cohen, John Grieve Smith, Mehdi Monadjemi 2012 All rights reserved. No reproduction, copy or transmission of this publication may be made without written permission. No portion of this publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright, Designs and Patents Act 1988, or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency, Saffron House, 6–10 Kirby Street, London EC1N 8TS. Any person who does any unauthorized act in relation to this publication may be liable to criminal prosecution and civil claims for damages. The author has asserted his right to be identified as the author of this work in accordance with the Copyright, Designs and Patents Act 1988. First published 2012 by PALGRAVE MACMILLAN Palgrave Macmillan in the UK is an imprint of Macmillan Publishers Limited, registered in England, company number 785998, of Houndmills, Basingstoke, Hampshire RG21 6XS. Palgrave Macmillan in the US is a division of St Martin’s Press LLC, 175 Fifth Avenue, New York, NY 10010. Palgrave Macmillan is the global academic imprint of the above companies and has companies and representatives throughout the world. Palgrave® and Macmillan® are registered trademarks in the United States, the United Kingdom, Europe and other countries. ISBN: 978–0–230–28469–2 This book is printed on paper suitable for recycling and made from fully managed and sustained forest sources. Logging, pulping and manufacturing processes are expected to conform to the environmental regulations of the country of origin. A catalogue record for this book is available from the British Library. Library of Congress Cataloging-in-Publication Data Harcourt, Geoffrey Colin. The making of a post-Keynesian economist : Cambridge harvest / G. C. Harcourt. p. cm. “Volume 2.” Includes index. Summary: “The Making of a Post-Keynesian Economist: Cambridge Harvest gathers up the threads of the last decade of the author’s 28 years in Cambridge. The essays include autobiography, theory, review articles, surveys, policy, intellectual biographies and tributes, and general essays” – Provided by publisher. ISBN 978–0–230–28469–2 (hardback) 1. Harcourt, Geoffrey Colin. 2. Economists – Great Britain. 3. Keynesian economics. 4. Economics. I. Title. HB103.H26A3 2012 330.1596092—dc23 2011026910 [B]

10 9 8 7 6 5 4 3 2 1 21 20 19 18 17 16 15 14 13 12 Printed and bound in Great Britain by CPI Antony Rowe, Chippenham and Eastbourne

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List of Figures viii Acknowledgements ix

Introduction: The Making of a Post-Keynesian Economist: Cambridge Harvest 1

Part I Autobiographical Essay

1 ‘Horses for Courses’: The Making of a Post-Keynesian Economist (1999) 11

Part II Theoretical Essays

2 The Debates on the Representative Firm and Increasing Returns: Then and Now (2007) 55 with Stephanie Blankenburg 3 Paul Samuelson on Karl Marx: Were the Sacrificed Games of Tennis Worth It? (2006) 84 4 Capital-Reversing and Reswitching (2009) 99 5 Whatever Happened to the Cambridge Capital Theory Controversies? (2003) 112 with Avi J. Cohen 6 The Relevance of the Cambridge–Cambridge Controversies in Capital Theory for Econometric Practice (2007) 131 7 The Harrod Model of Growth and Some Early Reactions to It (2006) 152 8 On Mark Perlman and Joseph Schumpeter: Their Respective Approaches to Evolutionary Economics and the History of Economic Theory (2004) 158

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Part III Review Articles

9 Monsters and Morals: Reviewing David Jenkins, Markets Whys and Human Wherefores. Thinking again about Markets, Politics and People, 2000 (2002) 167 10 On Paul Krugman on Maynard Keynes’s General Theory (2008) 171

Part IV Surveys

11 Joan Robinson and Her Circle (2005) 183 12 The Cambridge Economic Tradition (2003) 201

Part V Policy

13 New Labour and Constitutional Reform: Why not Introduce Compulsory Voting in all Elections? (2000) 211 14 The Economic Policies of Gordon Brown and the Treasury: Stability for What? (2001) 215 with John Grieve Smith 15 Chickens Coming Home to Roast (2003) 222

Part VI Intellectual Biographies and Tributes

16 The Vital Contributions of John Cornwall to Economic Theory and Policy: A Tribute from Two Admiring Friends on the Occasion of His 70th Birthday (1999) 229 with Mehdi Monadjemi 17 Wilfred Edward Graham Salter, 27 March 1929– 10 November 1963 (2007) 244 18 Peter Karmel: A Tribute (2009) 248 19 John Richard Wells, 1947–1999 (1999) 253 20 Second Address at the Memorial Gathering for Alister Sutherland, Trinity College, 30 October 2004 (2004) 256

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Part VII General Essays

21 ‘Despised and Rejected’ (1995) 261 22 Speech to Commerce Graduates at the University of Melbourne (2003) 266

Index 269

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4.1 Joan Robinson’s pseudo production function 104 4.2 Samuelson’s straight line w-r relationships with ‘envelope’ and capital values 106 4.3 Capital-reversing and reswitching with capital values 107 4.4 Real capital-reversing and reswitching 108 4.5 ‘Dip’ in standard of living 108 5.1 Samuelson’s (1966) example of Wicksell Effects in a simple Austrian model 116 5.2 Demand for capital (per unit of labour) in Samuelson’s (1966) example 117 6.1 Short-period utilisation possibilities doubling up for long-period accumulation possibilities 133 6.2 Salter’s ‘best-practice’ iso-quant, assuming constant returns to scale 134 16.1 The market for residential mortgage and non-housing funds 239

viii

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First, I would like to acknowledge the co-authors of some of the essays in these volumes: Stephanie Blankenburg, Avi Cohen, John Grieve Smith, Prue Kerr, Mehdi Monadjemi, Peter Nolan, Ajit Singh, Sean Turnell and Catherine Walston. One of the real pluses of the community of scholars is that co-authors are also such close and supportive friends. I am a very lucky person. Second, I am most grateful to Janet Nurse, Jane Starnes and Grace Setiawan for being such wonderful, cheerful and uncomplaining typ- ists, and to Ha (Viet Ha Nguyen) for handling so expertly my e-mails, and for research assistance. The author and publishers wish to acknowledge with thanks the following for permission to reproduce copyright material: Edward Elgar Publishing Ltd, Cheltenham, Glos. For permission to reprint Geoffrey Harcourt (1999), ‘ “Horses for Courses”: The Making of a Post-Keynesian Economist’, in Arnold Heertje (ed.), The Makers of Modern Economics, Volume IV, Cheltenham, UK and Northampton, MA: Edward Elgar Publishing, pp. 32–69 and Geoffrey Harcourt (2007), ‘The Debates on the Representative Firm and Increasing Returns: Then and Now’ In Philip Arestis, Michelle Baddelely and John S. L. McCombie (eds), Economic Growth, New Directions in Theory and Policy, Cheltenham, UK and Northampton, MA: Edward Elgar Publishing, pp. 44–64. Oxford University Press for permission to reprint ‘Paul Samuelson on Karl Marx: Were the Sacrificed Games of Tennis Worth It?’ in Michael Szenberg, Lall Ramratten and Aron A. Gottesman (eds), Samuelsonian Economics and the Twenty-First Century, New York: Oxford University Press, 2006, pp. 127–41. Edward Elgar Publishing Ltd, Cheltenham, Glos for permission to reprint Geoffrey Harcourt (2010), ‘Capital Reversing and Reswitching’, chapter 24 in Mark Blaug and Peter Lloyd (eds), Famous Figures and Diagrams in Economics, Cheltenham, UK and Northampton, MA: Edward Elgar Publishing, pp. 191–98. The American Economic Association for permission to reprint ‘Whatever Happened to the Cambridge Capital Theory Controversies?’ Journal of Economic Perspectives, vol. 17, no. 1, Winter 2003, pp. 199–214.

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Edward Elgar publishing Ltd, Cheltenham, Glos. for permission to reprint Geoffrey Harcourt (2007), ‘The Relevance of the Cambridge– Cambridge Controversies in Capital Theory for Econometric Practice’, in Philip Arestis, Michelle Baddeley and John S. L. McCombie (eds), Economic Growth. New Directions in Theory and Policy, Cheltenham, UK and Northampton, MA: Edward Elgar Publishing, pp. 17–35 and Geoffrey Harcourt (2006), ‘The Harrod Model of Growth and Some Early Reactions to It’ in D. A. Clark (ed.), The Elgar Companion to Development Studies, Cheltenham, UK and Northampton, MA: Edward Elgar Publishing, pp. 219–23. Springer for permission to reprint ‘On Mark Perlman and Joseph Schumpeter: Their Respective Approaches to Evolutionary Economics and the History of Economic Theory’, Journal of Evolutionary Economics, vol. 14, 2004, pp. 127–30. The editor of Soundings for permission to reprint ‘Monsters and Morals: Reviewing David Jenkins, Markets Whys and Human Wherefores: Thinking again about Markets, Politics and People’ Soundings, 2003. The editor of the History of Economics Review for permission to reprint ‘On Paul Krugman on Maynard Keynes’ General Theory’, History of Economics Review, No. 47, Winter 2008, pp. 125–31. The editor of The History of Economic Ideas for permission to reprint ‘Joan Robinson and Her Circle’, History of Economic Ideas, vol. 9, 2001/2, pp. 59–71. Edward Elgar Publishing Ltd, Cheltenham, Glos. For permission to reprint Geoffrey Harcourt (2003), ‘The Cambridge Economic Tradition’, in J. E. King (ed.), The Elgar Companion to Post Keynesian Economics, Cheltenham, UK and Northampton, MA: Edward Elgar Publishing, pp. 44–51. The editor of Soundings for permission to reprint ‘The Economic Policies of Gordon Brown and the Treasury. Stability for What?’ Soundings, Issue 20, Summer 2002, pp. 57–63. ; ‘Chickens Coming Home to Roost’, Soundings, Issue 23, Spring 2003, pp. 99–102; and ‘New Labour and Constitutional Reform. Why not Introduce Compulsory Voting in All Elections?’ Soundings, Issue 16, Autumn 2000, pp. 35–39. Edward Elgar Publishing Ltd, Cheltenham, Glos, for permission to reprint Geoffrey Harcourt (2007), ‘Wilfred Edward Graham Salter’, in J. E. King (ed.), A Biographical Dictionary of Australian and New Zealand Economists, Cheltenham, UK and Northampton, MA: Edward Elgar Publishing, pp. 243–45. The editor of Agenda for permission to reprint ‘Peter Karmel: A Tribute’ Agenda, vol 16, no. 1, 2009, pp. 63–66. Independent News and Media for permission to reprint ‘John Richard Wells’ (1999, Independent).

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Introduction

My favourite novelist is E. M. Forster. He was an Honorary Fellow of King’s, the first of my four Cambridge Colleges, when I went to King’s as a research student in 1955. I was fortunate to have three long conversations with Forster in the 1950s and 1960s, as it happens, all on significant events or topics: Suez in the 1950s, the suicide of a King’s Fellow in the 1960s and, with his permission, answers to my questions about his novels, especially the two set in Italy. One of his collections of essays is entitled Abinger Harvest (1936), a gathering up of threads. So I subtitled the gathering up of threads in this selection of essays from my last years in Cambridge, Cambridge Harvest, as a tribute to Forster and Cambridge. I start the selection with an autobiographical essay (Harcourt (1999a)), which was published in volume IV (1999) of Arnold Heertje’s series, The Makers of Modern Economics. I was amazed but delighted to join there Duncan Foley and Hirofumi Uzawa, two friends whom I much admire. The subtitle, The Making of a Post-Keynesian Economist, indicates the theme. I was once asked by a publisher to write my autobiography (as opposed to an intellectual autobiographical essay such as this essay); I refused. To write a complete autobiography, it is necessary to be as honest as possible and to reveal episodes and attitudes often known only to the persons concerned and of which they (in any event, I) are thoroughly ashamed. Also I would like to keep my many friends, yet one of the reasons the publisher asked me was because I know and have so many friends all over the world who are also economists. So I said ‘no’ because I felt I could not preserve my integrity and retain my friends!

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Next come six theoretical essays. The first (Chapter 2) is co-authored with my friend, Stephanie Blankenburg. Stephanie is one of the most remarkable and admirable persons I have ever known. She has high original and critical intelligence, complete integrity and courage, radical and progressive views which she puts into action. She combines all these traits with old-fashioned courtesy, concern and care. The essay is an English version of a chapter (Blankenburg and Harcourt (2001)) we wrote for a volume in the distinguished German series in the history of theory, edited by Bertram Schefold (2001). The topic of the chapter was the representative firm and increasing returns controversies of the 1920s. We relate the issues of these debates to similar issues that have arisen in modern endogenous growth theory. We argue that answers were and are lacking in both the 1920s and now when a careful evaluation of the underlying conceptual bases is made. The next essay (Chapter 3) arose from Michael Szenberg’s invitation to me to contribute to a volume celebrating Paul Samuelson’s ninetieth birthday in 2005 (Szenberg, Ramrattan and Gottesman (eds) (2006)). I went to the grand party in a hotel in Boston when the volume (then only in manuscript form) was presented to the birthday boy on, I think, Sunday night. Had a bomb been dropped on the hotel it would have made more than a marginal indentation into the world’s economics profession. Sadly it was the last time I was to see and talk to Paul (when I asked him when was his next game of tennis, he answered ‘Tuesday’) and my old friend Mark Perlman, and it was the only time I met John Cornwall’s mentor, James Duesenberry. I chose as the topic to write on, Samuelson’s changing view over his lifetime on Karl Marx, both as set out in the many editions of his textbook and in his ‘serious’ scientific papers (Harcourt (2006a)). I do not think, on balance, that he gave Marx his proper due though I do point out that by his ninth decade, Paul, whether he acknowledged it or not, was seeing the processes then at work in modern capitalism through Marxist lenses. Mark Blaug and Peter Lloyd had the bright idea of publishing essays on diagrams in economic theory that have changed the world. Avi Cohen and I were asked to write on and draw the diagrams of capital- reversing and reswitching. We rather dragged our heels until I promised Avi I would do a first draft for him to turn into the final version. As the latter, Cohen and Harcourt (2010), is considerably different in exposition (not in content) from the former, I have immodestly reprinted my draft here (Chapter 4). Our combined effort is in Blaug and Lloyd (eds) (2010). Then follows our joint paper, Cohen and Harcourt (2003), in the

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retrospectives section of the Journal of Economic Perspectives, ‘Whatever happened to the Cambridge capital theory controversies?’ (Chapter 5) Unfortunately, what was in the retrospectives section was not put on the front cover page so I fear we lost some potential readers. But we did generate vigorous correspondence in the journal, especially from Franklin Fisher and Luigi Pasinetti, both of whom felt underrepresented in our account. We made up for this – not that we necessarily accept their complaints, at least in full – in our Introduction, Cohen and Harcourt (2005), to the volumes of Readings in capital theory (Bliss, Cohen and Harcourt (eds) (2005)). The next essay, Harcourt (2007a), follows on logically; it sets out the implications for econometric theory and practice of the results of the capital theory controversies (Chapter 6). I find it reassuring to report that the late Clive Granger thought that there was some merit in the arguments advanced. David Clark has edited a wonderful book of essays in development economics (Clark (ed.) (2006)). He asked me to write the essay (Chapter 7) on Roy Harrod’s model (Harrod (1939, 1948)), and the early reactions to it by the post-Keynesians, Nicky Kaldor (1955–56), Joan Robinson (1956), and the neoclassicals, Bob Solow (1956) and Trevor Swan (1956); please note all you non-Australians. I reprint my essay, Harcourt (2006b), here. I like to think it is true both to Harrod and the reactions, and useful in the classroom. (I developed my approach over many years in lectures to first and second year undergraduates.) The last essay (Chapter 8) in Part II, Harcourt (2004), discusses the contributions of two great evolutionary economists and historians of theory – Joseph Schumpeter and Mark Perlman. Writing it made me reread Schumpeter on Keynes which I thought was far more positive than the conventional wisdom has it. I point out that because Perlman was much more sceptical about and less in awe of mathematical methods in economics; he was in many ways the more balanced and sensible historian of the two. Part III contains two review articles of outstanding books. One (Chapter 9) is written by the former (in)famous Bishop of Durham, David Jenkins (2000). It is a damning indictment of letting the market get out of hand in running our societies and our lives. The other (Chapter 10) is concerned primarily with Paul Krugman’s introduction (2007) to the reissue in the USA of Keynes’s magnum opus, Keynes (1936; 1973; 2007). Krugman’s account of his intellectual pilgrim’s progress with Keynes’s great book is absorbing and reassuring. If I may boast, I think I suggested to Amanda Hamilton who was then the economics

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editor of Palgrave Macmillan that she ask Krugman to do this. I recount in the essay the eventually happy outcome of the initial po-faced reaction of the Royal Economic Society to Krugman’s introduction. The year 2003 was the centenary of Joan Robinson’s birth. Of course, the Philistines who now run the Faculty of Economics (no longer Political Economy) at Cambridge made no effort to celebrate this significant event. But a chance conversation, sometime before the actual day, with my friend of many years, Tim Nulty, who was an ardent admirer of both Austin and Joan, led through his infectious enthusiasm to a splendid celebration and conference at the progressive department of economics of the University of Vermont; see Gibson (ed.) (2005, xvii). The papers of the conference were brought together in Gibson (ed.) (2005). I reprint here the paper I gave (Chapter 11). In effect it is an outline of the narrative of the intellectual biography of Joan Robinson which Prue Kerr and I published in 2009 in Tony Thirlwall’s series with Palgrave Macmillan, Great Thinkers in Economics. We like to think that we may have helped to make Palgrave Macmillan again the premier publisher of books on economics which was Amanda’s aim. The second essay (Chapter 12), Harcourt (2003a), is my contribution on the Cambridge economic tradition to the indefatigable John King’s edition of The Elgar Companion to Post-Keynesian Economics, King (ed.) (2003). I think the main arguments of the essay still stand but I would like to suggest that they are further buttressed and complemented by Harcourt (2006c) and Harcourt and Kerr (2009). I have always argued that policy should be, directly or indirectly, the ultimate end of all economic writing. I have found the progressive, left- of-centre journal Soundings an excellent outlet for musings on political issues, so I have published a number of short essays in it. Three of them are reprinted here. The middle one (Chapter 14) was written with my long standing friend, John Grieve Smith (2001), who courageously fought the good post-Keynesian fight through the barren years of Thatcherism and, even more upsetting, those of Blairism and Brownism. (Now I have deserted him by returning to Australia while he takes on the idiocies of Cameron-lite and Boy George Osborne.) Evidently a leading British economics journalist thought our essay on Gordon Brown and the Treasury the best critique of Brown’s (read Ed Balls’s) approach and policies he had read. If so, John must have the lion’s share of credit for I was a very junior partner. The other two essays (Chapters 13 and 15), Harcourt (2000, 2003b), are concerned respectively with the case for compulsory voting (Australia has always had it) and some thoughts on the fireman’s strike

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in the early noughties. When writing on the second topic I drew on some notes I had made many years ago on similar issues in Australia. The Australian Broadcasting Commission used to roster commentators (often from Universities) to talk for just over three minutes on topical issues of their choice in a radio slot called ‘Notes on the News’. I did this for several years because I thought it was an essential part of the good citizenship of University people. As I wrote in the introduction to the companion volume to this selection, Harcourt (2012), because of my age I am now writing more and more tributes to dear friends who have died. In Part VI, I reprint the tribute to John Cornwall for his seventieth birthday which I wrote with his former Ph.D student Mehdi Monadjemi (Chapter 16). It was published in the Festschift for John edited by his and my former student and friend, Mark Setterfield (1999). Sadly, John died in his eighty-first year; see the symposium in his memory in the Review of Political Economy, October, 2010. The next essay (Chapter 17), Harcourt (2007b), is a tribute to Wilfred Salter who died at the ridiculously early age of 34 in 1963. Yet Salter had a tremendous influence on the Australian and international economics profession. Much of my own work has been inspired by his contributions. I had the privilege and pleasure of having as my first Professor and Head of Department the great Australian economist and educator, Peter Karmel, when I went to Adelaide in 1958. I describe in Harcourt (2009) his excellence as Head, as an economist and, most of all, as a devoted family person and reliable, supportive, but down-to-earth, call it as it is, friend (Chapter 18). Then follow two short and sad tributes (Chapters 19 and 20) to two of my colleagues at Cambridge (Harcourt (1999, 2004)). Both John Wells and Alister Sutherland were unique and idiosyncratic splendid human beings, who often had to fight their own demons. Personally I would much rather have as colleagues such devoted if sometimes difficult and cranky people than the modern ‘representative teachers’ who minimise their teaching and good citizenship roles in order to fill up the publication sections of their CVs, spurred on, of course, by perverse signals from on high. I end with two general essays. The first (Chapter 21) is my response (Harcourt (1995)), to Joshua Gans and George Shepherd’s request to a number of economists (about 120) to send them details of rejections they had had from journals. (The letters were later published in Shepherd (ed.) (1995).) I hope I have exhibited perspective and light-hearted humour (except when, quite properly, I get stuck into the disgraceful

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behaviour of George Borts when he was editor of the American Economic Review). I also hope I have gone out with a bang, not with a whimper in the last essay (Chapter 22; Harcourt (2003b)). It is my ‘upwards and onwards’ Address to Melbourne University Commerce graduates when I received an Honorary Degree from my first alma mater, The University of Melbourne, in 2003. I close with a heartfelt dedication to my beloved wife of over 56 years:

For Joan, as always.

References

A rest is, Philip, Michelle Baddeley a nd John S. L . McCombie (eds) (2 0 07), Economic Growth. New Directions in Theory and Policy, Cheltenham, UK, Northampton, MA, USA: Edward Elgar. Blaug, Mark and Peter Lloyd (eds) (2010), Famous Diagrams and Figures in Economics, Cheltenham, UK, Northampton, MA, USA: Edward Elgar. Blankenburg, Stephanie and G. C. Harcourt (2001), ‘Die Debatte über das repräsentative Unternehmen und zunehmende Skalenerträge in den zwan- ziger Jahren’, in Schefold (ed.) (2001), 57–97. Blankenburg, Stephanie and G. C. Harcourt (2007), ‘The Debates on the Representative Firm and Increasing Returns: Then and Now’, in Arestis, Baddeley and McCombie (eds) (2007), 41–64. (Chapter 2). Bliss, Christopher, Avi J. Cohen and G. C. Harcourt (eds) (2005), Capital Theory, 3 vols, Cheltenham, UK, Northampton, MA, USA: Edward Elgar. Clark, D. A. (ed.) (2006), The Elgar Companion to Development Studies, Cheltenham, UK, Northampton, MA, USA: Edward Elgar. Cohen, Avi J. and G. C. Harcourt (2003), ‘Whatever Happened to the Cambridge Capital Theory Controversies?’ Journal of Economic Perspectives, 17, 199–214. (Essay 5). Cohen, Avi J. and G.C. Harcourt (2005), ‘Introduction: Capital Theory Controversy: Scarcity, Production, Equilibrium and Time’, in Bliss, Cohen and Harcourt (eds) (2005), xxvii–lx. Cohen, Avi J. and G. C. Harcourt (2010), ‘Reswitching and Reversing in Capital Theory’, In Blaug and Lloyd (eds) (2010), 191–98. Forster, E. M. (1936), Abinger Harvest, New York: Harcourt, Brace and Company. Gibson, Bill (ed.) (2005), Joan Robinson’s Economics: A Centennial Celebration, Cheltenham, UK, Northampton, MA, USA: Edward Elgar. Grieve Smith, John and G. C. Harcourt (2001), ‘The Economic Policies of Gordon Brown and the Treasury. Stability for What?’ Soundings, Summer, 57–63. (Essay 14). Harcourt, G. C. (1995), ‘Despised and Rejected’, in Shepherd (ed.) (1995), 73–77. (Essay 21). Harcourt, G. C. (1999a), ‘Horses for Courses: the Making of a Post-Keynesian Economist’, In Heertje (ed.) (1999), 32–69. (Essay 1).

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Harcourt, G. C. (1999b), ‘John Richard Wells, 1947–1999’, Independent. (Essay 19). Harcourt, G. C. (2000), ‘New Labour and Constitutional Reform: Why Not Introduce Compulsory Voting in All Elections?’ Soundings, Autumn, 35–39. (Essay 13). Harcourt, G. C. (2001), ‘Reviewing: David Jenkins, Market Whys and Human Wherefores. Thinking again about Markets, Politics and People. London: Cassell, 2000’, Soundings. (Essay 9). Harcourt, G. C. (2003a), ‘Cambridge Economic Tradition’, In King (ed.) (2003), 44–51. (Essay 12). Harcourt, G. C. (2003b), ‘Chickens Coming Home to Roast’, Soundings, Spring, 99–102. (Essay 15). Harcourt, G. C. (2003c), ‘Speech to Melbourne University graduates in Commerce’ (Essay 22). Harcourt, G. C. (2004a), ‘on Mark Perlman and Joseph Schumpeter: Their Respective Approaches to Evolutionary Economics and the History of Economic Theory’, Journal of Evolutionary Economics, 14, 127–30. (Essay 8). Harcourt, G. C. (2004b), ‘Second Address at the Memorial Gathering for Alister Sutherland, Trinity College, 30 October 2004’. (Essay 20). Harcourt, G. C. (2005), ‘Joan Robinson and Her Circle’, in Gibson (ed.) (2005), 15–28. (Essay 11). Harcourt, G. C. (2006a), ‘Paul Samuelson on Karl Marx: Were the Sacrificed Games of Tennis Worth It?’ in Szenberg, Ramratten and Gottesman (eds) (2006), 127–41. (Essay 3). Harcourt, G. C. (2006b), ‘The Harrod Model of Growth and Some Early Reactions to It’, In Clark (ed.) (2006), 219–23. (Essay 7). Harcourt, G. C. (2006c), The Structure of Post-Keynesian Economics: The Core Contributions of the Pioneers, Cambridge: Cambridge University Press. Harcourt, G. C. (2007a), ‘The Relevance of the Cambridge – Cambridge Controversies in Capital Theory for Econometric Practice’, in Arestis, Baddeley and McCombie (eds) (2007), 117–35. (Essay 6). Harcourt, G. C. (2007b), ‘Wilfred Edward Graham Salter (1929–63)’ in King (ed.) (2007), 243–45. (Essay 17). Harcourt, G. C. (2008), ‘On Paul Krugman on Maynard Keynes’s General Theory’, History of Economics Review, Winter, 125–31. (Essay 10). Harcourt, G. C. (2009), ‘Peter Karmel: A Tribute’, Agenda, 16, 63–66. (Essay 18). Harcourt, G. C. (2012), On Skidelsky’s Keynes and Other Essays: Selected Essays of G. C. Harcourt, Houndmills, Basingstoke, Hants: Palgrave Macmillan. Harcourt, G. C. and Prue Kerr (2009), Joan Robinson, Houndmills, Basingstoke, Hants: Palgrave Macmillan. Harcourt, G. C. and Mehdi Monadjemi (1999), ‘The Vital Contributions of John Cornwall to Economic Theory and Policy: a Tribute from Two Admiring Friends on the Occasion of His 70th Birthday’ In Settafield (ed.) (1999), 10–23. (Essay 16). Harrod, R. F. (1939), ‘An Essay in Dynamic Theory’, Economic Journal, 49, 14–33. Harrod, R. F. (1948), Towards a Dynamic Economics: Some Recent Developments of Economic Theory and Their Application to Policy, London: Macmillan. Heertje, Arnold (ed.) (1999), The Makers of Modern Economics, Volume IV, Cheltenham, UK, Northampton, MA, USA: Edward Elgar.

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Jenkins, David (2000), Markets Whys and Human Wherefores: Thinking again about Markets, Politics, and People. London: Cassell. Kaldor, N. (1955–56), ‘Alternative Theories of Distribution’, Review of Economic Studies, 23, 83–100. Keynes, J. M. (1936), The General Theory of Employment, Interest and Money, London: Macmillan, C.W., vol. VII, 1973. King, J. E. (ed.) (2003), The Elgar Companion to Post-Keynesian Economics, Cheltenham, UK, Northampton, MA, USA: Edward Elgar, second edition 2011. King, J. E. (ed.) (2007), A Biographical Dictionary of Australian and New Zealand Economists, Cheltenham, UK, Northampton, MA, USA: Edward Elgar. Krugman, Paul (2007), ‘Introduction to New Edition [of The General Theory]’, in Keynes (1936; 1973; 2007), The General Theory of Employment, Interest and Money, London: Macmillan, C.W., vol. VII, 1973; 2007, xxv–xxxviii. Robinson, Joan (1956), The Accumulation of Capital, London: Macmillan, 2nd edn, 1965; 3rd edn, 1969. Schefold, Bertram (ed.) (2001), Vade me cum zu der Keanischen Debatte über Kosten, Wettbewerb und Entwiklung. Düsseldorf: Verlag Wirtschaft un Finanzen ein unternehmen der Verlagrsgruppe Handelsblatt GmbH. Shepherd, George B. (ed.) (1995), Rejected, Leading Economists Ponder the Publication Process. Sunlakes, Arizona: Thomas Horton and Daughters. Solow, R. M. (1956), ‘A Contribution to the Theory of Economic Growth’, Quarterly Journal of Economics, 70, 65–94. Swan, T. W. (1956), ‘Economic Growth and Capital Accumulation’, Economic Record, 32, 334–61. Szenberg, Michael, Lall Ramratten and Aron A. Gottesman (eds) (2006), Samuelsonian Economics and the Twenty-First Century, New York: Oxford University Press.

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Introduction

Arnold Heertje’s invitation to contribute to his series came at an opportune time, just a few days after I had been presented with the volumes of a Festschrift organised by Philip Arestis, Gabriel Palma and Malcolm Sawyer (1997a, 1997b) at my Cambridge college, Jesus.† I have been reading the essays in the volumes by friends and colleagues (an overlapping set) with gratitude and absorption; I have also been reflecting on their interpretations and explanations of what I have done. Sometimes these have been of considerable surprise to me. For example, John King sent me the first draft of his essay (King, 1997) which partly revolved around my first book, Economic Activity (1967). I wrote the book jointly with Peter Karmel and Bob Wallace and I had to point out to John that many of the perceptive and ahead-of-their-time insights of the Young Harcourt were in fact those of the Young Karmel and/or the Young Wallace. Bruce McFarlane (1997) perceived in his reading of some of my papers on socialist investment and planning, insights and foresight which, while most flattering, reflect more his own ‘before the time was ripe’ contributions than mine; and so on. Nevertheless, I welcome the opportunity, which Heertje’s invitation provides, to try to put a structure on what I have attempted to do over a working life from which I am now approaching ‘retirement’. I cease to be officially employed by the University of Cambridge and Jesus in September 1998 as I shall be 67 in June 1998.1

* Originally published in Arnold Heertje (ed.), The Makers of Modern Economics, Volume IV, Cheltenham, UK and Northampton, MA: Edward Elgar Publishing, pp. 32–69.

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Major influences

In order to make sense of what I have tried to do in economics, or, more accurately, what I have tried to do as a teacher, researcher, ‘back room boy’ policy maker and political activist, I need to stress (apart, of course, from the generous support of university friends and colleagues wherever I have been working) the major influences on me: religion, politics, sport, and last (but not least), marriage and family life generally. It is no accident that I wrote the opening passages of the essay in Rome while visiting our oldest child, Wendy, her husband, Claudio Sardoni, and our numero uno (and, to date, only) grandchild, Caterina. (Responding to the copy editor’s queries in January 1999 allows me to report the birth of Emma-Claire Sardoni in Rome in November 1998.) Whatever I may have achieved in economics and other spheres would never have been possible without the extraordinarily generous love and support of Joan, of our four children, Wendy, Robert, Timothy and Rebecca (and their partners) and now, of course, Caterina and Emma- Claire and a host of relatives scattered around Melbourne and Sydney. The life of a scholar as well as those of a political activist and sports person inevitably have selfish aspects to them and the persons concerned are crucially dependent on the selfless support of their loved ones. I have always received this in abundance, for which I am more grateful than I can express in words. I turn now to the influences of politics and religion. I was born in Melbourne, Australia, on 27 June 1931 in the main bedroom of the family home in which my twin brother John (who has just retired after a distinguished career as an academic dentist) still lives. My parents, Marjorie and Kenneth Harcourt, lived there for the 55 years of their married life. Sadness pervaded the house because an older sister, Robyn, was a blue baby and died in her fourth year when we were under two; this profoundly affected our parents though they rarely spoke of it or her. Melbourne then was a stuffy, snobby, sectarian city, narrow-minded and intolerant. The Roman Catholics hated the Protestants (and vice versa) but they formed a united front when it came to the Jews and, indeed, foreigners generally. My parents were right-wing, agnostic (for most of their lives) and assimilationist Jews. They were born in Australia and, especially in my mother’s case, were most anxious to be accepted as insiders, an impossible dream, I fear. I had fierce quarrels with my parents when I was young – who has not? They were mainly about religion and politics and ‘correct behaviour’ (very important to them). Moreover, I left home when I went to university, partly in order to establish my

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independence from my mother’s possessive love. (My father understood that parental love consists just as much of letting go when the time is ripe as of care and support.) But I must stress that both of them were warm-hearted and fundamentally good, trying hard to do what they thought was right. Indeed, my father, who was much loved and respected, exhibited the old-fashioned virtues in his personal and business life (he was a leather merchant). His selfless devotion to and love of my mother following her severe stroke when she was 72 and he was already in his eighties, were of heroic proportions. I would have taken a different stance to them on our Jewish origins but it is easy to say this in another time and when not faced with the terrible uncertainties of the years when I was growing up. I have written elsewhere (see Sardoni, 1992) of how my early experiences of religious and political intoler- ance left indelible marks on me. My only excursion into journalism was to describe my experiences of anti-Semitism at the private secondary school to which my brother and I went in 1945 (see Harcourt, 1960). (There had already been unpleasant episodes related to our Jewish origins at our primary school which shook and disturbed me.) In Sardoni (1992), I described how starting economics in 1950 in the ‘Heaven on Earth’ atmosphere of Melbourne University quickly converted me to democratic socialism. Conversion to belief in God was a more pro- longed, difficult process. I had no trouble in reconciling the precepts of Christianity with democratic socialist economic principles – indeed, I cannot see how any other conclusion logically may be reached. I was held up by problems of personal faith, and the observed inconsistencies between the practices of many Christians and their professed ideals and beliefs, for what I realise now were mainly priggish reasons. Once I convinced myself that, despite my associations with Wesleyanism (my secondary school, Wesley College, and university college, Queen’s, were Methodist institutions), I did not need to have a warm feeling somewhere near the pit of my stomach before I could believe, I coupled my democratic socialist beliefs with a decision to regard belief in the Christian God (all Three) as a working hypothesis: let us suppose it to be true and see how we go from there. I took that step in 1953. I still regard it as a correct decision – my working hypothesis has not let me down. I became a democratic socialist because I thought that the existing ways in which our economic and social affairs were organised were unjust and irrational. A description, in the first year lectures on economic geography, of how the development of the Californian oil fields by private business had caused a large permanent loss of natural gas and oil first alerted me to the irrationality of unfettered competitive

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capitalism. I felt that any vital resources which were meant to serve the needs of both this and future generations should be developed by organisations with suitably long time horizons, so I argued for the nationalisation of all such resources. My basic reasoning, I believe, was correct, but I was naive to expect that politicians and managers of nationalised industries would necessarily have longer time horizons or more enlightened attitudes than the boards of private enterprises. It seemed to me irrational that capitalist institutions should push the exploitation of human selfishness (often called freedom of choice to make it sound better) so far to the front; while simultaneously stunting the development of the Christian (and humanist) virtues of altruism, cooperation, tolerance, compassion, and striving for consensus, not to forget forgiveness. I believe that the only essential difference between socialist humanists and Christian socialists is that the former think that people can bring about desirable reforms by their own unaided efforts. By contrast, Christians believe that it is only by the workings of the Holy Spirit in and through individuals and those individuals in turn working in and through secular and religious groups, that people may be able to achieve what the humanists think people can do unaided. Maybe Philip Wicksteed, a hero from my undergraduate days, put it too strongly: ‘If there is no descent of the Holy Spirit there can be no Kingdom of God, in spite of the most perfect and ideal social machinery’ (quoted in Steedman, 1994, p. 87). But then, maybe not. The Holy Spirit works in at least two ways. First, it removes the intol- erable pressures associated with the impossible task of achieving and maintaining personal perfection (think of poor Wittgenstein). This was a preoccupation of Evangelicals during my youth in Melbourne, in my view a perverse and unhealthy obsession with gazing at their own navels. Secondly, the Holy Spirit helps believers to work vigor- ously and with some chance of success, or at least optimism, within the social and political institutions of their societies. I explicitly rejected the view that religion is related to individual but not to group or social behaviour. I was never under any illusion as to the chances of complete success. Just because a cause or course of action is right and just there is no guarantee that it will succeed. But I do believe that to strive for the Kingdom of God on Earth is both correct and feasible for committed democratic Christian socialists, even if I am also bound to accept that a just and equitable society is unlikely ever to be fully realised. At one stage on the way I was tempted to become a Roman Catholic, but a crucial sermon in which the preacher set out the characteristics of the Roman Catholic, Evangelical and Protestant

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versions of Christianity led me inexorably towards the last. So I was baptised in 1953 in Queen’s College Chapel just before I joined the Australian Labor Party (ALP) (a lagged relationship, my political beliefs having been formed by mid-1950), and when I took up my first lecturing post in Adelaide in 1958, I began to call myself the only Jewish Methodist in that fair city.

School days and undergraduate days in the 1940s and 1950s

At secondary school I did mainly science subjects (very badly) because I wanted to be a vet. I took economics as an extra ‘to make up the numbers’. The two economics books which stand out from those years are Hubert Henderson’s Supply and Demand (1922) and J.R. Hicks’s The Social Framework (1942). Henderson explained in clear prose the process of choice at the margin, especially the key role of the marginal purchaser who really cares and so helps the rest of us who don’t – that much – when, for example, we purchase a tie! Hicks used the emerging national accounting framework to structure his discussions of the workings of a modern economy and of the historical development of different economic systems. This ideal introduction to the study of economics received Joan Robinson’s blessing years later in her essay (1960) on how economics should be taught so that the young are not corrupted. I spent three years in the Sixth Form taking the Matriculation (university entrance) examinations, struggling to get a Pass in Physics, a prereq- uisite for admission to the Vet School. I matriculated in 1949 (passing the dreaded Physics at the third attempt), but decided that I would rather be a school-teacher, teaching economics, not least because, although I was becoming enormously enthusiastic about the subject anyway, I could also get a scholarship to see me through university if I agreed to be a teacher on graduation (no other scholarships were then available). In 1950 I enrolled for a B.Com., a three-year Pass Course in which you could elect to take Honours in particular subjects by going to extra lectures and answering Honours questions in the examinations. I did this, going to lectures on A Tract on Monetary Reform (Keynes, 1923), my first introduction to the great one (inevitably pronounced ‘Keens’ until we were corrected) and lectures on Wicksteed’s Common Sense (1910) and the sections on indifference curves in Hicks’s Value and Capital (1939). I read now with pleasure Ian Steedman’s wonderfully detached and detailed accounts of my hero Wicksteed (see for example Steedman, 1989, chs 7 and 10; 1994) and I can still remember the lectures on how

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allocation in the Victorian/Edwardian Wicksteed household illustrated the workings of a great nation2 and how Wicksteed taught the notion of the margin and of an instantaneous rate of change without letting on what he was doing, while at the same time making any self-respecting person persevere by the strategically placed remark that failure to read through volume I of The Common Sense is a sign of intellectual shallow- ness.3 I topped the first year of the course and, encouraged by my first mentor, Joe Isaac, who had tutored me at Queen’s, left the Victorian Education Department and enrolled in the Honours course, hoping to become a university teacher rather than a secondary school teacher. The Melbourne Department was very, even self-consciously, Cambridge-orientated (Joe, though, had done his PhD at LSE in the company of Frank Hahn). Marshall, Pigou, Keynes, Dennis Robertson, Maurice Dobb, Austin and Joan Robinson, Richard Kahn and, especially, Piero Sraffa became household names to us students. I say ‘especially Sraffa’ because one of my teachers, the distinguished economic historian, John La Nauze, greatly admired the Ricardo editions and his close colleague, G. S. L. Tucker, was Sraffa’s student. Tucker had just gone to Cambridge to write the PhD dissertation which was the basis for one of the finest books in the history of economic theory, Progress and Profits in British Economic Thought 1650–1850 (1960). Sraffa was spoken of with awe by La Nauze, Tucker and others at Melbourne, a feeling which I have never lost (not even when, fortified by a couple of whiskies, I went with Vincent Massaro to see Sraffa to discuss, that is, scream at one another, a draft of a note on sub-systems which we wrote in 1963; see Harcourt and Massaro, 1964a). We were introduced to Michal Kalecki (by Joe Isaac) and Maurice Dobb (by Jim Cairns, who subsequently became the hero of the anti- (Vietnam) war movement in Australia in the 1960s and 1970s, as well as Deputy Prime Minister of Australia). Joe took us through the steps of the argument of Kalecki’s theory of distribution, got us all excited, then translated the argument into terms of a trivial problem in order to show that in his view it was mere manipulation of identities, a real let down which I can still feel. Joe was, as always, gentle in his critique but I think he missed the point that there were refutable relationships in Kalecki’s argument. Dobb on the development of capitalism from Feudalism (1946) and, especially, on Political Economy and Capitalism (1937) was to have a lasting effect on my thought, though I needed the instruction of three of my students, Alan Oakley in the 1970s, Prue Kerr and Claudio Sardoni in the 1970s and 1980s, to make me begin to understand the true subtlety and richness of Marx’s theory, method and approach.4

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In those days at Melbourne University you had to take in your third and fourth Honours years a number of compulsory papers, two specialisations, and write a 30 000 word dissertation. As my specialisations I took, first, History of Economic Thought (HET). We read the greats as each one of us had to prepare a seminar paper on Smith, Ricardo, Marx, et al. (I did J. S. Mill.) For my second specialisation, I took Mathematical Economics (an ideal complement to HET) – the value chapters and appendices of Value and Capital and the classic papers on duopoly, then all the rage. We were also taken through Dick Stone’s 1945 Journal of the Royal Statistical Society article by Don Cochrane (of Cochrane and Orcutt fame) who was then teaching at Melbourne. I have described my traumas with mathematics elsewhere, as well as my view of its role in economics – a good servant but a bad master (see Harcourt, 1995a). I want to spend a little space on the subject matter of my undergraduate dissertation. The single most influential article of my undergraduate years was Kurt Rothschild’s ‘Price theory and oligopoly’ (1947). The combination of having read it and of my introduction to The General Theory in the second year spurred me on to see what differences oligop- olistic behaviour at the level of the firm makes to the systemic results of the analysis of The General Theory. The immediate focus of my dissertation came from the sections in the consumption function chapters on ‘financial prudence’, ‘writing off’ the book values of durable assets well ahead of the need to replace them, so that total investment has to be all that greater in order to offset this compulsory saving before investment has an expansionary impact on the economy (Keynes, 1936, pp. 98–104). I wondered what differences it would make if instead of competitive price-taking behaviour we had Rothschild’s strategic oli- gopolists indulging in a number of different sorts of price-making behaviour, desiring secure profits as much as maximum profits. I established a few rather incoherent inferences in the first chapter and then, in order to test them, made up funds statements from the profit and loss statements and balance sheets of various Australian companies over the depression years. (The Professor of Accountancy, Lou Golberg, had a splendid collection of published accounts of Australian companies.) It was an untidy and incompletely thought out piece of research but it was the beginning of a sustained train of thought, aspects of which I have worked on ever since.5 Thus my PhD dissertation at Cambridge was initially to be on the implications for the theory of the firm and of the trade cycle, of the assumption that firms desire secure profits as much as maximum profits. It ended up as a study of the implications of the use of historical-cost

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accounting procedures to set prices and dividends, and levy taxes in a period of inflation. I used the data set that, first, Brian Tew and Ronald Henderson and then, later, Ajit Singh, Geoff Whittington and Geoff Meeks were to use (see Tew and Henderson 1959, Singh and Whittington 1968, Meeks 1977). Perhaps the original intention was not that far departed from? I graduated from Melbourne University at the beginning of 1954. I then wrote a Master’s degree dissertation (on a pilot survey of income and saving in Melbourne) as the first research assistant to Dick Downing who had just taken up the prestigious Ritchie Chair of Economic Research at Melbourne University. I learnt how to do applied research and Downing introduced me to the Fowler brothers and Sir Ernest Gower, which taught me how to write.

Cambridge and King’s in the 1950s

In 1954 I was awarded a travelling scholarship from Melbourne University to go to King’s College, Cambridge in October 1955. Joan and I were in effect on our honeymoon – we were married on 30 July 1955 and left Australia two weeks later. It took us nearly five weeks by ship to get to the UK. Initially, Nicky Kaldor was my supervisor. He went on leave in 1956 and I transferred to Ronald Henderson. In my first Michaelmas term I wrote a paper on my topic. I read it as first cab off the rank to the research students’ seminar run by Piero Sraffa assisted by Robin Marris, and regularly attended by Joan Robinson. The new research students had been gathered together at the beginning of the term by Marris and asked what they would like to talk on. When I mentioned my topic, Marris pounced: ‘You’re first!’ I wrote an outline of what I thought the implications were. It was pretty incoherent. I did not see the answers clearly until I turned a pithy paragraph by Joan Robinson (1965, p. 177) into maths and a diagram in chapter 5 of Some Cambridge Controversies ... (Harcourt, 1972, p. 210): to wit, that when we have price-makers and retained profits are an important source of finance for investment, so that prices are set partly to finance investment, systemically something akin to the paradox of thrift cum the balanced budget theorem occurs. In some circumstances we get the paradoxical result that the Kahn/Keynes multiplier process may be negative! The microeconomic aspects of this process were analysed in greater detail in an article on ‘Pricing and the investment decision’ which Peter Kenyon and I published in Kyklos in 1976. The article had a long gestation

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period. I wrote the first draft in 1966 and sent it to the Oxford Bulletin. It was refereed by G. B. Richardson, an unsung hero of British economics. He liked the idea but found a serious flaw in the argument. I put the paper aside and it was not until I ended a three-week spell in hospital in 1974 and went straight from hospital to a seminar by Kenyon that the solution came to me. I wrote out the skeleton of the argument when I got home that night and asked Peter to put the flesh of scholarship on it for the first draft. In Harcourt (1997a) I conjecture that the economy-wide implications of our analysis may be a serious obstacle to establishing sustained full employment without ‘too much’ inflation. Henderson read my undergraduate dissertation in January 1956 and said, ‘Right, I’m sending you to the NIESR to write two empirical reports.’ One was on the woollen and worsted industry, the other was on the chemical industry. The object was to try out the data set which was then being transformed into the aggregate profit and loss accounts, balance sheets and funds statements for what was to become Studies in Company Finance (Tew and Henderson, 1959). So, for two terms, I spent 2–3 days a week in London at the National Institute of Economic and Social Research (NIESR) gathering the raw data. The Director at the time was Bryan Hopkin and Christopher Dow was prominent amongst the research workers. I remember that Dow, in a state of high euphoria, took me for a beer one evening while he outlined the imported-cost inflation model for which he is justly famous (Dow, 1956) – he had literally just finished the first draft. I did not understand him very well – the combination of his euphoria and English beer did not make for clear thought. But, some process of osmosis must have occurred for my own work was subsequently to be in this tradition, a tradition associated in Australia with Eric Russell, Trevor Swan, Russell Mathews and John Grant (Mathews and Grant, 1957, 1958). In my first year as a research student I went to Joan Robinson’s lectures on what became The Accumulation of Capital (1956), often with Tom Asimakopulos and Keith Frearson. I did not make that much sense of the lectures, so when in my second year the book was published I locked myself up for a term with it, determined to try to understand. I emerged to read a paper on the main propositions to the research students seminar, taking two sessions to do so. Joan was invited to a third session to answer questions – Marris was in the chair for all three. The author ticked us off for only asking technical questions – as research students we were rather hung up on economics for economists, Price and Real Wicksell effects and all that – rather than discussing broad conceptual issues and the sweep of the analysis. I have more sympathy

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with her response now than I did at the time, no doubt reflecting the fact that I am now 14 years older than she was then. We also had seminars on recent topics in the literature. Malcolm Fisher introduced us to the literature on the permanent income and life cycle hypotheses. Joan Robinson took us through the optimum saving literature. Amartya Sen6 impressed us all by having the paper he read to the class published in the Economic Journal (1957). It certainly provided inspiration. The last paper I gave to the Thursday seminar before returning to Australia was read from the proofs of an article I published in Accounting Research (Harcourt, 1958) on the implications of changing the company tax base to a measurement of income based on replacement costs. Sraffa threw me completely at the beginning of the seminar. I gave the orders of magnitude of the differences between depreciation at historical cost and at replacement cost; he asked why anyone should wish to compare them!

First years at Adelaide

When we left Cambridge for Adelaide in early 1958 I had written a (very rough) first draft of my dissertation and I had started to absorb the framework of The Accumulation of Capital. With hindsight, I see that I had returned to my undergraduate interest in Kalecki, in particular, to the Marxian schemes of reproduction coupled with the Keynes/Kalecki theory of effective demand – their solution of the realisation problem – together with beginning to understand the macro theory of distribution and how its ingredients were the accumulation plans of the capitalists, the different saving behaviour of groups in the economy and the pricing policies of price-making firms. That is to say, I was absorbed in mainly classical problems done in the modern post-Marxian and post- Keynesian way. I was mostly interested then in the different systemic effects (as I would say now) according to whether historical costs or replacement costs were the base for the mark-up. I was not yet analysing the choice of technique nor theories of technical progress nor capital theory as such. (As an undergraduate I had been fascinated by problems in capital theory and had read Schumpeter, Boulding and Hayek (The Pure Theory of Capital, 1941), the last while waiting to go on in my ‘bit’ part in the college play.) While in Cambridge I read Joan Robinson’s 1953/54 Review of Economic Studies article but understood little of it. I was pretty much at sea when I met with Pasinetti in Caius to discuss the analysis of the choice of technique and Wicksell effects in her 1956 book, The Accumulation of

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Capital. Indeed, I was much more interested in tax reforms – changing the company tax base to replacement costs – and accounting reforms so that pricing policies would be more ‘logical’, much influenced by the writings of Russell Mathews and John Grant which I started to read in 1957. This changed the direction of my research and I proceeded to do for UK data what they had done for Australian data – construct estimates of stock appreciation and capital consumption at replacement cost in order to see what ‘true’ profits were and relate the underlying changes to the trends of financial ratios in balance sheets. The original ‘bits’ I added were to put their micro models into the basic macro model of The Accumulation of Capital and also to make a preliminary investigation of the effects of different investment incentive schemes within this framework. In 1958 I started my 27 years of happy association with Adelaide gown and town. Its economics department was then headed by a young Professor, Peter Karmel (who was only in his twenties when he was appointed). The social and political environment then was benign in many dimensions: universities were starting to be well funded, governments were calling more and more on economists for advice, the Australian economy was to share in the prosperity and optimism of the Golden Age of capitalism. As well as a close friend from Melbourne days, Bob Wallace, the department had the person who was to become my greatest mentor and friend in Australia, Eric Russell. A contemporary of Peter Karmel at Melbourne, Eric had gone to King’s in the 1940s to do a second undergraduate degree; he was in the cohort which included Robin Marris, Harry Johnson, Aubrey Silberston, I. G. Patel and Frank Davidson. Though he had published little when I came to Adelaide he was already noted for his paper with James Meade on how the Australian economy worked (Meade and Russell, 1957), and for his part in helping the trade unions in their annual basic wage cases presented by their youthful charismatic tearaway advocate, Bob Hawke (who subsequently became Labor Prime Minister of Australia in the 1980s and early 1990s). I learnt a tremendous amount from Eric about how to ‘do’ theory, applied work and policy, especially about relating policy to the way the economy worked while simultaneously respecting the lessons of fairness and decency.7 In Harcourt (1997a), I returned to Meade and Russell and the work Eric did on wages policy in Australia in the 1960s (Russell, 1965). I allied it with the analysis of Wilfred Salter’s 1960 classic and a fundamental Kaleckian insight (1943). Kalecki highlighted the difference between the political economy of getting to full employment after a slump, on the one hand, and the political economy of

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sustaining it, on the other. I suggested that if economies followed the Russell/Salter rule of adjusting money incomes for effective productivity plus prices, they would greatly improve their chances of entering virtuous regimes of Salter processes in which overall productivity would grow at agreeable rates because low productivity industries would be knocked out and investment in high productivity industries would be encouraged. This would enhance the chances of restraining increases in nominal incomes, so allowing full employment to be maintained because real incomes would be growing at relatively satisfactory rates. These ideas were put by the Australian Council of Trade Unions advocate to the Industrial Relations Commission in the recent (1996–97) Living Wage case (partly through the good offices of our son, Tim, who is a research officer at the ACTU). Alas, they did not carry the day with the Commission. The first six years at Adelaide were amongst the most happy, exciting and productive of my life, though much of the final output only appeared in the next phase of my life. In 1963 I returned to Cambridge on study leave. To my amazement, I was appointed in November 1963 to a University Lectureship and elected soon after to a Fellowship at Trinity Hall. Cambridge was then one of the most outstanding departments in the world (hence my amazement) and an extraordinary environment in which for someone in their early thirties to teach and research. I only held these posts for two years and one term on unpaid leave from Adelaide following my year of study leave, 1963–64, because I felt I had a moral obligation to return to Adelaide.

A young don at Cambridge in the 1960s

By the time I returned to Cambridge I had written, in addition to the offshoots from my PhD dissertation, a review article of Salter’s 1960 book (Harcourt, 1962), a paper criticising Kaldor’s (then) theories of distribution and growth (1963; 1982) and the first draft of what, next to my 1969 Survey article on capital theory in the Journal of Economic Literature, is my best-known paper, ‘The accountant in a Golden Age’ (1965a; 1982). The paper on Kaldor was critical of his assumption of the need for full employment for his distribution mechanism to work. I asked: what pricing policies would the decision makers in the investment goods and consumption goods sectors need to follow in order that the mechanism worked and planned investment became actual investment? By showing that they would be very peculiar indeed in a number of different scenarios I hoped to show that it would be a good

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idea, not to scrap the distributive mechanism, but to drop the assumption of full employment which was so unKeynesian – and unnecessary. While the paper was critical it also laid the foundations for more positive developments which came in Cambridge. There, following hearing Bob Solow’s 1963 Marshall Lectures on two mythical creatures, ‘Joan’ and ‘Nicky’, working with Vincent Massaro on Sraffa’s Production of Commodities (1960) and following up the work I had done in Adelaide on Salter’s book, I wrote the first draft of what is my favourite theoretical paper, ‘A two-sector model of the level of employment and the distribution of income in the short run’ (1965b; 1982). It was originally presented on a nostalgic return visit to Sraffa’s research students’ seminar, to an audience which included such well-known research students as Joan Robinson, Richard Kahn, John Cornwall, Vincent Massaro, Robin Matthews, Ken Arrow, James Meade, Bob Solow, Luigi Pasinetti and Piero Sraffa himself. I also finished ‘The accountant in a Golden Age’ during 1963–64. The project was originally suggested to me by Harold Lydall (he had succeeded Karmel at Adelaide). He was puzzled by some arithmetical examples he had worked out in which the accounting rate of return was not equal to the internal rate of return. I set the issue in the context of a Golden Age where answers are always known because expectations are always realised. I asked the question: if an accountant were to be let loose with his [sic] box of tools in a Golden Age would he come up with the correct answer for the rate of profits (which we already knew)? The answer was, in general, no, often by large margins. The result has stood the test of time, despite the efforts of John Kay to destroy it (see Kay, 1976, 1978, Wright, 1978), and its independent rediscovery by Franklin Fisher in the 1980s (see Fisher and McGowan, 1983; Fisher, 1984). Writing the review article of Salter’s book opened a rich vein of research interests for me for the next ten years. In 1964 I reviewed for the Economic Journal Minhas’s book (1963) on the CES production function, factor reversals and empirical tests for them. I used Salter’s work on vintages to point out that the data from which the CES function was estimated were inappropriate total or average data and that there was no clear relationship between the desired marginal values of the parameters of the ‘best-practice’ techniques and the total values of the data used. Moreover, Minhas used accounting rates of profit data which were ‘hopeless’ indicators of the ‘true’ economic rates of profit needed. The review was the embryo of a paper which I published in the Review of Economic Studies in July 1966. The article was an ironic piece

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criticising conceptual foundations. One referee and a number of readers interpreted it as inadequate and amateur econometrics. Bob Solow (1997) called it an ‘atypical paper’ (by me) but I like to think it belongs to a class of papers I have written over the years. Certainly, the idea for the papers I wrote with Peter Praetz and Al Watson on CET production frontiers in the 1970s (see Watson, Harcourt and Praetz, 1970a, 1970b), came from this paper. In it I asked the question: suppose we grant the neoclassicals everything except their abstraction in early aggregate production function exercises from the existence of vintages, will the methods used in the initial work on CES production functions allow unbiased estimates to be made of the value of a key parameter, the elasticity of substitution of capital for labour of the Salter ‘best-practice’ isoquant? I tried to show by using a series of hopefully plausible growth scenarios with vintages, that large and unpredictable biases emerged. In the latter papers, we made up a number of ‘worlds’ in which we knew the values of the CET parameters. We then argued that the econometric method used by Allan Powell and Fred Gruen (1968, 1970) to estimate them did not allow the authors to come up with unbiased estimates of the ‘true’ values. As their work was directed at policy proposals associated with estimates of supply responses in Australian agriculture, we thought it worthwhile to check the reliability of their method (but see Ray Byron, 1970, on the reliability of our method). A natural next step came when Audrey Silberston asked me to Nice in 1966, where 20 or so Eastern European and Russian economists and a corresponding number of Western economists gathered together for an International Economic Association Conference on ‘Plan and Market’. I wrote a paper on choice of techniques rules in Western and planned economies. I started at the level of the individual firm faced with Salter isoquants for its investment decision and asked: what investment–output and investment–labour ratios would be chosen, according to the rules used, and could anything in general be said about the ordering of the ratios which resulted? Western governments then, especially in the UK, were experimenting with all sorts of investment–incentive schemes, so I also did a taxonomic analysis of the effects on the choice of technique adopted of different schemes – accelerated depreciation, investment allowances, cash grants, and so on – when they in turn were combined with the different investment–decision rules. I came up with the, perhaps surprising, result that with the orders of magnitude usually met in the real world, the pay-off period criterion resulted in the most investment–intensive techniques being chosen (see Harcourt 1968; 1982).8 (By the time I wrote Some Cambridge Controversies ... I had

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reduced the analysis to a simple diagram which consisted of a 45 degree line and three concave to the origin curves. It allowed the essential economics of the findings to come out starkly and, I like to think, crystal-clear! (See Harcourt, 1972, p. 64.) While at Cambridge I wrote the first and second drafts of Economic Activity (Harcourt, Karmel and Wallace, 1967). The book was based on the lecture course on Keynesian economics which first Peter Karmel, then I and then Bob gave at Adelaide, and which I gave at Cambridge after Robin Matthews went to Oxford as Drummond Professor in 1965. I used to tell the Cambridge students: ‘30 years ago, Maynard Keynes lectured from the proof sheets of The General Theory to a select group of undergraduates and others. I am not Keynes and you may not be as select, but I am lecturing from the proof sheets of a book on Keynesian economics.’ (Mervyn King, now Governor of the Bank of England, was at the lectures.) I still think the book is a clear account of the ‘state of the art’ at the time. Especially is it noted for making all assumptions explicit and for stressing the limitations as well as the illuminations of the analysis. We also made the correct choice of not using IS/LM as the core model. The wider political background of the time was, in my case, a growing realisation of the immorality of the war in Vietnam and of Australia’s disgraceful role in it as one of the USA’s few ‘respectable’ allies, a role adopted in order to achieve political ambitions at home and some ill-defined, long-term insurance policies abroad. The details of the background to the war itself were provided for me by Martin Bernal and Ajit Singh in particular. The Faculty at Cambridge and its visitors were, like most other communities then, torn in two between hawks and doves, especially in the early 1960s. For example, in 1963–64, Ken Arrow was a dove, Bob Solow was still a hawk and many of the Faculty were with him. But by the end of 1966 when I left for Australia there had been a marked increase in the number of doves, including Solow who courageously spoke out for his changed position.

Anti-(Vietnam) war activities and controversies in capital theory

I had been a member of the ALP since 1954, President of my local sub branch in the late 1950s, early 1960s and also active in penal reform as Secretary of the Howard League for Penal Reform (S.A. Branch). But I was very much a political animal within the normal channels. This changed when I came home, scandalised by the war and Australia’s

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role in it, including the immoral conscription by birthday ballots of 18-year-old males. I was soon radicalised by the emerging student and anti-war movements of which I immediately became a part in 1967 – a founding member of the Executive Committee of the Campaign for Peace in Vietnam in South Australia and subsequently for two spells, its chairman (as it was called in those less ‘politically correct’ days). The two most intellectually important influences on me articulat- ing my new position on direct action and involvement were Noam Chomsky’s essay ‘The responsibility of intellectuals’ (1967) and Hugh Stretton’s The Political Sciences (1969); the practical influences were the day-to-day experiences of helping to organise a protest movement. My economic analysis started to change as well; not only was my personality intruding more into my writing, but also, as I no longer accepted that ideology and analysis could be separated, I made the former explicit in my writings and my teaching, especially by the end of the 1960s. I have described elsewhere (see Sardoni, 1992, pp. 5–6), my experiences of those years and those of Joan and the children, now four (Rebecca, our fourth child, was born – when else? – on 10 May 1968, the day the French riots started), with the attendant death threats, potential and, on one occasion, an actual attempt, and so on. Here I want briefly to describe the events which were to change my academic life. In August 1968 I heard a mysterious rumour that Mark Perlman wanted to me to do a ‘Hahn and Matthews’ on capital theory for the newly formed Journal of Economic Literature. Sure enough, Perlman arrived in Adelaide to ask me to do just this – evidently, the person he initially commissioned had pulled out and Perlman was left in Australia with a new journal to edit and no author for the survey article for the second issue. Wilfred Prest, the Professor at Melbourne when I was an undergraduate, suggested to Perlman that he get me to do it. Following a day’s ‘hard sell’, I said ‘yes’. I partially separated from the anti-war movement (with the blessing of my comrades there), closed a door which was usually open and wrote the first draft in four months (see Sardoni, 1992, pp. 6–7). Having to do so wonderfully concentrated the mind, for while I was aware of the issues in a vague, general way I did not fully understand them, especially the details of the reswitching and capital-reversing debates. Reading the literature more closely, in particular a draft of the wonderful paper by Amit Bhaduri (1969) in which he connected the analytical details to older debates in political economy associated with Marx and the original neoclassicals, I wrote ‘A child’s guide to the double-switching debate’ as the first of five working

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papers. I wrote these, each on different aspects and issues, because I found it was the only way to avoid being overwhelmed by the massive volume of literature to be surveyed. I sent the first paper to about 30 friends ranging from Joan Robinson to Bob Solow and Jim Mirrlees. The favourable feedback emboldened me to keep on and the first draft of the survey was duly sent to Perlman in time for him to have it refereed. The then economics editor of Cambridge University Press saw the working papers and asked me to write the book of the survey. The book (Harcourt, 1972) would never have been written had I not been invited by Masao Fukuoka to spend three months at Keio University in Tokyo on a Leverhulme Exchange Fellowship. I describe in the Preface (p. ix) how I lived the selfish life of a scholar and wrote the first draft in two months. There were two main themes: the critique of the conceptual basis of price as an index of scarcity in the theory of value and distribution; and the methodological critique emanating from Joan Robinson of the error of using differences to analyse changes, which became her dominant critique of neoclassical economics. I think she went too far in playing down the first theme (‘The unimportance of reswitching’, 1975) – the conceptual basis of an approach is a legitimate target for criticism (see below and Harcourt, 1996) – but was spot on with her insistence on the second critique, one with which Hicks increasingly was to agree and which Kaldor always stressed. His last book was called Economics without Equilibrium (1985), his 1984 Raffaele Mattioli Lectures (Kaldor, 1996) are replete with examples of analysis which avoids the error, and one of his first papers (1934) already contained the seeds of doubts. Moreover the best mainstreamers – for example, Ken Arrow, Franklin Fisher, Frank Hahn – were simultaneously developing path- dependent models.

Emergence of inflation, policy proposals, Spain, Canada and AEP

In 1972–73 I had another year’s study leave. It was spent in Cambridge as a Visiting Fellow of Clare Hall. My 1972 book had been published in May. I gave upwards of 50 seminars on it and my afterthoughts, subsequently published in Oxford Economic Papers in 1976. I wrote a number of commissioned papers on these issues in those years, significantly one relating to the policy implications (see Harcourt, 1975; 1982). I also met up again with Tom Asimakopulos, together with his family, all at Clare Hall. Though we never did get round to writing the book on growth we planned to do, we formed a close friendship

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which led to a steady exchange of papers for comment from then on until Tom’s death in May 1990 (see Harcourt, 1991; 1993a). In one of the follow-up papers I began to draw out some policy implications of the capital theory controversies and the post-Keynesian approach more generally. When I returned home in 1973 inflation was soon to take off in a major way and the Golden Age of capitalism came to its end. Australia was about to go through an (unintelligent) Thatcherite experiment several years before Thatcher came to power in the UK as the Fraser government from 1975 on cumulatively introduced monetarist policies, combined with an ugly confrontationist approach between government, capital and labour. Eric Russell, Barry Hughes, Philip Bentley and I, in support of Ralph Willis who subsequently became Treasurer in the Keating ALP government but who was then a lone voice crying in the ALP wilderness, started to develop a package deal for ridding the system (slowly) of inflation while trying to maintain high levels of employment and external balance. With Australia’s history and tradition of centralised wage fixing through the Arbitration Commission (sadly now abandoned), this involved arguing for, amongst other things, indexation combined with restraint on the rate of increase of money-wages, then an unpopular and indeed dangerous thing to do. I remember one burly communist trade union official berating me for doing so (even though I argued it was intended to pro- tect real wages and employment). One of my dearest friends, Donald Whitehead, changed from calling my proposals the silliest he had ever heard to broadly agreeing with them, sadly just before he died. The ingredients of the package deal we had in mind I described initially in ‘The social consequences of inflation’ (1974; 1982) and, more fully, with Prue Kerr, in ‘The mixed economy’ (1979), and in the 1982 John Curtin Memorial Lecture, ‘Making socialism in your own country’ (see Sardoni, 1992). In essence it involved redistribution through the public sector as the quid pro quo to wage-earning groups for accepting incomes policies directed at the rate of increase of money incomes, using the traditional Australian institutions of indexation and the Arbitration Commission. Fiscal and monetary measures were to be directed towards the level of activity, the rate of growth and the post-tax distribution of income. Nationalisation of certain key industries including financial intermediaries was put back on the agenda for discussion and I sat on the fence concerning the tariff, that is, leave it as it is and concentrate on export promotion. (The act in my professional life I most regret in retrospect is that I publicly supported, as did most other Australian

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economists at the time, the cut in tariffs by the Whitlam ALP government in the early 1970s.) I opted for a fixed exchange rate, with the proviso that in an economy like Australia’s a change might have to be contemplated from time to time. I was the economist on the ALP’s National Committee of Enquiry in 1978. I wrote the first draft of the discussion paper which was meant to be the broad background to the economic policies of the ALP government when it was returned to power in 1983 – only very indirectly, it is true, but I like to think that the Accord between wage-earners (through the Australian Council of Trade Unions) and the government in its early years owed something to our debates and suggestion in the 1970s. Two other significant events of the 1970s and 1980s were, first, an invitation from Fritz Machlup to chair a small IEA conference on the microeconomic foundations of macroeconomics (it was held at S’Agaro in April 1975) and, secondly, the start in 1977 of what was soon intended to be a visit every two years to the economics department of the University of Toronto’s Scarborough College. The first event was in a sense the culmination of my interests of the past 23 years or more. John Hicks was the initiator and chief intellectual influence of the conference. (As he had ‘retired’ he asked that a younger person from the Commonwealth with access to secretarial facilities chair the conference.) The resulting volume (Harcourt, 1977b) received mixed, not always fair, reviews and Hicks himself was depressed by the overall outcome of our discussions. Nevertheless, I think that we aired in honest and helpful ways some fundamental issues and that, amongst the papers and, especially, amongst the discussions so ably recorded by Sue Howson and Don Moggridge, there were many helpful clarifica- tions and leads as to what to do next. I found writing the Introduction one of the hardest tasks of my working life and so I was pleased when both Hicks and Paul Madden, my then colleague at Adelaide, said they liked it. I had met Lorie Tarshis at Stanford in the summer of 1965 and I had come to know Sue Howson and Don Moggridge at Cambridge in the 1960s and 1970s. So I gladly accepted their invitation which they initiated through Lorie (who was then the Chairman of the Division of Social Sciences at Scarborough) to spend a semester there in 1977. Though I disliked intensely commuting 20 miles from downtown Toronto, I loved working with the splendid, mostly young, team which made up the department, and, especially, getting to know Lorie well and also Jon Cohen. Jon became a daily running companion and a close soul mate as well (the two are not unconnected). I had another spell at ‘Scarberia’ in

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1980 but when I returned to Cambridge in 1982 I decided, regretfully, that it would be too strenuous to try to keep the visits going. I wrote two papers during these visits which were not published at the time. One concerned an account of my growing horror at the political and social implications of the theoretical work then being done under the rubric of monetarism and new classical macroeconomics. I outlined this in an angry and passionate manner and called for all branches of Keynesian economics, no matter how they differed on theoretical issues, to unite on policy and in opposition to the awful policies which were being rationalised by these other theoretical developments. The paper was thought to be in poor taste, unprofessional and unfair. Looking back now I think it was ‘spot on’. When Paul Davidson read of its existence in Harcourt (1995b), he asked to see a copy and then most gener- ously offered to publish it with an addendum on my current assessment of the issues in the Journal of Post Keynesian Economics (see Harcourt, 1996–97). In the addendum I said I stood by the general thrust of the paper and I commended Hahn and Solow in Hahn–Solow (1995) for their incisive internal critique of new classical macroeconomics. The other paper was a joint one with Jon Cohen, predicting what we thought would happen to private and public education in the USA and other capitalist countries as a result of trends then emerging – essentially, growing public deprivation, demoralisation and squalor, while the private sectors would flourish, attracting the best teachers and increasing proportions of students, mostly from income strata where parents, on the whole, could afford to pay. I think we were right here too but at the time (1980) and now, we could not get the paper published. Jon and I also circulated a ‘round robin’ Keynesian manifesto on policy which a few brave souls on the Canadian economics scene were prepared to sign with us. Finally, I want to mention another aspect of my years at Adelaide, my joint-editorship with a number of colleagues, the late Hugh Hudson (who was the founding editor), Keith Hancock, John Hatch, Merv Lewis and Bob Wallace, of Australian Economic Papers (AEP) from the 1960s to the 1980s. I tried to make AEP in those years an outlet for all approaches to economics, provided that the work itself was sound within its own approach. Certainly a number of economists outside the mainstream had important papers published in AEP. I single out especially Tom Asimakopulos’s first paper in his Robinsonian mode (1969), Victoria Chick’s reassessment of the nature of the Keynesian revolution (1978) and Ferdinando Targetti’s and Bogulslawa Kinda-Hass’s translation into English of, and comment on Kalecki’s review article in Polish

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of The General Theory in 1936 (1982). I regard Kalecki’s article as the best and most incisive article we ever published. It shows conclusively that Kalecki had independently thought out the principal propositions of The General Theory and that in addition to producing a theory of employment, he also produced a macroeconomic theory of distribution. The latter takes in pure competition as a special case. He showed that market structures made no essential difference to the new theory of effective demand.

Piero Sraffa

The editor of the series read the first draft of the essay and asked that I ‘add a little more about Sraffa and perhaps his reaction to [my survey article and book on the Cambridge controversies in capital theory]’ (25 September 1997). I have already mentioned how significant Sraffa’s writings were for me as a result of my undergraduate years at Melbourne University. As well as the Ricardo volumes, we read his famous 1926 Economic Journal article, ‘The laws of returns under competitive conditions’. It was a major article on the honours reading list for the lectures on imperfect and monopolistic competition (indeed, it was the starting point) and it was in that context that I first tried to understand its arguments. We now know that Sraffa himself had by then (the early 1930s) repudiated this context, or, at least, considerably played it down (see, for example, Harcourt, 1990; Sardoni, 1992, pp. 301–5). The Piero Sraffa I first met in October 1955 and who looked after the research students at Cambridge, was a different person from the Sraffa I came to know in the 1960s, 1970s and 1980s. In the 1950s, though a kindly person, he was rather remote and withdrawn (he was still recov- ering from a serious accident in which he fractured his skull). In the 1960s he was much more approachable and easy to get on with, for by then he was both a relieved and fulfilled person: the Ricardo volumes were finished (except for the Index), Production of Commodities ... had been published and astute people such as Krishna Bharadwaj and Maurice Dobb understood what he was on about. He still had his fiery temper and acute critical mind, as I illustrate below. Early in my sabbatical year of 1963–64 I met Vincent Massaro who was spending a year in Cambridge on a NATO Fellowship to study the writings of Joan Robinson and Sraffa. Vince was a first-generation American of Sicilian origin, a devout Catholic, a devoted admirer of Dorothy Day and the Catholic Worker – and also (something of) an anar- chist. He had done a PhD dissertation at Notre Dame on the doctrine

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of increasing misery in Marx (so naturally he was awarded a NATO Fellowship to come to Cambridge!). I had had a quick look at Production of Commodities ... in Adelaide when it was first published, because I had been told that Sraffa had been working on a book on capital theory for many years and that this was it. A colleague at Adelaide, John Dillon, the distinguished agricultural economist, also had a quick look and dis- missed it as ‘old hat input-output’. I found the book incomprehensible – a completely unfamiliar terrain – so I put it away for study leave. Vince and I agreed to read it together from cover to cover and not go onto the next sentence until we felt we had understood the last one. This procedure, combined with Vince (mainly) talking to Piero (in Italian) and a detour to write our Economic Journal note on sub-systems (Harcourt and Massaro, 1964a), allowed us to write a review article of the book for the Economic Record (Harcourt and Massaro, 1964b; Harcourt, 1972, appendix to ch. 4), getting each sentence approved by Sraffa in the process. In the sections on joint production and fixed assets I found a slip in Sraffa’s example on pp. 68–69 in which he showed how to calculate the direct and indirect labour associated with the production of a tractor. I modified the example in order to overcome the slip (see Harcourt, 1972, 190–92), and discussed it all with Sraffa. We reached agreement (I thought) that there was a slip and that I had avoided it in my mod- ification of his example; but when we had our last meeting to discuss the completed manuscript before we sent it off, Sraffa took exception to my argument. I rashly said: ‘But, Piero, last time we discussed this, you agreed I was right.’ I can still see him arching his splendid eyebrows and hear his strident tones as he shouted: ‘I am not the Pope, I am not infal- lible.’ I had only witnessed this intensity of temper once before, when Vince and I were summoned to his room in Trinity to discuss the draft of our sub-systems note. In it we had attributed to him the view that the means of production currently being used came from the immediately preceding year and that those parts of the current gross product which are equal to the means of production will be used as means of production in the following year. That time I was fortified by a considerable amount of (Piero’s) whiskey, this time I was not! Piero took me several times as his guest to Feasts in Trinity and I took him on his last ever visit to Rome, in 1973. By then his short-term memory was playing him tricks so that he had lost his tickets and passport on his previous visit. I was the only one of his friends free at the time to go with him (I was then on leave from Adelaide at Clare Hall). We went for a week; we stayed at the Hotel Hassler at the top of the Spanish steps where he was always an honoured guest. (If I had not been his

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guest I would have ended up at the bottom of the steps had I tried to enter alone.) I had an excellent week seeing the sights of Rome during the day and dining with Piero at various fine restaurants in the evening when all doors opened to the famous, much revered ‘Signor Sraffa’ (and sidekick). His mission in Rome was to get a protégé elected to the Italian Lincei Academy; he would return each evening, lie on the floor clutching his head and saying ‘I am a failure, I am in despair.’ He would then get up and suggest we go out for dinner, despair soon departing. We drank champagne on the return flight to the UK – at 10 o’clock in the morning. I was very fond of Piero and much in awe of his intellect and critical abilities. But apart from the discussions I mentioned above and the story of how reswitching came to Cambridge,9 I did not have many serious discussions with him as, over the years, I tried to get his agenda and contributions into focus. In this endeavour Krishna Bharadwaj’s writings (and our many discussions) were of enormous importance for me, especially her superb 1976 Dutt Lectures (Bharadwaj, 1978), which put Sraffa’s critique into an appropriate historical perspective. Sraffa was a great admirer of Marx as well as of ‘his’ David. He saw his own role as making clear and precise some obscure, or incoherent, or unfinished parts of Marx’s grand schema while at the same time setting out what he saw as the incoherence and logical flaws in the conceptual foundations and arguments of the neoclassical theory of value and distribution. I have discussed these views in detail in a number of papers (see Harcourt, 1978, 1981, 1982, 1983, 1984, 1986, 1990). As to my articles and book on the capital theory controversies and Sraffa’s reactions to them, apart from missing my moment of glory because neither Piero nor I could ‘do’ matrix algebra, I have only one other episode to relate. On New Year’s Day 1973, I received from Joe Stiglitz the first draft of his critical review article of my 1972 book which he wrote for the Journal of Political Economy (see Stiglitz, 1974). I wrote Joe many pages of comments. This led him to clean up his act and remove part of a sentence which I prized: ‘a few of the jokes are probably almost as funny as Harcourt seems to think they are.’ (But I must also say that Joe very decently removed sections I found personally offensive.) I showed Piero the article and my reply to Joe. He made two sets of comments. Joe had written: ‘There is a well-known propensity of individuals to dislike what they don’t or can’t understand’. Piero commented: ‘ “Don’t or can’t understand”? don’t is wilful, can’t is stupid?’! Secondly, Joe had drawn on his referee’s report on my 1969 survey article for his article and at the end of the first draft he

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must have forgotten he was reviewing my 1972 book. For he wrote: ‘It is a shame ... that this major review article ... on a subject that has been the source of so much discussion in recent years should have served to protract the debate rather than to clarify the issues, to shed more heat than light.’ He blamed not me but the editor (Mark Perlman). Piero commented: ‘p. 14 ... “blames the editor”. Does he want a censor?’ Let me leave it at that!

Return to Cambridge in 1982

Mark Perlman wrote a Preface to a selection of my essays (Harcourt, 1995a), in which he classified them into four groups:

1. works analysing contemporary economic theoretical problems; 2. works synthesising states of debates in economic theory; 3. works having a distinctly biographical flavour and pertaining to various contemporary economists; and 4. works pertaining to economic and allied social policies.

The beginning of my interest in writing intellectual biographies arose from three sources: first, Angus Wilson’s request that I send him details on Joan Robinson’s contributions for the oration he was preparing for the award of an Honorary Degree to her by the University of East Anglia in the mid 1970s; secondly, the tragic death of Eric Russell in February 1977 while I was in Canada (I have described elsewhere – see Sardoni, 1992, p. 8 – how I wrote two papers on Eric as part of a shared attempt to cope with our grief at this terrible loss); and, thirdly, Paul Davidson’s suggestion that I oversee a number of occasional portraits of the founding mothers and fathers of post-Keynesianism for the Journal of Post Keynesian Economics. Since then I have produced a steady stream of intellectual biographies, some of which arose from experiments in oral history, for example, Tarshis, Shackle, Boulding, Goodwin (see Harcourt, 1993a), Stone (see Harcourt, 1995a), others from memories of personal contacts, together with reading or rereading their writings, for example, Joan Robinson, Kaldor, Tom Asimakopulos (see Harcourt, 1993a), Krishna Bharadwaj, Austin Robinson and Josef Steindl (see Harcourt 1995a). I have enjoyed doing this for I have always been interested in what makes people tick and also perhaps too much prone to search for heroines and heroes. When I returned to Cambridge in 1982 to a teaching post in the Faculty and a Fellowship at Jesus, my major task was to write the

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intellectual history of Joan Robinson and her circle – Austin Robinson, Richard Kahn, Piero Sraffa, Nicky Kaldor, Michal Kalecki, Richard Goodwin, Luigi Pasinetti. I wanted to see whether there was a coherence to the tradition this group of economists both inherited from the classical economics, Marx and Keynes and passed on. Sadly, virtually all the major figures have now died, starting with Joan and Piero in 1983, ending – to date – with Austin in June 1993 and James Meade in December 1995. Since I nearly joined them several times myself between 1992 and 1994 I am rather lagging in getting it all together in book form. But there are now well over 30 separate essays which provide the essential background to the project and so I do not entirely despair of getting it finished before I call it a day. When I retire I shall be able to spend more time in King’s Modern Archives where most of the papers of these economists are housed. While I shall draw mostly on what is in the public domain – I am not a fan of the modern ‘tell it all’ biography – I do think it necessary to provide evidence on what was going on behind the scenes when their articles and books were being written.10 [With Prue Kerr, I published an intellectual biography of Joan Robinson in 2009 (See Harcourt and Kerr (2009). The number of background essays by Prue and I was by then over 100.).] I must confess to having been sidetracked on occasions and in different directions. In the last six years I have returned to policy on a large canvas, following the invitation to give the second Donald Horne Address in Melbourne in February 1992, on ‘Markets, madness and a middle way’ (1992; 1995a). It spawned further papers, one on macroeconomic policy for Australia in the 1990s (1993c; 1995a), another on ‘The Harcourt Plan to “save” the world’ (1993b). This subsequently become ‘A “modest proposal” for taming the speculators and putting the world on course to prosperity’ (1994b; 1995a). In 1997 I published the paper on economic policy, accumulation and productivity to which I referred above and gave the Seventh Colin Clark Memorial Lecture on ‘Economic theory and economic policy: two views’ (Harcourt, 1997d). The latter drew on a review (Harcourt, 1997b) I wrote of Joe Stiglitz’s 1990 Wicksell Lectures, Whither Socialism? (Stiglitz, 1994, 1996), and a review article (Harcourt, 1997c) of Kaldor’s 1984 Mattioli Lectures (Kaldor, 1996). Stiglitz’s lectures contain one of the best internal critiques I have ever read of mainstream economics (taken by him and Kaldor to be represented by the Arrow–Debreu model of general economic equilibrium (AD)). It is based on Stiglitz’s work on the economics of information and missing markets; it highlights the inability of AD to take in the essential fact of life, one which Smith and Marx recognised, that

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capitalism is the greatest ever generator of change through endogenous technical advances. The idea of the Horne Addresses is to ask an Australian living abroad to come home to give a wide-ranging address on issues of vital importance for Australian citizens. The conjunction of events to which mine was addressed was the launching of the Republican movement in Australia and the U-turn on economic policy of the Federal ALP government that was then occurring. The background was the emerging reaction against the ‘let the market rip’ policies of the 1980s which characterised part of economic policy in Australia, and the crowing over, and then second thoughts about, the implications of the collapse of Communism. I never held any brief for the awful regimes of the USSR and the Eastern European economies but I did point out that the achievements of those Western industrialised capitalist economies that had gone overboard on Hayekian/Friedmanite policies from the 1970s on were not that much to write home about either. There was therefore a case to be made for middle ways – the Kaleckian approach to democratic socialism, for example, for Eastern Europe, the Keynes/Kaleckian (with modern additions) post-Keynesian blueprints for Australia and other similar countries. I preceded my outlines of middle ways with an account of what modern (and not so modern) theory had to say about the conditions which need to be satisfied for markets to be safely left to do their thing, pointing out (as Kaldor and Stiglitz do, too) that these conditions are spectac- ularly not satisfied in the markets for labour, foreign exchange, financial assets and housing. I recognised that it was a non sequitur to jump to the proposition that some form of intervention and regulation would necessarily do better – the case for this had always to be made. The common theme connecting these papers was the argument that many markets and indeed economic systems themselves are characterised by cumulative causation processes. This viewpoint implies that very different policy proposals and institutions are needed than those associated with the more orthodox general equilibrium framework. Radically different attitudes would be taken towards, for example, speculators and speculation because their systemic effects would not be the benign ones identified by, for example, Milton Friedman in his well- known article on the case for flexible exchange rates (1953). The essays on macroeconomic policy relate principally to the problems of small open economies. It allowed me to ride some hobby horses, for example, that government expenditure should not principally be used for pump-priming but rather should fit in with the longer-term needs of economies, taking into account the social and

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political philosophy of the government in power. I also drew attention to the danger of forgetting those old-fashioned but profound lessons from the writings of Russell and Salter concerning the macroeconomic effects of incomes policies on rates of accumulation, and from Kalecki concerning the vital differences between getting to, and then sustaining, full employment. Because at the economy level capital and labour are complements, changing money incomes according to changes in the cost of living and effective productivity is not only equitable, it is also efficient. It encourages investment in profitable, productivity- enhancing industries and hastens the decline of industries whose time has not only come but gone. In the paper on a ‘modest proposal’ I tried to set out the problems of the various broad regions of the world, show how they are interrelated and what particular combination of policies and institutions might serve to tackle their problems effectively and simultaneously. There is a Utopian tinge to such an exercise (though I did try to take into account the constraints imposed by present political and ideological climates). Nevertheless, unless such interrelationships and schemes are explicitly set out, it is difficult to get people of good will to think about the causes and cures of the world’s ills. Next step the universe, of course. If it were to be asked had I ever considered being an official policy advisor, the answer is ‘yes’ – and I decided not to be. In 1974 I was approached by Jim Cairns, who taught me at Melbourne University and who was then Deputy Prime Minister of Australia and Federal Treasurer in the Whitlam government, to see whether I would consider being either Governor of the Reserve Bank of Australia or permanent head of one section of an intended revamp of the Commonwealth Treasury. To the first request, I immediately said ‘no’, adding ‘You know me, Jim, I’m a real man, not a money man.’ I promised to think about the second request but on reflection and, especially, after talking to Eric Russell and Peter Karmel, I said ‘no’ to it, too. They pointed out (and I agreed) that I had neither the appropriate temperament nor the necessary guile to withstand the inevitable machinations of very bright civil servants who would undoubtedly be resentful at having a rank outsider brought in over their heads. In any event, it is clear in retrospect that Jim was already on the skids; he was soon to be sacked, first, from the post of Treasurer and then from the Deputy Prime Ministership. Another chap and I spent one morning in Canberra outlining to him a Left-Keynesian budget for him to take to Cabinet. He said he had to leave us at lunch time because Whitlam wanted to see him. When he returned after lunch,

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we asked him what Whitlam had wanted; he replied: ‘The bastard’s sacked me!’ – so much for the chances of our Left-Keynesian proposals having any influence! The other major ‘sidetrack’ was collaborating with Peter Riach on A ‘Second Edition’ of The General Theory (Harcourt and Riach, 1997). Peter had a bright idea based on the well-known fact that composers have often died before they could finish certain works which others then took up and completed. Keynes had thought of writing at least ‘footnotes’ to The General Theory soon after it was published, but his severe heart attack in 1937 and then the Second World War and his death in early 1946 pre- vented him from doing so. Peter’s project, which he asked me to join, was to ask a number of Keynes scholars, ranging from Golden Oldies to the up-and-coming, to each write an essay of around 6000 words on, first, what they thought, based on whatever evidence there was in the Collected Writings and elsewhere, Keynes might have written and, secondly, what they have done and why on particular aspects of The General Theory in the post-war years. It is a most opportune time to have done this for Keynes is surely rising again from the dead. The book was published in two volumes by Routledge in January 1997, just over 60 years on from the publication of The General Theory itself. The first volume tracks (more or less) the chapters of the original General Theory. (Some of the contributors write, in the first sections of their essays, ‘as J. M. Keynes’.) The second volume contains an overview (by James Tobin), essays on extensions and new developments since The General Theory was first published, and essays on predecessors and successors (see Harcourt, 1997e). Riach and I wrote a long introduction setting the chapters in context, and between us and the contributors we accumulated a 50-page bibliography.11

Doing Economics

Steve Medema and Warren Samuels asked me to contribute to their volume, How do Economists do Economics? (1996). So how do I and how do I think we ought to do economics? With Eric Russell, Nicky Kaldor, Joan Robinson, Piero Sraffa, Richard Kahn and Michal Kalecki and, of course, Keynes as mentors, I am a ‘horses for courses’ person – how and what you do depends upon what the purpose is. If doctrinal debate is the issue – the robustness of a fundamental intuition or insight in a particular approach, say price as an index of scarcity in neoclassical economics, surplus labour and value as the origin of profits in the capitalist mode of production in Marxian economics – it is proper to operate at a high level of abstraction, to use simple, very unrealistic, models (which are appropriately closed) with which to capture the essence of the problem

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and which exclude all other ‘matters of the real world’ as irrelevant for the purpose in hand. My favourite example is the debate which Ian Steedman (1975, 1976, 1977) initiated on whether the existence of joint production destroyed the general validity of the Fundamental Marxist Theorem (FMT) (Morishima, 1973) – the necessary and sufficient condition for positive profits in the sphere of distribution and exchange is positive surplus labour (and value) in the sphere of production. For that purpose it was legitimate to use a Golden Rule, Golden Age model, and ignore real life puzzles such as the realisation problem. The argument then turned on the correct formal specification of what, initially, were ideas expressed in literary form. Steedman inappropriately used equalities in order to estimate necessary and surplus labour (in his examples the latter turned out to be negative) whereas inequalities (linear programming) were the appropriate formal tools in this context to capture the basic idea that the monopoly of capitalists as a class of the means of production and of access to finance enabled them to make the wage-earners as a class work longer than was necessary to produce their wage goods alone with the existing techniques of production and accumulated capital goods. Joint production techniques could be handled as an unessential complication (though an inescapable feature of the real world) which should not destroy this essential insight. If it appeared that they did, it was the specification and not the insight which must give way, as indeed happened (see Morishima, 1976). Or, to take another issue with which I have some familiarity: is the demand curve for ‘capital’ as a whole well-behaved? Stationary-state comparisons of long-period competitive equilibrium positions are the simplest and most appropriate method of analysis to test for the robustness in heterogeneous capital good models of the results of simple one all-purpose commodity models in which the marginal productivity theory of distribution and the related neoclassical ‘parables’ rigorously ‘go through’ (see, for example, Harcourt, 1976). To descend from these dizzy theoretical heights to a more practical plane – the testing of inferences of theory against real world data. One approach is to follow the frankness and honesty of Bob Solow in his most famous empirical work on the aggregate production function and technical progress. He wrote in reply to Anwar Shaikh’s critique (1974) of his procedure and findings:

It merely shows how one goes about interpreting given time series if one starts by assuming that they were generated from a production function and that the competitive marginal-product relations apply. (Solow, 1974, p. 121)

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The limitations are set out, the meaning of the findings is coherent, the usefulness of them then turns on whether or not it is believed that the underlying simple theoretical model captures the essence of the processes which spawned the statistical observations of the times series used in the first place. Solow and (especially) his surrogates, then and now, presumably believe that they do. Their critics do not – and some of them have provided either alternative approaches or different theoretical structures to explain what the data show. As another example let me take the empirical work I did in the 1950s and 1960s on the effects of using historical-cost accounting procedures in periods of inflation. The inferences to be looked for in the data were rather broad: that if inflation continued, and if the taxation authorities and management insisted on basing taxes and dividends respectively on accounting profits rather than on ‘economic’ profits – those adjusted for stock appreciation and capital consumption at replacement cost – and if management insisted on setting prices by ‘marking up’ historical costs while not widening their margins, we ought to see over time a decline in ‘economic’ rates of return coupled with a deterioration on the liabilities side of balance sheets. The latter would result from financing not expansions, but firms as ‘going concerns’, trying to continue to do tomorrow what they had done today. Whereas, if replacement cost procedures were used, such deteriorations should not be observed – for these reasons. Plain competition, or bad management, or changes of fashion could also lead to similar happenings. But, anyway, if the first set of tendencies were the most powerful at work in the specific concrete situations examined, we knew what we had to look for and, hopefully, find. (In my case inflation proved disobliging and, relatively, went away for 20 years.) In this example I did not use any sophisticated econometric techniques – the essential aim was to understand the sources and construction of the data set, what processes it was hypothesised lay behind it and spawned the observations, adjust it from its raw form to get it in the appropriate form to allow estimates of the relevant theoretical variables to be made, and then analyse what the results showed. Such a procedure belongs to a well-established Australian tradition (not exclusively, of course, in Cambridge, for example, it is known as the Reddaway method and I am sure that many other economists follow it too). It involves thorough understanding of the sources and limitations of the data, especially of how ‘far off’ the actual observations are from their theoretical counterparts, the use of simple tables, ratios, graphs, to get a ‘feel’ for what the orders of magnitude are, never going further than

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the data themselves warrant while being ready to take advice from the experts on what traps to look for and what techniques may be used either to avoid them or to tease out answers which otherwise would remain hidden. I want now to consider cases intermediate between high theory and the rough and tumble of applied work, those concerning theory and specific issues. There are at least two basic approaches. One is axiomatic, for example, as Frank Hahn often says, let us see how far the assumption that the world is inhabited by ‘greedy people’ will take us. The other starts by observing behaviour, institutions, ‘stylized facts’ and then constructs simple models incorporating the essence of the observations in order to try to explain the original observations, and so on. Arrow, Debreu and Hahn are outstanding proponents of the first approach, Kaldor, Kalecki, Joan Robinson – also Keynes, Marx and Adam Smith – of the second. A vital question is whether there are large differences between the answers to the same questions according to which approach is taken. The work I did in the 1960s on the choice of techniques illustrates this. I compared the investment–labour ratio which would be predicted by the axiomatic approach, using some versions of the set of DCF procedures, with those which would be predicted by starting from ‘real world’ investment-decision rules – the pay-off period criterion, the accounting rate of profit rule (and, in some instances, the various recoupment period procedures of socialist managers in the 1960s). As I mentioned above, I was able to show that for the orders of magnitude likely to be met in the real world, the pay-off period criterion always resulted in a more investment-intensive, less labour-intensive technique being chosen than did any of the other investment-decision rules. I also showed that under the conditions assumed the ratios associated with the net present value rule (NPV) were intermediate between those associated with the pay-off period criterion and the internal rate of return rule (IR) respectively (except in long-period competitive equilibrium when the NPV rule and IR rule not surprisingly resulted in the same technique being chosen). I then allied this set of findings with an analysis of the impact of a variety of investment-incentive schemes which were combined with the various investment-decision rules, in order to see how robust the main results were and also whether what was predicted to happen was in accord with what the policy makers had in mind when they introduced the schemes. Finally, may I say a little about my other two major research preoccupations – surveys and intellectual biographies? A useful survey should

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put a structure on an area in the literature. It should draw out the main thrust of the arguments, identify the major articles or books, and show how the rest cluster around them. It should suggest the areas and issues of disagreement, try to reconcile what is reconcilable, point out what is not and why, and suggest where, if anywhere, we should go from here. Doing all this gives perspective and senses of relevance and balance. If in the process it also enlightens and even amuses, why, these are surely acceptable pluses. What of intellectual biography? As I said, I believe in heroines and heroes and I like to know what makes them tick. I became an economist because I hated injustice, unemployment and poverty. Most of my heroines and heroes became economists for the same reasons and they devoted their lives to trying to do something about understanding how these ills arose and how to get rid of them. Some – not all – understood the Realpolitik of policy advice, as I have tried to myself. Intellectual biography allows us to begin to see the links between the historical settings of the persons concerned, their class, their racial, educational, religious and philosophical backgrounds, and the issues of the day on which they have worked. By analysing the intertwinings of all these aspects, we get a better understanding of the writings and contributions of these economists, of limitations as well as achievements, of the particular forms which their analyses take, and hopefully, we are inspired to follow on from where they left off. If not, it is at least to be hoped that we have had a good read on the way. I have written elsewhere (see Harcourt, 1995a), about the vexed question of the use of mathematics in economics and why I think mathematics is a good servant but a bad master. My own most ambitious theoretical paper was the two-sector model of distribution and employment in the short period (1965b). I wanted to extend the analysis into a process in historical time, seeing how the model economy moved from period to period but I did not have the necessary mathematics to allow me to do this. It is partly because of this paper that I admire Kalecki’s contributions so much, for he had the technical expertise and the genius to do superbly what I wanted to do but could not. (My paper, of course, owes much to his contributions.) Dick Goodwin’s writings spring to mind also at this juncture. So the most use I ever made of mathematics was in my papers on the choice of technique. Even then I eventually reduced the argument to a simple diagram which exploited the properties of the two most useful (and used) constructions of our trade – the 45° line and the graph of a concave-to-the origin quadratic (see Harcourt, 1972, p. 64).

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Similarly, I regard econometrics as a set of valuable tools and techniques which enable us to squeeze information from data in technical forms which people generally understand. But always the guiding principle must be the economics of the problem and its importance and relevance, not what economic problem can we find to which to fit any fancy technique that we have come across. It is most important to get the conceptual aspects of a problem clear, together, sometimes, with conjectures as to outcomes, before starting any formal or statistical analysis. This I have always tried to do.

What of the future?

Arnold Heertje also told me, after he read the first draft, that he ‘would like to have [my] view on the future development of economics’ (25.9.97) – a tall order indeed for someone who has always stressed the role of uncertainty in economic theory and life. I hope it is clear from what I wrote in the previous section how I would like to see economics develop; but I cannot pretend that it will necessarily do so. Undergraduates and graduates the world over are no longer flocking to economics courses; rather they are leaving in droves for courses in business studies, embryonic hired prize fighters all! Those that do come are increasingly mathematically literate but tend to have narrow interests in general, so that history, politics, sociology, philosophy, psychology and knowledge of institutions are at a heavy discount. No doubt the trade will continue for a while yet along its present very technical lines and highly competent if uncritical normal scientists in a Kuhnian sense will continue to be turned out and subsequently fill the ‘brownie point’ journals with their writings. I must not paint too gloomy or jaundiced a picture. Some of the leaders in the discipline and some of the elders of the tribe, those who inspire (or have inspired) by example, are both imaginative within our discipline and are happy to embrace the findings and even the approaches of other disciplines. But, as ever, mavericks tend to get short shrift; just as John Hicks, Kaldor and Joan Robinson were marginalised in their generation as soon as they stepped out of line, so, too, are their modern equivalents. This means that most people tend to be cautious, are prepared to work only within defined guidelines, while making sure that undergraduates and graduate courses are similarly designed and constrained. I think this is a great pity, indeed shameful. Of course, as a liberal educator I accept that students have a right to know and to be taught what is the best and latest in mainstream theory and practice. But as

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an economist I also care about comparative advantage and the potential value of sensible product differentiation. And, again as a liberal, I believe in creating an environment in which open minds and quirky thoughts may flourish. Alas, little of this is possible in the current cli- mate in economics the world over.

Au revoir, not adieu

Are my Christian democratic socialist flames still burning as brightly now as when first lit in the early 1950s? The answer is ‘yes’. While the going was tough in the 1970s and late 1980s, recent events, for example, the publication of Reclaiming the Ground (Bryant, 1993), the election of first John Smith and then Tony Blair as leader of the British Labour Party, the accompanying return to basics (in a non-Majorite manner) cheered me up no end, as have the elections (and re-elections) in Australia of ALP governments, for all their faults and limitations. (Most annoyingly, just as the UK has returned a Labour government (1 May 1997), Australia is in its second year of an extremely unpleasant, narrow, ruthless, little-minded conservative government, laughingly called a coalition of the Liberal and National Parties. Alas, near the end of their first year in office (January 1998), Blair’s ‘New Labour’ government seems intent on making many of the mistakes that the Whitlam, Hawke and Keating Labor governments made in Australia. Do we never learn?) Of course, the agendas have changed; the proposals are now more modest, more basic – jobs, homes, schools, hospitals, trains, the environment (!) – than in those heady days immediately after the Second World War. But they still make up a worthwhile agenda for the creation of just and equitable societies, for middle ways which are tailor made for each country’s history, sociological structure and inherited institutions. And they are likely to be supported as more and more citizens recoil from the excesses and horrors of both command and market, free-for-all, economies. In the despair of her last years Joan Robinson pleaded with her favourite pupil at Williams: ‘Whatever you do, promise me you won’t go into economics’ (see Turner, 1989, p. 206). I would rather say to my pupils,12 ‘Come, join me, there is a job to do and a world to win.’

Notes

† I am indebted to Nick Brown and to Arnold Heertje for their comments on a draft of the chapter.

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1. In writing this chapter I have drawn on a number of related essays, see Harcourt (1994a, 1995b, 1996) and Sardoni (1992). 2. I also remember standing under the shower, screaming at my poor father that since Wicksteed had shown that there was no such thing as a supply eurve, that only demand determines prices, the P. W. S. Andrews-type cost- plus pricing which he said was followed in his trade just could not be! 3. Another carrot-stick gem I tell students is that misdirected effort, no matter how great, earns no marks. 4. Prue Kerr and I recently wrote the entry on Marx (Harcourt and Kerr, 1996) – all managers ever want and need to know – for Malcolm Warner’s Encyclopedia for managers (1996). 5. For an independent assessment of the dissertation, see Hatch and Petridis (1997, p. 3). 6. The class of 1955–58 was, in retrospect, a good vintage – as well as Sen, it included Tom Asimakopulos, Charles Feinstein, Pierangelo Garegnani, Luigi Pasinetti, John Whitaker and a whole host of bright Australians – Allan Barton, Keith Frearson, John Harper, Hugh Hudson, Duncan Ironmonger, John McCarty – who were to make their mark in academic and government life in Australia. 7. I also learnt from him how to teach undergraduates and to be a proper university colleague and citizen generally – he was an outstanding role model. See Sardoni (1992, ch. 18) and Harcourt (1977a, 1993a) for accounts of Eric’s life and contributions. 8. Initially I thought that the orderings were a completely general result but I subsequently found that I had a wrong sign in one of my differentiations. Showing why the result was not general led to some interesting economic analysis in itself. 9. In 1965 Levhari (who was Samuelson’s pupil) published a paper in the Quarterly Journal of Economics in which he claimed to have shown that while reswitching and capital-reversing could occur in an industry, they could not occur in the economy as a whole. I was the first person in Cambridge to read Levhari’s article. I told Piero about it, that some chap in the Quarterly Journal of Economics said his (Piero’s) result was wrong for the economy. PS: ‘He’s wrong – and you show it.’ G. C. H.: ‘I can’t do matrix algebra.’ PS: ‘Neither can I’ – so he asked Luigi Pasinetti who promptly did so in a paper presented at the First World Congress of the Econometric Society in Rome in 1965 and subsequently published in the 1966 symposium in the Quarterly Journal of Economics. 10. To work regularly as one of the editors of the Cambridge Journal of Economics has been extraordinarily helpful to me for my task (a glance at the ideals and rubric of the journal will show why), as well as a most pleasant and satisfying task in itself. I look forward immensely to our regular Friday working lunches where, fortified by the excellent bread and cheese, fruit and Frank Wilkinson’s no-nonsense pot of tea, we get through a great amount of coop- erative work in a stimulating, friendly, often argumentative but basically supportive environment. 11. With Paul Dalziel, I have tried to mount a modest counterattack to the increasingly dominant view that in the world economy as a whole, saving

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determines investment, as if Keynes and James Meade and his ‘relation’ never existed (see Dalziel and Harcourt, 1997). 12. As I have mentioned my students only in passing, I want to stress that I regard teaching undergraduates and supervising research students (since I returned to Cambridge in 1982 I have always had 8–11 PhD students working on a wide range of topics) as the most responsible and rewarding tasks university teachers are privileged to have. Nor have I elaborated on my sporting passions; so let me say for the record, that I played Australian Rules Football until I was 47, that I still play cricket (and make runs and take wick- ets) and that I go for a long bike ride most days because the combination of my recent brushes with death and acute Achilles tendon problems have, alas, ended my nearly 50 years’ habit of a daily run (not jog).

References

General Arestis, Philip, Gabriel Palma and Malcolm Sawyer (eds) (1997a), Capital Controversy, Post-Keynesian Economics and the History of Economics: Essays in Honour of Geoff Harcourt. Volume One, London: Routledge. Arestis, Philip, Gabriel Palma and Malcolm Sawyer (eds) (1997b), Markets, Unemployment and Economic Policy: Essays in Honour of Geoff Harcourt. Volume Two, London: Routledge. Asimakopulos, A. (1969), ‘A Robinsonian Growth Model in One-Sector Notation’, Australian Economic Papers, 8, 41–58. Bhaduri, Amit (1969), ‘On the Significance of Recent Controversies on Capital Theory: a Marxian View’, Economic Journal, 79, 532–39. Bharadwaj, Krishna (1978), Classical Political Economy and Rise to Dominance of Supply and Demand Theories, New Delhi: Orient Longman. Brennan, H. Geoffrey and A. M. C. Waterman (eds) (1994), Economics and Religion: Are They Distinct? Boston, Dordrecht, London: Kluwer Academic Publishers. Bryant, Christopher (ed.) (1993), Reclaiming the Ground: Christianity and Socialism, London: Hodder and Stoughton. Byron, R. P. (1970), ‘The Bias in the Watson-Harcourt-Praetz Variant of the Constant Elasticity of Transformation Production Frontier’, Economic Record, 46, 567–73. Chick, Victoria (1978), ‘The Nature of the Keynesian Revolution: a Reassessment’, Australian Economic Papers, 17, 1–20. Chomsky, N. (1967), ‘The Responsibility of Intellectuals’, in T. Roszak (ed.), The Dissenting Academy, New York: Pantheon Books, 1967, pp. 254–98. Dobb, M. H. (1937), Political Economy and Capitalism, London: Routledge. Dobb, M. H. (1946), Studies in the Development of Capitalism, London: Routledge. Dow, J. C. R. (1956), ‘Analysis of the Generation of Price Inflation: A Study of Cost and Price Changes in the United Kingdom, 1946–54’, Oxford Economic Papers (N.S.), 8, 252–301. Fisher, Franklin M. (1984), ‘The Misuse of Accounting Rates of Profit: Reply’, American Economic Review, 74, 509–17.

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Fisher, Franklin M. and John J. McGowan (1983), ‘On the Misuse of Accounting Rates of Return to Infer Monopoly Profits’, American Economic Review, 73, 82–97. Friedman, M. (1953), Essays in Positive Economics, Chicago: Chicago University Press. Hahn, Frank and Robert Solow (1995), A Critical Essay on Modern Macroeconomic Theory, Oxford: Blackwell. Hatch, John and Ray Petridis (1997), ‘A Cambridge Economist but an Australian Patriot’, in Arestis et al. (1997a), pp. 1–10. Hayek, F. A. (1941), The Pure Theory of Capital, London: Macmillan. Henderson, H. D. (1922), Supply and Demand, London: Nisbet. Hicks, J. R. (1939), Value and Capital, Oxford: Clarendon Press. Hicks, J. R. (1942), The Social Framework: An Introduction to Economics, Oxford: Clarendon Press. Kaldor, N. (1934), ‘A Classificatory Note on the Determinateness of Equilibrium’, Review of Economic Studies, 1, 122–36. Kaldor, N. (1985), Economics without Equilibrium, Armonk, NY: M.E. Sharpe. Kaldor, N. (1996), Causes of Growth and Stagnation in the World Economy, Cambridge: Cambridge University Press. Kalecki, M. (1943), ‘Political Aspects of Full Employment’, Political Quarterly, reprinted in Kalecki (1971), pp. 138–45. Kalecki, M. (1971), Selected Essays on the Dynamics of the Capitalist Economy 1993– 1970, Cambridge: Cambridge University Press. Kay, J. A. (1976), ‘Accountants, Too, Could Be Happy in a Golden Age: The Accountant’s Rate of Profit and the Internal Rate of Return’, Oxford Economic Papers, 28, 447–60. Kay, J. A. (1978), ‘Accounting Rate of Profit and Internal Rate of Return: A Reply’, Oxford Economic Papers, 30, 469–70. Keynes, J. M. (1923), A Tract on Monetary Reform, London: Macmillan, Collected Writings, Volume IV, 1971. Keynes, J. M. (1936), The General Theory of Employment, Interest and Money, London: Macmillan, Collected Writings, Volume VII, 1973. King, John E. (1997), ‘Notes on the History of Post-Keynesian Economics in Australia’, in Arestis et al. (1997a), pp. 298–309. Levhari, D. (1965), ‘A Nonsubstitution Theorem and Switching of Techniques’, Quarterly Journal of Economics, 79, 98–105. McFarlane, Bruce (1997), ‘Socialism: Goals and Efficiency’, in Arestis et al. (1997b), pp. 165–77. Mathews, R. L. and J. McB. Grant (1957), ‘Accounting Conventions, Pricing Policies and the Trade Cycle’, Accounting Research, 8, 145–64. Mathews, R. L. and J. McB. Grant (1958), Inflation and Company Finance, Sydney: Law Book Company of Australia. Meade, J. E. and E. A. Russell (1957), ‘Wage Rates, the Cost of Living and the Balance of Payments’, Economic Record, 33, 23–28. Medema, Stephen G. and Warren J. Samuels (eds) (1996), Foundations of Economic Research: How do Economists do Economics, Cheltenham: Edward Elgar. Meeks, Geoffrey (1977), Disappointing Marriage: A Study of the Gains from Merger, Cambridge: Cambridge University Press.

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Michie, Jonathan and John Grieve Smith (eds) (1997), Employment and Economic Performance: Jobs, Inflation and Growth, Oxford: Oxford University Press. Minhas, B. S. (1963), An International Comparison of Factor Costs and Factor Use, Amsterdam: North Holland. Morishima, M. (1973), Marx’s Economics: A Dual Theory of Value and Growth, Cambridge: Cambridge University Press. Morishima, M. (1976), ‘Positive Profits with Negative Surplus Value: A Comment’, Economic Journal, 86, 599–603. Pasinetti, L. L. (1966), ‘Changes in the Rate of Profit and Switches of Techniques’, Quarterly Journal of Economics, 80, 503–17. Powell, A. A. and F. H. Gruen (1968), ‘The Constant Elasticity of Transformation Production Frontier and Linear Supply System’, International Economic Review, 9, 315–28. Powell, A. A. and F. H. Gruen (1970), ‘Biases in the Estimation of Transformation Elasticities: A Rebuttal’, Economic Record, 46, 564–66. Robinson, Joan (1953/54), ‘The Production Function and the Theory of Capital’, Review of Economic Studies, 21, 81–106. Robinson, Joan (1956), The Accumulation of Capital, London: Macmillan. Robinson, Joan (1960), ‘Teaching Economics. A Passage to India’, Economic Weekly (Bombay), reprinted in Collected Economic Papers, Volume 3, 1965, pp. 1–6. Robinson, Joan (1965), Collected Economic Papers, Volume 3, Oxford: Blackwell. Robinson, Joan (1975), ‘The Unimportance of Reswitching’, Quarterly Journal of Economics, 89, 32–39. Rothschild, K. W. (1947), ‘Price Theory and Oligopoly’, Economic Journal, 57, 299–320. Russell, E. A. (1965), ‘Wages Policy in Australia’, Australian Economic Papers, 4, 1–26. Salter, W. E. G. (1960), Productivity and Technical Change, Cambridge: Cambridge University Press, 2nd edn, 1966. Sardoni, Claudio (ed.) (1992), On Political Economists and Modern Political Economy: Selected Essays of G. C. Harcourt, London: Routledge. Sen, A. K. (1957), ‘A Note on Tinbergen on the Optimum Rate of Saving’, Economic Journal, 67, 745–48. Shaikh, Anwar (1974), ‘Laws of Production and Laws of Algebra: The Humbug Production Function’, Review of Economic Statistics, 56, 115–20. Singh, A. and G. Whittington in collaboration with H. T. Burley (1968), Growth, Profitability and Valuation, Cambridge: Cambridge University Press. Solow, Robert M. (1974), ‘Laws of Production and Laws of Algebra: The Humbug Production Function: A Comment’, Review of Economic Statistics, 56, 121. Solow, Robert M. (1997), ‘Thoughts Inspired by Reading An Atypical Paper by Harcourt’, in Arestis et al. (1997a), pp. 419–24. Sraffa, Piero (1926), ‘The Laws of Returns Under Competitive Conditions’, Economic Journal, 36, 535–50. Sraffa, Piero (1960), Production of Commodities by Means of Commodities: Prelude to a Critique of Economic Theory, Cambridge: Cambridge University Press. Steedman, Ian (1975), ‘Positive Profits with Negative Surplus Value’, Economic Journal, 85, 114–23. Steedman, Ian (1976), ‘Positive Profits with Negative Surplus Value: A Reply’, Economic Journal, 86, 604–8.

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Steedman, Ian (1977), Marx After Sraffa, London: New Left Books. Steedman, Ian (1989), From Exploitation to Altruism, Oxford: Polity Press, Blackwell. Steedman, Ian (1994), ‘Wicksteed: Economist and Prophet’, in Brennan and Waterman (1994), pp. 77–101. Stiglitz, J. E. (1974), ‘The Cambridge–Cambridge Controversy in the Theory of Capital: A View from New Haven: A Review Article’, Journal of Political Economy, 82, 893–903. Stiglitz, J. E. (1994, 1996), Whither Socialism? Cambridge, MA: MIT Press. Stone, J. R. N. (1945), ‘The Analysis of Market Demand’, Journal of the Royal Statistical Society, 108, 1–98. Stretton, Hugh (1969), The Political Sciences: General Principles of Selection in Social Science and History, London: Routledge. Targetti, F. and B. Kinda-Hass (1982), ‘Kalecki’s review of Keynes’s General Theory’, Australian Economic Papers, 21, 244–60. Tew, Brian and R. F. Henderson (eds) (1959), Studies in Company Finance, Cambridge: Cambridge University Press. Tucker, G. S. L. (1960), Progress and Profits in British Economic Thought 1650–1850, Cambridge: Cambridge University Press. Turner, Marjorie S. (1989), Joan Robinson and the Americans, Armonk and London: M.E. Sharpe. Warner, Malcolm (ed.) (1996), International Encyclopedia of Business and Management, London: Routledge. Wicksteed, P. H. (1910), The Common Sense of Political Economy, London: Routledge, 1933 edn, ed. L. Robbins. Wright, F. K. (1978). ‘Accounting Rate of Profit and Internal Rate of Return’, Oxford Economic Papers, 30, 464–68.

Works by G. C. Harcourt Harcourt, G. C. (1958), ‘The Quantitative Effect of Basing Company Taxation on Replacement Costs’, Accounting Research, 9, 1–16. Harcourt, G. C. (1960), ‘The Early Verdict’, Nation, December 3, reprinted in K.S Inglis (ed.) (1989), Nation: The Life of an Independent Journal of Opinion 1958– 1972, Melbourne: Melbourne University Press, pp. 45–46. Harcourt, G. C. (1962), ‘Review Article of W.E.G. Salter, Productivity and Technical Change’, Economic Record, 38, 388–94. Harcourt, G. C. (1963), ‘A Critique of Mr Kaldor’s Model of Income Distribution and Economic Growth’, Australian Economic Papers, 2, 20–36. Harcourt, G. C. (1964), ‘Review of Minhas (1963)’, Economic Journal, 74, 443–45. Harcourt, G. C. (1965a), ‘The Accountant in a Golden Age’, Oxford Economic Papers, (N.S.), 17, 66–80. Harcourt, G. C. (1965b), ‘A Two-Sector Model of the Distribution of Income and the Level of Employment in the Short Run’, Economic Record, 41, 103–17. Harcourt, G. C. (1966), ‘Biases in Empirical Estimates of the Elasticities of Substitution of C.E.S. Production Functions’, Review of Economic Studies, 33, 227–33. Harcourt, G. C. (1968), ‘Investment-Decision Criteria, Investment Incentives and the Choice of Technique’, Economic Journal, 78, 77–95.

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Harcourt, G. C. (1969), ‘Some Cambridge Controversies in the Theory of Capital’, Journal of Economic Literature, 7, 369–405. Harcourt, G. C. (1972), Some Cambridge Controversies in the Theory of Capital, Cambridge: Cambridge University Press. Harcourt, G. C. (1974), ‘The Social Consequences of Inflation’, Australian Accountant, October, 520–28. Harcourt, G. C. (1975), Theoretical Controversy and Social Significance: An Evaluation of the Cambridge Controversies, Edward Shann Memorial Lecture, University of Western Australia Press. Harcourt, G. C. (1976), ‘The Cambridge Controversies: Old Ways and New Horizons – Or Dead End?’, Oxford Economic Papers, (N.S.), 28, 25–65. Harcourt, G. C. (1977a), ‘Eric Russell, 1921–77: A Memoir’, Economic Record, 53, 467–74. Harcourt, G. C. (ed.) (1977b), The Microeconomic Foundations of Macroeconomics, London: Macmillan. Harcourt, G. C. (1978), ‘Can Marx survive Cambridge?’ Nation Review, 15; reprinted in Harcourt (1982), pp. 199–204. Harcourt, G. C. (1981), ‘Marshall, Sraffa and Keynes: Incompatible Bedfellows?’ Eastern Economic Journal, 7, 39–50. Harcourt, G. C. (1982), The Social Science Imperialists: Selected Essays, G.C. Harcourt, Prue Kerr (ed.), London: Routledge and Kegan Paul. Harcourt, G. C. (1983), ‘On Piero Sraffa’s Contributions to Economics’, in Peter Groenewegen and Joseph Halevi (eds) (1983), Altro Polo Italian Economics Past and Present, University of Sydney: Frederick May Foundation for Economic Studies, pp. 117–28. Harcourt, G. C. (1984), ‘The End of An Era: Joan Robinson (1903–83) and Piero Sraffa (1898–83)’, Journal of Post Keynesian Economics, 6, 466–69. Harcourt, G. C. (1986), ‘The Influence of Piero Sraffa on the Contributions of Joan Robinson to Economic Theory’, Economic Journal, 96, 96–108. Harcourt, G. C. (1990), ‘On the Contributions of Joan Robinson and Piero Sraffa to Economic Theory’, in Maxine Berg (ed.) (1990), Political Economy in the Twentieth Century, New York, London: Philip Allan, 35–67. Harcourt, G. C. (1991), ‘Athanasios (Tom) Asimakopulos, 28 May 1930–25 May 1990: A Memoir’, Journal of Post Keynesian Economics, 14, 39–48. Harcourt, G. C. (1992), ‘Markets, Madness and a Middle Way’, The Second Annual Donald Horne Address, Melbourne: Monash University, also published in Australian Quarterly, 64, 1–17. Harcourt, G. C. (1993a), Post-Keynesian Essays in Biography: Portraits of Twentieth Century Political Economists, Basingstoke: Palgrave Macmillan. Harcourt, G. C. (1993b), ‘The Harcourt Plan to “Save” the World’, At the Margin, issue 1, 2–5. Harcourt, G. C. (1993c), ‘Macroeconomic Policy for Australia in the 1990s’, The Economic and Labour Relations Review, 4, 167–75. Harcourt, G. C. (1994a), ‘Comment’, in Brennan and Waterman (1994), 205–12. Harcourt, G. C. (1994b), ‘Taming Speculators and Putting the World on Course to Prosperity: A “Modest Proposal” ’, Economic and Political Weekly, 29, 2490–92. Harcourt, G. C. (1995a), Capitalism, Socialism and Post-Keynesianism: Selected Essays of G.C. Harcourt, Cheltenham: Edward Elgar.

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Harcourt, G. C. (1995b), ‘Recollections and Reflections of An Australian Patriot and a Cambridge Economist’, Banca Nazionale del Lavoro Quarterly Review, 194, 225–54. Harcourt, G. C. (1996), ‘How I Do Economics’, in Medema and Samuels (1996), pp. 93–102. Harcourt, G. C. (1996–97), ‘Critiques and Alternatives: Reflections on Some Recent (and Not So Recent) Controversies’, Journal of Post Keynesian Economics, 19, 171–80. Harcourt, G. C. (1997a), ‘Economic Policy, Accumulation and Productivity’, in Michie and Grieve Smith (1997), pp. 194–204. Harcourt, G. C. (1997b), ‘Review of Stiglitz (1994, 1996)’, Journal of Institutional and Theoretical Economics, 153, 590–91. Harcourt, G. C. (1997c), ‘The Kaldor Legacy: Reviewing Nicholas Kaldor, Causes of Growth and Stagnation in the World Economy’, Journal of International and Comparative Economics, 5, 341–57. Harcourt, G. C. (1997d), ‘Economic Theory and Economic Policy: Two Views’ (The Seventh Colin Clark Memorial Lecture 1997), Economic Analysis and Policy, 27, 113–30. Harcourt, G. C. (1997e), ‘A “Second Edition” of Keynes’s General Theory’, The Cambridge Review, May, 21–25. Harcourt, G. C. and Peter Kenyon (1976), ‘Pricing and the Investment Decision’, Kyklos, 29, 449–77. Harcourt, G. C. and P. M. Kerr (1979), ‘The Mixed Economy’, in Jane North and Pat Weller (eds), Labor, Sydney: Ian Novak, pp. 184–95. Harcourt, G. C. and P. M. Kerr (1996), ‘Marx, Karl Heinrich (1818–83)’, in Warner (1996), pp. 3388–95. Harcourt, G. C. and Prue Kerr (2009), Joan Robinson, London: Palgrave Macmillan. Harcourt, G. C. and Vincent G. Massaro (1964a), ‘A Note on Mr. Sraffa’s Sub- Systems’, Economic Journal, 74, 715–22. Harcourt, G. C. and Vincent G. Massaro (1964b), ‘Mr Sraffa’s Production of Commodities’, Economic Record, 50, 442–54. Harcourt, G. C. and P. A. Riach (eds) (1997), A ‘Second Edition’ of The General Theory, 2 vols, London: Routledge. Harcourt, G. C., P. H. Karmel and R. H. Wallace (1967), Economic Activity, Cambridge: Cambridge University Press. Dalziel, Paul C. and G. C. Harcourt (1997), ‘A Note on “Mr Meade’s Relation” and International Capital Movements’, Cambridge Journal of Economics, 21, 621–31. Watson, A. S., G. C. Harcourt and P. D. Praetz (1970a), ‘The Constant Elasticity of Transformation Production Frontier and Estimates of Supply Response in Australian Agriculture’, Economic Record, 46, 553–63. Watson, A. S., G. C. Harcourt and P. D. Praetz (1970b), ‘Reply to Powell and Gruen, and Byron’, Economic Record, 46, 574–75.

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9780230_284692_04_cha02.indd 53 12/23/2011 4:56:04 PM 9780230_284692_04_cha02.indd 54 12/23/2011 4:56:04 PM 2 The Debates on the Representative Firm and Increasing Returns: Then and Now (2007)* with Stephanie Blankenburg

There is something completely archaic yet very modern about the tone and issues of the 1920s debates in the Economic Journal on the representative firm and increasing returns, also often referred to as ‘the cost controversy’.† Then, as now, applied economists, ‘realitics’, as Sir John Clapham called them, and theoretical economists (‘analytics’) were often a race apart who neither properly understood nor appreciated each other’s roles and approaches. Then, as now, views differed on whether or not theory had to be directly applicable in explanations of ‘real world’ observations and much misunderstanding occurred because the separation between logically coherent ‘high theory’ in its own domain and, a separate issue, its direct applicability, was not made by protagonists in an argument. Or, if it were, one side would be concerned with the former, the other with the latter, without either making this understanding explicit. For these confusions and misunderstandings, Marshall must take his full share of the blame. Though this distinction was clear in his own mind, in the presentation of arguments in his Principles it is purposefully blurred because of his desire to be read by businessmen (sic) as well as by his pupils and the profession generally. Thus the text especially of the Principles often reads as though it were a narrative about real-life happenings, admittedly explicitly confined in the main to normal periods

* Originally published in Philip Arestis, Michelle Baddelely and John S. L. McCombie (eds), Economic Growth, New Directions in Theory and Policy, Cheltenham, UK and Northampton, MA: Edward Elgar Publishing, pp. 44–64.

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but meant to call up in the readers’ minds their own observations and experiences. Yet Marshall’s powerful theoretical mind provided an underlying but often hidden structure (or one confined to footnotes and appendices) of explicitly set out theoretical pre- suppositions and arguments. This took the same subtlety of mind (and foxiness of character) as Marshall’s to be clearly discerned and attended to in the interpretation of the text. It must also be remembered that at this time, not only was the distinction between the domains of theory and practice in the discipline being worked out, not least by Frank Knight in what was to become Risk, Uncertainty and Profit (1921),1 but also the classical notion of a freely competitive environment which in the writings of Adam Smith and Karl Marx, for example, was the dynamic setting for distribution, accumulation and growth as well as a theory of price formation, was being refined into the rigorous but static characteristics of the price-taking model on which students are brought up today in courses on microeconomics. This was to become a coherent, rigorous, logically water- tight but basically an un-illuminating and ineffectual explanation of the behaviour of actual firms, industries and, ultimately, economies. For though it was possible to find price-taking behaviour hinted at in the Principles, its twin assumption of perfect foresight which together defined perfect as opposed to pure competition was conspicuous by its absence in the text of the Principles (but perhaps not necessarily so in its underlying structure of a long-period stationary state). Because also in much of the discussion it is not always clear whether it is the long period or the short period or both that are being analysed, there is not always a clear distinction made between analysis of production and price-setting as such, on the one hand, and accumulation and investment, including the choice of technique of production within the investment decision, on the other. This meant that when the shapes of cost curves were examined, it was not always clear whether it was a production decision or an investment decision that was being analysed. That is to say, whether when an increase or decrease in production is considered, the analyst was asking what may reasonably be expected of changes in costs, if any, in a given situation of the here and now; or, what happens to the level of long-period costs at different potential levels of production of the plants chosen to be invested in, is the subject of analysis. These points were to become clear in Edward Chamberlin’s discussion in an appendix to his Theory of Monopolistic Competition (1933) on the long-period envelope cost curve. There, he overcomes the misconceptions in Jacob Viner’s classic statement (Viner 1932) of the issues, misconceptions associated with the contribution of his

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obstinate Chinese draftsman, to show that to call the long-period curve an envelope was to use a serious misnomer, because the curve did not have a separate existence from the possible short-period plant curves in a given situation, the relevant parts of which it is made up.

There was always a potential contradiction in Marshall’s ‘vision’. He had ‘invented’ supply and demand analysis in a way which allowed him to handle that elusive but vital variable time, by distinguishing between the market, short and long period where what was and was not locked up in the cet. par. pound was decided by the economist/analyst. He also saw societies as evolving interrelated organic entities; and he knew but tried not to let on in too damaging a manner that the basically static analysis of his supply and demand functions and periods could not handle in a fundamental way the other aspect of his understanding. Though he wanted ‘economic science’ to be fruit- as well as light-bearing, he was also committed to a defence of a competitive environment which was sustainable, despite substantial changes over time in institutions. In particular, he wanted his ‘trees in the forest’ analogy of competitive conditions to survive the emergence of monopolies and oligopolies accompanied by the emergence and then dominance of joint stock companies as the main form of industrial organisation. He knew of what he considered to be Cournot’s error (as a description of the real world as opposed to being a logical argument in its own domain), that increasing returns in firms and competition could not be enduring bedfellows. Once one firm got ahead of its rivals it could undersell them and take over the industry, i.e., become a monopoly. Marshall’s answer to this was not couched in terms of Schumpeter’s creative destruction – a temporary monopoly firm exploiting an innovation made monopoly profits which attracted imitators in to compete them away – nor Joan Robinson’s fish in a pond whereby the bigger fish came to dominate – eat up – the smaller ones. Rather he introduced the device of the representative firm which allowed the real world facts of increasing returns, internal and external economies, to be accommo- dated without destroying the viability of competitive environments in the long run. The representative firm was a forerunner of the modern representative agent, the purpose of which is to stand in for the behaviour of the group (for Marshall, the industry, for the moderns, the whole economy) while having in fact no actual existence in reality. There were minor policy recommendations allowed; they were spelt out in more precise analytical detail than Marshall would have

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permitted himself to do by his in effect chosen successor, Pigou.2 By distinguishing between private and social costs and recognising the existence of decreasing and increasing returns, Pigou built on Marshallian foundations to establish carrot and stick measures (subsidies and taxes) to induce social optima of a limited and commonsense variety. All this was the fare of the various editions of The Economics of Welfare. It was here that Clapham entered the fray with his teasing, emperor has no clothes on, article, ‘On empty economic boxes’ (1922). Clapham was a no-nonsense economic historian who had a detailed knowledge of agricultural, industrial and financial firms and industries, and of the interrelated systems to which they belonged. He had read his Marshall and Pigou but felt that the gap between the carefully and precisely stated propositions by the former two economists (especially by Pigou) and the complexity arising from his own observations was virtually unbridge- able. Especially was this so when the preliminary step to the policy of suggesting a tax or a subsidy was the need to classify specific industries as subject to either decreasing or increasing returns. He took as his illus- tration a visit to a hat factory; he asked in which of the boxes marked on the outside as increasing or decreasing returns industries would the specific industry to which the hat factory ‘belonged’ be found. Indeed he wondered whether the neat products of the theory – homogeneous, competitively sold – could ever be matched to the great variety of actual products which came under the general heading of hats. From this he next wondered aloud whether the definition of an industry could ever be pinned down in practice; and so on. In doing so he was contribut- ing to the general debate, on both sides of the Atlantic, concerning the natures of applied and theoretical work. As we have mentioned above, this involved a tightening up of the definition of perfect competition, taking it away from the looser but more dynamic concept it had in the guise of the free competition of the Classicals, Marx and Marshall to the price-taking, perfect foresight model. The latter was also distinguished from pure competition which only assumed price-taking. (Smith, Marx and Marshall would never have thought of trying to analyse a world in which the future was known with certainty.) In the December 1922 Economic Journal (Clapham’s article had appeared in the September issue, my, things were published quickly in those days), Pigou replied to the critique by his fellow King’s man. He thought that the categories analytic and realitic were themselves empty – no actual person really fell into either category. Pigou distinguished between two sorts of knowledge. The first is ‘pure’ knowledge about implications such as we find in logic and mathematics (Ken

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Rivett, GCH’s methodology teacher at Melbourne university, called these necessary propositions, true by definition). The second is realistic knowledge, knowledge of subject matter presumed to be actual, the characteristics of the data studied and taught by physicists. He also classified knowledge into that which can or cannot give direct help in the practical conduct of affairs (always a Pigovian emphasis). If Clapham were to be taken literally, there was no point in trying to analyse returns, whether increasing or decreasing, because even if we filled the empty boxes, we would still receive no help in practice: A non sequitur, says Pigou, adding that by far the greater part of knowledge which history aims at is totally irrelevant in practice. Nevertheless, because knowledge by itself is of little value we must try to make more Jevons’s, people equally at home in both fields. In the meantime, we should substitute cooperation between the two types for quarrels on the basis of imperfect understanding of the deficiencies of one another’s method. So, Professor Clapham, would you please pass the salt!

III

Throughout the debates, explicit mention is made by the protagonists about whether the short period or the long period or both is the appropriate context. Similarly, an explicit distinction is made between the processes of production, on the one hand, and accumulation or investment which allows new methods to be put in place in firms and industries, on the other. But, having said this, it must also be said that these various aspects were also a source of a great deal of confusion and muddle which were not really cleared up until after the 1930 Economic Journal symposium which closes our period of examination. In our view, the watershed which allows these issues to be settled is Chamberlin’s Appendix B (in the 1950 sixth edition of his classic) on the relationship between the short-period average cost plant curves and the long-period misnamed envelope average cost curve – misnamed, because as Chamberlin makes clear, the envelope curve is not an envelope, something placed around something else, but is in fact segments of (with continuity, points on) succeeding plants’ curves showing the least-cost method of producing each level of output in the given situation. As we know, Chamberlin argued that the reasons for the U shape of the plant curves are completely different from those responsible for the U shape of the long-period curve. The former is due to the application of the law of variable proportions to production with each possible plant; the latter is due to economies of scale outweighing diseconomies

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as we pass from one plant to another, and then to a reversal of the dominance between the contending factors. For our purposes, the important point to note is that the construction of the long-period curve from its constituent plants is telling us as observing economists (and businesspeople and profit-seeking accumulators) what is the appropriate choice of technique for anticipated future levels of output, i.e., it is relevant for the investment decision now and, once embodied, for production decisions later on. In a full analysis, such as we were to get in Wilfred Salter’s 1960 classic, the amount of investment and the change in capacity in individual firms would depend on how many existing plants remain profitable in the sense of positive expected quasi-rents in any given situation and how much of production levels deemed to be profitable would need to come from the new plant and methods introduced in the current investment expenditure associated with the optimum points on the long-period curve. Seen like this, much of the cross purpose and non-meeting of minds in the debates of the 1920s disappear.

At the end of Piero Sraffa’s contribution to the 1930 symposium (Keynes 1930), he makes absolutely clear where he stands on Marshall’s theory:

We seem to be agreed that [Marshall’s] theory cannot be interpreted in a way which makes it logically consistent, and at the same time, reconciles it with the facts it sets out to explain. Mr. Robertson’s remedy is to discard mathematics, and to suggest that [Sraffa’s] remedy is to discard the facts; perhaps I ought to have explained that ... I think it is Marshall’s theory that should be discarded. (Sraffa 1930, 93)

At the Corfu Conference on capital theory in the late 1950s, Sraffa (1961) set out the standards he set himself (and the subject) concerning measurement, theory and the criteria they should meet within the context of capital theory. He first distinguished between measurement by statisticians ‘... only approximate ... provided a suitable field for work in solving index number problems’; the second concerned theoretical measures which ‘required absolute precision. Any imperfections ... knocked down the whole theoretical basis.’ The definition of capital in theory must therefore be kept ‘separate from the needs of statistical measurement ... J. B. Clark, Böhm-Bawerk and others intended to

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produce pure definitions of capital, as required by their theories ... contr adictions ... pointed to defects in the theory’. (Sraffa 1961, 305–6). Sraffa’s 1925 and 1926 articles (the first few pages of Sraffa 1926 constitute a summary of the complex and detailed arguments of the much longer 1925 article) are principally attacks on the logical foundations of Marshall’s theory of competitive value. (Often, though, it is Pigou’s version of it that Sraffa has within his sights.) The theory itself depends on ‘the fundamental symmetry existing between the forces of supply and demand’, using the method of partial equilibrium (‘particular equilibrium’ in Sraffa’s terms, Sraffa 1926, 539), so that ‘the essential causes determining the price of particular commodities may be [ ... ] grouped together so as to be represented by a pair of intersecting curves of collective demand and supply’ (Sraffa 1926, 535). Sraffa’s conclusion is that the only case which is logically consistent with the approach is one of constant costs ‘in respect of small variations in the quantity produced’. (Sraffa 1926, 541). In a footnote on p. 541 he stresses that constancy comes from an ‘absence of causes which tend to cause the cost either to increase or diminish’, not from an improbable ‘accidental balancing of two opposite tendencies’, as Sidgwick and Marshall would have it. The criticism is a logical and methodological one, a search for a set of conditions which allows the method logically to be applied. Sraffa starts by reminding us that the ‘laws’ of returns historically belonged in different parts of the discipline, diminishing returns in the theory of distribution (rent) rather than in a discussion of relative values and prices, increasing returns in discussions of ‘general economic progress’ rather than in a discussion of ‘increase[s] in the scale of production’ (Sraffa, 1926, 557). Combining them together, as modern theory now did (and does) in a theoretical whole, was restrictive and contradictory. Especially was this true of increasing returns, for to be consistent with competitive theory (they could of course be a fact of life) the division of labour had to be ‘limited to the case of independent subsidiary factor- ies coming into existence as the production of an industry [increased]’ (Sraffa 1926, 537). Internal economies associated with the growth of individual firms had to be ‘entirely abandoned [ ... ] incompatible with competitive conditions’ (Sraffa 1926, 537–38), so that ‘external economies’ were more and more emphasised. Diminishing returns were traditionally associated with the existence of a fixed factor and in the (then) modern theory (but not in Classical Political Economy) with the short period. But this implied to Sraffa that the more broadly an industry was defined the more likely it was that diminishing returns would arise from the use of the one factor.

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Whereas the more homogeneous we made the commodity within an industry (suppose we move from agriculture to fruit) ‘the greater will be the possibility that the forces which make for increasing returns will predominate’ (Sraffa 1926, 538). The effects are similar to those of time, especially the time allowed for adjustments to occur and have an impact on returns. Most importantly, the independence assumption relating to demand and supply schedules is now at risk. For, as Sraffa says, ‘it is precisely in [the] category that ... when a variation in the quantity produced by [an] industry ... sets up a force which acts directly ... upon its own costs [and] the costs of other industries [so that] the conditions of the ‘particular equilibrium’ which it was intended to isolate are upset ... that the applications of the laws of returns fall, in the great majority of cases’ (Sraffa 1926, 539). For diminishing returns, we are left with ‘that minute class of commodities in the production of which the whole of a factor is employed’ (Sraffa 1926, 539). For increasing returns, we only have those economies (‘most seldom to be met with [in practice]’) which are external to the firm but internal to the industry (Sraffa 1926, 540). So, if we are to use partial equilibrium analysis, ‘in normal cases the cost of production of commodities produced competitively ... must be regarded as constant in respect of small variations in the quantities produced.’ (Sraffa 1926, 540–41). In the 1926 article, Sraffa turned his back on general equilibrium as a way out and spawned instead what became the imperfect/monopolistic competition revolutions which allowed the existence of lower costs at higher rates of output because of demand constraints in imperfectly competitive markets (but see note 7).

In 1928 Joseph Schumpeter published in the Economic Journal, a profoundly cerebral article on the instability of capitalism. He asked: if we abstract from political and other shocks to the system, including certain classes of technical advances, is a competitive economy a stable system in the sense that it tends to a level of operation which is repeatable? (It was Walras’s principal ambition to show that indeed it was.) In the article Schumpeter reveals his views on the nature of economic theorising and on what he means by stability. Thus in the ‘real world’ a system could behave in a most unstable way because of political shocks, e.g. a war or a natural calamity such as flood or fire (or even foot and mouth) and yet be internally stable in its cet. par. operation.

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In making this distinction he was justifying his view that Walras was the role model for theorists, yet his own vision of the impact of innovations in the accumulation carried out by his entrepreneur heroes and continuous technical change could be logically fitted into a theoretical analysis which started from a Walrasian general equilibrium system in equilibrium. In this manner Schumpeter hoped to deal with the issues that the other contributors in the representative firm and increasing returns debates were grappling with. His article appeared in the same issue of the Economic Journal as the article by Lionel Robbins on the representative firm (which Whitaker (1989) judged not to have been of lasting value or importance but which had much notice taken of it when it was first published.3). He argues that Marshall put in the representative firm as an after thought and that he never made the section of the Principles which contains it correct, quoting Keynes on Marshall in support. His criticism turns on the meaning of average implied by representative and whether in equilibrium a representative or average entrepreneur (or manager) is a viable or necessary concept. In doing this he has more Hubert Henderson’s entrepreneur or manager than Marshall’s own practice in mind. Robbins was to follow up this discussion with his more lasting contribution on the ambiguity of the notion of stationari- ness in economic analysis, a discussion which has particular relevance for misunderstandings in capital theory, even today.4

Now we come to the climax of the debates, the symposium organised by Keynes in the March 1930 Economic Journal. There were three contributors – Dennis Robertson, Piero Sraffa and Gerald Shove. Keynes saw Robertson as a stout defender of old Marshall, representative firm in hand, Sraffa as extremely negative (so what is new?) and Shove as original and constructive, working within the Marshallian tradition but refusing to accept the representative firm as the only way of tackling the issues involved. Robertson responded to Robbins’s view that normal profit is what is needed to keep particular individuals in an industry so that it is determined by what they could get elsewhere and is therefore not a unique figure for the industry (or the economy as a whole).5 Robbins had criticised Henderson on these points and Robertson now defended him. According to Robertson, Henderson was describing those on the road to elimination from the industry because of their inadequacies. At any

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moment of time, however, similar types enter the industry so leaving the industry in equilibrium. Robertson reiterates the proposition that the concept of the representative firm is essential to our understanding of the theory of increasing returns because it helps us to tackle Cournot’s difficulty associated with increasing returns: how equilibrium can exist without the whole supply being concentrated in the hands of one pro- ducer. He lists recent answers. First, Schumpeter (and others) deny the validity of a long-period falling supply curve (except as a record of historical events); it cannot be the series of conditional statements which it is required to be. To Robertson this is a counsel of despair which was considered and rejected by Marshall (so that’s alright then). Marshall stressed that the firm’s experience is not to be considered the equivalent of the industry’s experience, especially in the long period. Then there is Sraffa who resorts to a theory of monopoly which will yield a determinate result (always one of Sraffa’s aims for theory). Robertson reminds us that as always it is all in Marshall, this time in footnote. 1 on p. 458 as Marshall’s auxiliary argument, the central point of the economics of imperfect competition in a footnote. Pigou’s answer depends upon there being external economies of large- scale production at the level of the industry even though individual firms work under conditions of decreasing returns. Pigou accepts internal economies of large-scale production but these have been ruled out by Sraffa, not because they do not exist but because Marshall’s partial equilibrium method could not be used in their presence. For Pigou the representative firm is one for which there is an optimum size for each scale of aggregate output beyond which there are no further internal economies. (He has also transformed the representative firm into the equilibrium firm.) For Pigou but not for Sraffa, external economies are sufficient to ensure this. Allyn Young (1928) extended the concept of external economies to include lower costs resulting from progressive division and specialisation of industries, the essential part of the process by which increasing returns are realised. (This insight was to guide Kaldor’s writings for all of his working life.) Pigou built on the insight to suggest that these external economies allow increasing internal economies to an increase in the size of individual firms as industries expand, due to growing specialisation. This is both possible and plausible, but it is not the line that comes from either Marshall or observed fact. Robertson thinks it is the response to increasing demand for the industry’s products by individual firms wanting to get the benefits of large-scale organisation and plant which are known but not yet brought into existence

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by specialisation or by other ways. Marshall’s trees of the forest were meant to explain this idea and allow increasing returns to exist in the industry yet competition between firms also to prevail. Individual firms are not representative firms and they must expand as the representative firm does when overall demand increases. Hence no one individual firm will ever have a monopoly of the whole trade. How, asks Robertson, would Robbins make this point once he has scrapped the representative firm? Enter now Piero Sraffa. Why, he asks, if internal economies were available were they not taken advantage of? And if they are, why do they cease at (long-period) equilibrium – a point of constant returns! Sraffa’s answer was to find out what assumptions were implicit in Marshall’s theory and, in the event, he thought Marshall’s theory should be discarded. The stage is now set for Shove. He accepts that Robertson’s piety is one way out, that his account of the role of the representative firm in Marshall’s theory of competitive equilibrium is correct. But Shove also sides with Robbins, arguing that the problem can be solved without introducing the representative firm at all. In showing why he would draw on an ‘unpublished study of the relations between cost and output on which [he had] been engaged for some years’ (Shove 1930, 94). To start with we must allow for those characteristics of long-period equilibrium which its inventor Marshall intended the representative firm to display. First, if an entrepreneur has a special aptitude for the work he/ she is engaged in, his/her earnings will be much greater than the return he/she would get elsewhere and that which others in the industry with the same general capacity but not special advantages would receive. So the rent to the former is compatible with equilibrium and admits of wide variations in the rate of profit received by individual entrepreneurs. Secondly, luck plays an important part in determining the actual earnings of individual entrepreneurs; so equilibrium requires not the equality of actual earnings, but of the mathematical expectation of earnings for similar units in different uses. Thirdly, the profits of the firm (apart from luck) differ at different stages of its career so there is no tendency for firms to show the same rate of profit unless they are at the same stage of development. (The same is true for skilled employees whose earnings are low when learning, rise to a maximum when fully equipped and decline when old age comes.) Fourthly, the equilibrium of the industry as a whole does not imply that all (indeed any) of its individual firms are in equilibrium. The requirement is that aggregate output is unchanged; but some firms may be expanding, others declining, such as to offset each other overall. For

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equilibrium it follows that a general expansion or contraction should not be profitable. The representative firm is an appropriate indeed brilliant device for displaying facts when we want to depict equilibrium as resulting from the rise and fall of individual houses of business. But when we look at the ebb and flow of resources of all kinds from one use to another, a different method is needed. ‘We must then say that the attraction exerted by a particular occupation on a particular unit is the mathematical expectation of earnings in that occupation for a unit of resources with the character and aptitudes of this one (thus allowing for (1) and (2) [above]); that this expectation is to be reckoned by summing the series of its probable earnings at each stage of its career (thus allowing for (3)); and that it must be calculated on the assumption that resources within the industry ... are distributed between the firms in the most profitable way (thus allowing for (4)).’ (Shove 1930, 96, emphasis in original). Moreover, Shove argues convincingly that there are numerous equilibrium points, each one of which corresponds to a specified starting point. (So path-dependence is not that new.) To Shove the economic problem represented by the real world is more a question of sorting out and fitting each into its appropriate niche, a vast number of heterogeneous individuals and activities than of regulating and directing into proper channels large homogeneous streams of standardised productive agents. Robertson does not agree because he wants to build up supply schedules by aggregating the supply schedules of various factors of production. But this can only be done if factors of production can be expressed in quantities alone and in a measure which is independent of value! For Shove, when we try to unravel the relations between industry size and the efficiency of the businesses which make it up, we must distinguish between, first, improvements in organisation due to an increase in the output of the industry as a whole; and secondly, improvements which are due to increases in the output of individual firms, with industrial output remaining unchanged. According to Shove, Marshall had rolled the two together. Expansion under the second head causes both increases and decreases in efficiency so that the most efficient size is where they just offset each other. Under the first head, all changes which increase efficiency must be related to increases in industry size alone. This means that increases in the size of firms are governed by increases in the size of the industry. (Shove refers us to Marshall, pp. 459–60 for confirmation.)

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Shove’s most telling point is that time is missing from Pigou’s and Robertson’s diagrams. They have overlooked the crucial point that the enlargement of the total volume of trade may increase the speed at which individual businesses can grow. His final coup de grace is that Marshall’s original trees of the forest analogy is no longer typical. Rather, most firms survive indefinitely, rising and falling with changes in the conditions of trade (i.e., over the cycle). Marshall had recognised this by changing ‘is’ to ‘was’ in later editions of the Principles as he could no longer ignore the implications of the rise of joint stock companies.

VII

20 years after its publication, Schumpeter credited Keynes with ‘a stroke of editorial genius’ for having organised and published ‘a symposium (D. H. Robertson, G. F. Shove, and P. Sraffa) on the matter (‘Increasing Returns and the Representative Firm [ ... ]) that is still eminently worth reading’ (Schumpeter 1994 [1954], fn 53, 1046). 50 years on, there are at least two reasons why not only the symposium, but also many of the original contributions to the controversy, are still – or perhaps once again – ‘eminently worth reading’. First, it is important not to consider the controversy exclusively from the perspective of the formal solutions and models that now form part and parcel of textbook chapters on imperfect competition and industrial organisation. From this technical point of view, the debate is archaic. However, these models reflect only some of the ideas raised in the debates. In particular, they ignore the questions raised by Sraffa and Young (and to a lesser extent also by Schumpeter) about the fundamental inability of marginalism to accomodate the analysis of dynamics and economic progress. The relationship between statics and dynamics, as well as methodological questions about the ‘realism’ of economic analysis, are as much at the heart of the controversy as the nitty-gritty detail and technicalities of the collective attempt to come to grips with the microeconomics of Marshallian price theory. Yet they received much less attention. Secondly, a fresh look at the less formal aspects of the controversy seems particularly pertinent in the light of the recent renewed interest of neoclassical macroeconomists in dynamic analysis and in the explanation of technical change and economic growth. Put briefly, the 1920s controversy effectively ended the reign of Marshallian economics as the dominant paradigm of economic thought. From this critical point of departure, the discussion moved in three main directions: the exploration of the potential of Walrasian (and Paretian) general equilibrium

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theory (Arrow-Debreu, Hahn), Sraffa’s alternative asymmetric theory of prices, distribution and reproduction, and endogenous theories of innovation, growth and development based on the principle of cumulative causation (Kaldor, Myrdal, Schumpeter, Veblen). While Sraffa’s 1960 contribution was largely ignored by the mainstream, the scope and usefulness of neoclassical general equilibrium theory was undermined by a number of developments. These include the results of the capital theory controversies of the 1950s and 1970s, the defeat of the micro foundations project based on aggregative econometrics exemplified in the impossibility to remove the arbitrariness of aggregate excess demands and the failure to provide a proof of the existence of a general equilibrium position for the case of imperfectly competitive economies (Rizvi 1994a, 1994b). More recently – and arguably at least partly in response to these developments – the ‘new classical’ macroeconomics and the new endogenous growth theory (EGT) emerged within the neoclassical general equilibrium paradigm. What both have in common, is serious amnesia as far as the impasse reached by general equilibrium theory in the 1970s is concerned. Pasinetti’s assessment of the fate of the 1950s and 1970s capital theory controversies equally applies to the other developments mentioned above: ‘Amnesia on such a vast scale can only be explained by more appropriate terms, such as “suppression” or “repression” or “removal”. This is, perhaps, one of the most intriguing examples of that process described by Kuhn [ ... ], through which dominant “normal” science suppresses, and thus ignores, the cases of contradiction and anomaly it bears within’ (Pasinetti 2000a, 412). The result is economic theorising that applies assumptions, such as the equality of demand and supply, and concepts, such as aggregate production functions, which in the past have been found to be either based on ad hoc reasoning or logically inconsistent ‘as if they were part and parcel of everyday economic reality, not the slightest doubt being shown about them’ (Pasinetti 2000a, 416). It is against this background that the less formal insights contained in the 1920s debates regarding the relationship between static and dynamic analysis and the (methodological) question of realism seem to us to be of renewed relevance for a critical assessment, in particular, of the latest foray of neoclassical general equilibrium theory into dynamic analysis, i.e. EGT. Before having a closer look at EGT, we briefly summa- rise the relevant issues raised in the controversy, mainly by Sraffa and Young. Sraffa’s critique of Marshall extends beyond his careful analysis of the limiting cases in which partial equilibrium analysis can accommodate

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an industry supply curve with variable costs to a fully fledged criticism of marginalism. In his 1925 paper, Sraffa’s central concern is with the restrictions a theory of prices based on marginalist reasoning imposes on the analysis of production and accumulation in that it generates an artificial requirement of a functional relationship between costs and output. There is a specifically methodological dimension to Sraffa’s critique of (Marshallian) marginalism. While this follows directly from his substantial objections to the symmetrical treatment of production and consumption it deserves separate attention. What Sraffa objects to repeatedly is the lack of realism and practical relevance of the marginalist ‘theory of competitive value’ (e.g. 1926, 535). The initial criterion by which to judge the validity of any theory is, of course, its logical con- sistency. If, however, the theory can be made logically consistent only for very exceptional cases, its practical relevance is questionable. This sums up Sraffa’s approach to Marshall’s ceteris paribus construction. His discussion of possible remedies or solutions as well as his (occasional) remarks on the way in which the particular constructions and premises underlying this approach have been arrived at do,6 however, suggest that there are two different meanings to this general charge of practical irrelevance. As Sraffa explicitly recognises, the fact that, for any practical purposes, partial equilibrium analysis is useless does not exclude the possibility that this deficiency is purely due to given scientific limitations in handling complexity. It follows that the realism of the approach might increase, without the need to fundamentally question or abandon essential premises such as the symmetry assumption, once the subject has advanced sufficiently ‘to extend the field of investigation so as to examine the conditions of simultaneous equilibrium in numerous industries’ (1926, 541). In this sense, Sraffa’s critique of partial analysis is an internal one. In another sense, however, the charge of a lack of realism goes much further. In the same passage in which he discusses the hypothetical possibility of general equilibrium analysis to resolve the problem of cost-output interdependencies, he adds that, in the case of increasing returns, this still leaves us with ‘the impossibility of confining within statical conditions the circumstances from which they originate’ (1926, 541). Sraffa then goes on to explore the possibilities of a theory of imperfect competition as a way out of the conundrum, but he abandoned this route shortly afterward and ultimately chose to develop an asymmetric theory of prices, distribution and reproduction. While there is much debate as to how and when exactly his (largely undocumented) change of mind came about,7 it is worthwhile pointing out that this later

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development is consistent with Sraffa’s more general misgivings about the reinterpretation of the laws of returns to accommodate the marginalist symmetry assumption. What worries him is the persistent reduction of ‘descriptive’ (qualitative) to ‘functional’ (physical) relations or curves through the introduction of the universal behavioural assumption of optimisation (substitution). Seen thus, his complaint that ‘[t]he fact that the ‘external economies’ peculiar to an industry, which make possible the desired conciliation between scientific abstraction and reality, are themselves a purely hypothetical and unreal construction, is something that is often ignored’ (1925, 347) amounts to an external critique of marginalism in general: the theory is unrealistic not simply in the sense that it is incomplete, but in the sense that the movements it can accommodate and the categories it can handle are generated by the requirements of the theory itself rather than by limitations of knowledge. Put differently, the boxes that are empty are not scientific abstractions that will, in due time, be filled with concrete contents but they are idealisations and can, therefore, never be filled. As regards Young’s 1928 contribution to the debates, the essential point to keep in mind is the difference between his treatment of increasing returns and ‘external economies’ and that provided by Marshall, as well as the difference of both their notions from Pigou’s ‘externalities’. It is clear that Marshall and Young had Adam Smith in mind when defining and specifying the concept of increasing returns, i.e., broadly speaking the idea that an increase in the extent of the market allows for a reorgan- isation of the productive process (division of labour) that, in turn, results in an increase in labour productivity. It is also clear that Young was, to a considerable extent, inspired by Marshall’s broad conceptualisation of the sources of increasing returns. Apart from his crucial insight that the division of labour also acts to expand markets, there are two main differences between Young and Marshall: first, Young explicitly rejects Marshall’s view that external economies arise within an industry. In his view, it is crucially important to recognise that such economies operate at an economy-wide level, i.e., that ‘industrial operations be viewed as an interrelated whole’ (1928, 539). Secondly, while Marshall explicitly excludes ‘any economies that may result from substantive new inven- tions’ (Marshall 1920, 460), thereby leaving open the door to a static interpretation of increasing returns (i.e., marginal increasing returns to scale arising from equiproportional factor changes and fixed input costs8), Young makes technological change one of the corner stones of his analysis of dynamic (non-marginal) increasing returns to scale. Ultimately, Young’s version of Sraffa’s critique of marginalism is that he

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emphasises (with Adam Smith) the complementary relation between factors of production and replaces the principle of partial factor variation with that of the cumulative nature of economic progress: not only are increasing returns of a dynamic and inter-sectoral nature (including technological change whether of a piecemeal or a radical kind, variable input costs and non-proportional factor changes), but diminishing returns to capital are unlikely ever to set in because capital investment embodies technical change. Neither Marshall’s half-heartedly ‘dynamic’ version of ‘external economies’ nor Young’s much more radical interpretation of them have much, if anything, in common with Pigou’s ingenious, but now totally static, definition of an ‘externality’ as repre- senting a divergence between private and social costs.

VIII

Having collectively forgotten about the conceptual problems arising from aggregation (of capital or of individual demand functions), modern neoclassical macroeconomics has rediscovered its interest in dynamic analysis, and in the explanation of technical change and ‘economic progress’ in particular. The most prominent representative of this new neoclassical foray into dynamic analysis is EGT. EGT represents a renewed attempt to unpack the Solowian ‘growth residual’ or ‘measure of our ignorance’ (Abramovitz 1956, 11). It aims to provide an endogenous explanation of technological progress within a (macroeconomic) general equilibrium framework.9 A central feature of this approach is its focus on the concept of knowledge, both as a factor of production and as a good. A principal claim to originality is that it can accommodate increasing returns. Analytically speaking, the main characteristic of EGT is the absence of diminishing returns to capital (Barro and Sala-i-Martin 1995, 39, Romer 1994, 13–14, Solow 1994, 49 and 2000, 351). In the Solow–Swan model, diminishing returns to both factors of production, (physical) capital and labour, together with constant returns to scale are instru- mental for the outcome of zero growth per capita in the long period. By contrast, in the story told by EGT, the rate of profits no longer exhibits a tendency to fall and, consequently, the major conclusion of the Solow– Swan model is reversed: An increase in the saving rate now can raise the growth rate of the economy permanently.10 Standard EGT identifies two main sources of endogenous growth: reproducible inputs (AK models), and market imperfections in the form of knowledge externalities arising from entrepreneurial efforts

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and technical change (R&D models). The first category of models was pioneered by Frankel (1962, see also Cannon 2000); a recent example is Romer (1986). Often supposed to encapsulate the basic message of EGT, these models are built on the assumption of linearity in the differential equation for the production of the factor capital (that stands for all accumulable factors of production) derived from the standard Solow– Swan production function and the equation for capital accumulation. There are two ways of interpreting these models: First, the absence of diminishing returns to capital can be attributed to the elimination of all non-accumulable factors of production from the production function. If, in the Solow–Swan model, diminishing returns to capital are the consequence of taking all other determinants of aggregate output as given implying that labour is non-accumulable in the sense that an increase in output will require a more intensive use of physical capital, the AK models redefine labour as human capital, merging it with physical capital into a single factor. In effect, this assumes an unlimited supply of high quality labour, and hence an exogenously given constant real wage and constant rate of profits independent of the amount of capital employed. Income distribution is thus technologically determined, and if the technology employed uses only self-reproducing inputs (i.e., the rate of capital depreciation is zero), perpetual motion is generated with its rate depending solely on the determinants of saving behaviour and the investment-saving mechanism. This interpretation has been suggested by Kurz and Salvadori (1998, see also Rebelo 1991, Cesaratto 1999 and Solow 2000 for similar interpretations). Secondly, AK models are a special case of Arrow’s ‘learning-by doing’ model (Arrow 1962) with a unity elasticity of learning, the difference being that the source of increasing returns at the aggregate level is specified by linking it to learning processes rather than simply attributing it to capital accumulation per se. In either case, the essential assumption that some externality from capital accumulation ensures constant marginal returns to the accumulable factor along the secular growth path by allowing proportional growth of all factors in efficiency units, has a definite drawback from the point of view of neoclassical distribution theory: In doing away with the assumption of scarcity (decreasing demand curves for capital and labour and partial factor variation), the long-term growth rate no longer equals the rate of growth of the labour supply and factors need no longer be rewarded at their marginal productivity. This also means that the compatibility of the long-term growth path with full capacity utilisation ensured by market forces is no longer guaranteed.

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R&D models can be traced back to Uzawa (1965); important recent examples are Lucas (1988), Romer (1990), Aghion and Howitt (1992 and 1998), Grossman and Helpman (1991a and 1991b). Basically, the scarcity assumption is reintroduced by distinguishing between accumulable and non-accumulable factors of production. The latter are standard physical capital and labour, while there are a number of interpretations of the former (human capital, education, ideas and design, etc.). For simplicity, we call this factor ‘knowledge’. Significantly, this additional accumulable factor of production is not scarce in the sense that it is con- ceptualised as being independent of the supply of labour. Knowledge is assumed to be a self-generating technology and enters the aggregate production function as a constant of some form (i.e., in terms of a constant share of labour time dedicated to knowledge generation, a constant amount of some form of knowledge or a constant increase in labour-augmenting technology generated by innovations). This essential assumption is combined with market imperfection models of technical change in which the consumption choices of a representative agent engaged in (infinite or overlapping-generation horizon) intertemporal utility-maximisation affect the rate of change of productivity and growth. Hence, the main difference between these models and the more abstract AK models is that technical progress is now endogenised in the sense that it is ‘a special resource-using, profit-seeking activity with its own technology’ (Solow 1997, 17). Consequently, the theoretical possibilities for generating productivity increases is almost without limit. Important models include variations on horizontal innovation (Romer, Grossman and Helpman) and vertical (or so-called Schumpeterian) innovation (Aghion and Howitt), but once individual (representative) choices affect the future productivity of resources there is, in principle, no limit to the factors that may be taken into account as affecting these choices. For our purpose, what is important is not, however, the detail of the specific outcomes of these models, but the basic analytical treatment of knowledge in standard EGT models. Knowledge as a factor of production is self-generating, i.e., not scarce in these models. As with the AK models, the purely analytical assumption of constant returns to the accumulable factor is what ensures that, in the long term, there is a balanced growth path. In terms of the economic explanation of balanced growth dynamics, R&D models are, however, solely concerned with increasing returns to scale rather than with the absence of diminishing returns to knowledge. Significantly, this shift in emphasis from the ‘theory of rent’ to the ‘theory of economic progress’ involves a reinterpretation of

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knowledge as a (semi-) private good. R&D models of endogenous growth explain increasing returns to scale as arising from externalities, now caused by market imperfections inherent in the process of innovation. What this means, differently from the AK models (where the nature of the externality is not specified), is that the externality is now identi- cal, in nature, with the accumulable factor of production. Knowledge does not just generate externalities, it is an externality. The notion of externalities (to be differentiated from the broader notion of external economies, i.e., dynamic (non-marginal) increasing returns to scale) has meaning only within the static neoclassical benchmark notion of efficient market allocation. Something is an externality because it is external to the market, that is, it cannot be transacted through the market and will therefore not be ‘properly’ compensated. An externality is the utility of a variable in the production function that is not ‘under control’ in the sense that it is not reflected in market prices. The efficiency of market allocation is, in turn, a function of two factors: that goods be private goods (i.e., their use is non-rivalrous) and that goods and factors be scarce. The analytical interpretation by EGT of knowledge as a factor of production would suggest that knowledge could also be seen as some form of pre-existing ‘public fund’ or ‘free good’ (for each period of production) on which standard factors of production can draw. However, what is emphasised in the context of the microeconomic conceptualisation of innovation processes is the fact that knowledge is not only nonrivalrous, but also partially excludable. This implies that market allocation is at least possible, if not efficient: ‘The feature that makes a good collective rather than private [ ... ] is the possibility of simultaneous enjoyment of the good, not the possibility of preventing others’ enjoyment. The first issue deals with the efficiency of market allocation, the second with its feasibility. Market allocation of public goods may indeed be feasible, but that does not make it efficient’ (Marglin 1984, 467–68). This emphasis on the possibility of ‘privatising’ knowledge is, however, difficult to reconcile with its presumed ability to generate constant returns to the accumulable factor (at the most abstract level, to itself). One of the consequences of introducing private property rights to allow for the private appropriation of returns from knowledge is that this will generate artificial scarcity, certainly with regard to the use (and possible reproduction) of knowledge, and most likely also with respect to its accessibility. This ‘paradox’ of the R&D models is easily overlooked in the fog created by the concept of an ‘externality’. This concept functions as a ‘bridge’ between the analytical dynamics of endogenous

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growth (knowledge as a factor of production) and the static analysis of allocative mechanisms (knowledge as a good). Hence, neither the AK models nor the R&D models of endogenous growth provide a substantial explanation of dynamic increasing returns to scale. In the first case, no attempt is made and the validity of neoclassical value (and distribution) theory is simply assumed.11 In the second case, the notion of externalities allows EGT to ignore the implications arising from its mathematical formulation of balanced growth dynamics in favour of an economic interpretation that opens the way to safeguard, if not competitive value theory, at least the institutional framework of a private market economy. What this discussion highlights is that Sraffa’s as well as Young’s (and Schumpeter’s) early misgivings about the ability of neoclassical value theory to account in a non-restrictive manner for processes of accumulation, first raised in the 1920s debates, has not been disproven by recent developments in neoclassical growth theory.

As pointed out, there are more damning criticism of EGT (regarding its use of aggregate capital) and of the new classical macroeconomics in general (concerning its disregard of the Sonnenschein–Mantel–Debreu results) that have arisen from later theoretical developments. The reason the 1920s debates remain (at least in part) modern in spirit is that they deal, in a few clear-sighted contributions, with one of the root causes of the present unsatisfactory state of affairs. The point is that even if, for the sake of the argument, we were prepared to ignore the regressive turn taken by the ‘new classical macroeconomics’, of which EGT is one important instance, – that is, even if we were prepared to overlook the fact that a microeconomic theory of general equilibrium is simply being interpreted as a macroeconomic theory – neoclassical theory is still unable to provide a substantial and consistent (non-ad hoc) explanation of growth dynamics. This root cause is that the logic of marginalism imposes a symmetry requirement for the analysis of the separate spheres of consumption and production that proves inadequate for understanding and concep- tualising the fundamentally dynamic processes driving economic organisation and progress. Attempts to maintain this symmetry create more empty boxes that cannot be filled. Thus, what matters from today’s point of view is Sraffa’s external criticism of the symmetry assumption that applies equally to partial and general equilibrium analysis: The

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‘knowledge factor’ of EGT is just as empty a box as the ‘representative firm’ – and for that matter the ‘representative agent or individual’ – not because our scientific tools are insufficient to deal with real complexi- ties, but because these theoretical constructions are idealisations generated by the requirements of the theory in the first place. The restrictive nature of these concepts lies in the fact that they assume what should be explained. Since the concept of the ‘representative firm’ was so essential to Marshall’s attempt to safeguard marginalist analysis in the sphere of production as well as to the 1920s debates that tried to come to grips with this attempt, it is worthwhile to briefly draw out the parallels between this concept and the role played by the ‘knowledge factor’, and ‘knowledge externalities’ in particular, in EGT. The debate about what exactly the representative firm stands for – that is, whether it is, in a metaphorical sense a biological or a mechanical concept – has recently flared up again (e.g. Hart 1996, Marchionatti 2000, Raffaelli 2000). For our purpose, there is no need to decide whether the ‘representative firm’ was meant to encapsulate the growth path of a firm or average (normal) industry expenses for a given aggregate volume of production in competitive conditions (especially given that Marshall himself maintained his usual ambiguity on this question). What is important is that Marshall considered this concept particularly relevant for an explanation of industries operating with increasing returns (Principles 1920: 376). It allows Marshall to ignore the impact of radical innovations at the aggregate (industry) level, and thus to reconcile firm disequilibrium with aggregate (industry) equilibrium by assuming that technical change will be of a such a gradual and piecemeal nature at the aggregate level that competitive equilibrium prevails. The device of blurring the difference between knowledge as a factor of production and as a good employed by EGT achieves exactly the same: it allows EGT to ignore the cumulative nature of embodied technical progress. In this case, the analytical ‘bridge’ between static and dynamic analysis is provided by the concept of ‘knowledge externalities’. The difference from Marshall is that increasing returns are not now the result of a proportional increase of all factors in a single industry, but of an economy-wide scale effect arising from the greater efficiency of given amounts of non-accumulable factors of production due to the larger use of a self-generating (accumulable) factor of production called knowledge. In neither case are Youngian dynamic increasing returns or, more precisely, the processes underlying accumulation, explained. As both Sraffa and Young pointed out, ‘[w]ith the extension

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of the division of labour, the representative firm, like the industry of which it is a part, loses its identity’ (Young 1928, 538, see also Sraffa 1930, 91–92). Similarly, EGT never actually explains the processes and mechanism that underlie the self-generating nature of knowledge as a factor of production. Rather, the analytical purpose of both the ‘representative firm’ and of ‘knowledge externalities’ is that they admit precisely those changes and movements that are a priori compatible with the theory. The cumulative nature of embodied technical progress is not among these.12, 13 The contributions to the 1920s debate by Sraffa, Young and Schumpeter can thus be seen to provide a common basis from which to re-appreciate the ‘the real source of the trouble, [i.e.,] the confusion between comparisons of equilibrium points and the history of a process of accumulation’ (Joan Robinson 1975, 34). It is also well known that they differed in one respect: both Young and Schumpeter took the view that static analysis was simply different from dynamic analysis – a separate world, so to speak – and chose to concentrate on the latter. Sraffa refused to leave the terrain of the theory of value and prices to the neoclassicals. The result has been the emergence of two different research agendas: Sraffa went on to provide us with a consistent, general and asymmetric theory of prices, distribution and reproduction that allows for an encompassing analysis of dynamics. Kaldor took up and developed Young’s suggestions for a theory of embodied technical progress and capitalist accumulation. Not altogether surprisingly, it was Schumpeter who has been ‘revived’ by EGT since, of the three authors mentioned here, he remained the most ambivalent with regard to the compatibility of his theory of development with marginalist analysis, an impression often – wrongly or rightly – reinforced by his almost unbounded admiration for Walras.14 On the basis of our discussion above, the most promising, and also the most challenging, task for the future is to reunite these two traditions of research. As Pasinetti has pointed out recently (2000a, 422), this would imply much more than a mere ‘tying together’ of existing insights. Even if we consider the recent developments of ‘new classical’ macrotheory to be unsatisfactory, it does not follow that the issues addressed are secondary: The social fabric of modern capitalism has changed considerably since the heyday of Sraffa and Kaldor. Whether or not the material basis of technical progress in capitalism has changed – whether or not, therefore, we are moving towards a knowledge-driven economy – and what exactly this entails are questions that deserve answers.

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Notes

† While this paper is a joint production, G C H is primarily responsible for the first draft of sections I to VI and S. B. for the first draft of sections VII to IX. S. B. would like to thank Richard Arena for very fruitful discussions that helped to clarify some of the arguments advanced. The usual disclaimer applies. 1. For an excellent exploration of the (indirect) role played by Knight in the 1920s controversy see Marchionatti (1999 and 2000, pp. 53–55). 2. For a detailed analysis of developments regarding increasing returns and external economies up to 1914 see Whitaker (1982). 3. Robbins is listed as being at New College, Oxford, but he writes as though he had already begun his long reign at the LSE. 4. See Kurz (2000) for a discussion of this in the context of Wicksell’s approach to capital theory over his life time. 5. This incidentally indicates how concentrating on partial equilibrium analysis takes attention away from the Classical and Marxian emphasis on the need to explain what determines the rate of profits of the economy as a whole in a competitive setting, a concept Sraffa was to return to in Production of Commodities by Means of Commodities (1960). 6. See Sraffa (1926, fn 1 541). In the 1925 article he makes the following remark on Marshall’s role in popularising the ‘fundamental symmetry’ of demand and supply forces: ‘It is only in the Principles of Economics that the theory appeared in its definitive form. The radical change that this work precipitated in the substance of the laws of variation of costs were largely unnoticed, while the theory of value based on the ‘fundamental symmetry’ of the forces of demand and supply, of which those laws are necessary premises, remained unchanged. In essence, the foundations were replaced without the building standing above receiving a single jolt from it all, and it was the great ability of Marshall which allowed the transformation to pass unnoticed. If he had given the originality of the new conception the prominence it deserved, perhaps it would not have been received without opposition. By presenting it as something well-known and lacking novelty, almost as a commonplace, he was able to have it accepted as a tacit compromise between the necessities of the theory of competition, which are incompatible with the decrease of individual cost, and the necessity not to stray too far from reality that (being far from perfect competition) presents numerous cases of individual decreasing costs of this kind’ (1925, 347). 7. Dardi (2000), based on recent studies of Sraffa’s archive papers, offers a comprehensive and convincing account. His essential point is that Sraffa turned his back on imperfect competition once he realised (shortly after his 1926 contribution) that this attempt to reconcile the theory of value with increasing returns meant that subjective and strategic considerations impervious to rigorous analysis would have to be given pride of place. This is not to say that Sraffa already had some form of alternative inter-sectoral simultaneous equilibrium analysis in mind when formulating his critique of Marshall (i.e., we agree with Mongiovi 1996 on this point), only that neither is there a reason to assume that there is no continuity at all between the Sraffa 1926 and Sraffa 1960: In our view, the bridge is that his critique of Marshall

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in particular (rather than of marginalism in general) reflects his continuous preoccupation with the analytical and practical consequences of the ‘formal symmetry’ of production and consumption, and his belief that a theory of prices built on marginalist reasoning is incapable of providing a comprehensive and consistent account of dynamic processes (production and accumulation) or capitalist dynamics for that matter. This, after all, also explains why he focused his attention on Marshall rather than any other marginalist. Finally, Pasinetti’s recent account of Sraffa’s three’ streams of thought’ in the period between 1926 and 1960, based on a recent ‘archival excursus’ also appears to us to support this broad perception of continuity in Sraffa’s intellectual preoccupation (Pasinetti 2000b, 141–43). 8. See also Marshall’s definition of increasing returns as a quantitative relation: ‘Increasing Return is a relation between a quantity of effort and sacri- fice on the one hand, and a quantity of product on the other’ (1920, 319). 9. Our focus here is on the basic analytical structure of the best-known EGT models. While we are well aware of Fine’s ‘paradox’ (Fine 2000, 250) – the discrepancy between very simple basic assumptions, on the one hand, and the sophistication of techniques and axiomatic modelling giving rise to complex outcomes of simple extensions of the basic models, on the other. (see also Pasinetti 2000a, 416) – our purpose in discussing EGT is a limited, illustrative best served by focusing on essentials. Useful surveys are in Revue Economique 1993, Economic Journal 1992, Scandinavian Journal 1992 and the Journal of Economic Perspectives 1994. Recent critical reviews are Cesaratto (1999), Fine (2000) and Banca Nazionale del Lavoro Quarterly Review 2000 (LIII). 10. Apart from its recognition of the importance to provide an endogenous explanation of technological change, this signals another important motivation of EGT: by reviving the idea that the rate of growth is dependent on saving decisions, it (re)opens the way for orthodox policies aimed at raising the saving rate. EGT is ‘pre-Solow-Swan’ in that it represents ‘a return to gen- eralised Domar, but with sophisticated bells and whistles’ (Solow 1994:49, similarly Pasinetti 2000a, 416, Cesaratto 1999, 783–85, Fine 2000, 251). However, the bells and whistles are important in one respect: EGT attempts to endogenise technological change by providing a microeconomic explanation based on ‘the optimising savings behaviour of representative individuals rather than upon a systematic savings rate taken as a parameter for the economy’ (Fine 2000, 248). Finally, another important role played by the focus on individual saving behaviour is that it allows us to focus ‘attention on the steady-state growth rate rather than on transitions between them’ since ‘it can be shown that lengthy transitions from one steady-state path to another occur only if very low intertemporal substitution in consumption is assumed[ ... ]’ (Kurz 1998, 48). 11. Significantly, where attempts at an economic explanation are made, this involves Marshallian internal-external economies (e.g. Romer 1986). 12. Aghion and Howitt say as much in a footnote on their treatment of (physical) capital accumulation: ‘There are many reasons for thinking that policies that favor capital accumulation will generally also stimulate innovation and raise the long-run growth rate’, adding in a footnote that ‘[a]nother reason, which does not however fit easily into the present framework, is that capital

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goods embody technologies’ (Aghion and Howitt 1998, 102). When EGT models have begun to tackle dynamic analysis more profoundly, ‘all [these] contributions [ ... ] have been introduced from outside neoclassical theory, even when – as has happened for those contributions that, by being published in the major (mainstream) journals have attracted most attention – they have been inserted into neoclassical theory’ (Pasinetti 2000a, 419). 13. A similar methodological argument applies to the use made of the concept of the ‘individual agent’ not just by EGT but the ‘new classical’ macroeconomics in general. This, though, does not relate to the analysis of the role played by technical progress in capital accumulation. Rather, as Pasinetti has pointed out, ‘[i]t becomes pure nonsense to speak of income distribution’ (Pasinetti 2000a, 418). For an excellent critique of the representative individual from the point of view of general equilibrium theory see Kirman (1992). 14. But see Arena and Raybaut (2001) for an assessment of the conceptual difference between Schumpeter and ‘Schumpeterian’ EGT.

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Whitaker, J. K. (1982), ‘Increasing Returns and External Economies: Some Early Developments’, paper presented to the Annual Meetings of the History of Economics Society, Duke University. Whitaker, J. K (1989), ‘The Cambridge Background to Imperfect Competition’, in Feiwel, G.R. (ed.) (1989), The Economics of Imperfect Competition and Employment: Joan Robinson and Beyond, London: Macmillan. Uzawa, H. (1965), ‘Optimum Technical Change in An Aggregate Model of Economic Growth’, International Economic Review, 6, 18–31. Young, A. (1928), ‘Increasing Returns and Economic Progress’, Economic Journal, 38, 527–42.

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... around 1955 I volunteered mentally ... to investigate whether [Marxian economics] was truly as lacking in merit as seems to be thought the case. (Mark Twain: Wagner is not as bad as he sounds) ... colleagues and friends thought it strange of me to waste good tennis time on so irrelevant a subject. (Samuelson, 1997a, p. 190)

Introduction and motivation

In his ninth decade Paul Samuelson said in an address to the Bank of Italy on 2 October, 1997, in which he compared the difference experiences of present-day American and European economies:

I lay stress on two main factors, both new and neither one predicted ... by any economists writing in the 1980s. One. In America we now operate ... the Ruthless Economy. Two. In America we now have A Cowed Labor Force ... two features ... interrelated ... [yet] ... somewhat distinguishable. (Samuelson, 1997b, pp. 66–67)

When I read this, I thought: ‘Karl, that you should have lived to see this hour’. So, when I was asked by Michael Szenberg to contribute to the

* Originally published in Michael Szenberg, Lall Ramratten and Aron A. Gottesman (eds), Samuelsonian Economics and the Twenty-First Century, New York: Oxford University Press, 2006, pp. 127–41.

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volume in honour of Paul’s 90th birthday, I thought it would be interesting and certainly appropriate to sketch Samuelson’s views on Marx as an economist, and any changes in them, over Samuelson’s working lifetime (to date, of course).1 As well as rereading some of his papers on Marx, I went through the references to Marx and topics related to him cited in the indexes of the various editions of Paul’s famous introductory textbook (since the 14th edition of 1992, Samuelson and Nordhaus) in order to trace both the waxing and waning over time of the space given to Marx, to see whether and, if so, how his views have changed. Because, with Prue Kerr (see Harcourt and Kerr, 1996; Harcourt, 2001), I have tried to explain to business people and managers what we think the essence of Marx’s legacy is, I have taken our evaluations as the backdrop against which to assess agreement and disagreement with Samuelson’s interpretations and evaluations. I hope he will find the chapter topic acceptable, not least because his contribution (Samuelson, 1997a), to volume I of the Festschriften for me was on Marx.

Overview of Samuelson’s views on Marx

Starting with the introductory text, Marx certainly receives mentions from the first edition (1948) on, but discussions of him and topics related to him – for example, Friedrich Engels, the labour theory of value (LTV), simple and expanded reproduction in the context of modern (now dubbed ‘old’) growth theory, the iron law of wages, and so on – really took off in the late 1960s and the 1970s: whole sections were devoted to the contributions of Marx, the economist. Furthermore, running through other chapters and discussions of other topics are references to, for example, Marx’s predictions about history, the nature of technical progress, and the role of the reserve army of labour. There are also sections discussing the economic principles of ideal socialist states vis-à-vis those of pure competitive capitalist economies and the like. In the ninth edition (1973) there is introduced for the first time an eight- page appendix on the rudiments of Marxian economics (pp. 858–66). Overall, Marx does not get that bad a press from Samuelson, either as told to beginning students or in his various papers2: it is true that in his 1961 Presidential Address to the American Economic Association, Samuelson damned Marx with faint praise – ‘From the viewpoint of pure economic theory, Karl Marx can be regarded as a minor post- Ricardian’ (Samuelson, 1962, p. 12; 1966b, p. 1510) – but he quickly backed off – a little – from this in later evaluations, for example, his article in the American Economic Review celebrating the centenary of the

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publication of volume I of Das Kapital. While ‘only the Good Fairies should be invited [to] such a birthday party ... , a great scholar deserves the compliment of being judged seriously’ (Samuelson, 1967; 1972a, p. 268). In the latest editions of the introductory textbook, while the number of references to Marx are much reduced, they are still not that unfavourable. Indeed, they are more favourable in the Samuelson and Nordhaus editions than in the latest ‘Australian Samuelson’ (Samuelson et al., 1992), some of whose authors are unrepentant cold war warriors! As is to be expected, Samuelson comes to his evaluation of Marx as an economic theorist par excellence. In an autobiographical essay published in 1972, Samuelson records that he felt he ‘was made for economics’. ‘To a person of analytical ability, the world of economics was his oyster in 1935 ... a terrain strewn with beautiful theorems begging to be picked up and arranged in unified order’ (Samuelson, 1972b, p. 161). The same enthusiastic approach characterises his writings on Marx. While he is careful never to put Marx down because Marx did not have access to the same technical and mathematical tools that Samuelson had, he nevertheless emphasises what he sees as lack of basic logic in many of Marx’s arguments, especially in relation to the labour theory of value. Samuelson takes his most severe stance in his well-known 1971 Journal of Economic Literature survey of the literature relating to the Marxian transformation problem. Marx argued that the pattern of labour values of commodities in the sphere of production and the pattern of competitive prices of production in the sphere of distribution and exchange are integral to each other, but that labour values are dominant in a logical sense because of the essential nature of the capitalist mode of production. It was necessary therefore to explain the nature of the deviations of one pattern from the other. In the survey, Samuelson gives a virtuoso performance in his technical discussion of the issues. He provides wonderful diagrams for teaching and the profession alike; he likens labour values of commodities to the outcome of mark-ups akin to value added taxes on the stages of their production, and prices of production to the outcome of mark-ups akin to turnover taxes, making clear the nature of the inevitable divergences of the relative prices of production from the labour values Marx claimed underlay them. Samuelson will have none of this. He argues that the essential solution to the transformation problem is contained in an eraser (a rubber to Australians and Limeys) with which to erase (rub out) the value scheme and, making a new start, replace it with the prices of production scheme – ‘the “transformation algorithm” is ... : “Contemplate two alternative and discordant systems. Write down one. Now transform by taking an eraser

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and rubbing it out. Then fill in the other one. Voilà! You have completed your transformation algorithm” ’ (1971; 1972a, p. 277).

The transformation problem

Generations of students introduced to economics through Samuelson’s textbook are told that the LTV is a theory of prices, the proposition that commodities exchange in proportion to the labour directly and indirectly embodied in them, and that as Smith knew – Ricardo too (but he did not want to) – once we leave Smith’s ‘early and rude state of society’, these labour values are both inaccurate and unnecessary in an explanation of the pattern of the relative (long-period) prices that a competitive situation will tend to establish. Moreover, labour is not alone the source of value and therefore price (a meaningless distinction to modern readers but not to the classical political economists (see Cohen and Harcourt (2003)) once land and capital goods come into the story. Then, we need a general equilibrium system in order to determine simultaneously both prices of commodities and payments for the services of the factors involved in producing commodities, so that labour values as defined by Marx are both misleading and unnecessary. No one has ever established, though many have tried, that Marx himself solved the transformation problem in an agreeable way, and Engels behaved badly in not paying up to those who anticipated or even improved upon Marx’s proposed solution after he and Marx had issued just such a challenge. Nevertheless, it is wrong to give the impression that Marx thought the LTV was a literal theory of the pattern of prices of production – we know (and Samuelson makes this explicit) that he had written volume III of Capital before the publication of volume I in which, probably understandably but nevertheless wrongly, the price system is identified with a simple LTV. What Marx claimed – this is well documented by, for example, William Baumol, Maurice Dobb, and Ronald Meek, as Samuelson acknowledges – was that he could predict the deviations of the prices of production around the underlying labour values once we considered more complicated models of the pure competitive capitalist mode of production in which organic compositions of capital differed as between industries even though rates of exploitation tended to be the same. Prue Kerr’s and my interpretation of Marx’s method of analysis and of the LTV is as follows. Marx came to political economy from philosophy; he was crucially influenced by the philosophical views of Hegel and the principle of dialectical change. The use of the dialectic led him always to look for internal contradictions both in systems of thought

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and in the working out of social processes. His organising concept when he came to political economy was the notion of Surplus – how it was created, extracted, distributed, and used in different societies. Marx looked at human history as succeeding epochs of different ways of surplus creation, and so on; he was determined to find by analysis of the power patterns of each the seeds of both their achievements and their internal contradictions and eventual destruction and transformation as, through the endogenous processes thus discovered, one form gave way to the next. The jewel in his crown was his analysis of capitalism. Marx’s method of analysis may be likened to an onion. At the central core underlying the overlapping outer layers of skin is the pure, most abstract yet fundamental model of the mode of production (Marx’s phrase) being analysed. All fossils from the past, all embryos of what is to come, are abstracted. The system is revealed in its purest form. Yet, the aim is to show that the fundamental characteristics and relationships thus revealed are robust – that they survive intact the complications provided by adding back (in analysis) the inner and outer layers of skin of the onion, that they still remain the ultimate determinants of what is observed on the surface. Thus, if we may illustrate from the transition from volume I to volume III of Capital, though there is little explicit mention in volume I of the (near) surface phenomenon of prices of production of volume III, the links from the underlying labour values of volume I are always at the forefront of Marx’s intention – not in the mainstream sense of providing a theory of relative prices (the mainstream interpretation of what the LTV is about) but in making explicit the link as a necessary part of the story of production, distribution, and accumulation in capitalism. Let us now see what we understand by the dreaded term LTV. As we said, the principal task Marx set himself was to explain the creation and so on of the surplus in capitalism. Naturally he linked this in capitalism with an explanation of the origin of profits and the determination of the system-wide rate of profits. He identified in previous modes the role of classes in each, one dominant, one subservient, with reference to the creation of wealth and so social and economic power, and the connec- tion of their relationship to the creation and so on of the surplus by a process of explicit exploitation of one class by another. For example, in feudalism, the process was obvious: its institutions and laws ensured that the lords of the manor could physically extract from the serfs part of the annual product, either by making the serfs work for set periods on the lords’ lands or because the serfs were tenants, requiring them to ‘hand over’ part of the product of the land which their labour had brought forth.

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When we get to pure competitive capitalism, such a process seems impossible. For one aspect of capitalism, purified in modern theory to become price-taking behaviour by all agents with prices set by the impersonal forces of the market, in classical and in Marx’s times more robustly specified as wide diffusion of power amongst individual capitalists and individual wage-earners, seems to make it impossible for individual capitalists to coerce free wage-earners into doing what they do not wish to do. They could always leave one and work for another, just as any one capitalist and his or her capitals could leave or enter any activity – hence the tendency for rates of profits to be equalised in all activities and the need to explain what determines the origin and size of the systemic rate of profits to which their individual values tended. Moreover, each free wage-labourer was paid a definite money wage for all the hours he or she worked. Under these conditions, how could exploitation occur or a surplus arise, and where did profits come from? Marx answered this by distinguishing between necessary and surplus labour time associated with the class relations of capitalist society. Capitalists as a class (subset into industrial, commercial, and finance capital) had a monopoly of the means of production and finance. Workers as a class, having only their labour power to sell, had to do as they were told in the workplace. As property-less, landless but free wage- labourers, whose creation was the by-product of feudalism giving way to capitalism, they had but one choice – either to work under the conditions established by the capitalist class or to withdraw from the system entirely, and starve. Therefore the working day could conceptually be split into two parts: the hours needed with the existing stock of capital goods, methods, and conditions of production to produce wage goods (necessary labour) and the rest (surplus labour) which was the source of surplus value in the sphere of production, and of profits in the sphere of distribution and exchange. Marx adopted the classical idea, especially Ricardo’s, that all commodities had an embodied labour value to explain how labour services, a commodity saleable just like any other in capitalism, would tend to sell at a price determined by its value. But human labour had the unique property that it would create more value – produce more commodities – than was needed for its own reproduction and this was embodied in the commodities corresponding to this surplus labour time. A subsidiary part of the story was that the actual operations of capitalism resulted in the waxing and waning of the reserve army of labour (RAL) – a much more suitable euphemism for the unemployed than the modern description of the same phenomenon as flexible labour

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markets – causing actual wages to tend toward (or fluctuate around?) their natural values (a purely classical story). But the main story was that while the surface phenomenon seemingly reflected fairness and efficiency – people being paid fully for what they did and all the hours they worked – this masked the underlying exploitation process arising from the situation of class monopoly. In the sphere of production there was a tendency to equality in the length of the working day (week, year) and intensity of work too. In the sphere of distribution and exchange, abstracting from actual (market) prices, there was a tendency for the prices of production to be such that a uniform rate of profits was created (the first great empirical generalisation of classical political economy) and for the profit components of the prices of production to be such as to constitute uniform rates of return on total capitals, similarly measured, in all activities. Many, including Samuelson, have come to see the ‘transformation problem’ as a sterile exercise and debate. Yet viewed in this way I think it makes sense, both in explaining a fundamental characteristic of capitalism and in illustrating the power of Marx’s method and approach. In order to show that anything classical political economy could do Marx could do as well and better, it was necessary to reconcile the pure theory of the origin of profits in the capitalist mode of production with the other major ‘finding’ of political economy – the tendency to a uniform rate of profits in all activities – and also to ‘explain’ what determines the size of the system-wide rate of profits. (Piero Sraffa, who had a deep knowledge of and admiration for Marx’s work, always spoke of the rate of profits, indicating that it was the system-wide concept which needed to be explained within the classical and Marxist system. As Luigi Pasinetti said of his own modern variant of the theory of the rate of profits, ‘It is macro-economic because it could not be otherwise’ (Pasinetti, 1974, p. 118)). The various conundrums arise because, while competition would ensure a uniform rate of exploitation (s/v, where s = surplus labour and v = necessary labour) in all industries because, as we have seen, free wage-labourers can always move from one occupation to another, there is nothing obvious or even not obvious in the forces of competition and their impact on technical progress to ensure that the corresponding organic compositions of capital (c/v) (with some license, the capital–labour ratios) should also tend to equality. But since a well-known Marxist result is that r = s/v/(1 + c/v), when all variables are measured in terms of abstract socially necessary labour time, if the LTV meant that commodities exchanged in proportion to their embodied labour mounts, there

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would not be a tendency, not even a long-run one, to equality of rates of profit (so measured) in all activities. Therefore it became necessary to explain the deviations of the prices of production with their uniform profit components around the underlying labour values, at the same time requiring the explanation to embrace the magnitudes of surplus value et al. in the sphere of production. This step is what the various proposed ‘solutions’ of the transformation problem were meant to establish – Sraffa’s is the most satisfying as Ronald Meek pointed out in his 1961 review article of Production of Commodities (Meek, 1961; 1967). Baumol in his comment (Baumol, 1974a) in 1974 on Samuelson’s Journal of Economic Literature survey (in which he was only concerned to establish what Marx really said, not that he was necessarily correct) set out a parable which I believe is consistent with our interpretation.3 Baumol (1974a, p. 153) wrote:

My contention is that Marx[‘s] interest in the transformation problem analysis as a sequel to his value theory was not a matter of pricing. [He] sought to describe how non wage incomes are produced and then how this aggregate is redistributed ... first ... substantive issue to Marx and the one he discusses in volume I, while the latter is the surface manifestation known to all bourgeois economists and which Marx only deigns to consider in volume III. The substance of Marx’s analysis can be summarised in a simple parable ... the economy is described as an aggregation of industries each of which contributes to a storehouse containing total surplus value ... Each industry’s contribution is proportionate to the quantity of labour it uses ... how society’s surplus value is produced. The distribution of surplus value from the ... storehouse takes place via the competitive process which assigns to each industry for profit ... an amount ... proportionate to its capital investment ... the heart of the transformation process – the conversion of surplus value into profit ... takes from each according to its workforce and returns to each according to its total investment (emphasis in original).

‘Values,’ adds Baumol, ‘are not approximations to prices nor a necessary step in their calculation ... one is a surface manifestation – the latter ... intended to reveal an underlying reality’ (p. 55). (Baumol (1974b) and Samuelson (1974a) subsequently had an exchange over Baumol’s comment. Samuelson, in effect, restated his original position and Baumol thought Samuelson’s reply was to an article he never wrote.)

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I would also argue that Piero Sraffa’s solution of the transformation problem (Sraffa, 1960), the nature of which is brought out beautifully in Ronald Meek’s illuminating review article of Sraffa’s classic (Meek, 1961; 1967), arises because Sraffa’s analysis is set in a context that accepts Marx’s general approach, even though he is critical of specific incoherence and his analysis is also directed at unfinished business. Meek showed the striking similarity between Marx’s, ultimately unsatisfactory, concept of the average industry and Sraffa’s precise account of the Standard system, Standard commodity and the relationship r = R (1 – w), where r = rate of profits, R = the maximum rate of profits in the Standard system (and actual economy) and w = share of wages in the Standard national income. ‘What both economists are trying to show ... is that the average rate of profits, and therefore the deviations of price ratios from embodied labour ratios, are governed by the ratio of direct to indirect labour in the industry whose conditions of production represents a sort of ‘average’ of those prevailing in the economy as a whole’ (Meek, 1961; 1967, pp. 176–78, emphasis added). Furthermore I would submit that, in general terms, Samuelson’s (1997a) address in Rome draws on the idea that it is the creation of the potential surplus in the sphere of production via the activities of the business class, now with international as well as national aims, that provides the backdrop to the realisation (or not) of profits and accumulation in the sphere of distribution and exchange. The person who has set this out extremely clearly is Donald Harris in his 1975 American Economic Review article and 1978 book. Joan Robinson, who was contemptuous of the LTV – she used to say in effect that she could not see why the LTV is needed to explain that chaps who owned the means of production and had access to finance could push around chaps who did not – nevertheless was at one with Harris on this interpretation. Samuelson also seems to be at one with Marx in recognising the internal contradictions in the operation of capitalism, whereby in the attempt through harsh monetary policy to create a larger potential surplus, the impact on Keynesian ‘animal spirits’ maybe such as to prevent the potential surplus becoming an actual surplus.4 Witness the disappointing rates of accumulation in many economies in recent years, relatively to those of the years of the Long Boom (or Golden Age of capitalism).

Samuelson on Marx: accumulation and growth

One of the headings in the 1960s and 1970s editions of Economics, for example, the eighth edition (1970, p. 718), at first sight may tend to

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cause raised eyebrows. Samuelson refers to ‘Ricardo–Marx–Solow models of capitalist accumulation!’ But on further reflection, Samuelson has made an incisive point here (marred only by his omission of Trevor Swan’s name from the list), as Bob Rowthorn, for one, has often argued. For if we ignore the adjectives involved, there is a family resemblance between, for example, the narrative that James Meade told in his neoclassical theory of growth (Meade, 1961) – itself explicitly based on Swan’s work, especially on the feedback between relative factor prices, choice of technique, and induced technical change – and the narratives that we find in volumes II and III of Capital. All these authors were striving toward what we now call a theory of endogenous technical change to which, of course, Samuelson has also made important contributions. From some of his earliest post-war writings, Samuelson has always been keen to test whether classical and Marxian conjectures are confirmed when the latest technical advances, for example, linear programming, are used to specify their ideas in models. Thus, we have here his papers in the 1950s on Marx and Ricardo (Samuelson, 1957, 1959a, 1959b, 1960, all reprinted in Samuelson, 1966a, Part IV), and later in his textbooks, on schemes of simple and expanded reproduction in Marx. Samuelson sees these classical and Marxian contributions as early forerunners of modern (now ‘old’) growth theory associated with Harrod (1939, 1948) and with Solow and Swan’s responses to the puzzles thrown up by Harrod’s contributions: that is to say, the analysis of steady states and their stability, especially the stability of the warranted

rate of growth, gw, itself, and the possibilities of gw finding its way to the

natural rate of growth, gn, if initially their values are not equal. But perhaps this is a misreading of what Marx principally had in mind. Claudio Sardoni (1981) has pointed out that Marx was asking the question: what conditions have to be satisfied in order that aggregate demand and its components match aggregate supply and its components, period by period, and that this did not necessarily imply advance in a steady state at a constant rate of growth. Marx did the analysis in terms of his three departmental schema, which Samuelson reproduces in his discussions. Marx asked in effect what conditions will ensure that each department either directly (i.e. from within itself) or indirectly can find markets for its output. The point is that by establishing the very special conditions involved, Marx illustrated how unlikely it was that a competitive capitalist economy, with each individual capitalist doing his/her own thing concerning production, employment, and accumulation, would lead to an uncoordinated collective outcome that satisfied the conditions for balance of both totals and compositions.

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The next question then was what would the nonfulfilment lead to as far as systemic behaviour was concerned? Marx thought it would create cycles and even crises. Joan Robinson once pointed out that Harrod had rediscovered this insight when he set out what were the consequences of the nonattainment of the warranted rate of growth, that is, of the actual rate of growth not immediately (and thus not ever) coinciding with the warranted rate.

Marx and Samuelson’s method and approach

Samuelson’s Italian address reflects, I think, a central characteristic of Marx’s procedure. As pointed out above (see pp. 87–88), Marx divided history into distinct periods classified by the specific way the surplus was created and so on. Allied with this insight was the view that each period has a dominant class, the nature of whose dominance determined the nature of surplus creation. Nothing in Marx’s account of surplus creation in capitalism is inconsistent with the view, shared by Samuelson in many of his comments in his textbook and essays, that capitalism was an extraordinarily dynamic mode of production which through accumulation and innovation raises productivity and at least potential standards of living over time. Those scholars who were more favourable to Marx in general, for example, Dobb, Meek, Sraffa, took this narrative for granted when they contributed their formal analysis of the characteristics of the two spheres of operation in capitalism. So too does Samuelson now, or so I interpret him as doing; but in his earlier discussions at least he seems not to have accepted the prior narrative. Partly, this may be due to Samuelson’s comparative advantage in presenting technical analysis, the establishing of pleasing lemmas and theorems; partly, it may be due to his being adverse to ‘the late Prof. Wildon Carr’s admirable motto ... “It is better to be vaguely right than precisely wrong.” ’5 Samuelson and Marx have some, perhaps many, things in common in their methodology and general approach. Both always steeped themselves in what had gone before, provided an internal critique, and then built their own often innovative but also synthetic contributions on the basis of their absorption of the writings of their predecessors. Samuelson is very careful to name predecessors of ideas, both in his textbook and in his articles, before he uses his powerful technical skills to see whether conjectures or less rigorous (in his terms) arguments of predecessors go through. Usually this proves to be most illuminating

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and helpful, especially in teaching, by extracting in a simple precise way the essence of some conventional doctrines. Though it runs the risk sometimes, as Keynes said of Russell, Wittgenstein, and Ramsey’s ‘gradual perfection of the treatment [of logic]’, of reducing it to ‘mere dry bones’ (Keynes, CW, Vol. X, 1972, p. 338); dry bones into which, moreover, life may not be breathed. That is to say, while the systems formed may be self-consistent, they are too far removed from the reality from which they started to serve to provide illuminations.

Increasing misery and skilled labour

Samuelson used his method and approach to criticise the ‘doctrine of increasing misery’ (Meek, 1967, p. 113) of Marx, whereby both the rate of profits tends to fall over time and the situation of the wage-earners to worsen, as one prediction too many. I suppose a riposte could be that if accumulation too were falling as a result so that unemployment was rising, both tendencies could be present. But this is not a convincing response, especially when we take, as we must in this context, long- term advances in technical progress into account. We must agree therefore with Samuelson’s contention that Marx was wrong and so must be content with being ‘just another genius’ as Meek (1967, p. 128) told us many years ago.6 Samuelson lists in many places as one of his criticisms of the LTV the incoherence introduced by the presence of skilled labour, in that a way of measuring its amounts in a common unit of socially necessary labour cannot be found or, at least, not in a manner that is independent of the wage structure which it ought to be one of the tasks of economic theory to explain. There are perhaps two comebacks. First, in order to make the point at a high level of abstraction that surplus labour and value are both the source of profits and vital determinants of their size, assuming homogeneous labour may be a legitimate simplification. Second, Rowthorn (1988) has set out an ingenious way of getting over the problem of reduction of skilled to unskilled labour. He follows a suggestion of Hilferding. This involves tracing back and adding together the amounts of socially necessary labour needed to produce skilled labour. Rowthorn provides an elegant formal exposition using simultaneous equations, which no doubt would warm Samuelson’s heart. It, moreover, allows technical advances to be incorporated and so ‘the reduction of skilled to unskilled labour can be performed quite independently of the level of wages and the analysis avoids Böhm-Bawerk’s charge of circularity’ (Rowthorn, 1980, p. 233).

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Conclusion

To conclude: Samuelson in his Italian Address has, to some extent anyway, accepted Marx’s desire to explain in simple pure (or ideal) models the various processes at work in capitalism then and now. He has also accepted some of the ingredients of Marx’s own explanations while not jettisoning his own use of more mainstream ingredients. I hope that I have not done Paul Samuelson any gross injustice in this evaluation. If I have, no doubt he will respond by emulating Marx (but, I am sure, much more politely) in the manner in which Samuelson at the end of his essay celebrating the Centenary of the publication of volume I of Capital describes Marx’s own likely response:

But this is a birthday party and I [PAS] approach the boundaries of good taste. Let me conclude by wishing that, like Tom Sawyer attending his own funeral, Karl Marx could be present at his own centennial. When the ‘the Moor’ rose to speak, how we would all pay for our presumptuousness! (Samuelson, 1967; 1972a, p. 275)

Notes

1. May I say how honoured and delighted I feel to have been asked to contribute to the volume? Though we do not agree on some issues, I have always admired Paul and his work. I have especially appreciated the graciousness he has always shown to me, despite – or perhaps because – of our differences over the years: the graciousness he also showed my mentor, Joan Robinson, despite their many intellectual battles over the years. He is a role model and an inspiration to our profession. (Alas, since I first wrote this, Paul has died at age of 93.) 2. I must admit, though, that after having done my homework, I looked again at Paul’s essay (1997a), ‘Isolating sources of sterility in Marx’s theoretical paradigms’, only to read that ‘at the end of the day 1 never could find analytical pearls to cast before orthodox economist swine ... Capital’s volume 2 tableaux of reproduction and balanced exponential growth [is] ... Karl Marx’s sole contribution to economic theory’ (p. 190) – and then only in a (very) special case! 3. Indeed, in my case – I cannot speak for Prue – I was very much influenced by Baumol’s comment and parable, as well as by many discussions with and the writings of my three former research students, Prue Kerr, Allen Oakley, and Claudio Sardoni on these and related matters. 4. Samuelson surely would also appreciate Tommy Balogh’s quip that ‘Monetarism is the incomes policy of Karl Marx’ (Balogh, 1982, p. 177). 5. This was quoted by Gerald Shove in his evaluation of Marshall’s Principles 50 years on from their publication. Shove thought it ‘might well have been Marshall’s’ as well (see Shove, 1942, p. 323).

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6. In fairness to Marx it may be said that all the major classical political economists thought there would be a long-run tendency for the rate of profits to fall, though they differed fundamentally in their explanations why.

References

Arestis, Philip, Gabriel Palma, and Malcolm Sawyer (eds) (1997). Capital Controversy, Post-Keynesian Economics and the History of Economics: Essays in Honour of Geoff Harcourt. Vol. 1. London: Routledge. Balogh, Thomas. (1982). The Irrelevance of Conventional Economics. London: Weidenfeld and Nicholson. Baumol, William J. (1974a). ‘The Transformation of Values. What Marx “Really” Meant (An Interpretation)”, Journal of Economic Literature, 12, pp. 51–61. Baumol, William J. (1974b). ‘Comment’, Journal of Economic Literature, 12, pp. 74–75. Cohen, Avi J. and G. C. Harcourt (2003). ‘Whatever Happened to the Cambridge Capital Theory Controversies?’ Journal of Economic Perspectives, 17, pp. 199–214. Harcourt, G. C. (2001). 50 years a Keynesian and Other Essays. London: Palgrave Macmillan. Harcourt, G. C. and Prue Kerr (1996). ‘Marx, Karl Heinrich (1818–83)’, in Warner (ed.), (1996), pp. 4355–62. Reprinted in Harcourt (2001), 50 Years a Keynesian and Other Essays. London: Palgrave Macmillan, pp. 157–68. Harris, Donald J. (1975). ‘The Theory of Economic Growth: A Critique and Reformulation’, American Economic Review, Papers and Proceedings, 65, 329–37. Harris, Donald J. (1978). Capital Accumulation and Income Distribution. Stanford, CA: Stanford University Press. Holten, Gerald. (ed.). (1972). The Twentieth-Century Sciences. New York: Norton and company incorporated. Keynes, J. M. (1972). CW, Vol. X, London: Macmillan. Meade, J. E. (1961). A Neo Classical Theory of Economic Growth. London: Allen and Unwin. Rev. new 2nd edn. 1964. Meek, Ronald L. (1967). Economics and Ideology and Other Essays: Studies in the Development of Economic Thought. London: Chapman & Hall Ltd. Pasinetti, Luigi L. (1974). Growth and Income Distribution: Essays in Economic Theory. Cambridge: Cambridge University Press. Rowthorn, Bob. (1980). Capitalism, Conflict and Inflation: Essays in Political Economy. London: Lawrence and Wishart. Samuelson, Paul A. Economics: An Introductory Analysis (1948–2004). New York, Toronto, London: McGraw-Hill Book Coy., 18 editions, from 1992 on (14th edition), co-authored with William D. Nordhaus. Samuelson, Paul A. (1966a). The Collected Scientific Papers of Paul A. Samuelson, Vol. I. (edited by Joseph E. Stiglitz), Cambridge, MA and London: The MIT Press. Samuelson, Paul A. (1966b). The Collected Scientific Papers of Paul A. Samuelson, Vol. II. (edited by Joseph E. Stiglitz), Cambridge, MA and London: The MIT Press. Samuelson, Paul A. (1971). ‘Understanding the Marxian Motion of Exploitation: A Summary of the So-Called Transformation Problem between Marxian Values and Competitive Prices’, Journal of Economic Literature, 9, pp. 399–431.

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Samuelson, Paul A. (1972a). The Collected Scientific Papers of Paul A. Samuelson, Vol. III. (edited by Robert C. Merton), Cambridge, MA and London: The MIT Press. (In the text the original dates of publication of papers by Samuelson are given but the page references, where relevant, i.e., collected, are to the three volumes of Collected Scientific Papers.) Samuelson, Paul A. (1972b). ‘Economics in a Golden Age: A Personal Memoir’, in Holton (ed.), (1972), The Twentieth-Century Sciences. New York: Norton and company incorporated, pp. 155–70. Samuelson, Paul A. (1974a). ‘Insight and Detour in the Theory of Exploitation’, Journal of Economic Literature, 12, pp. 62–70. Samuelson, Paul A. (1997a). ‘Isolating Sources of Sterility in Marx’s Theoretical Paradigms’, in Arestis, Palma and Sawyer (eds), Capital Controversy, Post- Keynesion Economics and the History of Economics: Essays in honour of Geoff Harcourt. Vol. 1. London: Routledge, pp. 187–98. Samuelson, Paul A. (1997b). ‘Wherein Do the European and American Models Differ?’ Address delivered at the Bank of Italy, October 2, 1997, Number 320, mimeo. Samuelson, Paul A. William D. Nordhaus, Sue Richardson, Graham Scott, and Robert Wallace. (1992). Economics. Third Australian Edition, 2 volumes. Sydney, New York: McGraw-Hill Book Company. Sardoni, C. (1981). ‘Multi-Sectoral Models of Balanced Growth and the Marxian Schemes of Expanded Reproduction’, Australian Economic Papers, 20, pp. 383–97. Shove, G. F. (1942). ‘The Place of Marshall’s Principles in the Development of Economic Theory’, Economic Journal, 52, pp. 294–329. Sraffa, Piero. (1960). Production of Commodities by Means of Commodities: Prelude to a Critique of Economic Theory. Cambridge: Cambridge University Press. Warner, Malcolm. (ed.) (1996). International Encyclopaedia of Business and Management. London: Routledge.

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We start by defining the interrelated phenomena of capital-reversing and reswitching.† Capital-reversing (the Ruth Cohen Curiosum) in that a less productive, less capital-intensive technique may be associated with a lower value of the rate of profits (r). Reswitching is that the same technique, having been the most profitable one for a particular set of values or ranges of values of r and the wage rate (w), could also be the most profitable at another range (or ranges) of values of r and w, even though other techniques were the most profitable at values of r and w in between. On the face of it these may seem rather esoteric results; so what is their significance? Opinions vary on this. To the mainstream protagonists in the debates about them, while they are interesting possibilities that need to be recognised and explored, their existence does not bear at all on the legitimacy of the mainstream approach to economic analysis, nor on its methodology. To the critics of the mainstream, the results are fundamental to a critique of two central planks of neoclassical analysis: first, the robustness of its central economic intuition and conjecture that price is an index of relative scarcity, an illumination as applicable in an explanation of the distribution of income as it is in an analysis of the demand for and supply of commodities; secondly, if this intuition is to be made operational in a theory of distribution it is absolutely necessary to find a unit in which to measure capital (as a whole) which is independent of distribution and prices so that it may be a determinant of why the economy-wide r is what it is in various situations. These

* Originally published in Mark Blaug and Peter Lloyd (eds), Famous Figures and Diagrams in Economics, Cheltenham, UK and Northampton, MA: Edward Elgar Publishing, pp. 191–98.

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concerns have been common to both ancient and modern controversies in capital theory. It was initially claimed, see Harcourt 1969; 1972, 3, that they sur- faced again in the most recent bout of controversy, that between the two Cambridges, in the writings of Joan Robinson (1953–54, 1956), David Champernowne (1953–54) and Robert Solow (1956) in the 1950s, and, most crucially, in Piero Sraffa’s classic, Production of Commodities by means of Commodities, Sraffa (1966). It was in Sraffa’s ‘Prelude to a critique’ that their central role was made most explicit. However, in 1975 (in the same issue of the Quarterly Journal of Economics in which Joan Robinson wrote of the unimportance of reswitching), Karaswarmy Velupillai (1975) pointed out that the phenomena themselves were to be found in another modern classic, Irving Fisher’s The Rate of Interest (1907). Fisher provided a numerical example of reswitching, which however, he regarded as odd (Fisher, 352–53). As Velupillai writes, ‘the usually perspicacious Fisher’ failed to note how detrimental it was to his approach and that it was not until [Sraffa (1960)] that we were able to see the various implications expanded to their logical consequences’ (Velupillai 1975, 680). For Joan Robinson capital-reversing was ‘a curious possibility’ which had been pointed out to her by Ruth Cohen (hence its title, the Ruth Cohen curiosum), Joan Robinson (1953–54, 106). Calling it also ‘perverse behaviour’, she writes that ‘a good deal of exploration [would be] needed before we can say whether [it] is a mere theoretical rigmarole, or whether there is anything in reality corresponding to it’. For Champernowne (1953–54), though such a possibility ‘may fit in well with our precon- ceived notions, there is no logical justification for [them. It is] logically possible that over certain ranges of the rate of interest, a fall in interest rates and a rise in [wages] will be accompanied by a fall in output per head and a fall in capital per head’ (118, emphasis in original). Champernowne therefore ruled out the possibilities by assumption so that he could establish the usual propositions of marginal productivity theory from his version of a well-behaved production function containing his chain-intex measure of capital as an argument. For Solow (1956a), capital as a scalar was a very special case which might be relevant for aggregative analysis which could be ‘rough and ready’ but was not needed in the full blown M.I.T. general equilibrium model. For Sraffa, however, it was a vital part of his prelude to a critique, entwined with his demonstration that it was not possible to find a unit in which to measure capital which was independent of distribution and prices (he had the Austrian period of production method specifically in mind) and the non-generality of a unique association between r and

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the technique of production chosen in the investment decision, nor of a downward sloping relationship between r and capital per person. All three authors in Cambridge, England produced diagrams of varying degrees of complexity to illuminate their analyses, Joan Robinson and Champernowne within the context of their analyses of accumulation and growth, and of the production function itself and its link to capital theory. At much the same time as the contributions of Joan Robinson and Champernowne were occurring, Pierangelo Garegnani, who was then a graduate student at Cambridge (Maurice Dobb and Sraffa were his supervisors and Lionel Robbins and Joan Robinson, his examiners), was writing his remarkable dissertation, ‘A problem in the theory of distribution from Ricardo to Wicksell’ (1959). In it he skirted around those particular puzzles without using any diagrams as he discussed the problem of the measurement and meaning of capital in both classical (Ricardo and Marx) and neoclassical theory (Walras and Wicksell). He subsequently went as a visiting Rockefeller Fellow to M.I.T. where he discussed explicitly capital-reversing and reswitching and their significance in a paper which was not published until 1970 in the Review of Economic Studies. (It was first submitted in April 1963 and a revised version was submitted in October 1968 – a relatively short gestation period for Garegnani, who later became Sraffa’s literacy executor, had already taken on Sraffa’s view on time in scholarly research.) The initial draft of the paper is referred to by Paul Samuelson in a footnote in his 1962 surrogate production function paper. Samuelson wrote that he was ‘grateful to ... Garegnani ... for saving [him] from asserting the false conjecture that [his] extreme assumption of equiproportional inputs in the consumption and machine trades could be lightened and still leave one with many of the surrogate propositions.’ Samuelson hoped that Garegnani ‘would publish his note showing why the surrogate case is so special’, Samuelson (1962, n.7, 198). In his 1962 paper Samuelson was defending Solow’s procedures in growth theory (1956b) and econometric work (1957) by attempting to establish the robustness of the results of simple models, the central core of which were captured in simple one-commodity all purpose models, and which illuminated through parables the behaviour of the more general and sophisticated M.I.T. model. The four neoclassical parables are negative associations between the rate of profits and (1) the capital–labour ratio, (2) the capital–output ratio, and (3) sustainable levels of consumption per head; and that in competitive conditions, the wage rate and the rate of profits (or the rental on capital) are measured by and measure their respective marginal products.

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As the force of Sraffa’s findings began to be realised by those criticised, reactions occurred, coming to a head in David Levhari’s 1965 paper in the Quarterly Journal of Economics in which he argued that Sraffa’s results – capital-reversing and reswitching (Levhari mixed them up, calling reswitching the Ruth Cohen Curiosum) could hold in an industry but not in the economy as a whole. This claim was immediately challenged first in public by Luigi Pasinetti at the 1965 Econometric Society meeting1 and then in a series of papers (including Pasinetti’s) in the Quarterly Journal of Economics symposium in 1966. The symposium was summed up by Samuelson who, along with many other contributions, used an example from Sraffa’s book (37–39) to bring out clearly why capital-reversing and reswitching and their cor- ollaries may occur. The basic Austrian concept of capital may be expressed by suppos- ing, first, that labour is applied uniformly through time to produce (say) a unit of output, and, secondly, the greater is the time taken for the final product to emerge, the smaller is the total amount of labour that is needed overall. It follows that at very high values of r (and low values of w), techniques which use more total labour but less time will be cheapest; while at low values of r and high values of w, the more time-intensive methods will be the most profitable. With discreteness in technology, one technique may be the most profitable for a range of values of r and w; but once it disappears, it could never reappear. Now compare two methods, A and B, in neither of which is labour applied uniformly over time. Suppose that A has a large input of labour at the beginning of its (two-period) gestation period, while B has a longer gestation period (three periods), a small input of labour at the start and a large one towards the end which is less than the total input in A. The total input of labour in A is less than in B. At very high values of r, interest on interest on interest on the cost of labour employed at the start of B must exceed the wage and interest costs of A so that A is preferred to B. At very low or zero values of r, A is preferred again because it has the lower total input of labour (and time!). At intermediate ranges of value of r where the investment of most of B’s labour for a shorter period than A’s at moderate values of r makes B’s total cost less than A’s so that B is preferred. In 1969 Amit Bhaduri set out the debates in the context of Marx’s analysis and Harcourt, in surveying capital theory in the second issue of the newly created Journal of Economic Literature, made section 3, ‘A child’s guide to the double-switching debate’,2 the central core of the survey. It is from the survey, Bhaduri’s paper and Garegnani’s paper that

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the most minimalist figures needed to illustrate the phenomena could be derived. We use here the figures in my survey and subsequent 1972 book, Some Cambridge Controversies in the Theory of Capital, to bring out the essential thrust of the two results. Both Joan Robinson and Champernowne discussed various possible measures of capital within a neoclassical framework. Joan Robinson settled for what she called real capital, capital measured in terms of labour time. It can only be a rigorous measure within a situation of overall economy equilibrium. For then, because all expectations have been and always will be realised, whether we look at capital as inputs in the gestation period accumulated forward at the ruling rate of profits or as gross profits yet to come discounted back to the present at the ruling rate of profits, we get the same answer. This basically Wicksellian result allows us to deduce the measure of real capital and Joan Robinson’s version of the production function. We consider a series of possible stationary states producing a consumption good in purely competitive environments exhibiting constant returns to scale, complete divisibility, where machines last forever. From the definition of equilibrium we may write: QwL− KwLr=+=(1 )t c (1) g r Where K = capital measured in term of the consumption good; w = wage rate in terms of the consumption good; r = rate of profits (= rate of interest);

Lg = input, t periods ago, of labour required to produce a unit of equipment, where t is the gestation period of investment;

Q = output of consumption good when Lc people work with a unit of equipment.

Capital in terms of labour time (KL) is therefore

t KL = K/w = Lg (1 + r) (2)

We then list all known techniques according to their outputs per head of the consumption good. Corresponding to each technique will be the relationship

t Q = wLc + rwLg (1 + r) (3) Q So that w = (1 )t LrLrcg++

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By ‘costing up’ all techniques for all possible values of r and their corresponding values of w and then relating output per head to real capital per head, we get Joan Robinson’s version of the aggregate production function (which came to be called the Pseudo production function because it consists of comparisons of equilibrium positions, not processes responding to different values of w (r) through accumulation) (see Figure 4.1). This is the familiar (then, not now) zig-zag construction in which the (horizontal) zigs show the dominance of a given technique for a range of w, r values while the (upward sloping) zags show different combinations of equi-profitable techniques for given values of w (and r). Champernowne used a chain index measure of capital, an ingenious construction whereby effects of price differences were, as it were, precipitated out of a value measure of capital to reveal an underlying index of ‘quantity’. This allowed him, together with other assumptions, to get rid of Joan Robinson’s ‘anomalies’ and re-establish traditional results – but neither his measure nor Joan Robinson’s were independent of distribution and prices. A by-product of these discussions are two further concepts which help in an understanding of the capital-reversing and reswitching results. They are Price Wicksell effects and Real Wicksell effects. A Price

0 KL

Figure 4.1 Joan Robinson’s pseudo production function

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Wicksell effect is the revaluation of the capital associated with a given technique when different w, r values are considered. A Real Wicksell effect relates to the different values of capital when one technique is preferred to another as different w, r combinations are considered. The approach to the principal diagrams is best done through the w-r relationship (or factor-price frontier) which is central to all these authors’ analyses. We use comparisons of stationary states of competitive two-sector models – a consumption good sector and a capital good sector. We conceive of the current state of technical knowledge as a book of blue prints of how to produce the two goods through inputs of the services of labour and capital. We then work out for each possible value of w (or r) what is the corresponding maximum r (or w) and plot them in w, r space. This allows an ‘envelope’ to be formed showing which is the dominant or equi-dominant technique for each possible value of w (or r). If the individual w, r relationships are straight lines (this was Samuelson’s ‘special case’ in his 1962 article), they form an envelope which allows all the neoclassical parables to go through. But if, as is usual, because the input ratios differ as between the two sectors, so that the w-r relationships are either convex or concave to the origin (or a mixture), the possibility of capital-reversing and reswitching arises. There may be a positive relationship between r and capital per person (however measured) and the same technique may appear on the ‘envelope’ separated by other technique(s) in between. We show all these propositions in the figures. First, in Figure 4.2, we show Samuelson’s straight-line w-r relationships. In the top quadrant we show the formation of the ‘envelope’; it may be noted that once a technique has had its day it never appears again; that as we consider lower values of r and higher values of w, the techniques with higher output per person and capital (however measured) dominate. In Figure 4.2, capital is measured in terms of the consumption good and, for each technique, the relative price is invariant to different values of r and w, see the bottom quadrant. We now show an example which exhibits both capital-reversing and reswitching. We consider a straight line w-r relationship and a concave- to-the origin w-r relationship, see Figures 4.3 and 4.4. (It can be shown, see, for example, Harcourt 1972, 135–36, that in this case, the lower is the value of r, the lower is the value of capital per person (however measured)). It may be seen in the top quadrant of Figure 4.3 that technique b is on the ‘envelope’ for two separate stretches with technique a dominant in between, that is to say, a reswitch has occurred. At the point on

the ‘envelope’ defined by wba and rba, capital-reversing is illustrated in

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w c

c b

a b

a 0 r r r bc ab a max

cb a k

Figure 4.2 Samuelson’s straight line w-r relationships with ‘envelope’ and capital values

that a lower output per head and capital per head of technique a dominates at a lower value of r, see the bottom quadrant. Capital is measured in terms of the consumption good in Figure 4.3. In Figure 4.4 we show the same example using real capital per person in the bottom quadrant, (we may note in passing that while it is impossible to have reswitching without capital-reversing, it is possible to have capital-reversing without reswitching, at least on the ‘envelope’ itself, see Harcourt 1972, 128–29.) We noted that while the neoclassical parables must hold in the straight-line case (basically because it is the equivalent of the one all- purpose commodity model from which the parables were derived in the first place, see Harcourt 1972, 141–44). This is no longer (necessarily) true once we have curved w-r relationships. We illustrate a counter example to parable 3 – a negative association between values of r and sustainable levels of consumption per head, a ‘dip’ in standard of living,

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w qb b b reswitching qa a wab

wba

0 rab rba a b r

capital reversing (or RCC)

bba k

Figure 4.3 Capital-reversing and reswitching with capital values

in Figure 4.5. (As we are considering stationary states, consumption per head is also output per head.) Because the debates in capital theory, as developed by Joan Robinson, Champernowne, Solow and Trevor Swan (1956), were placed in the wider context of the post-war development of growth theory, the results, as well as bearing on the two issues set out at the start of the essay, also were relevant to this wider context. From the start Joan Robinson dou- bled the validity of using comparisons of equilibrium situations to analyse actual growth processes. (In asides, in her earliest papers, she was

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w b qb b reswitching a

qa wab a

wba b

0 r r a br ab ba

capital- reversing (or RCC)

bba

Figure 4.4 Real capital-reversing and reswitching

output per qb man = sustainable steady-state consumption per head

0 rab rba r

Figure 4.5 ‘Dip’ in standard of living

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not always true to herself.) Champernowne admitted that equilibrium situations entailed Joan Robinson’s scepticism but hoped that at least slow and steady growth might be illuminated, especially when using his chain-index measure. Swan also at least flirted with this wish. Garegnani, however, increasingly distanced himself from Joan Robinson’s stance, arguing that precise, rigorous theory could only be done in a context of the long period where sustained and dominant forces were analysed, with the ephemeral effects of short-period happenings abstracted from. By contrast, Joan Robinson played down more and more the significance of the two phenomena which are the subject of this essay, so that her last article directly on them, Joan Robinson (1975), was entitled, as we noted, ‘The unimportance of reswitching’. She thought that such results were legitimate in a doctrinal debate to see whether in the most ideal and abstract situations certain conjectures were robust but that the idea that their existence could be tested empirically, as some critics argued, was a flawed misunderstanding of what was involved. In this Joan Robinson has been proved correct, notably by insiders, for example, Christopher Bliss (1975) and Franklin Fisher (1989). Cohen and Harcourt in their JEP retrospective article in 2003 and introduction to the Bliss, Cohen and Harcourt three volumes of Readings in capital theory (2005) concluded as follows:

Most capital controversies of the past 100 years revolve around two major problems: (1) integrating production into the scarcity theory of value and (2) integrating capital and time into equilibrium models. Two further commonalities exist in attempts to deal with these problems: (3) the panacea of one-commodity models in eliminating the tension between the physical and value conceptions of capital, and (4) the role of ideology and vision in fuelling controversy, especially when one-commodity models are not robust Bliss, Cohen and Harcourt (eds.) Vol. I, 2005 li–lii.

It is their contention that the two concepts examined and the diagrams to which they have given rise have played an essential if not dominant part in these debates.

Notes

† A draft (2009) of the chapter by Avi Cohen and myself in Mark Blaug and Peter Lloyd (eds) (2010).

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1. When I told Sraffa about Levhari’s result he immediately said ‘He’s wrong’ and suggested I should show why. I told him I could not do matrix algebra (Sraffa said he could not either) so he asked Pasinetti, who could, to show why. 2. Double-switching was first used before the more general phrase reswitching took over.

References

Bhaduri, A. (1969), ‘On the Significance of Recent Controversies on Capital Theory: a Marxian View’, Economic Journal, 79, 532–39. Bliss, C. J. (1975), Capital Theory and Distribution, Amsterdam: North Holland. Bliss, C. J., A. J. Cohen and G. C. Harcourt (eds) (2005), Capital Theory 3 vols. Cheltenham, UK, Northampton, MA: USA, Edward Elgar. Champernowne, D. G. (1953–54), ‘The Production Function and the Theory of Capital: a Comment’, Review of Economic Studies, 21, 112–35. Cohen, A. J. and G. C. Harcourt (2003), ‘Whatever Happened to the Cambridge Capital Theory Controversies?’, Journal of Economic Perspectives, 17, 199–214. Fisher, F. (1989), ‘Adjustment Processes and Stability’ In Murray Milgate, John Eatwell and Peter Newman (eds) The New Palgrave: General Equilibrium, New York: Norton, 36–42. Fisher, I. (1907), The Rate of Interest: Its Nature Determination and Relation to Economic Phenomena, New York: Macmillan Garegnani, P. (1959), ‘A Problem in the Theory of Distribution from Ricardo to Wicksell’, unpublished Ph.D dissertation: Cambridge. Garegnani, P. (1970), ‘Heterogeneous Capital, the Production Function and the Theory of Distribution’, Review of Economic Studies, 37, 407–36. Harcourt, G. C. (1969), ‘Some Cambridge Controversies in the Theory of Capital’, Journal of Economic Literature, 7, 369–405. Harcourt, G. C. (1972), Some Cambridge Controversies in the Theory of Capital, Cambridge: Cambridge University Press. Levhari, D. (1965), ‘A Nonsubstitution Theorem and Switching of Techniques’, Quarterly Journal of Economics, 79, 98–15. Pasinetti, L. L. (1966), ‘Changes in the Rate of Profit and Switches of Technique’, Quarterly Journal of Economics, 80, 503–17. Robinson, J. (1953–54), ‘The Production Function and the Theory of Capital’, Review of Economic Studies, 21, 81–106. Robinson, J. (1956), The Accumulation of Capital, London: Macmillan, 2nd edn 1965, 3rd edn 1969. Robinson, J. (1975), ‘The Unimportance of Reswitching’, Quarterly Journal of Economics, 89, 32–39. Samuelson, P. A. (1962), ‘Parable and Realism in Capital Theory: the Surrogate Production Function’, Review of Economic Studies, 39, 193–206. Solow, R. M. (1956a), ‘The Production Function and the Theory of Capital’, Review of Economic Studies, 22, 101–8. Solow, R. M. (1956b), ‘A Contribution to the Theory of Economic Growth’, Quarterly Journal of Economics, 70, 65–94.

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Solow, R. M. (1957), ‘Technical Change and the Aggregate Production Function’, Review of Economics and Statistics, 39, 312–20. Sraffa, P. (1960), Production of Commodities by Means of Commodities: Prelude to a Critique of Economic Theory, Cambridge: Cambridge University Press. ‘Symposium’ (1966), Quarterly Journal of Economics, 80, 503–83. Swan, T. W. (1956), ‘Economic Growth and Capital Accumulation’, Economic Record, 32, 334–61. Velupillai, K. (1975), ‘Irving Fisher on Switches of Techniques: a Historical Note’, Quarterly Journal of Economics, 89, 679–80.

9780230_284692_06_cha04.indd 111 12/23/2011 4:59:19 PM 5 Whatever Happened to the Cambridge Capital Theory Controversies? (2003)* with Avi J. Cohen

Preliminaries: Joan Robinson’s complaints

In ‘The Production Function and the Theory of Capital’, Joan Robinson (1953–1954, p. 81) wrote:†

... the production function has been a powerful instrument of miseducation. The student of economic theory is taught to write Q = f (L, K) where L is a quantity of labor, K a quantity of capital and Q a rate of output of commodities. He is instructed to assume all workers alike, and to measure L in man-hours of labor; he is told something about the index-number problem in choosing a unit of output; and then he is hurried on to the next question, in the hope that he will forget to ask in what units K is measured. Before he ever does ask, he has become a professor, and so sloppy habits of thought are handed on from one generation to the next.

Her article precipitated into the public domain the Cambridge controversies in capital theory, so-called by Harcourt (1969) because the protagonists were principally associated directly or indirectly with Cambridge, England, or Cambridge, Massachusetts. The controversies raged from the mid-1950s through the mid-1970s, with highly prominent protagonists – Piero Sraffa, Joan Robinson, Luigi Pasinetti and Pierangelo Garegnani in the ‘English’ corner, versus Paul Samuelson,

* Originally published in Journal of Economic Perspectives, vol. 17, no. 1, Winter 2003, pp. 199–214.

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Robert Solow, Frank Hahn and Christopher Bliss in the ‘American’ or neoclassical corner1 – slugging it out in first-rank journals such as the Quarterly Journal of Economics, the Review of Economic Studies and the Economic Journal. Blaug (1975) and Harcourt (1972, 1976) cover both sides of the controversy. The Cambridge controversies, if remembered at all, are usually portrayed today as a tempest in a teapot over anomalies involving the measurement of capital in aggregate production function models, having as little significance for the neoclassical marginal productivity theory of distribution as do Giffen good anomalies for the law of demand. When theories of endogenous growth and real business cycles took off in the 1980s using aggregate production functions, contributors usually wrote as if the controversies had never occurred and the Cambridge, England contributors had never existed. (Robinson and Sraffa obliged by dying in 1983.) Since neoclassical theory has survived and the challengers have largely disappeared, the usual conclusion is that the ‘English’ Cantabrigians were clearly wrong or wrong-headed. Did the Cambridge controversies identify ‘sloppy habits of thought’ that have been handed down to yet another generation, or were they a teapot tempest of concern now only to historians of economics? In this article, our aim is to put into perspective what was at stake and to argue that the controversies were but the latest in a series of still- unresolved controversies over three deep issues. The first is the meaning and, as a corollary, the measurement of the concept of capital in the analysis of industrial capitalist societies. The second is Joan Robinson’s complaint that equilibrium was not the outcome of an economic process and therefore an inadequate tool for analysing processes of capital accumulation and growth. The third issue is the role of ideology and vision in fuelling controversy when the results of simple models are not robust. Our aim is to convince the reader of the importance and relevance today of these issues, which, we predict, will inevitably erupt in future controversy.2

Round 1: meaning and measurement of capital in the scarcity theory of price

With the marginal revolution, Jevons, Menger and Walras developed pure exchange models in the 1870s that shifted the explanation of price away from the classical difficulty-of-production focus to the neoclassical focus on utility and relative scarcity. Adam Smith’s diamond–water paradox was no longer a paradox, since price was explained as proportional

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to marginal utility, which depended on scarcity. Neoclassical capital theory was the arena for extending the general principle of relative scarcity to explain all prices, including factor prices in models with production and time (Hennings, 1985). A common starting point for the neoclassical perspective on capital is a one-commodity Samuelson/Solow/Swan aggregate production function model:

Q = f(K, L),

where the one produced good (Q) can be consumed directly or stock- piled for use as a capital good (K). With the usual assumptions, like exogenously given resources and technology, constant returns to scale, diminishing marginal productivity and competitive equilibrium, this simple model exhibits what Samuelson (1962) called three key ‘parables’: 1) The real return on capital (the rate of interest) is determined by the technical properties of the diminishing marginal productivity of capital; 2) a greater quantity of capital leads to a lower marginal product of additional capital and thus to a lower rate of interest, and the same inverse, monotonic relation with the rate of interest also holds for the capital/output ratio and sustainable levels of consumption per head; 3) the distribution of income between laborers and capitalists is explained by relative factor scarcities/supplies and marginal products. The price of capital services (the rate of interest) is determined by the relative scarcity and marginal productivity of aggregate capital, and the price of labour services (the wage rate) is determined by the relative scarcity and marginal productivity of labour (L). The three parables of this one-commodity model depend on a physical conception of capital (and labour) for their one-way causation – changes in factor quantities cause inverse changes in factor prices, allowing powerful, unambiguous predictions like parable 2. But problems for these parables arise in more general models with heterogeneous capital goods. Heterogeneous capital goods cannot be measured and aggregated in physical units; instead, capital valuation must be used, as Wicksell (1911 [1934]) volume 1, p. 149) told us long ago. Their value can be measured either as the cost of production, which takes time, or the present value of the future output stream they produce. In either case, since the measure involves time, it presumes a rate of interest – which, in the simple model, is determined in a one-way manner by the quantity of capital. This additional circularity, or interdependence, causes Wicksell effects. Wicksell effects involve changes in the value of the capital stock associated with different interest rates,

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arising from either inventory revaluations of the same physical stock due to new capital goods prices (price Wicksell effects) or differences in the physical stock of capital goods (real Wicksell effects). In the Cambridge controversies, the problems created for the neoclassical parables by Wicksell effects were termed reswitching and capital- reversing. Reswitching occurs when the same technique – a particular physical capital/labour ratio – is preferred at two or more rates of interest while other techniques are preferred at intermediate rates. At lower values of the interest rate, the cost-minimising technique ‘switches’ from a to b and then (‘reswitches’) back to a. The same physical technique is associated with two different interest rates, violating parables 1 and 2. With capital-reversing, a lower capital/labour ratio is associated with a lower interest rate. In comparing two steady-state equilibrium positions, it is as though capital services have a lower price when capital is ‘more scarce’. Capital-reversing implies that the demand curve for capital is not always downward sloping, violating parables 2 and 3. Why do reswitching and capital-reversing occur? Samuelson (1966) provides the intuition using the Austrian conception of capital as time, so that the productivity of capital is the productivity of time itself. Figure 5.1 illustrates two techniques for making champagne using only labour and time (and free grapes). In technique a, 7 units of labour make 1 unit of brandy in one period, which ferments into 1 unit of champagne in another period. In technique b, 2 units of labour make 1 unit of grape juice in one period, which ripens into wine in another period. Then 6 units of labour shaking the wine produce 1 unit of champagne in a third period. The cost-minimising technique depends on relative factor prices. At high interest rates (r > 100 per cent), compounded interest on the 2 units of labour invested for 3 periods makes b more expensive, so a is chosen. At zero interest, only labour costs count, so a is also cheaper. But at interest rates between 50 per cent and 100 per cent, b is cheaper. The corresponding demand for capital curve would look like Figure 5.2. First, notice that at different values of r along any discreet downward- sloping segment, the value of the ‘capital’ is different for a physically unchanging technique, due to price Wicksell effects. Notice also that at lower values of r, the technique switches from a to b and then reswitches back to a, due to real Wicksell effects. And at a value of r just below 100 per cent, capital-reversing occurs as a lower r is associated with a lower capital/labour ratio. Because of Wicksell effects, in models with heterogeneous capital goods (or heterogeneous output), the rate of interest depends not only

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on exogenous technical properties of capital, but also on endogenously determined prices like the interest rate. The endogeneity of prices allows multiple equilibria, which complicates the one-way parable explanations of income distribution. Differences in quantities no longer yield unambiguously signed price effects. The power and simplicity of one- commodity models emanates from eliminating these endogenous price effects and measurement problems (Cohen, 1989). As early as 1936, Sraffa wrote a letter to Joan Robinson explaining the essence of this complication for neoclassical capital theory. Reswitching and capital-reversing were noted in the 1950s by David Champernowne (1953–1954) and Joan Robinson, but their full significance was realised only with Sraffa’s 1960 book. Sraffa (1962, p. 479) posed the key question regarding the meaning and measurement of capital: ‘What is the good of a quantity of capital ... which, since it depends on the rate of interest, cannot be used for its traditional purpose ... to determine the rate of interest[?]’3

t – 3 t – 2 t – 1 Q = 1 Technique a t L = 7

Q = 1 t – 3 t – 2 t – 1 Technique b L = 2 t L = 6

Figure 5.1 Samuelson’s (1966) example of Wicksell Effects in a simple Austrian model The cost equations are: Technique a 7L (1 + r)2 Technique b 2L (1 + r)3 + 6L (1 + r) When comparing costs, L cancels out for both techniques. Switchpoints occur when the costs are equal.

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100%

b 50% a

0 K / L Figure 5.2 Demand for capital (per unit of labour) in Samuelson’s (1966) example

Round 2: equilibrium and time, differences versus changes

Capital is fundamentally intertwined with issues of time. As Bliss (1975, p. 39) wrote: ‘One of the essential tasks of a theory of capital is ... to make clear why a purely static and timeless economic theory could not be adequate.’ Questions about the measurement of capital in aggregate production function growth models segued to questions about how, if at all, may dynamic processes of accumulation and distribution be analysed within an essentially static equilibrium framework. The neoclassical approach to capital commonly examines accumulation and rates of return using comparative statics exercises – including comparisons of steady-state growth paths – which reflect differences in initial conditions. Joan Robinson insisted that such comparisons did not reveal anything about processes of accumulation and growth, even their ultimate outcomes. She ‘frequently had occasion to complain of the inability of neoclassical writers to distinguish between a difference in the parameters of an equilibrium model and the effects of a change taking place at a moment of time’ (Robinson, 1980, volume 5, p. vii, emphasis in original). Her phrase ‘history versus equilibrium’ summed up this methodological critique. Joan Robinson (1974 [1980], p. 57) argued:

The real source of trouble is the confusion between comparisons of equilibrium positions and the history of a process of accumulation.

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We might suppose that we can take a number of still photographs of economies each in stationary equilibrium; ... This is an allowable thought experiment. But it is not allowable to flip the stills through a projector to obtain a moving picture of a process of accumulation.

Thus, many years ago, Joan Robinson (1953, p. 590) put back on the agenda what we now call path-dependent equilibria: ‘the very process of moving has an effect upon the destination of the movement, so that there is no such thing as a position of long-run equilibrium which exists independently of the course which the economy is following at a particular date.’ The title of her 1975 paper, ‘The Unimportance of Reswitching’ (Robinson, 1975a), reflected her belief that while reswitching and capital-reversing were problematic for neoclassical capital theory, her methodological critique was far more important. The neoclassical comparative statics exercises are clearly an abstraction, as are all economic models. The crucial question is whether the abstraction of comparative statics captures or obscures essential features of the accumulation process.4

Round 3: neoclassicals fight back: aggregate production functions – 1956–1966

Solow (1955–1956) immediately recognised that problems in measuring aggregate capital due to Wicksell effects could be overcome only ‘in very special cases’ and presciently commented that ‘the real difficulty of [capital] comes not from the physical diversity of capital goods. It comes from the intertwining of past, present and future ...’ He coun- tered with an empirical defense of one-commodity models as capturing the essential features of the growth process, a position held consistently to this day (Solow, 2000; but see also Pasinetti, 2000). With characteristic wit, he defends his choice by saying that ‘if God had meant there to be more than two factors of production, He would have made it easier for us to draw three-dimensional diagrams.’ Solow’s (1956, 1957) one- commodity production function model enabled him to measure the respective contributions of capital deepening and technical progress to growth in output per head over time. There were also three, less successful, theoretical attempts during the period from about 1956 to 1966 to fend off the problems of heterogeneous capital. First, Swan (1956) introduced into this round of capital controversies what came to be known as the metaphor of ‘putty capital’.

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He collapsed the ever present tension between capital as physically heterogeneous capital goods and as homogeneous funds flowing to equalise rates of return through his metaphor of meccano sets, the pieces of which can be timelessly and costlessly reshaped into appropriate quantities of ‘capital’ in response to the pull of relative factor prices. These metaphors originated with Böhm-Bawerk (1907, p. 280), who wrote in the context of his controversy with J. B. Clark: ‘Clark thinks of capital as a quantum of value ‘imputed’ in material goods. He strips off everything which may suggest material existence, and retains only a value jelly, existing eternally.’ Subsequent metaphors included ‘leets’ (steel spelled backward), butter, lego and putty (as opposed to clay). But all of these metaphoric feints, which effectively collapse heterogeneous capital goods into a one all-purpose commodity, only avoid, but do not solve, Wicksell’s problems. Solow (1963) re-entered the ring with a second theoretical response from the neoclassicals, attempting to avoid problems of capital by focusing on the rate of return on investment. In the tradition of Irving Fisher (1930), this was capital theory without any mention of either ‘capital’ or ‘its’ marginal product. Solow’s model addressed the question ‘what is the expected marginal return to a little more saving/investment in a fully employed economy?’ and served as the basis for empirical estimates of rates of return in actual economies. Pasinetti (1969, 1970) argued that neither Fisher’s nor Solow’s approach provided an intuitively satisfying explanation of the rate of return unless an ‘unobtrusive postulate’ that disallowed capital-reversing was slipped into the analysis, although Solow (1970) disputed this. The third theoretical neoclassical response attempted to extend the one-commodity results to more general heterogeneous commodity models. Samuelson’s (1962) attempt in the ‘surrogate production function’ included what appeared to be a variety of physically distinct capital goods, but he also assumed equal factor proportions in all industries, making relative prices independent of changes in distribution between wages and profits. As Samuelson subsequently realised, this effectively collapsed his model back to one commodity.5 By the late 1960s, Samuelson’s (1966, p. 568) judicious ‘Summing Up’ article admitted that outside of one-commodity models, reswitching and capital-reversing may be usual, rather than anomalous, theoretical results and that the three neoclassical parables ‘cannot be univer- sally valid’. On a theoretical level, the ‘English’ Cantabrigians won the round over aggregate production functions. Even neoclassicals like Hahn (1972, p. 8) showed no mercy for aggregate production functions,

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which ‘cannot be shown to follow from proper [general equilibrium] theory and in general [are] therefore open to severe logical objections’. They fell out of favour in the 1970s and early 1980s until their revival with endogenous growth and real business cycle theories.

Round 4: general equilibrium – 1966 and beyond

A final neoclassical theoretical counteroffensive moved into the arena of general equilibrium, with Bliss and Hahn replacing Solow and Samuelson as key protagonists. General equilibrium models sustain the general neoclassical principle of explaining all prices, including factor prices, by relative scarcity, in that prices are determined by preferences, endowments and technology, and factor returns are equal to or measured by disaggregated marginal products. Competitive equilibrium prices are also consistent with a Pareto-efficient disposition of output. The three parables, however – especially the inverse, monotonic relation between the quantity of capital and the rate of interest – were not rescued. Bliss’s 1975 book (which most observers consider the definitive neoclassical treatment of capital theory that ended the Cambridge controversies) examines this relation using intertemporal general equilibrium models to generate comparative static results.6 Bliss (1975, p. 85) concludes that ‘there is no support from the theory of general equilibrium for the proposition that an input to production will be cheaper in an economy where more of it is available.’ Sraffians get the same result (Schefold, 2000). The general equilibrium round was motivated by Samuelson’s quest, in his surrogate production function model, ‘to provide some rational- ization for the validity of the simple J. B. Clark parables’ (Samuelson, 1962, p. 194, emphasis in original). Clark (1891, p. 312) made straightforward one-way causal claims: ‘[A]s capital increases, while other things remained unchanged, interest falls and as the labour forces increases, if other things remain the same, wages fall.’ Samuelson’s failure prompted a ‘retreat’ to general equilibrium models. But the switch to general equilibrium, rather than saving the neoclassical parables, abandoned them for simultaneous equation price systems, and correct statements about factor returns being equal to or measured by disaggregated marginal productivities. Relinquished, however, were one-way causal claims about unambiguously signed differences in the interest rate associated with differences in the quantity of capital. As Hahn (1981, p. 128) put it, neoclassical general equilibrium ‘is not committed to a relative scarcity theory of distribution’.

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Moreover, the general equilibrium approach revitalised Joan Robinson’s concerns about equilibrium. Theoretical work, specifically, the disappointing SonnenscheinMantel-Debreu stability results, found no particular reason to believe in the stability of the general equilibrium outcome. In discussing these results, Hahn (1984, p. 53) wrote: ‘[T]he Arrow-Debreu construction ... must relinquish the claim of providing necessary descriptions of terminal states of economic processes.’ The lack of adequate stability results raised questions about the conception of equilibrium as the end of an economic process and the adequacy of comparative statics as explanations of the process of change following a parameter shift (Fisher, 1989; Ingrao and Israel, 1990).

And the winner is ... ?

Not so fast. The fight was far from over because there was no agreement on the significance of all of these results. The two sides used different criteria to judge the agreed upon outcomes of the controversy. The different criteria involve another ongoing and unresolved controversy: Has there been continuity in the evolution of economic theory from Adam Smith to the present or discontinuity, with the marginal revolution setting neoclassical economics on a different path from earlier classical political economy and Marx (Bharadwaj, 1978)? The ‘English’ Cantabridgians, who viewed Sraffa’s 1960 book as a revival of classical theory (Sraffa also edited Ricardo’s collected works), believe in discontinuity; most neoclassicals, in continuity. While neoclassical economics envisions the lifetime utility- maximising consumption decisions of individuals as the driving force of economic activity, with the allocation of given, scarce resources as the fundamental economic problem, the ‘English’ Cantabrigians argue for a return to a classical political economy vision. There, profit-making decisions of capitalist firms are the driving force, with the fundamental economic problem being the allocation of surplus output to ensure reproduction and growth (Walsh and Gram, 1980). Because individuals depend on the market for their livelihoods, social class (their position within the division of labour) becomes the fundamental unit of analysis. The potential rate of profits on capital arises from differing power and social relationships in production, and the realisation of profits is brought about by effective demand associated with saving and spending behaviours of the different classes and the ‘animal spirits’ of capitalists. The rate of profits is thus an outcome of the accumulation process.7 Joan Robinson argued – citing Veblen (1908) and raising the spectre

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of Marx – that the meaning of capital lay in the property owned by the capitalist class, which confers on capitalists the legal right and economic authority to take a share of the surplus created by the production process. Imagine for a moment the Cambridge controversies as a crucial thought experiment between two competing visions of economics. From a Cambridge, England, perspective, how much more decisive could the results have been? Capital theory was the arena for extending the principle of scarcity to explain the return to capital through marginal productivity. It was precisely on this key point of what determines the rate of return that the ‘anomalous’ reswitching and capital-reversing results occurred. The three neoclassical capital parables were shown only to hold in a one-commodity model (where classical theory was equally valid). All attempts to extend the parable results to more general models of heterogeneous goods failed, because Wicksell effects made the links between capital and interest bidirectional rather than one- way. Moreover, the stability literature of general equilibrium called into question the neoclassical vision of the lifetime utility-maximising decisions of individuals driving an optimal allocation of resources through the mechanism of prices as scarcity indexes. What else would it take to convince an economist to shift visions? For neoclassicals, none of this was obvious. For them, the controversies were conducted largely in neoclassical terms about neoclassical models. Reswitching and capital-reversing prompted much useful neoclassical work to try and refine the theory through secondary hypotheses and additional assumptions; Burmeister’s (2000) ‘regular economies’ are a good example. But there was little sense of a viable alternative vision waiting in the wings and even less sense that the neoclassical vision was at stake. Furthermore, neoclassical one-commodity models remained intact and fruitful as a basis for empirical work. As explicit simplifications, they could get by with the less rigorous notion that relative scarcities must be the empirically dominant determinant of relative prices, even if Wicksell effects are theoretically possible.8 Solow’s rationale for his empirical work has always been straightforward and frank: assuming that the data may be regarded ‘as if’ they were generated by the underlying simple model, the estimation procedures serve to provide orders of magnitude of the key parameters of the model. These ‘lowbrow’ models remain heuristically important for the intuition they provide, as well as the basis for empirical work that can be tractable, fruitful and policy-relevant.9

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In contrast, the ‘English’ camp was sorely lacking empirical work on the causes and impact of capital investment. The Cambridge, England, rejoinder on the empirical issue, baffling to many ‘American’ economists, was that the empirical likelihood of Wicksell-type feedback effects was beside the point. This was a theoretical debate, in which all models assume a given technology. Any time series or cross-country data would have different technology bases, which could be used to explain away any ‘contrary’ empirical tests by advocates on either side.10 According to Sraffa (1961, pp. 305–6): ‘Theoretical measures require absolute precision. Any imperfections ... were not merely upsetting, but knocked down the whole theoretical basis. ... The work of J. B. Clark, Böhm-Bawerk and others was intended to produce pure definitions of capital, as required by their theories. If we found contradictions ... these pointed to defects in the theory.’11 Another weakness on the ‘English’ side was that neither Joan Robinson nor her fellow Cambridge critics developed an alternative set of theoretical (as opposed to descriptive) tools that avoid her concerns about the limitations of equilibrium analysis. Or even where they have – we think here of Kalecki’s (1968) and Goodwin’s (1967) cyclical growth models, Kaldor’s (1996) cumulative causation processes and Pasinetti’s writings (1981, 1993) – the profession by and large ignored them. Thus, the two Cambridges could not agree about the significance of either the results nor the supporting evidence. Such disagreements about significance are an endemic problem in economic analysis. What is the meaning of a simple model whose clear-cut results are not sustained when restrictive assumptions are loosened? Is it nonetheless a valuable parable, useful heuristically and empirically to isolate crucial tendencies that get obscured in more general models? Or is it a mistake whose insights must be discarded while searching for a better explanation in a completely different direction? Blaug (in Caravale, 1976, p. 38) captured beautifully the typical neoclassical response to these questions: ‘The Cambridge School has this crazy idea, that if we have a rigorous simple theory, and then we discover one little flaw in it, that makes it more complicated to use it, we are finished. If we need five tyres to run a car instead of four tyres, we haven’t got a car any more, so we must give up everything and start using an aeroplane.’ With neither side able to deliver a knockout punch, issues of faith and ideology entered the ring with claims about the significance of the results and competing visions of economics. When one-commodity results are not robust in more general models, the lack of definitive

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evidence leaves room for ideology to play a role in the decision to hang on to a theory or vision. The intensity and passion of the Cambridge controversies were generated not by abstract technical questions about Wicksell effects, but by strong ideological undercurrents like the ethical justification of the return to capital and fundamental methodological questions about comparing deeply differing visions of economics and the extent to which equilibrium is a useful tool of economic analysis. Ideology and methodology, two subjects most economists would rather avoid, were pervasive undercurrents fuelling the controversies (Bliss, 1975, chapter 15).

Whence and whither the Cambridge capital theory controversies?

The Cambridge controversies were the last of three great twentieth- century capital theory controversies. Earlier controversies occurred at the turn of that century among Böhm-Bawerk, J. B. Clark, Irving Fisher and Veblen and then in the 1930s among Knight, Hayek and Kaldor. Similar issues recurred in all three controversies, and we will sketch some examples here.12 At the turn of the twentieth century, J. B. Clark and Böhm-Bawerk were consciously countering Marx’s theory that the return to capital involved exploitation of labour.13 Clark’s response, that wages and interest were simply prices stemming from the respective marginal products of labour and capital, is best expressed in his famous claim that ‘what a social class gets is, under natural law, what it contributes to the general output of industry’ (Clark, 1891, p. 312). Veblen disputed Clark’s marginal productivity theory, arguing instead that profit was institution- ally grounded in the social power of the capitalists that enabled them to appropriate the technological achievements of the society as a whole. Irving Fisher (1907) believed that the interest rate could be viewed as the equilibrium outcome of simultaneous equations. Böhm-Bawerk disagreed, arguing that simultaneous equations, while useful, involved circular reasoning and failed to provide a causal explanation of interest. Böhm-Bawerk, in defending an alternative Austrian vision of economics, sought a one-way explanation tracing interest determination back to the original physical factors of labour and land. In the 1930s controversies, Hayek insisted that decreases in the interest rate prompt more roundabout, capital-intensive production, even though he could not prove this in heterogeneous goods models. Hayek (1941, pp. 141–42) freely acknowledged: ‘All attempts to reduce the

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complex structure of waiting periods ... are bound to fail, because the different waiting periods cannot be reduced to a common denominator in purely technical terms.’ Kaldor and Knight agreed that the inverse, monotonic relation between capital intensity and the interest rate is not sustained in heterogeneous commodity models. They disagreed about which of their respective one-commodity models provided better insights. All three authors (Böhm-Bawerk and Veblen, too) expressed concerns about equilibrium. For example, Hayek’s (1941, p. 17) ‘dynamics’ emphasised historical causation over mutual interdependence. Kaldor (1938, p. 14) argued against comparative statics and for a ‘process of change’. Knight (1931, p. 210) believed that capital and growth are ‘long-run historical changes [that] must be faced as problems of historical causality and treated in terms of concepts very different from those of given supply and demand functions and a tendency toward equilibrium under given conditions.’ Looking back over this intellectual history, Solow (1963, p. 10) suggested that ‘when a theoretical question remains debatable after 80 years there is a presumption that the question is badly posed – or very deep indeed.’ Solow defended the ‘badly posed’ answer, but we believe that the questions at issue in the recurring capital controversies are ‘very deep indeed’. The Cambridge controversies were not a tempest in a teapot. We agree with Bliss’s conclusion (1975, p. 346) in viewing ‘the theory of capital not as some quite separate section of economic theory, only ten- uously related to the rest, but ... as an extension of equilibrium theory and production theory to take into account the role of time.’ Major issues – explaining (and justifying) the return to capital, visions of accumulation, limitations of equilibrium tools – were and are at stake. While many of the key Cambridge, England, combatants stopped asking questions because they died, the questions have not been resolved, only buried. When economists decide to delve again, we predict controversies over these questions will be revisited, just as they were time and again in the 80 years prior to the Cambridge controversies.

Notes

† The authors are most grateful to the editors of the journal, Mark Blaug, Christopher Bliss, Harald Hagemann, Heinz Kurz, David Laidler, Murray Milgate and the participants in seminars at Queens’ College, Cambridge, Brock University, the York/Toronto Workshop in the History of Economics, the History of Economic Thought conference at the University of New England, New South Wales, and the History of Economics Society meetings at Wake Forest University

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for their comments on drafts of this article. Thanks to Bonny Stevensen for creating the figures. The article drew a number of comments in the Journal of Economic Perspectives, to which the authors replied in the Fall issue, 17, 2003, 232–33. Our most serious sin was the omission of Luigi Pasinetti’s defence (Pasinetti 1966), of Sraffa against David Levhari’s claim (1965) that reswitching and capital-reversing could not occur at the systemic level. (Reference to Pasinetti’s article survived all but the final draft of our article.) 1. Sraffa, Joan Robinson and Pasinetti were at the University of Cambridge. Pasinetti and Garegnani had both been Ph.D. students there in the 1950s. On the ‘American’ side, Samuelson and Solow were at MIT, Hahn was actually at the University of Cambridge, and Bliss, though at Essex and then Oxford, had been an undergraduate and university teacher at Cambridge. 2. 2003 marks numerous anniversaries – the fiftieth of Joan Robinson’s original paper, the 100th of her birth and the 20th of Joan Robinson’s and Sraffa’s deaths. 3. Do similar valuation problems arise for heterogeneous labour? The crucial difference with capital is that there is no theoretical presumption that competition will equalise wages across different types of labour, in the way that rates of return will equalise (adjusted for risk) across investments in different capital goods/industries. To the extent that heterogeneous labour reflects differences in human capital, the valuation problems for the neoclassical parables due to interest rate changes are only exacerbated. 4. Joan Robinson also aimed this critique at her otherwise allies, Sraffa’s followers. Garegnani, for example, staunchly defends the view that rigorous results may only be established within a framework capturing the effects of persistent forces that characterise long-period positions – for example, the natural prices of the classical political economists, the prices of production of Marx and the long-period normal equilibrium prices of Marshall, the economist’s counterpart of the natural sciences’ traditional centres of gravitation. Garegnani’s (1970) insistence on using this long-period method is why Joan Robinson directly and Kaldor indirectly fell out with the Sraffians. 5. Ironically, Samuelson’s simplifying assumption also supported Marx’s labour theory of value! 6. Dixit (1977) said in effect that Bliss’s arguments made the quasi-rents of most previous writing on capital theory either zero or, with regard to those of Cambridge, England, negative. 7. In the neoclassical vision, rates of interest and profits are interchangeable terms. ‘English’ Cantabridgians differentiate profits (the return on investment in capital goods) from interest (the hire price of finance) and stress the theoretical importance of profits. Outside the one-commodity model, the price of capital’s services – its rental – is the rate of profits multiplied by the price per unit of capital goods (Harcourt, 1972, pp. 37–39). 8. Following Stigler, Cohen (1993) argues that the neoclassicals held a ‘93% scarcity theory of value’ after the Cambridge controversies, akin to Ricardo’s admission of a 93 per cent labour theory of value after the effects of capital were taken into account.

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9. There are important limitations on the empirical support for the neoclassical parables. Fisher (1971, p. 325) has shown that as long as factor income shares remain constant, an aggregate Cobb–Douglas production function will fit the data well ‘even though the underlying technical relationships are not consistent with the existence of any aggregate production function.’ 10. The recent endogenous growth literature on convergence has grown out of the lack of empirical evidence for the predictions of the neoclassical one-commodity model (that is, countries with higher capital/labour ratios should, but do not, have lower rates of return and growth). Joan Robinson’s (1975b, p. 54) comment presaged this literature: ‘In comparisons across countries, American industry is generally found to have the highest ratio of inputs per worker ... but I do not know that anyone has ever suggested that the rate of profit on capital is exceptionally low in the United States.’ 11. David Laidler suggests that Sraffa was ahead of his time in pointing out that neoclassical models based on an aggregate production function lack proper micro foundations, because this is a far more telling criticism of modern real business cycle theory, whose exponents make strong claims about such matters, than it was of 1950s vintage growth models. 12. Cohen and Harcourt (2005) provide a fuller treatment of these early episodes and more detail on all arguments in this paper. 13. For a short introduction to the earliest controversy in this journal, with a focus on Clark but some discussion of the other participants, see Persky (2000).

References

Bharadwaj, Krishna. 1978. Classical Political Economy and Rise to Dominance of Supply and Demand Theories. New Delhi: Orient Longman. Blaug, Mark. 1975. The Cambridge Revolution: Success or Failure? A Critical Analysis of Cambridge Theories of Value and Distribution, Revised Edition. London: Institute of Economic Affairs. Bliss, Christopher J. 1975. Capital Theory and the Distribution of Income. Amsterdam and New York: Elsevier North-Holland. Böhm-Bawerk, E. von. 1907. ‘Capital and Interest Once More: II. A Relapse to the Productivity Theory’. Quarterly Journal of Economics. February, 21:2, pp. 247–82. Burmeister, Edwin. 2000. ‘The Capital Theory Controversy’, in Critical Essays on Piero Sraffa’s Legacy in Economics. Heinz D. Kurz, ed. Cambridge: Cambridge University Press, pp. 305–14. Caravale, Giovanni, ed. 1976. The Cambridge Debate on the Theory of Capital and Distribution. Perugia: Università degli Studi di Perugia. Champernowne, David G. 1953–54. ‘The Production Function and the Theory of Capital: A Comment’. Review of Economic Studies. 21:1, pp. 112–35. Clark, John Bates. 1891. ‘Distribution as Determined by a Law of Rent’. Quarterly Journal of Economics. April, 5:3, pp. 289–318. Cohen, Avi J. 1989. ‘Prices, Capital and the One-Commodity Model in Neoclassical and Classical Theories’. History of Political Economy. Summer, 21:2, pp. 231–51.

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Cohen, Avi J. 1993. ‘Samuelson and the 93% Scarcity Theory of Value’, in The Dynamics of the Wealth of Nations. Growth, Distribution and Structural Change. Essays in Honour of Luigi Pasinetti. M. Baranzini and G. C. Harcourt, eds. London: Macmillan, pp. 149–72. Cohen, Avi J. and G. C. Harcourt. 2005. ‘Capital Theory Controversy: Scarcity, Production, Equilibrium and Time’, in Capital Theory. C. J. Bliss, A. J. Cohen and G. C. Harcourt, eds, in the series Critical Ideas in Economics. K.D. Hoover and M. Blaug, eds. Cheltenham, U.K.: Edward Elgar. Dixit, Avinash. 1977. ‘The Accumulation of Capital Theory’. Oxford Economic Papers. 29:1, pp. 1–29. Fisher, Franklin. 1971. ‘Aggregate Production Functions and the Explanation of Wages: A Simulation Experiment’. Review of Economics and Statistics. 53:4, pp. 305–25. Fisher, Franklin. 1989. ‘Adjustment Processes and Stability’, in The New Palgrave: General Equilibrium. John Eatwell, Murray Milgate and Peter Newman, eds. New York: Norton, pp. 36–42. Fisher, Irving. 1907. The Rate of Interest: Its Nature, Determination, and Relation to Economic Phenomena. New York: Macmillan. Fisher, Irving. 1930. The Theory of Interest. New York: Macmillan. Garegnani, Pierangelo. 1970. ‘Heterogeneous Capital, the Production Function and the Theory of Distribution’. Review of Economic Studies. July, 37:3, pp. 407–36. Goodwin, Richard M. 1967. ‘A Growth Cycle’, in Socialism, Capitalism and Economic Growth. Essays Presented to Maurice Dobb. Charles Feinstein, ed. Cambridge: Cambridge University Press, pp. 54–58. Hahn, Frank H. 1972. The Share of Wages in the National Income. London: Weidenfeld and Nicholson. Hahn, Frank H. 1981. ‘General Equilibrium Theory’, in The Crisis in Economic Theory. D. Bell and I. Kristol, eds. New York: Basic Books, pp. 123–38. Hahn, Frank H. 1984. Equilibrium and Macroeconomics. Oxford: Basil Blackwell. Harcourt, G. C. 1969. ‘Some Cambridge Controversies in the Theory of Capital’. Journal of Economic Literature. 7:2, pp. 369–405. Harcourt, G. C. 1972. Some Cambridge Controversies in the Theory of Capital. Cambridge: Cambridge University Press. Harcourt, G. C. 1976. ‘The Cambridge Controversies: Old Ways and New Horizons – or Dead End?’ Oxford Economic Papers. 28:1, pp. 26–65. Hayek, Freidrich A. von. 1941. The Pure Theory of Capital. London: Routledge. Hennings, Klaus. 1985. ‘The Exchange Paradigm and the Theory of Production and Distribution’, in Foundations of Economics. M. Baranzini and R. Scazzieri, eds. Oxford: Blackwell, pp. 221–43. Ingrao, Bruna and Giorgio Israel. 1990. The Invisible Hand: Economic Equilibrium in the History of Science. Cambridge: MIT Press. Kaldor, Nicholas. 1938. ‘On the Theory of Capital: A Rejoinder to Professor Knight’. Econometrica. April, 6:2, pp. 163–76. Kaldor, Nicholas. 1996. Causes of Growth and Stagnation in the World Economy: The 1984 Raffaele Mattioli Lectures. Cambridge: Cambridge University Press. Kalecki, Michal. 1968. ‘Trend and Business Cycles Reconsidered’. Economic Journal. June, 78: 310, pp. 263–76.

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Knight, Frank H. 1931. ‘Professor Fisher’s Interest Theory: A Case in Point’. Journal of Political Economy. April, 39:2, pp. 176–212. Levhari, David 1965. ‘A Nonsubstitution Theorem and Switching of Techniques’, Quarterly Journal of Economics, 79, pp. 98–105. Pasinetti, Luigi L. 1966. ‘Changes in the Rate of Profits and Switches of Techniques, Quarterly Journal of Economics, 80, pp. 505–17. Pasinetti, Luigi L. 1969. ‘Switches of Technique and the “Rate of Return” in Capital Theory’. Economic Journal. September, 79:315, pp. 503–31. Pasinetti, Luigi L. 1970. ‘Again on Capital Theory and Solow’s “Rate of Return” ’. Economic Journal. June, 80:318, pp. 428–31. Pasinetti, Luigi L. 1981. Structural Change and Economic Growth: A Theoretical Essay on the Dynamics of the Wealth of Nations. Cambridge: Cambridge University Press. Pasinetti, Luigi L. 1993. Structural Economic Dynamics: A Theory of the Economic Consequences of Human Learning. Cambridge: Cambridge University Press. Pasinetti, Luigi L. 2000. ‘Critique of the Neoclassical Theory of Growth and Distribution’. Banca Nazionale del Lavoro Quarterly Review. 53: 215, pp. 383–431. Persky, Joseph. 2000. ‘The Neoclassical Advent: American Economics at the Turn of the 20th Century’. Journal of Economic Perspectives. Winter, 14:1, pp. 95–108. Robinson, Joan. 1953. ‘Imperfect Competition Revisited’. Economic Journal. September, 63: 251, pp. 579–93. Robinson, Joan. 1953–54. ‘The Production Function and the Theory of Capital’. Review of Economic Studies. 21:2, pp. 81–106. Robinson, Joan. 1980 [1974]. ‘History Versus Equilibrium’, in Collected Economic Papers, Volume 5. Cambridge, MA: MIT Press, pp. 48–58. Robinson, Joan. 1975a. ‘The Unimportance of Reswitching’. Quarterly Journal of Economics. February, 89:1, pp. 32–39. Robinson, Joan. 1975b. ‘Reswitching: Reply’. Quarterly Journal of Economics. February, 89:1, pp. 53–55. Robinson, Joan. 1980. Collected Economic Papers, Volumes 1–5. Cambridge, MA: MIT Press. Samuelson, Paul A. 1962. ‘Parable and Realism in Capital Theory: The Surrogate Production Function’. Review of Economic Studies. June, 29:3, pp. 193–206. Samuelson, Paul A. 1966. ‘A Summing Up’. Quarterly Journal of Economics. November, 80:4, pp. 568–83. Schefold, Bertram. 2000. ‘Paradoxes of Capital and Counterintuitive Changes of Distribution in an Intertemporal Equilibrium Model’, in Critical Essays on Piero Sraffa’s Legacy in Economics. H. Kurz, ed. Cambridge: Cambridge University Press, pp. 363–91. Solow, Robert M. 1955–56. ‘The Production Function and the Theory of Capital’. Review of Economic Studies. 23:2, pp. 101–8. Solow, Robert M. 1956. ‘A Contribution to the Theory of Economic Growth’. Quarterly Journal of Economics. February, 70:1, pp. 65–94. Solow, Robert M. 1957. ‘Technical Change and the Aggregate Production Function’. Review of Economics and Statistics. 39:3, pp. 312–20. Solow, Robert M. 1963. Capital Theory and the Rate of Return. Amsterdam: North- Holland.

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Solow, Robert M. 1970. ‘On the Rate of Return: Reply to Pasinetti’. Economic Journal. June, 80:318, pp. 423–28. Solow, Robert M. 2000. ‘The Neoclassical Theory of Growth and Distribution’. Banca Nazionale del Lavoro Quarterly Review. December, 53: 215, pp. 349–81. Sraffa, Piero. 1936. Letter to Joan Robinson, October 1936. Archives, King’s College, Cambridge. Sraffa, Piero. 1960. Production of Commodities by Means of Commodities: Prelude to a Critique of Economic Theory. Cambridge: Cambridge University Press. Sraffa, Piero. 1961. ‘Comment’, in The Theory of Capital. F. A. Lutz and D. C. Hague, eds. London: Macmillan, pp. 305–6. Sraffa, Piero. 1962. ‘Production of Commodities: A Comment’. Economic Journal. June, 72:286, pp. 477–79. Swan, Trevor W. 1956. ‘Economic Growth and Capital Accumulation’. Economic Record. 32:2, pp. 343–61. Veblen, Thorstein. 1908. ‘Professor Clark’s Economics’. Quarterly Journal of Economics. February, 22:2, pp. 147–95. Walsh, Vivian and Harvey Gram. 1980. Classical and Neoclassical Theories of General Equilibrium. New York: Oxford University Press. Wicksell, Knut. 1911 [1934]. Lectures on Political Economy, Volume 1. London: George Routledge & Sons.

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There is a well-known tale of the mathematician who used to burst into tears at the sight of the binomial theorem ‘because it was so beautiful’.† I have had occasion to remark that, for the same reason, economists at least get lumps in their throats at the sight of the Cobb–Douglas production function because it has such beautiful properties: the exponents of K and L measure the respective shares of profits and wages in the national income; the marginal products of K and L measure the return to capital and the wage-rate; the marginal products themselves relate in a very simple way – proportionally, where the factors of proportionality have clear economic meaning – to their respective average products.1 Moreover, in growth theory the Cobb–Douglas allows simple measures of the contributions to growth in income per head of the respective growth in capital and labour. That is why, apart from Australian chauvinism/patriotism, I prefer Swan (1956) to Solow (1956). Trevor Swan’s algebra and diagrams neatly exploit the above properties (and more) to illuminate the processes being analysed and, in particular, show why competitive markets give out stabilising signals which guide Harrod’s warranted rate of growth towards equality with his natural rate of growth by affecting the choice

* Originally published in Philip Arestis, Michelle Baddeley and John S. L. McCombie (eds), Economic Growth. New Directions in Theory and Policy, Cheltenham, UK and Northampton, MA: Edward Elgar Publishing, pp. 17–35.

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of technique (as reflected in capital–output ratios). And when technical progress is included, as Solow (1957) showed, manipulation of the basic equations allows us to get simple measures of the respective contributions of deepening and (disembodied) technical progress to the growth in output per head over time.2 Finally, the same function (or its more sophisticated cousins, such as the constant-elasticity-of-substitution (CES) production function) have provided yeoman service in endogenous growth theory in recent years.

In this chapter I want to concentrate on another aspect of the Cobb– Douglas (and cousins) when used in applied, econometric work. It arises from the implicit assumption in much econometric specification that the short period and the long period may be collapsed into one. Then, for certain forms of the aggregate production function, exactly the same values of key parameters (and therefore variables) are involved, whether we are considering greater or lesser utilisation of a given stock of capital goods in the short run, that is, movements up or down what Joan Robinson called the utilisation function, or changing capital–labour and capital–output ratios as the result of differential rates of growth of accumulation and the labour force over time; in the latter process, there may not only be more capital per head and per unit of output but also better capital per head and per unit of output. Such a specification, allied with the assumptions of competitive market structures in the economy concerned and static expectations about the future courses of the prices of products and of the services of the factors of production (so that the simple marginal productivity implications of cost-minimising and profit-maximising may go through) allows the use of actual ‘real world’ statistics on wages, profits, capital and so on when fitting the specified model. This in turn allows the estimation of key parameters, for example, the exponents of the variables of the function, the elasticity of substitution of capital for labour; and so on. This methodological point was the basis of the criticism by Joan Robinson (1964) of, for example, Solow’s procedures in his 1963 de Vries Lectures (Solow, 1963). There, for much of the book, he used what she called a butter model in the theoretical sections and in the specifications of his empirical work. (The main objective of his lectures was to develop theoretical measures of the Fisherian social rate of return on investment in a number of different scenarios. He treated it as a technocratic measure – the potential return to a bit more saving/investment at full employment. He estimated its values in what was then West Germany,

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B9 L ‘long-period’ accumulation

short-run utilisation

0 B L

Figure 6.1 Short-period utilisation possibilities doubling up for long-period accumulation possibilities

and in the USA. As the resulting values were considerably greater than those of near riskless returns on certain financial assets, the inference was that more investment should be encouraged in both countries.) In the model, butter was both input (B) and output (B9) and the parameters of the model were usually functions of key ratios only, B9/L and B/L, where L was the potential work force. Ignoring technical progress for the moment, it did not matter whether the thought experiment was concerned with running up and down the short-period utilisation function with varying values of B9/L and B/L, or whether the changes in the values of B9/L and B/L were due to accumulation over ‘time’ so that B9/L was taken to be increasing as deepening occurred – ‘moving down the production function’ as Joan Robinson (1959; 1960) once put it. As I argued above, the ‘real world’ observations are, by definition, observed points on the existing utilisation functions of each instant of time, since, though in the long run we are all dead, the living are always to be found in the short run. Nevertheless, they were meant to serve as well as observations of long-period values taken from, in effect, the same production function, see Figure 6.1.

III

We do not have to go into the intricacies of the capital-reversal and reswitching debates and results (see, for example, Cohen and Harcourt,

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2003; Harcourt, 1972; 1995) in order to criticise the conceptual basis of this standard procedure.3 In 1963 Robin Matthews, who was then review editor of the Economic Journal, asked me to review Bagicha Minhas’s 1963 book, An International Comparison of Factor Costs and Factor Uses in which he exploited the properties of the famous CES production function, which came from an article written by Minhas jointly with Arrow, Chenery and Solow (1961) (hereafter referred to as ACMS). (I don’t suppose many PhD students have such illustrious research assistants these days.) The previous year I had published a review article – see Harcourt (1962; 1982) – of the late Wilfred Salter’s classic, Productivity and Technical Change (1960). Salter’s book (which grew out of his early 1950s Cambridge PhD dissertation, supervised by Brian Reddaway) was a pioneering account of vintage (putty-clay) models and their application at firm and industry levels. As a result of what I learnt from Salter then (I still learn today), I argued in the review of Minhas – see Harcourt (1964) – that though the data used in Minhas’s study came, of necessity, from existing short-run utilisation functions incorporating stocks of existing capital goods of different vintages associated with past accumulation, it was being used to estimate the values of the characteristics of what Salter called the iso-quants of the latest ‘best-practice’ techniques. These were, of course, the most up-to- date ways known in various industries of producing different levels of output (or output per unit of input if we assume that the ex ante production function – Salter’s iso-quant – exhibits constant returns to scale, defined by an isoquant in Q/I (= l) and Q/L (= i) space, see Figure 6.2). As a result of the choice of technique in each short run, the additions

0 i Figure 6.2 Salter’s ‘best-practice’ iso-quant, assuming constant returns to scale

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through accumulation at the margins of the stock of existing capital goods reflect the then ‘optimum’ point on the iso-quant. Minhas and his co-authors were interested in a number of theoretical and empirical possibilities. Paul Samuelson (1948) had shown for the case of two countries which produce the same two commodities, use the same factors of production and have the same production functions in each industry, but different factor endowments, that free trade will equalise their absolute and relative factor prices. He assumed constant returns to scale and that, at any given ratio of factor prices, the chosen ratio in one industry is always greater or less than the corresponding ratio in the other. Minhas et al. showed that if the two commodities are produced with two CES production functions that have different elasticities of substitution of capital for labour, there will always be a critical ratio of factor prices at which their factor intensities are equal, and above (or below) are reversed, requiring, for this case, modifications of Samuelson’s factor–price equalisation theorem. Minhas was concerned in his book to fit relationships derived from the CES production function to observed data that came from the same industries in different countries. He wanted to estimate the values of the elasticities and to see whether factor reversals occurred within the observed range of factor prices. He purported to show: that the CES production functions fitted the data well (if it is assumed that the efficiency of factors used between countries differed neutrally); that the elasticities were usually significantly less than unity (bye-bye, Cobb–Douglas); and that the critical price ratio was within the observed range of factor prices. For our present purposes we note that the ‘real world’ data were interpreted as points around the ‘best-practice’ iso-quant in each industry in different countries. The short period and the long period had again been collapsed into one another, where by long period, I mean the choices available at any moment of time for investment in ‘best-practice’ techniques, that is, the choice is made in the short period, but long-period factors are its dominant determinants.

I followed the review with an article (Harcourt (1966)), in which I said in effect: let us grant neoclassical economists every assumption they make in these investigations (I had ACMS and Minhas especially in mind), except that we allow for different vintages of ‘best-practice’ techniques to have been embodied by past bursts of accumulation into the total stocks of capital goods of the utilisation functions, which directly

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or indirectly had thrown up the data used by Minhas et al. in their estimates of the values of the elasticities of substitution. Will the equations they fitted to such data be ‘good’ fits, that is, will they provide unbiased estimators of the elasticities of substitution of the ‘best-practice’ iso- quants, which is their claim? ACMS found a close association between the logarithms of labour productivity (value added per unit of labour used) and money-wage rates in the same industries in different countries, which was confirmed by the appropriate regressions. If the values added and labour inputs used in their analysis are assumed to be observations from CES production functions, the regression coefficients, say b, in equations of the form:

log. q = log · A + b log. w + ε.

where q = value added per unit of labour, w = money-wage rate and ε = error term, can be shown to be estimates of the elasticity of substitution of capital for labour (see ACMS, 1961, 228–29; Minhas, 1963; Harcourt, 1972, 51–55). But do the estimates of b provide what is claimed for them? The answer is ‘no’ as I believe I established in the article, and which I think Solow (1997), in so far as I understand him, accepts. Having argued that all we ever have in the data they used are totals and averages, whereas we are really interested in relationships between marginal quantities, I made up a number of plausible (I hope) stories – Solow has his doubts – and examined how close, qualitatively, the estimates of b would be approached by the use of ACMS’s procedures. I then put quantitative orders of magnitude on the biases by using Minhas’s data and assuming that some of my stories had generated the data. I found biases both upwards and downwards, of considerable size, relatively to what was known to be their ‘true’ values.4 I shall not discuss the intricacies of the arguments between Anwar Shaikh (1974; 1980) and Solow (1974), because the other contributors to this volume have written extensively on it elsewhere and now here. But I do want to emphasise again the up-frontness of Solow’s account of his procedure in his 1957 article. He wrote: ‘It merely shows how one goes about interpreting time series if one starts by assuming that they were generated from a production function and that the competitive marginal product relations apply’ (Solow, 1974, 121). So he is not arguing that the world is Cobb–Douglas or CES or ... , only that if we view our observations as if they were observations thrown up by Cobb–Douglas et al., these are the orders of magnitude of the parameters which our econometric procedures allow us to estimate (this is

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where the Fisher, Filipe, Shaikh, Solow, and McCombie debates begin). Solow does add that if the findings implied that the share of wages was 25 per cent and of profits 75 per cent, he would be less willing to trust his findings.5

Finally, I want to discuss what in one sense is the heart of the matter, already touched upon in the claim that the short period and the long period have been collapsed into one. In the Cambridge–Cambridge capital theory debates there has been much discussion about the significance and relevance of the results, especially the phenomena of capital-reversal and reswitching, for economic theory and practice. One claim is that the answers to these queries is essentially an empirical one. Two champions of this view are the late Charles Ferguson and the late Mark Blaug. Here is Ferguson’s most (in)famous quote on the Cambridge critique in general and these issues in particular. It comes from his 1969 book.

[The validity of the Cambridge, England, criticism of neoclassical theory] is unquestionable, but its importance is an empirical or an econometric matter that depends upon the amount of substitutabil- ity there is in the system. Until the econometricians have the answer for us, placing reliance upon neoclassical economic theory is a matter of faith. I personally have the faith; but at present the best I can do is to invoke the weight of Samuelson’s authority as represented, for example, by the fly-leaf quotation [in Ferguson’s book]. (Ferguson, 1969, xvii–xviii)6

Blaug, as well as defending the faith, has also often asked what is the likelihood of capital-reversal and reswitching occurring in practice? Joan Robinson especially has argued that this is a nonsense question. The phenomena are discussed in theoretical terms, using either comparisons of long-period equilibrium stationary states or of steady-state equilibrium growth models. They are therefore concerned with differences – what is the long-period equilibrium stationary state associated with a given value of one of the distributive variables, either w or r, for a given set of possibilities now? The set may be either a smooth, contin- uously substitutable, neoclassical production function or an MIT et al. book of blueprints, with a different set of techniques for producing each commodity on each page, with the values of the coefficients – inputs

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per unit of output – in each industry ‘changing’ discretely from one page to another. (Joan Robinson’s use of this apparatus in her 1953–54 article led Solow (1955–56, 106) to quip: ‘Everyone who invents linear programming these days seems charmed by it.’) So no process of accumulation in actual historical time is being considered. Moreover, the book of blueprints (or the neoclassical production function, the equivalent of Salter’s iso-quant at the level of the economy as a whole) could be expected to change over time due to technical advances, so that time series observations are at best taken from a particular point on the ex ante production function on a particular page of the newest, latest book of blueprints. There is thus no way this information may be used to test whether capital-reversal or reswitching is contained in any one book of blueprints. So we are really concerned with a doctrinal debate concerning the coherence of neoclassical intuitions about the characteristics and functions of prices (and their relationship to the underlying scarcity theory of value) at a very abstract level of ‘high theory’ (no doubt child’s play for the heavies accustomed to publishing in Econometrica, QJE, Review of Economic Studies, JET, and so on7). We are reminded here of Piero Sraffa’s account of the different criteria that theory and statistical practice have to meet.

‘[O]ne should emphasise the distinction between two types of measurement ... the one in which the statisticians were mainly interested. Second ... measurement in theory. The statisticians’ measures were only approximate ... the theoretical measures required absolute precision ... If we found contradictions, ... these pointed to defects in the theory. (Sraffa, 1961, 305)

Just as Ricardo was chasing a Will-o’-the-wisp when he searched for an invariable standard of value which would allow him to precipitate out the effects of changes in distribution and technical progress from a measure of the surplus available for accumulation over time, so, too, is Blaug’s and Ferguson’s search for empirical findings to provide answers to their questions a similar chase, they are just not there to be found. Stiff cheddar, but there it is.

Or is it? I once suggested an alternative approach, see Harcourt (1966, 233; 1982, 145), which led one of the ACMS gang of four to query

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whether I was fooling/kidding. It was the following: an article by Salter (1962), published after his tragically early death, was concerned with an empirical enquiry using a questionnaire to ask businesspeople in different industries how much and what type of investment they would do if they wanted to increase their present capacities by a given amount. My suggestion was to test the ACMS hypothesis by asking this question of businesspeople in the same industries but different economies with different actual (and expected) relative factor prices. The resulting observations, on ACMS’s methodology, could be points on Salter iso-quants. If the same techniques were found to be associated with widely different relative factor prices (with other techniques chosen in between), that would be some evidence of the empirical presence of reswitching in the book of blueprints of the current ‘best-practice’ techniques in a situation in which it would be sensible in principle to test for its presence empirically.8 What is to be done? Must we despair, in the light of the implications of the capital theory controversies, concerning the possibility of doing useful work using econometric techniques? I do not believe so, though I do think Joan Robinson’s critique bears on the underlying conceptual foundations of much current econometric work. Basically, the world is still viewed in a Marshallian, even Pigovian manner (when it is not being viewed as the outcome of the decisions of Frank Ramsey’s benevolent dictator). There is a stable (?) long-period equilibrium position ‘out there’ which both constrains and guides short-run movements as though it were a powerful magnet holding them in check, drawing the short-run values of prices and quantities toward itself and its own corresponding long-period values (or, at least, making the former fluctuate around the latter). So actual observations may be interpreted as coming from (and approximating to) short-period flow equilibrium values, each corresponding to a station on the way to the long-period equilibrium cross.9 Now certainly this is the structure of Marshall’s theory, but he never claimed that it was even an approximate description of the world. He was describing tendencies towards long-period equilibrium, providing that none of the background fundamentals of the initial situation were allowed to change once the process of observing short-period equilibrium flows was started (theoretically, of course). He made it absolutely clear that in actual historical time, the vital components of the initial position could change, especially knowledge of the best ways of doing things.10 This is where Salter comes into the discussion, arguing that, analytically, it is reasonable to suppose that the arrival of new ideas may be treated as if they arrive discretely, so that the accumulation

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process may embody the current ‘best-practice’ ideas through investment at the margin of the existing stock of different vintages. This is a far smaller order of abstraction to have to accept than what I take to be implied in cointegration procedures. But suppose we follow another tack, using the seminal ideas of Richard Goodwin11 and Michal Kalecki concerning the indissolubility of trend and cycle. Kalecki’s succinct (as ever) statement of the approach is the following: ‘In fact, the long-run trend is only a slowly changing compo- nent of a chain of short-period situations; it has no independent entity’ (Kalecki, 1968; 1991, 435).12 An implication for theory of the indissolubility of trend and cycle is that the separation of the factors responsible for the existence (unique- ness or multiple) of equilibrium from those responsible for stability (local and global) is unacceptable, an insight becoming more and more recognised by the mainstream with the examination in recent years of path-dependent models (already signalled by Nicky Kaldor in 1934 and Joan Robinson in 1953, probably earlier). This is, of course, matched by Kalecki’s work and Goodwin’s 1967 classic, ‘A growth cycle’. So the role for Classical/Marxist centres of gravitation13 in theory may be adjusted to the conjecture that actual observations may be regarded as near enough to those associated with short-period macroeconomic rest states14 to allow econometric methods to be used to fit them in, say, time series analysis. Here I leave it for the Andrew Harveys of this world to take over.15

Appendix 1: The main issues and results of some Cambridge controversies in the theory of capital

The debates between the two Cambridges (England and MA) occurred principally between the 1950s and the 1970s. They started with Joan Robinson’s 1953–54 article ‘The production function and the theory of capital’, and really hotted up with the publication in 1960 of Piero Sraffa’s classic, Production of Commodities by Means of Commodities. They ‘ended’ with the publication of Christopher Bliss’s 1975 volume, Capital Theory and the Distribution of Income, as a result of which Avinash Dixit (1977) pronounced the quasi-rents of previous writings on the issues to be either zero or, in the case of the Cambridge, England, protagonists, negative. That the ‘end’ may have been prematurely dated is argued by Harcourt (1995) and Cohen and Harcourt (2003). With hindsight, we may say that the issues related not so much to the measurement of capital as to its meaning. This carried with it further

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questions about how the accumulation process in capitalist society may best be envisaged and so modelled. There are two principal competi- tors: On the one hand, Marx–Keynes–Schumpeterian ruthless, swash- buckling entrepreneurs and capitalists, for whom profit-making and accumulation are ends in themselves, call the tune to which all other classes in society must dance. On the other hand, the consumption and saving behaviour of lifetime utility-maximising agents dominates and all other actors and institutions in the economy, firms, the stock exchange, for example, are but the agents through which they achieve their ends. To both views must be coupled the question: what is the appropriate method with which to analyse the processes of accumulation, distribution and growth? The first question posed historically was: can we find a technical unit in which to measure capital that is independent of distribution and prices? For, if we are to use a demand and supply approach to explain the origins and sizes of the distributive variables – the rate of profits (r), the wage rate (w) – and distributive shares; if we are to make explicit the intuition of the supply and demand approach that price is an index of scarcity; and if we accept that in a competitive situation there is a tendency to equality of rates of profit in all activities so that we have to explain the origin and size of the overall, economy-wide r; then we need to know before the analysis starts what we mean by a quantity of capital in order that it may be a determinant of r (an exogenous, given variable), and one of the reasons why r may be high or low relative to w is that we have a ‘little’ or a ‘lot’ of capital. If it is not possible to find such a unit (the debates showed that outside one commodity models, it is not), it is not possible to say r takes the value it does partly because we have so much ‘capital’ and because ‘its’ marginal product has a particular value. This aspect of the debate was related to a methodological critique associated with the distinction between differences and changes. The results of the debate were mostly drawn from comparisons of long- period positions, which reflect differences in initial conditions. It is argued that they can tell us nothing about processes – changes – in particular, the processes of accumulation. Joan Robinson (1979 [1974]) was to characterise this critique as ‘history versus equilibrium’. Its implications are reflected in the discussion in the text about the short period and the long period. The reaction to the criticism of the aggregate production function and the meaning of ‘capital’ in its construction was to try to avoid the use of ‘capital’ and ‘its’ marginal product and make the social rate of

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return – Irving Fisher’s central concept – a key concept. It provides on the productivity side of the story what the rate of time preference does on the psychological side; see Solow (1963). Parallel with this development was Paul Samuelson’s attempt (1962) to rationalise Solow’s use of J. B. Clark–Frank Ramsey–J. R. Hicks models in growth theory and econometric work; see Solow (1956; 1957). Samuelson attempted to show that the rigorously derived results of the simple model were robust, and that they illuminated the behaviour of more complex heterogeneous capital models. Lying behind all this was the conceptual understanding that ‘capital’ and r are related in such a way that the demand curve for ‘capital’ is well-behaved, that is, downward sloping. This result as well as other neoclassical parables derived from the simple model – the negative associations between r and the capital–output ratio and sustainable levels of consumption per head – together with the marginal productivity theory of distribution itself were refuted by the capital-reversing and reswitching results, as Samuelson (1966b) handsomely acknowledged. Capital-reversing (the Ruth Cohen curiosum) is that a less productive, less capital-intensive technique may be associated with a lower value of r. The reswitching result is that the same technique, having been the most profitable one for a particular range of values of r and w, could also be most profitable at another range of values of r and w, even though other techniques were profitable at values in between. Both refute the agreeable (neoclassical) intuition of the results of the simple models and, Pasinetti (1969; 1970) argued, of Solow’s Fisherian approach (Solow, 1963) as well. Solow (1970) did not agree.

Appendix 2

The essential methodology of ACMS is as follows: consider the production function

Q = F(K, L) (1a)

which, because of constant returns to scale, may be written as

QK⎛⎞ = f ⎜ ,1⎟ (1b) LL⎝⎠⎜ ⎟ that is, q = f(k) (2)

where q = Q/L, k = K/L

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Now

∂Q = fk′() ∂K (3) ∂Q = fk()− f′ () kk ∂L and, assuming perfect competition and static expectations,

w = f(k) = f9(k)k (4)

Equation (4) has an inverse function that relates k to w and, because q = f(k), it also allows q to relate to w, say

q = g*(w) (5)

ACMS turn this procedure around and suppose that the form of the relationship between productivity and the wage rate is known. Let it be

q = g*(w) (6)

that is, expression (6) is the general form of the regression equation in the text above. Then, with their assumptions,

q = g*(q − f(k)k) (7)

which is a differential equation for f(k) with a solution

q = f(k; Ā) (8)

where Ā is a constant of integration. Note that equation (8) is constrained to make f 0(k)>0 and f9(k)<0. We next show that if there is this link from the productivity–wage rate relationship to the production function, the regression coefficient, b, is not only the elasticity of productivity with respect of the wage rate, (dq/dw) (w/q), but also the elasticity of substitution of capital for labour, σ. σ measures the responsiveness of the capital–labour ratio to changes in the ratios of the marginal products of capital and labour, and, therefore, with perfect competition and static expectations, to changes in relative factor prices. With constant returns to scale, σ may be defined as follows:

(/)(/)∂∂∂∂QKQL s = (9) QQKL(/∂∂∂2 )

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We already have expressions for ∂Q/∂K and ∂Q/∂L: see expression (3) above. Q(∂2Q/∂K∂L) may be shown to be: (1/L)(−kf 0(k)), and we know that Q = Lf(k).16 Substituting these expressions in expression (9) gives

fkfk′′()(()− fkk ()) s = − (10) kf() k f′′ () k

Now

w = f(k) − f 9(k)k (4)

so that

dwfkkfkkkfkk= ′′ ( )d−− ( )d ′′ ( )d (11) = −kf′′()d k k

From q = f(k), we obtain

dq = f 9 (k)dk

and, thus

1 ddkq= (12) fk′()

Substituting expression (12) in expression (11), we obtain

dq d()wkfk= − ′′ fk′() and so

d()qfk′ (13) = − d()wkfk′′

Therefore

dqw fkfk′′ ()(()− fkk ()) = − = s (14) d(w q kf k) f′′( k)

But (dq/dw) (w/q) is, by definition, b, so that b is an estimate of σ.

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Notes

† I thank, but in no way implicate, Nigel Allington, Stephanie Blankenburg, Robert Dixon, John McCombie, Tom Michl and the editors of the volume for their comments on a draft of the chapter.

1. Write Q = LαKβ (1) where α + β = 1, Q = output (income), L = labour and K = capital. Thus Q = L1 − βKβ (2)

dQ 11 and = bLK−−bb (3) dK But Q/K = L1 − βKβ − 1

dQQ so that = b (4) dKK

rKdd Q/ K⋅ K and the share of capital in output (income) is w == (5) k QQ δ δ β But r = Q/ K, so that wk = (6) As β is the ratio of the marginal to the average product of capital, it is the elasticity of output with respect to capital. Similarly, it may be shown that

wl = a. 2. Write Q = A (t) f (K, L) (1) Where A(t) is a shift factor reflecting the pull of all forces of technical change. Differentiating (1) with respect to time, we obtain

ddff QAtfKLAtKAtL =++()( , ) () () (2) ddKL where dots over variables indicate derivatives with respect to time. Dividing by Q, we get

QAt () dd fK fL =+At() + At () (3) QAt() dd KQ LQ Now

ddfQ At() = ddKK and

ddfQ At() = ddLL so that if factors are paid their marginal products

dQK = w dKQ k

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which is capital’s share in product. So we may write (3) as

QAt () K L =+ww + QAt() kl K L

which, if wk + wl = 1, becomes

QLAt () ⎪⎪⎧⎫ KL − =+ww⎪⎪− (4) () kk⎨⎬ QLAt⎩⎭⎪⎪ KL or * * q = a + wk k , (5) With Cobb–Douglas, we may write (5) as q* = a + β k* (6) Growth in output per head equals the rate of growth of the shift factor (‘technical progress’) plus the rate of growth of capital per man (‘deepening’) with the latter weighted by capital’s share: * * a = q − wk k (7) * * and to estimate a we only have to obtain statistics on q , wk and k ; these either exist or may be constructed. 3. See Appendix 1 for a brief account of the debates and the main results. 4. The ability to play God in the computer age that the analysis in this article allowed me to do led me to succumb to temptation again, this time in the company of two Adelaide colleagues, the late Peter Praetz and Al Watson. As a Trinity we made up a number of worlds of our own in which we knew the true values of key parameters. We then generated, by ‘Monte Carlo’ experiments, observations from these worlds and tested whether the econometric procedures used by our friends, the late Fred Gruen and Alan Powell, to estimate supply responses in Australian agriculture in fact gave unbiased and accurate estimates of the values of the parameters they were interested in (their values/sizes had important implications for policy). Alas, according to us, they did not, though another ‘mate’, Ray Byron, argued that our procedures were as shonky as those of Powell and Gruen’s but for different reasons! It was all good clean fun, of course – see Gruen et al. 1967a, 1967b; Powell and Gruen 1966a, 1966b, 1967, 1968, 1970; Watson et al., 1970a, 1970b; Byron 1970a, 1970b. 5. Nevertheless, as Thomas Michl (2002, 53, 29 May 2002, letter to G.C. Harcourt) reminded me (in this case, a euphemism for bringing it to my attention for the first time), ‘Empirical research guided by the neoclassical growth model has consistently found that the apparent elasticity of output with respect to capital exceeds its predicted value, typically taken to be the share of profit in national income.’ 6. Samuelson (1966a, 444–45) wrote: ‘Until the laws of thermodynamics are repealed, I shall continue ... to believe in production functions ... a many-sec- tored neoclassical model with heterogeneous capital goods and somewhat limited factor substitutions can fail to have some of the simple properties of the idealised J. B. Clark neoclassical models. Recognising these complications does not justify nihilism.’

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7. I think it is at this point that Franklin Fisher and I may still part company, see his comment on this in Fisher (2005). 8. Thomas Michl (29 My 2002; Letter to G.C. Harcourt) thought this a useful way forward and suggested that engineers could usefully be asked too. His own conjecture ‘is we could find the best-practice firms are already working with the most automated technique’. 9. See, for example, Granger (1993). The link between Granger’s article and what is in the text may be more clear to me than to my readers. I heard Granger give the paper at the 1992 RES conference and we discussed the theory underlying it afterwards. 10. Dennis Robertson (1956, 16, emphasis in original) mentions the two concepts of the long period Marshall had in mind: ‘one in which it stands real- istically for any period in which there is time for substantial alterations to be made to the size of the plant, and one in which it stands conceptually for the Never-never land of unrealised tendency’. 11. It is significant that Anwar Shaikh (2005) makes use of Goodwin’s classic 1967 prey-predator Marxian model in his analysis. 12. The following statement by Joan Robinson (1962; 1965, 100) is a theoretical counterpart of Kalecki’s insight: ‘The short period is here and now, with concrete stocks of means of production in existence. Incompatibilities in the situation ... will determine what happens next. Long-period equilibrium is not at some date in the future; it is an imaginary state of affairs in which there are no incompatibilities in the existing situation, here and now.’ 13. At least four different versions of the concept of centres of gravitation (c.g.) may be identified. Three are analogies drawn from physics, the fourth, from meteorology. The first relates to a frictionless pendulum always swinging, but always passing the same minimum point on its path to and fro. The second is a pendulum, the motion of which eventually ends because of fric- tion. It settles at the minimum point of its path, which is also the c.g. of the first version. The third (due to the late David Champernowne) concerns a dog running towards its master, who is riding a bike. The bike is the c.g., always moving. The dog’s direction of movement at any point of time may be predicted by the knowledge of where the bike (master) is at that point of time. The fourth is akin to average temperatures (of seasons and places), which are predicted by their relationships to the average values of relevant factors. The averages are good predictors over time but not day by day; see Harcourt (1982, 205–21). 14. Nor is the existence of short-period rest states inconsistent with the view of the world associated with Allyn Young (1928), Kaldor and Myrdal of virtuous and vile cumulative causation processes, as opposed to the stable long- period equilibrium positions of, say, Chicago mainstreamers. 15. Foley and Michl (1999) have introduced the concept of the fossil production function. It allows the econometric application of the Cobb–Douglas function to be salvaged by giving a different meaning to the economic processes producing the data. Taking their lead from Ricardo, Joan Robinson and Kaldor, they suggest that capital-using technical progress occurs over time, with only one best-practice technique being available at any moment of time. Empirical observations, either cross-section or time series, reflect current and past vintages, with average productivity rising over time. Michl

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(2002) shows that this procedure helps to make sense of evidence taken from OECD countries, and of the findings of discrepancies between the values of capital–output elasticities and profit shares. 16. This can be shown as follows: ∂∂∂2QQ⎛⎞ = ⎜ ⎟ ∂∂KL ∂ K⎝⎠⎜ ∂ L⎟ ∂ = (()fk− f′ ()) kk ∂K ∂ ⎛⎞d = ⎜ (()fk− f′ ()) kk⎟ ∂Kk⎝⎠⎜d ⎟ 1 = (())−kf′′ k L

References

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9780230_284692_08_cha06.indd 151 12/23/2011 5:02:07 PM 7 The Harrod Model of Growth and Some Early Reactions to It (2006)*

Roy Harrod himself saw his 1939 article, ‘An essay in dynamic theory’, and his 1948 book, Towards a Dynamic Economics, as putting forward a new, exciting way of seeing and doing economics. It would, he wrote, make ‘the old static formulation of problems [seem] stale, flat and unprofitable’ (Harrod, 1939, p. 15). His primary purpose was to set out some fundamental relationships between rates of change of levels of key variables at a moment of time (instead of, as in static analysis, relationships between levels). He abstracted from lags between variables in key relationships – they could come in later – and from all but the necessary attention to the impact of certain expectations on economic behaviour and decision making. This led him to distinguish between four

concepts of the rate of growth of economies: expected (ge), actual (g),

warranted (gw) and natural (gn). The first two are self-explanatory; the

last two are very much his innovations. gw is rather inelegantly defined by Harrod (1939, p. 16) as ‘that rate of growth which, if it occurs, will leave all parties satisfied that they have produced neither more nor less than the right amount’. This would lead decision makers to repeat the rates of growth they had first planned and then subsequently achieved.

The natural rate of growth (gn) reflected the supply-side characteristics of the economy; it was determined by the rate of growth of the labour force and the rate at which through technical advances the labour

force improved its productivity over time. Harrod supposed gn to be

* Originally published in D. A. Clark (ed.), The Elgar Companion to Development Studies, Cheltenham, UK and Northampton, MA: Edward Elgar Publishing, pp. 219–23.

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independent of ge, g and gw, on reflection, an unacceptable simplification once the embodiment of technical advances in the stock of capital goods by investment and the accompanying impact on productivity of the labour force are recognised. Two questions then arose. First, if the economy does not immedi-

ately grow at gw as an aggregate outcome of the activities of individual business people, could the signals given out by the economy, in particular, the implications of the revealed discrepancies between what was initially expected and what was actually achieved, be such as to induce

the decision makers to take such actions as to move ge and g towards gw?

That is to say, is gw a stable or an unstable rate of growth? Second, even

if gw were to be achieved, would it also necessarily coincide with gn, so that both full employment of labour and normal capacity working of the stock of capital goods would be achieved? In outline, this is how Harrod and his interpreters posed the questions. With hindsight we may see that his contributions fit into two major strands of the preceding literature. The first relates to Karl Marx’s schemes of reproduction, Marx (1885 [1978]), a link of which Harrod candidly admitted (to Joan Robinson who pointed it out to him) he was not aware when he wrote his two classics. Marx asked in effect what conditions must be fulfilled as between the three departments of the economy – wage, capital and luxury goods – in his two schema, simple and expanded reproduction, respectively, in order that, as we would say now, both aggregate demand and aggregate supply, and their respective compositions, would match? That is to say, each department could in effect take in its own washing and the appropriate portions of the other departments’ washing as well (see Sardoni, 1981). Having established the very special conditions implied, Marx conjectured that it would be a fluke if individual business people operating in a competitive environment and pursuing their own goals brought these conditions into being. He argued that if they did not, then instability and even crises would result. Harrod’s contribution was to provide a precise set of answers to such fundamental questions concerning the laws of motion of capitalism. The second strand to which he contributed is, of course, the Keynesian revolution. Keynes (1936) had analysed the employment-creating effects of accumulation and argued that it was unlikely that, left to itself, a capitalist economy would even on average bring about a level of accumulation that would offset leakages into full employment saving. He had little systematically to say about the capacity-creating effects of current investment expenditure, especially if it were to be acted upon so as to

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produce full employment in the short run. Harrod did not explicitly (as did Evsey Domar) pose questions about the latter – what were the conditions that would make aggregate demand be such as to ensure that the

economy advanced along gn, that is to say, would ensure the equality of

ge, g, gw and gn? If these equalities were not attained, what factors in the economy would provide signals that would lead decision makers to act in such a manner as to establish them?

So we have two basic questions: first, what determines gw and is gw

stable? Second, if gw ≠ gn initially, what forces are present, at least in a long-term sense, to bring them to equality?

First, we derive an expression for gw. Harrod built on the analysis in his 1936 book on the trade cycle of the relationship between the accelerator which determined planned investment expenditure and the multiplier which determined the equilibrium level of income associated with planned investment expenditure. He concentrated on a point in time, deriving the conditions by which the aggregate level and rate of growth of expected sales in the economy would be achieved by creating through investment the capacity for production to match them and the aggregate demand to match the forthcoming aggregate supply. As Amartya Sen (1970) has shown, the desired expressions may

be derived as follows: we write the saving function as St = sYt where S is overall saving, s is the marginal (equals the average) propensity to save, Y is income (also realised sales and output) and t is the current

period of time; the investment function is It = q (Xt − Yt−1), where I is planned investment expenditure, q is the desired incremental capital– output ratio (the accelerator) and X is the expected level of sales of time t. Harrod assumed that national income is always the short-period equilibrium level of income, so abstracting from the groping process whereby the stabilising signals given out by any initial gap between planned investment and planned saving tend to take the economy toward the equilibrium point, Keynes’s level of effective demand, so that planned and actual investment equal planned and actual saving

(sYt = It). It follows that: 11 YIqXY==().− tts s tt−1

What is the condition for Xt = Yt? Write: YqXY⎛⎞− q ttt==⎜ −1 ⎟ g ss⎜ ⎟ e XXtt⎝⎠

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Yt/Xt = 1 if and only if ge = s/q. This is the expression for Harrod’s gw.

Moreover, the actual growth exceeds, equals, or falls short of ge if ge

itself exceeds, equals or falls short of gw.

Harrod noted that unless the economy is on gw, then, even though accumulation plans are always realised, they would not have been made in the first place, had the actual outcomes been correctly expected. This

leads to the analysis of gw’s stability. We may put it this way: having ruled out by assumption the stabilising signals of a gap between planned investment and planned saving in the short period, Harrod sensed the destabilising signals of such a gap

in the long period. Suppose that g > ge > gw. Then business people would be encouraged to undertake an even greater rate of accumulation in the

future, so driving the economy even further away from gw. This occurs because, if we look at levels, the investment relationship, the slope of which, q, is the accelerator, is both greater than unity and s, the slope of the saving function (constrained to be much less than unity), so that the saving relationship is intersected from below. There is excess demand to the right of the intersection (and excess supply to the left), providing exactly the opposite signals to the short-period signals. Moreover, even

if the economy is on gw there is no guarantee that gw will correspond to

gn because they are determined by independent factors. There were two principal early reactions to Harrod’s instability

problem and the non-equality of gw and gn. The best-known is, first, the neoclassical model of economic growth associated with Robert Solow (1956) of Cambridge, Massachusetts and Trevor Swan (1956) (who was then Professor of Economics at the Research School of Social Sciences of the Australian National University); two eminent Keynesian economists, it should be noted. They asked the following question: suppose an all-wise, Keynesian-inspired, government were to keep the economy at full employment in all short periods. Would then the operation of neoclassical forces, Marshall’s ‘dynamical principle of “Substitution” ... seen ever at work’, Marshall (1890 [1961], p. xv), responding to appropriate signals through the price mecha-

nism, lead to a change in q so as to give it a value that makes gw = gn? As is well known, at least in a simple one-commodity model, the price mechanism does the trick by so changing the relative prices of the services of labour and capital as to lead business people, faced with different techniques of production, to choose the value of q that, given the value of s, brings about the desired equality. Solow argued that Harrod’s assumption of a constant value of q was too strong, too ad hoc, and likely to be the cause of the instability result, that a capitalist

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economy is immensely unstable, either pushing upwards to an inflationary Heaven or downwards to a deflationary Hell. This is not really fair to Harrod, for he was considering a point in time so that q could be both momentarily a constant and the outcome of sensible economic choice in a given situation. The other main response came, surprise, surprise, from the other Cambridge in the persons of Nicholas Kaldor, Richard Kahn, Joan Robinson and Luigi Pasinetti. In Kaldor’s classic 1955/56 article, ‘Alternative theories of distribution’, he accepts a constant q (indeed, goes further, making it independent of economic signals through profits) and supposes that the decision makers in aggregate are providing a rate

of planned accumulation that would put the economy on gn. He adopts the Keynesian view that investment leads and saving responds. He then assumes on the basis of empirical findings that saving out of profits is

greater than saving out of wages at the margin (sπ > sw) and that, as a long- term tendency, prices are more flexible than money wages. This means

that if at full employment (Yf), planned S/Yf were to be, say, less than Ī /Yf, the resulting excess demand situation would tend to make prices rise

faster than money wages so redistributing Yf from wages to profits and

raising the value of S/Yf until gw, initially not equal to gn because of an Ī inappropriate value of s, is brought to equality with gn when S/Yf = /Yf . Joan Robinson also independently suggested this outcome and, fur-

thermore, provided a version of the possible attainment of gw in her famous banana diagram (Robinson, 1962, p. 48). From Kalecki’s theory of distribution she derived a relationship between actual accumulation and achieved profitability; from Keynes’s theory she derived the ‘animal spirits’ function which related desired accumulation to expected profitability, itself a function of actual profitability in a situation where financial conditions and long-term expectations are givens. She tells a story of how, if the economy is not immediately at the point where, in a given situation, the two relationships intersect, the resulting gap between expected and actual rates of profit (the latter created by the accumulation induced by the expected rate of profit, an earlier Kaleckian as well as Kaldorian insight) will take the economy through the Keynesian mechanism whereby the actual rate of profit determines the value of the expected rate of profit, towards the stable intersection point. Here, what

was expected and what occurs coincide, the economy is growing at gw. However, the very passage of time may destroy the underlying given conditions, changing the positions of the relationships, so that like Marx, she predicts that the accumulation process leads to cyclical growth,

often unstable and sometimes crisis prone. And, of course, even if gw is attained in Harrod’s and her stories, though this would be optimum

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for the business people in the given situation because their plans have been achieved and they are the principal decision makers who drive the economy along, it certainly need not to be so for the wage-earners. Not only may they find that some of their number are unemployed, they are also unable to signal that it would be profitable to employ them, which indeed it would not be if ‘animal sprits’ are sluggish and weak. Stephanie Blankenburg has reminded me (a euphemism for making me aware of it), that Harrod’s model, along with Lewis’s model, provided the basis for a range of central debates on development policy in the

1950s and 1960s (personal correspondence). Specifically, if gn exceeds gw, so that the effective labour force grew faster than accumulation and planned investment outstripped planned saving, high unemployment and inflation would be found to go together in many developing economies. The Harrod model provided the necessary policy framework

by suggesting policies of population control (to reduce gn) and fiscal and other policies to impact on the saving ratio and the capital–output and capital–labour ratios, in order to raise s, reduce q, and so increase

gw (and gn). Together, the object was to bring about equality between

gn and gw (and, so, g and ge). The Harrod model is now out of fashion, due to the resurgence of neoliberal thinking and because it was perceived to be too simplistic a framework for understanding capital accumulation in pre-industrial and pre-capitalist conditions.

References

Harrod, R. F. (1936), The Trade Cycle: An Essay, Oxford: Clarendon. Harrod, R. F. (1939), ‘An Essay in Dynamic Theory’, Economic Journal, 49, 14–33. Harrod, R. F. (1948), Towards a Dynamic Economics, London: Macmillan. Kaldor, N. (1955/56), ‘Alternative Theories of Distribution’, Review of Economic Studies, 23, 83–100. Keynes, J. M. (1936), The General Theory of Employment, Interest and Money, London: Macmillan. Marshall, A. (1890 [1961]), Principles of Economics, 9th (Variorum) edn, London: Macmillan. Marx, K. (1885 [1978]), Capital, Vol. II, Harmondsworth: Penguin. Robinson, Joan (1962), Essays in the Theory of Economic Growth, London: Macmillan. Sardoni, C. (1981), ‘Multi-Sectoral Models of Balanced Growth and the Marxian Schemes of Expanded Reproduction’, Australian Economic Papers, 20, 383–97. Sen, A. K. (1970), Growth Economics: Selected Readings, Harmondsworth: Penguin. Solow, R. M. (1956), ‘A Contribution to the Theory of Economic Growth’, Quarterly Journal of Economics, 70, 65–94. Swan, T. W. (1956), ‘Economic Growth and Capital Accumulation’, Economic Record, 32, 334–61.

9780230_284692_09_cha07.indd 157 12/23/2011 5:02:48 PM 8 On Mark Perlman and Joseph Schumpeter: Their Respective Approaches to Evolutionary Economics and the History of Economic Theory (2004)*

To Joseph Schumpeter’s Ten Great Economists (1952), reissued in 1997 with a typically learned and absorbing introduction by Mark Perlman, whose eightieth birthday is a most appropriate reason for this special issue, I would wish to add Mark and Schumpeter himself. Both had (have) encyclopaedic knowledge of our discipline and of the personali- ties who made it, both were (are) fascinated by evolutionary processes as they apply to our understanding of the motion over time of economies; both were exemplary teachers, as inspiring as they were demanding of high standards from their pupils and supervisees. Both were conservative in their politics, though Mark is more willing to use our discipline as a backdrop to the making of policy than was Schumpeter who, at least in later life, thought that analysis and scholarship were sufficient ends in themselves. Mark is much more sceptical than Schumpeter was concerning the role of mathematics as the language of our subject. Schumpeter was bedazzled by mathematics and its role, partly because, I suspect, he was not a naturally gifted mathematician, though he worked hard at making himself so. Mark, like Keynes, recognised that mathematics is but one of several languages that have appropriate roles to play in economic theory, analysis and applied work. As a result,

* Originally published in Journal of Evolutionary Economics, vol. 14, 2004, pp. 127–30.

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I do not think that there are inner contradictions, never to be resolved satisfactorily, in Mark’s economics such as there are in Schumpeter’s. Especially is this so of those concerning Schumpeter’s admiration for Léon Walras as the premier theorist of the subject, on the one hand, and his own desire to understand and analyse the dynamic evolutionary processes of capitalism in which technical advances, innovations, the hero entrepreneurs, the credit system and institutions play crucial roles, on the other. Yet all of these are precluded from Walras’s pure theory, not only in his time but also in ours, from which Schumpeter’s great works started and which was never wholly discarded. Of the essays in Ten Great Economists I concentrated most on the essays on Karl Marx, Alfred Marshall and Maynard Keynes. I have the feeling that Schumpeter was a more positive admirer of these three than Mark is (I may be doing Mark an injustice, especially with regard to Marshall, and, if so, I hope he will forgive me). Whatever is the case, however, there are good independent reasons for such positive evaluations of them, especially as economists. Like Joan Robinson, the more I get to know about Marshall the less I like or admire him as a human being while yielding to none in my admiration for him as an economist. In writing this, I am emboldened by the writings of that great Marshall scholar, Rita McWilliams Tullberg, whose Ph.D. dissertation I was privileged to super- vise and whose writings on Marshall and Mary Paley Marshall I much admire. I have to admit that two of my greatest friends who are also outstanding Marshall scholars, Peter Groenewegen and John Whitaker, retained their affection for him after their majestic and absorbing works of scholarship on him were finished. They must have more forgiving natures than mine (or even Rita’s), for both of us are scandalised by Marshall’s treatment of Mary and, in my case, by his endless scheming and bad faith and behaviour in Cambridge politics, setting up a tradition which, alas, continues to this day in the Faculty of Economics and Politics: a sad sentence to have to write in 2003, the year in which we are celebrating 100 years of the Economics Tripos at Cambridge. Of course, it is not really surprising that Schumpeter should find in Marshall a kindred soul. They both admired static equilibrium analysis (after all, Marshall invented much of it with his partial equilibrium approach, his attempt to handle time within it and his knowledge of general equilibrium, albeit he was always sceptical of its actual use), yet saw in history and biology – evolution – the true Mecca through which to obtain an understanding of the development of capitalism over time. So both economists had at the core of their systems and approach basic contradictions which neither ever solved and which caused them

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endless tension and pain. Mark has avoided this because he had always been suspicious of formalism as such and so could embrace without looking back the new evolutionary economics, giving it his blessing and making important contributions of his own to its development. On Marx, I rather side with Schumpeter who seems to have liked him as a person, warts and all, and would, I conjecture, have enjoyed and accepted the overall favourable portrait of Marx contained in Francis Wheen’s recent excellent biography (Wheen, 1999). Certainly there is more than a little truth in Joan Robinson’s quip that Schumpeter is Marx with the adjectives changed; their visions of the workings of capitalism, allowing for their different ideologies and political attitudes, are remarkably similar. I think Schumpeter errs in his criticism of Marx’s version of the labour theory of value (LTV ). Properly understood, I would argue that the theory is a portmanteau term for an explanation of the origin and size of profits and the rate of profits in the capitalist mode of production. As a (relatively minor) corollary of this view is the need to explain the deviations of prices of production around underlying labour values, the so-called transformation problem. While Schumpeter could rightly criticise Marx for getting the details of the solution wrong, later work has provided a convincing solution (probably most definitively described by William Baumol in his critique of Paul Samuelson’s Journal of Economic Literature essay on the transformation problem, a survey commissioned by Mark when he was the managing editor). Moreover, I would argue that the LTV, so viewed, is still of central relevance for an understanding of the modern world even today. Marx’s and Keynes’s (and Kalecki’s) analytical frameworks allow analyses that make much more sense of what has happened in advanced capitalist economies over the past 30 years and more than does the framework of modern macroeconomics which has not only repudiated most of Keynes’s analysis but has also never taken in Marx’s or Kalecki’s’; indeed, many of its practitioners probably have never heard of them, let alone read anything of what they wrote. The folklore is that Schumpeter’s essay on Keynes is marred by his jealousy of his subject’s standing and reputation and thus displacement of the author from his rightful place in the development of our subject. I cannot find much evidence for this in the essay itself. It is true that by interpreting The General Theory as a Ricardian strong case, Schumpeter is implicitly criticising the presence of “General” in the title (Keynes himself gave it at least three meanings, one of which was consciously meant to have overtones of Einstein). But overall the tone of the essay is affectionate, appreciative, admiring of both Keynes’s intelligence and basic decency, his courtesy and good manners (at least on some occasions!)

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and, not least, his heroic patriotism during the Second World War. It is a very positive essay and I concur with most of Schumpeter’s judg- ments. With Sean Turnell I have spent much of the past three years writing a review article of Robert Skidelsky’s superb three volume life of Keynes (Skidelsky, 1983, 1992, 2000), so that I feel that I now know a great deal about Keynes and his works.1 That Schumpeter had reached a much more deep understanding of them than I could hope to aspire to on the basis of so much less evidence in the public domain, by astute and acute reading of what was then available and from his own con- tact with Keynes and his contemporaries, especially Richard Kahn, Joan Robinson and Piero Sraffa, is an index of his superb intelligence and scholarship. It is also an exception to his usual rule in the history of economic analysis to leech out personality, background, ancestors in order to concentrate centrally on analysis. Perhaps this reflects a reaction to his own tortured, complicated, many-sided personality and painful life experiences. Mark is much more akin to Keynes in this respect; he looks for the influences of personality, background, cultural influences, no doubt a reflection of his own affectionate, warm-hearted interest in and support of pupils and colleagues. He simultaneously, of course, demands high standards and principled behaviour. I read a lot of Schumpeter’s writings when I was an undergraduate in the early 1950s, including the two volumes on Business Cycles (1939), Capitalism, Socialism and Democracy (1942), the seminal early book on The Theory of Economic Development (1912) and the first edition of Ten Great Economists (1952). Over the years, I have also dipped into the History of Economic Analysis (1954). I was much attracted to his view of capitalist development as the stock cycle imposed on the trade cycle imposed in turn on the Kondratieff long wave. (My enthusiasm for the last part of the story was rather dampened by my teacher at Melbourne University, John La Nauze, pointing out that at best only 2 ½ long waves had been “observed” in past history, so that it was perhaps a little pre- mature to suppose that they did exist in fact.) Nevertheless, the idea that the Great Depression was due to the troughs of the three cycles coinciding with each other remained extremely appealing. I felt uneasy then in not being able to see exactly how the closed system circular flows of the static general equilibrium system transformed themselves into the open evolutionary processes of creative destruction with innovating entrepreneurs leading the way, only to be caught up eventually by imitators competing away their monopoly profits. But I thought the narrative, perhaps more descriptive than analytical, made good sense, and when, many years later, I reviewed (Harcourt,

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1994) Michio Morishima’s Capital and Credit (1992), in which he put Keynes and Schumpeter together, in the process overturning his previous work of 40 years and more, I appreciated properly and probably for the first time, Schumpeter’s deep understanding of the role of banks and finance in industrial development in the financing of the process of accumulation. His view is complementary to Keynes’s 1937 analysis of the finance motive and Kalecki’s idea that the ultimate constraint on the rate of accumulation, given confidence and the state of long-term expectations, is the availability of finance, especially from the banks. It is such a pity, therefore, that Schumpeter’s manuscript on money was never finished or, indeed, published even though unfinished. I am sure it is full of insights and conjectures that would have spawned innumer- able research projects. So we have two great economists, united by similar interests, one taken from us far too early, the other now to enter his ninth decade and, hopefully, to offer us wisdom, guidance and his wonderful friendship for many years to come.2

Notes

1. See the title chapter ‘On Skidelsky’s Keynes’ in the companion volume to this selection of essays; Harcourt (2012). 2. Alas, this was not to be as Mark died in 2006. The manner of his death can only be described as noble.

References

Baumol, W. J. (1974) The Transformation of Values: What Marx “Really” Meant (An Interpretation). Journal of Economic Literature, 12: 51–62. Harcourt, G. C. (1994) Review of Morishima (1992). Journal of Economic Literature xxxii: 686–88. Keynes, J. M. (1936/1973) The General Theory of Employment, Interest and Money, Vol. VII. Macmillan, London. Morishima, M. (1992) Capital and Credit: A New Formulation of General Equilibrium Theory. Cambridge University Press, Cambridge; New York; Oakleigh. Samuelson, P. A. (1971) Understanding the Marxian Notion of Exploitation: A Summary of the So-Called Transformation Problem between Marxian Values and Competitive Prices. Journal of Economic Literature, 9: 399–431. Schumpeter, J. A. (1912/1934) The Theory of Economic Development, (translated by Opie R) Harvard University Press, Cambridge, MA. Schumpeter, J. A. (1939) Business Cycles: A Theoretical, Historical and Statistical Analysis of the Capitalist Process, 2 vols. McGraw Hill, New York; London. Schumpeter, J. A. (1942) Capitalism, Socialism and Democracy. Harper and Brothers, New York.

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Schumpeter, J. A. (1952) Ten Great Economists: From Marx to Keynes. George Allen and Unwin, London. Reissued in 1997 with an introduction by Mark Perlman. Routledge, London. Schumpeter, J. A. (1954) History of Economic Analysis. Oxford University Press, New York Skidelsky, R. (1983) John Maynard Keynes, Vol 1. Hopes Betrayed, 1883–1920. Macmillan, London. Skidelsky, R. (1992) John Maynard Keynes, Vol 2. The Economist as Saviour 1920– 1937. Macmillan, London. Skidelsky, R. (2000) John Maynard Keynes, Vol 3. Fighting for Britain 1937–1946. Macmillan, London. Wheen, F. (1999) Karl Marx. Fourth Estate, London.

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9780230_284692_11_cha09.indd 165 12/23/2011 5:03:56 PM 9780230_284692_11_cha09.indd 166 12/23/2011 5:03:56 PM 9 Monsters and Morals: Reviewing David Jenkins, Market Whys and Human Wherefores. Thinking again about Markets, Politics and People, 2000 (2002)*

David Jenkins has written a noble book about the moral, social and political consequences of the obsession with the market as an all- embracing institution for all aspects of the human condition, the overriding ideology of the past 30 years or so.† The book arose in part from the four lectures he gave at the end of February 1996 when he was the 1995–96 Samuel Ferguson Lecturer at the University of Manchester. The lectures were on the theme of Ideology, Exploitation or Inevitability? – Theological Reflections on the Market and Providence (vii). Jenkins is, of course, a learned, thoughtful and committed Christian (he is a former Professor of Theology and Religious Studies at Leeds University and was, until 1994, Bishop of Durham), but having told us of his faith and philosophy, he virtually banishes his specific beliefs from most of the arguments of the book. They underlie the arguments for him but the book may be read independently of them. Thus he writes (13): ‘As a Christian I am clear ... that it is offensive, unworthy and dangerous to treat the materials and living systems of the world as if they exist simply for our individual exploitation rather than as resources to be

* Originaly published in Soundings, 2003.

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husbanded for neighbourly use and the future sustenance of the community.’ Both believers and unbelievers of goodwill surely would say ‘Amen’ to that? Jenkins has read widely and deeply in the literature on how markets function. Quotes from – sometimes with approval, more often with criticism of – the writings of Samuel Brittan, Friedrich von Hayek, Anatole Kaletsky, Paul Krugman, Milton Friedman, Jeffrey Sachs, Robert Skidelsky, George Soros, Larry Summers and the anonymous writers of the Economist abound in his pages. Of the greats from the past, we have Hegel, Hume, Marx, Keynes, Joan Robinson and most of all, of course, Adam Smith. Jenkins has also used World Bank statistics and stories, and other empirical sources, to match up theoretical arguments and conjectures with the relevant ‘stylised facts’. His approach is philosophical, asking questions about both the con- sistency, within its own terms, of the theory about the operation of markets and, a separate question, the theory’s applicability in explanations of actual economic and social behaviour, its ability to illuminate the real world, as economists love to put it. A corollary is a searching examination of the theory’s role as a basis for general and specific policies. The crux of his objections is stated on p. 14: ‘To set up an acute and necessarily negative polarity between the individual as the focus of human being and the relational (and, up to a point, collective) exercise of being human flies in the face of simple facts and is dangerously impractical’. Jenkins avoids the fallacy of many proponents of intervention, to wit, that if market failures can be established in particular areas or episodes, government intervention must occur and inevitably bring about improvements. But this is a non-sequitur; the case for intervention in every instance has always to be made and Jenkins, when he comes to policy recommendations, attempts to do so. He recognises that in an imperfect world what the market brings about could be the best second-best solution (but he is not inclined to bet on it often). Jenkins is not an economist and so his language does not always coincide with economists’ ways of saying things, no bad thing, of course. In any event, his intuition and conceptual understanding of the theory and its limitations are overwhelmingly right. For example, he early on points out (3) that ‘the rules formulated about the [mainstream] operations of the Market in economic theory are timeless ... stories about how the economy works as if it were a machine ... not statements about how the economy works as an organic ... process ... related to time and to what happens in the future’ (emphasis in original). Early on in the book Jenkins discusses Smith. He immediately reminds us that the Theory of Moral Sentiments (TMS) and the Wealth of Nations (WN) are complements. Furthermore, the argument for the

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prior logical need for a creation of institutions which allow altruism to flourish, which is the thrust of TMS, is made explicit – only then can the workings of the invisible hand, more generally, the harnessing of self-interest to create the common good, have even a chance of being successful. Smith was an ironical realist who provided many sensible caveats and shrewd asides. None of these are lost on Jenkins, not least when he criticises the vulgar arguments and claims that are made in Smith’s name for the invisible hand and the virtues of the market. Like Smith, Jenkins appreciates that only when power is widely diffused on both sides of transactions does it follow that competitive markets could have some hope of producing desirable results, a proposition which is taken to be descriptive of most markets and their behaviour by even some of the more moderate proponents of using markets for everything. It is as if what Melvin Reder once memorably called ‘the Chicago view – “Tight Prior Equilibrium” ’ – rules OK. Jenkins is very telling in his critique of the insistent appeals to trickle down in order to justify the blowing out in the distribution of income and wealth, within and between countries, of recent years as floating exchange rates, and de-regulated financial and labour markets became the order of the day. Keynes told us long ago that we shall all be dead in the long run. Jenkins is inclined to say that in the long run the poor in most parts of the world, even if their societies are run according to the principles of the Washington consensus, will be, if not dead, yet still poor; and so will their descendants. He rightly does not put great store on the possibility of major markets approaching, let alone reaching, stable, long-run equilibrium positions, the necessary positions required to allow the supposed virtues of free market behaviour to be realised. Though he does not say so in so many words, the cumulative causation processes of a Myrdal or a Kaldor (and a Smith) – vicious or virtuous spi- rals up or down of markets and systems for long periods of time – make more sense to him than the Hayek/Chicago or even Samuel Brittan’s models of how markets work. There are also explicit shades of John Kenneth Galbraith’s insights in Jenkins’ arguments – the downside of the culture of contentment, the neglect of the poor and the unfortunate even in democratic societies, the dominance of large corporations and their role in determining both domestic and international governmen- tal behaviour. Finally, Jenkins devotes much of his book to discussing the implications of the Marxian insight that if financial capital gets out of kilter with industrial and commercial capital, the result is likely to be instabil- ities and crises. He shows an acute understanding of the workings of financial and foreign exchange markets, where stocks dominate flows

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and expectations and speculative bets dominate the effects of underlying ‘real’ economic activities in the determination of prices; and of the consequences which these dominances have for the lives of ordi- nary people, especially those least able to defend themselves. In making counter arguments, usually his own, he has also drawn on those of some of my favourites – Larry Elliot, Charles Goodhart, Ruth Kelly, for example. It is a pity that Jenkins did not draw on the arguments of Joe Stiglitz’s Whither Socialism? (1996), to my mind, the most incisive inside critique that we have of the theory rationalising the virtues of the market. He would also have found kindred souls in the late Tommy Balogh and the late Nicky Kaldor. Paul Krugman, as is to be expected, is cited as on both the side of the angels and the devils while Larry Summers is recognised for what he often is, silly-clever. Skidelsky is rightly criticised for his then extreme right-wing liberal phase which happily he is now discarding, as has John Gray, who also features in the book. The author himself sees his book as addressed, not so much to those who are already working on a critique of the market as the dominant institution as ‘to those who are baffled by the strength of the Market mantra, troubled by what they see around them, but unsure of the existence of any alternative way ahead’ (19). It would be wrong to pretend that Market Whys and Human Wherefores is an easy book to read. But perseverance with the deeply thought out arguments, themselves based on decent, humane values and passionate concern, with each argument built on preceding ones to make an impressive whole, is richly rewarding.

Note

† From ‘Monsters and Morals’, Soundings, 21, Autumn, 2002, 65–68.

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In recent years the sales of The General Theory in the USA have fallen to a low level. Amanda Hamilton, the economics editor of Palgrave Macmillan, had the brilliant idea of reissuing in the USA a paperback edition based on the RES Collected Writings (CW) edition, in which is included the general introduction to the CWs, the editors’ introduction to The General Theory itself, all the prefaces John Maynard Keynes wrote for the foreign translations – French, German and Japanese – as well as for the original volume, three appendixes including Keynes’s reply to Dunlop and Tarshis in the Economic Journal in 1939 and now a new introduction by Paul Krugman. This last is a masterstroke because Krugman is one of the best and best known economists and columnists in both the USA and interna- tionally. He writes clearly, engagingly and, in his twice weekly NYT column, often extremely provocatively. He has produced an inspiring and appropriate introduction and I devote much of the review to its contents. But I must point out that, initially, the RES was not inclined to accept his introduction: it was considered to be too parochial and colloquial in content and style. This led me to regard the RES’s reaction as po-faced English arrogance at its worst. As it happens, I had read the first draft of Krugman’s essay. There is very little difference at all between it and the now published version. I am delighted that good

* Originally published in History of Economics Review, No. 47, Winter 2008, pp. 125–31.

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sense ultimately prevailed. Before discussing Krugman’s essay, though, let me remind readers of the main points that arise from Keynes’s various prefaces for they give context and background both to Keynes’s work of genius and to Krugman’s essay. Keynes made clear in the original preface (dated 13 December 1935) that he had written a book of pure theory, which was ‘chiefly addressed to [his] fellow economists’, the practical applications of which were ‘only in ... second place’. The public could eavesdrop on ‘an attempt by an economist to bring to an issue the deep divergences of opinion between fellow economists which have ... almost destroyed the practical influence of economic theory’ (xv). The book represented for Keynes a long struggle to escape from previous ideas, and the passage in his thought from A Treatise on Money (1930) to his present position would be, he feared, more clear to him than to his readers. He expects two reactions from those ‘who are strongly wedded to “the classical theory” ’ – either that he is ‘quite wrong or that he has “nothing new” to say’. The first book was a snapshot, an attempt to ‘show how, assuming [a] given output, forces could develop which involved a profit- disequilibrium, and thus required a change in output’. The General Theory is ‘a study of the forces which determine changes in the scale of output and employment as a whole’ ... Money [but not technical monetary details] enters in an essential and peculiar manner [so that] a monetary economy ... is essentially one in which changing views about the future are capable of influencing the quantity of employment and not merely its direction’ (xvi). Because the method of analysis of the present under the influence of the future depends upon the interaction of supply and demand there is a link up to the ‘fundamental theory of value’ and so to a more ‘general theory’ which includes the classical theory as a special case. Keynes mentions how amazing it is what foolish things may be believed if an author works too much in isolation, an error he felt he had committed when writing his Treatise on Money but not with the writing of The General Theory. In the preface he thanks Richard Kahn, Joan Robinson, Ralph Hawtrey, and Roy Harrod but Dennis Robertson’s name is conspicuous by its absence. Robertson and Keynes had been as one through most of the 1920s, with Robertson, as Keynes often said, in the lead in the reforming and writing of monetary theory. Their intellectual break was always a source of great sadness for Keynes and bitter- ness to Robertson who never really got over it; see Fletcher (2000). Australian readers will note with pleasure that ‘[t]he index has been compiled by Mr D. M. Bensusan-Butt of K ing’s College, Cambridge’ (xvi).

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David adorned the Research School of Pacific Studies and Australian economics generally in the 1960s and 1970s. He wrote some of his best essays and books while there, at the same time mentoring many students and colleagues with his kindness, the application of his superb intelligence and economic intuition, and delightful gossip. The German and Japanese prefaces were written in 1936 but the French one, which is as significant and substantial as the English one, reflecting Keynes’s reactions to his critics and his new ideas and further developments of them, had to wait until 20 February 1939. The German edition is notable for the statement that the theory of output as a whole which the book provides ‘is much more easily adapted to the conditions of a totalitarian state, than is the theory of the production and distribution of a given output and a large measure of laissez- fair’ (xix). This is a slightly expurgated version of the German preface in which he went even further; see Schefold, 1980. In the Japanese preface he mentions Marshall’s ‘particular pains’ to emphasise the continuity of his thought with that of David Ricardo; that he grafted the marginal principle and the principle of substitution onto the Ricardian tradition and never separately expounded his theory of output and consumption as a whole. His followers, including the early Keynes himself, felt no need of such a theory. He excuses his bad manners in his presentation, ‘[b]ut how can one brought up in an English economic orthodoxy, indeed a priest of that faith at one time, avoid some controversial emphasis, when he first became a Protestant?’ (xx). In the French preface Keynes mentions ‘gaining an emancipation’ from a 100 years or longer domination of English political economic theory. This explains his controversial passages and style. Now he had ‘grown accustomed to [his] new skin and having almost forgotten ... [his] old one ... [he] would state [his] own position in a more clear- cut manner’ (xxi). He argues that the French had no such ‘orthodox tradition with the same authority over contemporary opinion as in [his] own country’ (xxi). He feels it would be ‘helpful to [his] French readers [if he indicated] what [he regarded] as the main differentiae of [his] approach’ (xxii). Why has he called his theory a general theory? He is ‘chiefly concerned with the behaviour of the economic system as a whole ... [he argues] that important mistakes have been made through extending to the system as a whole conclusions that have been arrived at in respect of a part of it taken in isolation’ (xxii). He illustrates this with an analysis of the paradox of thrift, an increase in the level of planned investment and an account of the multiplier. He further argues that his theory of the

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rate of interest, the price which equates the demand for and supply of liquidity, was a relationship seen with ‘considerable clarity’ by Charles de Montesquieu, ‘the real French equivalent of Adam Smith, the greatest of your economists, head and shoulders above the Physiocrats in penetration, clear-headedness and good sense ( ... the qualities an economist should have)’ (xxiii). Finally, he calls attention to his treatment of money and prices which registers his ‘final escape from the confusions of the Quantity Theory, which once entangled [him]’ (xxiii). He gives a recursive description of the determination of the short-period equilibrium values of the rate of interest, investment, employment, income and prices. He speaks of the curious dominance of Say and, for his French readers, the claim in his book is that it is a final break away from Say coupled with a return in the theory of the rate of interest to Montesquieu. By the time the French preface was written, Keynes had introduced the finance motive explicitly into his analysis and was moving towards accepting more imperfectly market structures in his price theory, though he still did not think, rightly in my opinion, that this made any qualitative difference to the essence of his theory of effective demand and employment as a whole. Many Post-Keynesians have accepted this view; perhaps the most persuasive account in the modern era is by Nina Shapiro (1997) in Harcourt and Riach (eds) (1997) but do read Robin Marris’s chapter which precedes it, Marris (1997). In any event, the analysis in Michal Kalecki’s review in 1936 in Polish of The General Theory (but not available in English until 1982; see Targetti and Kinda- Hass (1982)), most coherently makes this argument, see Targetti and Kinda-Hass (1982, 247). And in 1940 Keynes analysed inflationary processes using his new theory. His inflationary gap analysis is consistent with both Marshallian free competition and imperfectly competitive market structures. We now move to Krugman’s Introduction. Krugman discusses five issues concerning The General Theory: the message of Keynes; how Keynes did it; Mr Keynes and the moderns; what Keynes missed; the economist as saviour. Krugman starts by quoting from a panel of ‘conservative scholars and policy leaders’, their identification of the most dangerous volumes of the nineteenth and twentieth centuries. The General Theory did very well in the pecking order, beating Lenin and Frantz Fanon, and joining Darwin and Betty Friedan in ranking high on the list. Krugman thinks Keynes would have been pleased, given Keynes’s views on the lasting effects of ideas as opposed to vested interests ‘for good or evil’, Keynes (1936, 384). He adds that over the past 70 years (and more) The

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General Theory has shaped the views of even those who have not heard of it or think they disagree with it. Krugman also thinks that the conservatives mentioned above, though they probably had not read the book, were nevertheless sure that it was a leftist tract, a call for big government and high taxes. Moreover, others on both the left and right think this too. Krugman refers to the delay in an account of Keynes’s economics reaching American classrooms due to the disgraceful attack, ‘academic McCarthyism’, on Lorie Tarshis’s 1947 textbook which resulted in the collapse of its sales after a successful start. Tarshis was a proud Canadian but he wrote the book at Tufts before going to Stanford in the late 1940s. He had attended Keynes’s lectures at Cambridge in the early 1930s in which the new ideas were set out. The 250 or so pages of his textbook on Keynes’s theory faithfully drew on the master’s aggregate supply and demand analysis. Because of the attack on Tarshis, Paul Samuelson was able to scoop the pool in 1948 though he too bore the tail end of the attack, see Harcourt (1982, 1995). Had subsequent generations of American students been brought up on Tarshis instead of Samuelson, I conjecture that the stagflation episode of the 1970s could not have been used successfully to discredit the economics of Keynes. Krugman points out that Keynes was no socialist, that he was even mildly conservative (Robert Skidelsky (1992, xv) names him as ‘the last of the great English liberals’), who came to save capitalism from itself. Its failures in Keynes’s view had surprisingly narrow technical causes – ‘magneto trouble’, wrote Keynes in 1930. It, but not the whole car, needed to be replaced (Keynes had not yet formulated the system of The General Theory). Nevertheless, Krugman argues, if you are a free market traditionalist, you are right to hate Keynes, ‘an especially dangerous enemy because his ideas have been vindicated so thoroughly by experience’ (xxvi–xxvii). The contributions of the book are set out in four bullet points:

● Economies can and often do suffer from an overall lack of demand, which leads to involuntary unemployment ● The economy’s automatic tendency to correct shortfalls in demand, if it exists at all, operates slowly and painfully ● Government policies to increase demand, by contrast, can reduce unemployment quickly ● Sometimes increasing the money supply won’t be enough to persuade the private sector to spend more, and government spending must step into the breach (xxvii).

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None, except perhaps the last, would be ‘startling or controversial’ to a modern policy maker. Yet they were ‘very nearly unthinkable’ when Keynes proposed them. ‘[T]he great achievement of The General Theory was precisely to make them thinkable’ (xxvii). (As an anonymous referee reminded me, even George W. Bush ‘is a (recent?) convert to Keynesian fiscal policy’.) So how did he do it? Krugman, I’m glad to say, i.e., I agree with him, thinks modern economics is akin to starting ten years ago with a moving peg. So who wants to read something published over 70 years ago? Krugman thinks most contemporary economists, if they ever read it, did so only in their student days. This was his own experience and he describes how middle aged economists, ‘especially those with some experience of the ‘long struggle of escape’ involved in producing a new economic theory’, see it from ‘a very different perspective ... and ... feel a sense of awe. To really appreciate The General Theory, [they need] a sense of what Keynes had to go through to get there’ (xxvii). To persuade us to read The General Theory, Krugman provides the analogy of a meal with ‘a delectable appetiser’, and which ends with ‘delightful dessert after a course of rather tough meat’ – it is this last where true value lies. But read it all, Book I, which is ‘Keynes’s manifesto, ... a thrilling piece of writing’, in which Keynes puts on notice to ‘knowledgeable insiders’ that he is going to refute everything they thought they knew about employment (xxviii). He shows succinctly that the conventional view about real wages and employment involved a fallacy of composition, that the claim that money-wage cuts in the then existing situation could cure unemployment ‘made no sense’. In just a few pages he presented enough of his own theory ‘to suggest the breathtaking conclusion that the Great Depression then afflicting the world was not only solvable, but easily solvable’ (xxviii). Krugman then draws on his own experience in bringing increasing returns and monopolistic competition into international trade theory to rationalise why Keynes spent so many pages and chapters on units, definitions and so on as a prelude to his detailed accounts of the principal relationships of his system – the consumption function, the investment function, the liquidity preference function, the determination of the general price level: ‘When you are challenging a long-established orthodoxy, the vision thing does not work unless you are very precise about the details’ (xxix). Krugman really understands the details of the classical model Keynes wanted us to escape from (though he does not mention Michael Ambrosi’s brilliant reconstruction of Keynes’s system within the framework

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provided by Pigou’s 1933 book, Ambrosi (2003)). The actual classical model ‘was, essentially, a model of a barter economy, in which money and nominal prices do not matter, with a monetary theory of the price level appended in a non-essential way ... Say’s Law applied[,] ... the interest rate was purely a matter of the supply and demand for funds, with no possible role for money or monetary policy’ (xxx). So Keynes’s ‘novel innovation’ was not that money-wages are sticky – Keynes thought they could be in a downward direction but that flexible money-wages would only reinforce the workings of his system – but the ‘demolition of Say’s Law and the classical theory of the interest rate in Book IV, “The inducement to invest” ’ (xxx). Krugman also argues that Keynes had to break away from the business cycle theory(ies) of his day, to produce in the main a static not a dynamic model, the picture of an economy stuck in depression. Keynes therefore focussed on a question that could be answered – how can we create more employment if demand is depressed? Krugman adds: ‘By analysing how the economy stays depressed, rather than trying to explain how it became depressed in the first place, Keynes helped to bury the notion that there is something redemptive about economic suffering’ (xxxi). Are we then all Keynesians now? For Krugman the answer is ‘yes’ despite the belief of the bulk of the profession that we have left Keynes behind and, God help us, taken on Robert Lucas and his surrogates (my view, not explicitly Krugman’s). This for Krugman is a misreading or a non-reading of The General Theory. He tackles the non-readers including himself because of the several decades that passed between his first and second reading. If Keynes is interpreted as dismissive of monetary policy it is easy to accept that Milton Friedman refuted Keynes by showing that money matters. J. R. Hicks (as he then was) is partly to blame by confining Keynes in his 1937 article to the horizontal stretch of LM curve – this is unfair to Keynes, too kind to the classics. Keynes discussed monetary policy extensively but was sceptical of its efficacy in a situation where the rate of interest was already very low, close to zero for an extended period – not the experience of economists reaching intellectual age in the 1970s and 1980s. As is to be expected, Krugman illustrates his case with recent Japanese experience, quoting a Japanese joke from the 1990s that safes were the only products Japanese consumers were buying. Krugman next addresses two questions: ‘First, was Keynes right to eschew maximising behaviour? Second, did his successors betray his

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legacy by bringing maximisation back?’ (xxxiv). The answer to the first is ‘it depends’, and to the second, ‘no’, especially, in ‘fighting words: to interpret Keynes in terms of static equilibrium models is no betrayal because what Keynes mainly produced was indeed a static equilibrium model’ (xxxv). There I think Krugman goes too far. He ignores Keynes’s shifting equilibrium model (293–94) and Jan Kregel’s findings on Keynes’s modelling methods in Kregel’s 1976 classic. Nevertheless, Keith Freason pointed out to me long ago that IS/LM is clearly to be found on p. 173 of The General Theory in the long paragraph beginning: ‘We have now introduced money into our causal nexus for the first time, and we are able to catch a first glimpse of the way in which changes in the quantity of money work their way into the economic system. If, however, we are tempted to assert that money is the drink which stimulates the system to activity, we must remind ourselves that there may be several slips between the cup and the lip.’ In this paragraph both IS/LM’s strengths and its limitations, so well set out by Donald Moggridge in the appendix to his masterly Modern Masters book on Keynes, Moggridge (1976), are anticipated with great subtlety by Keynes. Krugman also defends Samuelson’s 45-degree diagram to explain the multiplier. He is right here (how could a joint author of Economic Activity (1967) say otherwise?) but misses the chance to say that, had Tarshis’s book won the day and, especially, had Americans been brought up on Keynes’s aggregate supply and demand analysis, the stagflation episode could not have been used to discredit the economics of Keynes, as we noted above. In the section on what Keynes missed, Krugman’s strongest criticism of The General Theory is that ‘Keynes mistook an episode for a trend’ (xxxv), by believing that ‘The monetary environment of the 1930s would be the norm from then on’ (xxxvi). Keynes was too pessimistic about investment opportunities and he did not foresee then that an inflationary trend, including accelerating episodes around it, would be the norm rather than the constant long-term general price level, based on nineteenth century experience, which is implicit in The General Theory. Krugman adds: ‘failure to address problems nobody imagined in the 1930s can hardly be considered a flaw in Keynes’s analysis’ (xxxvii). Nevertheless, as an anonymous referee commented, ‘Randy Wray has recently noted ... that [Hyman] Minsky serves as a useful corrective to Keynesian stagnationism, arguing that exuberance was more common than pessimism. Viewed from 2008, he seems to have been right.’ To sum up, Krugman adopts Skidelsky’s subtitle to Volume Two of his biography of Keynes (1992) – The economist as saviour. The General

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Theory is up there with The Wealth of Nations, he says (neither he nor Keynes would like Capital to be included but I would). ‘Keynes showed that ... mass unemployment had a single cause, inadequate demand, and an easy solution, expansionary fiscal policy’ (xxxvii). It was, though, the second world war rather than The General Theory that led to full employment but Keynes’s theory explained why. There is, says Krugman, ‘nothing like Keynes’s achievement in the annals of social science’ (xxxviii). If there ever is another Keynes, he or she would need to have his important qualities: ‘a consummate intellectual insider, who understood the prevailing economic ideas of his day as well as anyone ... a daring radical, willing to consider ... that some of the fundamental assumptions of the economics he had been taught were wrong’ (xxxviii). These qualities allowed Keynes to lead economists and the world into light – The General Theory is such an epic journey. So Krugman writes, ‘Read it, and marvel’, (xxxviii). I cannot add to that.

References

Ambrosi, Gerhard Michael (2003), Keynes, Pigou and Cambridge Keynesians: Authenticity and Analytical Perspective in the Keynes-Classics Debate, Houndmills, Basingstoke, Hampshire; New York: Palgrave Macmillan. Fletcher, Gordon (2000), Understanding Dennis Robertson: The Man and His Work. Cheltenham, Glos; Northampton, MA: Edward Elgar. Harcourt, G. C. (1982), The Social Science Imperialists: Selected Essays. Edited by Prue Kerr. London: Routledge and Kegan Paul. Harcourt, G. C. (1995), ‘Lorie Tarshis, 1911–1993: in Appreciation’, Economic Journal, 105, 1244–55. Harcourt, G. C. and P. A. Riach (eds) (1997), A ‘Second Edition’ of The General Theory, 2 vols. London: Routledge. Harcourt, G. C., P. H. Karmel and R. H. Wallace (1967), Economic Activity, Cambridge: Cambridge University Press. Hicks, J. R. (1937), ‘Mr Keynes and the “Classics”: A Suggested Interpretation’, Econometrica, 5, 147–59. Kalecki, M. (1936), ‘Pare uwag o teorii Keynesa’ (‘Some remarks on Keynes’ theory’), Economista, 3. Keynes, J. M. (1930), A Treatise on Money, 2 vols. London: Macmillan, C.W., vol v, vi, 1971. Kregel, J. A. (1976), ‘Economic Methodology in the Face of Uncertainty: the Modelling Methods of Keynes and the Post-Keynesians’, Economic Journal, 86, 209–25. Marris, R. (1997), ‘Yes, Mrs Robinson! the General Theory and Imperfect Competition’, in Harcourt and Riach (eds), vol. 1, 52–82. Moggridge, D. E. (1976), Keynes, Fontana Modern Masters, London: Collins. Pigou, A. C. (1933), The Theory of Unemployment, London: Macmillan. Samuelson, P. A. (1948), Economics: An Introductory Text. McGraw-Hill.

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Schefold, Bertram (1980), ‘The General Theory for a Totalitarian State? a Note on Keynes’s Preface to the German Edition of 1936’, Cambridge Journal of Economics, 4, 175–76. Shapiro, Nina (1997), ‘Imperfect competition and Keynes’, in Harcourt and Riach (eds), vol 1, 83–92. Skidelsky, Robert (1992), John Maynard Keynes, Volume Two. The Economist as Saviour 1920–37, London: Macmillan. Targetti, F. and B. Kinda-Hass (1982), ‘Kalecki’s Review of Keynes’ General Theory’, Australian Economic Papers, 21, 244–60. Tarshis, L. (1947), The Elements of Economics: An Introduction to the Theory of Price and Employment, Boston: Houghton Mifflin.

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1 Introduction

The major influences on Joan Robinson as an economist include Alfred Marshall, A. C. Pigou, Maynard Keynes, Gerald Shove, Austin Robinson, Richard Kahn, Piero Sraffa, Michal Kalecki and Nicholas Kaldor.† (I omit people who are still alive, most notably Luigi Pasinetti, Amit Bhaduri, John Eatwell and Donald Harris.) She came up to Cambridge in 1922, to Girton College, to read economics; she read history as a schoolgirl at St. Paul’s Girls School in London, and, at one remove, was privy to history in the making during World War I. Her father, a professional soldier, was at the centre of a major scandal concerning the conduct of the war by Lloyd George’s government. Though it effectively ended his military career, he was in fact vindicated for his whistle-blowing actions (as we would say now). He showed the sort of integrity and courageous, if quixotic, behaviour for which Joan Robinson herself was to become famous. Joan Robinson told me that until as a 15-year-old school child she became known as the daughter of Major General Sir Frederick Maurice of the infamous Maurice debates, her life in her mind was more real to her than life in reality. She did a switch (not a re-switch) at this juncture. I suspect that her childhood fantasy life may be one clue as to why she was such a powerful theorist and remorselessly logical writer. But enough of speculative psycho-babble. She read economics because she wanted to find out why poverty and unemployment abounded. She did not think her teachers gave satisfactory answers. She learnt Marshall through Pigou, Austin Robinson,

* Originally published in History of Economic Ideas, vol. 9, 2001/2, pp. 59–71.

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Dennis Robertson and Gerald Shove as well as from reading him and, no doubt, talking to Mary Paley Marshall. Her delightful spoof, ‘Beauty and the Beast’, written with Dorothea Morison when Joan was still an undergraduate, shows how well she had absorbed his ideas and his prissy Victorian way of putting them (Joan Robinson, Collected Economic Papers, vol. I, 1951).

2 Early life

Soon after graduating (she could not be admitted to a degree, for that women at Cambridge shamefully had to wait until 1948), she married Austin Robinson and they went to India for two idyllic years in Gwalior where Austin was tutor to the young Maharajah of Gwalior. Their stay began their life-long love affair with the sub-continent and interest in development problems. When they returned to Cambridge, Piero Sraffa had come from Italy, pushed by Mussolini, pulled by Keynes and the Faculty of Economics and Politics, and was giving his startling lectures which, amongst many other things, were extremely critical of Marshall, following on from his devastating criticisms in 1925 and 1926. (It was Edgeworth’s admiration for the 1925 article that led to the 1926 article and the invitation to Sraffa to join the Faculty.) Joan Robinson (1933a) picked up his ‘pregnant suggestion’ (xiii) that since Marshallian/Pigovian partial equilibrium analysis was not able logically to analyse freely competitive situations (except in very special circumstances, most unlikely to be found in reality), perhaps monopoly was the way to go: each firm its own little monopoly in a competitive environment so that the average revenue (AR) curve sloped downwards and the marginal revenue (MR) curve came into focus. Sraffa told me in the 1960s that he only put these particular parts in the 1926 article because he thought that the Brits were so pragmatic that they would need some down-to-earth, real world stuff (my words) to dilute the heavy continental doses of refined logic and methodology that were the core substances of the articles. Be that as it may, Joan Robinson proceeded to put together ideas that were then much in the air in Cambridge, London and Oxford, as Keynes, the reader for Macmillan of the manuscript of The Economics of Imperfect Competition (1933a), was to write to Harold Macmillan (Harcourt, 1993, p. 7). In doing so she and Richard Kahn used the MR curve as the organising concept – the concept itself came to them through Austin’s very bright pupil, Charles Gifford (Harcourt, 1995, p. 1230). Kahn himself, as we now know, had developed many of the ideas beforehand in his 1929–30 Fellowship Dissertation for King’s, The

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Economics of the Short Period (it was only published in English in 1989). Shove had been lecturing in his value lectures and writing on similar themes. Austin Robinson had been developing them, too, for his early classics, The Structure of Competitive Industry (1931) and Monopoly (1941) as well as in an examination script early in the 1920s decade (Joan Robinson 1933a, p. 163, n.1) As far as Marshall’s influence on the structure and approach of The Economics of Imperfect Competition was concerned, it came through Pigou and the equilibrium firm rather than through Marshall’s representative firm, which had taken such hard knocks from Sraffa in the 1930 Economic Journal symposium, despite Robertson’s and Shove’s efforts to defend it against Sraffa’s remorseless criticism. Joan Robinson regarded writing the book as ‘her nightmare’. Looking back after World War II she was extremely scathing about it because its method was a ‘shameless fudge’ – it supposed that demand curves of individual firms would stay put while entrepreneurs groped in real life for their equilibrium prices (Joan Robinson, 1969a, pp. vi–viii). That is to say, it was supposed that it was legitimate to apply an analysis based on a difference to a process of change, something that Sraffa had refuted in 1926. (In 1934 Kaldor published in the Review of Economic Studies (1934) what must have been one of the first papers in the modern era on path-dependent equilibria. Marshall was well aware of the phenomenon but chose to hide rather than highlight it, as Joan Robinson pointed out in her 1953 lecture by a Cambridge economist at Oxford.) She also claimed that one of her most disquieting findings was that, in an imperfectly competitive setting, the wage no longer measured the marginal product of labour, a knockdown blow for the ideology of the orthodox economists. The excess capacity result was also disquieting for them. She argued that Marshall and Pigou predicted that in a slump, firms either operated at full capacity or closed down-at odds with the facts of the time.

3 Cambridge

But, of course, while finishing The Economics of Imperfect Competition, Joan Robinson was already with Kahn, James Meade, Austin Robinson and Sraffa, deeply involved in the critique of Keynes’s A Treatise on Money (1930) in the Cambridge ‘circus’, attending Keynes’s lectures, writing progress reports (1933b, 1933c) and comments on Keynes’s emerging findings as Keynes moved from the long period of A Treatise on Money to the short period of The General Theory (1936) and overthrew the quantity theory of money framework of A Treatise on Money. This allowed

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him to develop the revolutionary new framework of The General Theory. Joan’s progress reports were sometimes set in both the old and the new world, for example, that Keynes had established a long-period theory of underemployment equilibrium. There was a backwards and forwards process between Keynes and Joan Robinson, Joan Robinson and Kahn and Kahn and Keynes. When The General Theory was published, Joan Robinson wrote two major books about it. One was her ‘told-to-the-children’ introduction (1937a), the other was her very adult essays on the theory of employment (1937b; 1947) The former is noted for its clarity and, sometimes, its conservatism as far as the use of the Marshallian framework, concepts and method is concerned. (Keynes too was conservative in method, changing emphasis and classifications but still feeling that operating in a supply and demand framework was the way to proceed and having no trouble – well not much – in using the Marshallian/Pigovian theory of value and distribution; he did, of course, extend Marshall by his method of shifting equilibrium (Kregel, 1976).) Perhaps the most important part of her Essays was the application of Keynes’s theory to the long period, to see whether the new results, for example, involuntary unemployment, the paradox of thrift, went through in a long-period setting. In doing so she was still happy to use a version of the marginal productivity theory of distribution and the then new and fashionable concept of the elasticity of substitution, to develop a long-period consumption and saving function in which the distribution of income played a key role as the marginal propensities to save from profits and wages were assumed to differ. In all this, one of Kahn’s roles was to caution, to criticise, to define, to provide the technical back-up to the superb logical intuition of both Keynes and Joan Robinson. (I have discussed elsewhere, Harcourt, 1994, what I consider to be the nature of Kahn’s contributions to the making of The General Theory.) Kaldor, then at the London School of Economics (LSE), took critical swipes at seemingly robust definitions and concepts in The Economics of Imperfect Competition – what is an industry, what is a firm, what is its equilibrium? Sraffa evidently was on the sidelines making uncomfortable remarks about capital theory and the incoherence of supply curves, which were, in his view, a blockage to the development of Keynes’s new theory (not to mention the comparable link between liquidity preference and utility). Kahn and Joan Robinson wanted to put these puzzles aside for another day because of the importance of the issues associated with the core of The General Theory. Austin Robinson preferred to put them aside forever.

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4 Sea change

After 1936 a sea change started to occur in Joan Robinson’s thought. She had her first acquaintance with Marx through reviewing John Strachey’s 1935 book, The Nature of Capitalist Crisis (Joan Robinson, 1936), and she met Michal Kalecki for the first time. It was the beginning of a close intellectual friendship, one that started with amazement that he understood, often better than its originators, the ‘new’ theory (and its jokes) and turned quickly to enduring admiration for his contributions, courage and character. As she became more familiar with Marx’s writings, she recognised that Kalecki’s starting point for his independent discovery of the principal propositions of The General Theory – Marx’s schemas of reproduction – was the logical way to tackle the issues of The General Theory and beyond. It led directly to a macroeconomic theory of employment and distribution, and from there, to a theory of cyclical growth in which the classical and Marxian preoccupations with accumulation and embodied technical progress could be fitted, if not exactly, certainly naturally. It also allowed the links between the sphere of production on the one hand and the sphere of distribution and exchange on the other to be made explicit (Harris 1975). Reading and writing on Marx during the early years of World War II, introducing in 1951 the English translation of Rosa Luxemburg’s The Accumulation of Capital, Joan Robinson (1975b), after the war and taking on board Roy Harrod’s pre-war essay (1939) and post-war lectures at the LSE (1948) mark the next stage. After the war her circle was joined in person by Kaldor who had been in Cambridge for part of the war when the LSE moved there and who joined King’s and the Cambridge Faculty soon after the end of the war. Close friends but even fiercer rivals, they were to work on parallel issues in the 1950s and 1960s, not always in harmony, it must be said: Joan Robinson was more the concil- iator, Kaldor, the offended, and Kahn, more often than not, the stirrer. Sraffa was again on the fringes, going on walks, climbing mountains and joining in discussions but usually only revealing what he had going on when it actually entered the public domain – the Ricardo volumes 1951–55 (which eventually saw the light mainly because of the selfless efforts of Maurice Dobb) and then Production of Commodities in 1960. There were, of course, prior hints, for example, his October 1936 letter to Robinson about the meaning and measurement of capital in neoclassical theory and his request that she ask her gardener about it (Bradford and Harcourt, 1997, pp. 130–31). But the full force of his prob- ings and questions really only hit home in the post-war period. From

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my observations I would say that Joan Robinson had more respect for Sraffa’s critical mind and was more scared of his criticisms than she was of anyone else’s. She and Kahn bickered as only long-established friends on an equal footing can; and though she had huge respect for Keynes, she was able to argue with him, judging from their exchanges in the Collected Writings, in ways she found not possible with Sraffa. Sometimes she was obtuse – I do not think she took on board, perhaps she chose to ignore it? – that Keynes might have been slightly miffed by her decision to write the told-to-the-children version of The General Theory. I imagine that much the same is true of her arguments with Kalecki – fierce, tough, but on an equal footing. Shove was critical of Joan Robinson’s understanding of neoclassical economics (read Marshall) in his 1944 review article of her 1942 book on Marx (he thought she was generally OK on Marx, not a view with which orthodox Marxists were ever to concur). Nevertheless, at the time she wrote her book on Marx, I think she was still critical but in a Marshallian methodological framework in her analysis and pres- entations, even of Keynes’s new theory. All this was to change as she responded to Harrod’s challenges and, along with Kahn and Kaldor as contemporaries and Sraffa again an enigmatic onlooker, moved to gen- eralise The General Theory to the long period. Even though when Keynes was dying and he was looking more kindly on the long-period forces he associated with Adam Smith, he nevertheless had become sceptical of a role for a long-period equilibrium, or even a long period as such, within the confines of his own theory in The General Theory. There is some evidence that Joan Robinson agreed with him on this. With hindsight, we may see the signposts in her early post-war writings: the 1951 introduction to Rosa Luxemburg’s book, the tract for students, On Re-reading Marx (1953b), especially her Cambridge lecture at Oxford to which I referred above, her explicit methodological complaints about neoclassical methodological practices in her Review of Economic Studies (1953a) paper on the production function and the theory of capital, and the definition of a golden age in The Accumulation of Capital, (1956a) as a mythical situation, clearly defined in her attack on Harry Johnson in ‘The General Theory after twenty-five years’ (Joan Robinson, 1962b). Thus much of the analysis in The Accumulation of Capital fitted Kahn’s description of flexing intellectual muscles, learning to walk before running, getting concepts and definitions precise but not yet directly describing the world as such.1 There she agreed with Marx and disagreed with Kaldor who, as ever, impatient, wanted his models from alternative theories of

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distribution to actually apply to the world. Joan Robinson (1949a; Collected Economic Papers, I, 1951 p. 169), though, in telling Harrod he had rediscovered the schemas of reproduction of Volume II of Capital, also suggested that they were necessary conditions for overall and compositional balance of aggregate demand and supply, not a description of capitalism as such. Quite the opposite: they showed how unlikely it was that decision-makers in capitalism, left to themselves, would ever bring about such balances, which led to speculation about the nature of the crises their non-attainment would spawn. This viewpoint was to become more and more explicit in her writings as the post-war period moved on, climaxing in ‘History versus equilibrium’ in 1974 and leading, almost, to nihilism in ‘Spring cleaning’ in 1980 (1980f): scrap the lot and start again, economic theory had come to pieces in her hands, she no longer believed in it. Though Joan Robinson sometimes assumed full employment in these exercises, she was most critical of Kaldor’s argument that this was a real world situation when growth was occurring. This was a source of their sometimes bitter disagreements. (When she read a draft of my 1963 critique of Kaldor on this issue, she wrote to me that I was the first to really nail the significance of Kaldor’s assumption and its implications.) In effect she was not willing to jump one step on in the solution of Harrod’s problem by finding conditions for the warranted rate of

growth, gw, to equal the growth of the labour force, gn, as Kaldor had in his macro model of distribution. (He assumed that the investment

share of full-employment output, I/Yf, was such as, if achieved, to allow

growth at gn.) It is clear in the banana diagram of her 1962 Essays in

the Theory of Economic Growth (Joan Robinson, 1962a), how gw, might be attained, though she thought it most unlikely in practice; or even if it were, that it would remain a sustainable position, not least because of the nature of capitalism whereby accumulators might achieve their

plans but wage-earners would not, so that attainment of gw did not

imply attainment of gn. This in itself could set up signals that took the

economy away from gw, even though it was a Bastard Golden Age. In any event, the very process of time and events would carry with them concrete changes in the factors defining the positions of the two skins of the banana and their consequent intersections.

5 Accumulation of capital

As she prepared to write her magnum opus, she turned to the neoclassical literature, Knut Wicksell in particular, for guidance on the choice

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of technique at the level of the economy as a whole, a secondary but most difficult technical task, she always argued. It was this search plus her musings about the origin and determination of the rate of profits in capitalism that came to fruition in her 1953 paper. It was a criticism of the neoclassical theory of the rate of profits and concept of capital and of neoclassical methodology. She felt she had in Sraffa’s introduction to volume one of the Ricardo volumes, the clue to an alternative and more satisfying theory of the rate of profits – the classical concept of the surplus already familiar to her from reading Marx but tightened up and made more precise without any metaphys- ical overtones of the labour theory of value (in her view!) in Sraffa’s exposition. This, together with her understanding of Kalecki’s theory of profits and her critique and amendment of Keynes’s theory of accumulation, which, together, showed how in the sphere of distribution and exchange the potential surplus available for profits might be realised, was to become the basis of her approach to value, distribution and growth from then on: sometimes with confidence and optimism, sometimes with despair and pessimism. Virtually her final statement was her 1980 paper with Amit Bhaduri in the Cambridge Journal of Economics. It showed how ultimately she came to see the niche for Sraffa’s contributions and the role for the Marx/Keynes/ Kalecki understanding of capitalism. The point is that Joan Robinson always looked behind the formal structures of theories to see what sorts of society – their history, ‘rules of the game’, sociological make-ups-were implied. Many times she referred to the implicit societies of Walras, Marshall and Wicksell and, of course, of Marx, Keynes and Kalecki in her ongoing arguments with Paul Samuelson and Bob Solow. (All gave up the other in the end as tire- some and impossible.) As she became more dissatisfied with what she saw as the misleading method of neoclassical economics – using differences to analyse changes – so she read these insights more and more into Keynes and his emphasis on the role of an inescapable environment of uncertainty and the conventions that it built into decision-makers’ behaviour. She increasingly suppressed his and her former dependence on Marshallian analysis and concepts as her understanding became deeper and deeper.2 Already in the 1950s she (1952a) and Kahn (1954) were discussing this aspect of Keynes in their extensions of his liquidity preference analysis to stock markets and banking, the financial side to investment and saving in a capitalist economy.

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6 China

In the post-war years, Joan started on her many visits to mainland China and to India (in later life she spent part of each year in Kerala State at an economics institute directed by Professor K. N. Raj). Her post- war work on growth and distribution theory, inspired initially as we have seen by her friendship with Kalecki, her wartime writings on Marx and by Harrod’s pre- and post-war contributions, spilt over into her concern about the terrible problems of the Third World, the plight of the wretched of the earth. But, as Pervez Tahir (1990a, pp. 93–94) points out, she may also be credited with being the first to use the phrase ‘disguised unemployment’ (in 1936) though it was its occurrence and causes in advanced capitalist economies that she analysed. (She did analyse it in the same year, 1943, as the year in which Rosenstein-Rodan named disguised unemployment in less developed countries.) Joan more literally and accurately referred to the phenomenon as surplus labour, pointing out that the persons involved could, if there were the employment opportunities available, take them up without any adverse effects on current levels of production. She allied this insight with a discussion of Marxian unemployment – persons without productive jobs because inadequate rates of accumulation meant that there were not the complementary supplies of capital goods for them to work with. In the context of advanced economies, she had argued that the cause was different – a lack of effective demand overall so that persons were forced to do things that with free choice and adequate demand they would not have needed to do.

7 General theory

Joan always said she went to China to learn, not to teach but she was not always true to herself! In her papers in the King’s Archives there are the notes of three lectures that she gave in China in the 1950s. They are remarkable in that they contain in skeleton outline the policies that broadly the Chinese authorities are implementing now – a pragmatic, gradualist, trial and error, mix of the market, openness and central control (see Tahir, Harcourt and Kerr, 2002). Much of the flesh was put on the skeleton in her 1960 Exercises in Economic Analysis (1960b), a do-it- yourself manual for students and teachers alike. The first lecture of the 1950s trio was concerned with interdepartmental flows that planners in less developed countries would need to have at the back of their

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heads – and the forefronts of their minds. The inspiration for these came, I suspect, from Marx’s schemas of reproduction through Kalecki’s influence – he used Marx’s schemas when he independently established the principal propositions of Keynes’s General Theory. The sectoral flows concern both monetary and real productive flows and the conditions for balance between sectors and between the totals and compositions of broad demands and supplies. The organisation is classical as the surplus, its creation, extraction, distribution and use, is the core concept of the analysis. The analysis was brought up to date by the use of the national accounting framework associated with the development of Keynesian analysis, but the classical Marxian emphasis on the sphere of production where work and production are organised and occur is never lost sight of. And when discussing the process of accumulation itself she always stresses the difference between finance and the real process of accumulation, on the one hand, and finance and the process of saving, on the other – a principal lesson she derived from the capital theory debates of the 1950s and 1960s and that she thought had been lost sight of in the neoclassical approach to growth and accumulation. In the light of the resurgence of saving determines investment models in recent years, especially in the discussion of international accumulation, she may not have been that far off the mark now (though I am also sure that Bob Solow and Trevor Swan were well aware of the distinction she was making). The second lecture is concerned with the choice of techniques of production to be embodied in accumulation in a labour-abundant, less- developed country. The analysis here reflects two strands. One was her then preoccupation with Wicksell’s account of the choice of technique to which she had returned in the context of her precipitation of the capital theory debates at about this time and of her writings on growth theory where, she argued as we saw above (see pp. 189–90) these were the most difficult but not the most important issues she needed to deal with. The other strand was the debate associated with Maurice Dobb (1954), Walter Galenson and Harvey Leibenstein (1955) and Amartya Sen (1960) on this issue in less developed countries. Here she felt that Dobb and Sen were inclined to rationalise a Stalinist emphasis on heavy industry even at the expense of employment-creation and gently rising standards of living for citizens in the present. She argued for a compromise, a middle way, which allowed something to be done for both employment and current living standards even if it meant that the surplus extracted for accumulation was less overall and the degree

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of mechanisation in embodiment less than in the Dobb–Sen analysis. Here and elsewhere, she always stressed the central role of the size of the real wage (or its equivalent in non-wage societies) – how it helped to determine how many people a given surplus of commodities would employ and also how it affected the sort of investment goods it was best for them to make at any moment of time. In the same set of lectures she discussed the role of the price mechanism in developing countries. Her published views on this are in her difficult but profound essay, ‘The philosophy of prices’ (Collected Economic Papers, vol. II, 1960a pp. 27–48). As we saw, Joan Robinson consistently argued that to understand an economy we must start from its history, institutions and ‘rules of the game’, especially when we are trying to influence the forms the last two should take. Here, however, she grappled with the inescapable facts of life of any society in which commodities are exchanged, having been produced by labour and commodities, and a price mechanism rules: that there is a two-way interchange between incomes and prices and that the appropriate price structure for the desired development of the economy may not throw up for significant sections of the population incomes that are consistent with society’s perception of what is a decent, acceptable and humane standard of life. This problem is made even more complicated by the fact that in one form of (pure) price system, incomes arise from prices that are related to commodities produced by specific factors, while in the other form of pure price system she identifies, factors are not specific, can operate in any sector. She also touched on the thorny problem of population, its role and its control. Though in later writings she was to argue that generalisations about the relationship between population growth and potential prosperity were pretty wonky propositions, she did argue that in the case of China some systematic measures to reduce family size were needed. Indeed she was most consistent on this, arguing that population was a variable that any enlightened society would try to influence, otherwise so much of current accumulation would have to be taken up in the process of merely standing still. As Tahir (1990a, p. 103) has pointed out, her views date from observing the effects of overpopulation in India in the 1920s; this even led her to argue against Harrod for a declining population independently of stages of development or the particular form of economic and social system, a view that, she also pointed out, was neither that of the pioneering development economists nor that of the Marxists ‘who have always brushed overpopulation aside as a capitalist bogey’ (Joan Robinson, 1949a p. 64)3 She added that now Communism

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was about to commence in a country with potentially Malthusian problems, how its rulers reacted to the issue could prove decisive!

8 Development

The general principles that she drew on here continued to guide her for the rest of her life. In 1979 she published a book on Aspects of Development and Underdevelopment in which she spelt out in detail the approach she developed in the 1950s and earlier. One of her colleagues tried to dissuade her from publishing it for fear of what it would do to her reputation; in fact it has stood the test of time remarkably well. She is as usual too starry-eyed about how the Chinese (and the North Koreans) do particular things and too harsh on how the Americans do things at home and abroad. (She always said that as Empires go–went– the British Empire was not all that bad; she is highly critical of certain episodes in British history but she is nevertheless more kindly disposed towards its performance than that associated with American hegemony in the post-war period.) She also argued that accumulation would inevitably be faster, if not more efficient, in a planned economy regime than in capitalism, a judgement that has not stood the test of time, though the legacy from the 1980s of unused office blocks in down-town areas of many advanced capitalist countries is not an index of rationality in accumulation decisions either.4 Generally, the pages are filled with a mixture of acute analysis, usually well chosen empirical examples, a feel for what ought to be done, coupled often with realistic analysis containing realpolitik but also influenced by her growing pessimism about what was likely to happen. At the end she concludes:

While population is still growing, though at a slightly decelerating rate, the arms race is continuing at an accelerating rate [this was a major reason for her pessimism in later life] and the spread of com- mercialism is destroying human values everywhere, it is not easy to take an optimistic view of the situation of the Third World today. All that economic analysis can hope to contribute is to remove some illusions and to help whoever is willing to look to see what their situation really is. (Joan Robinson, 1979b p. 143)

As we noted earlier, the structure of her thought increasingly came from Marx’s schemas of reproduction through Kalecki to her own interpretation of them. The latter was set out most perceptively in her tribute to Kalecki in the Memorial Issue of the Bulletin of the Oxford Institute of

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Economics and Statistics for Kalecki (Joan Robinson, 1977c). There, she divided the economy into two sectors, the wage goods sector and the investment goods sector. She showed how activity, employment and distribution in the short term were determined by the rate of accumulation, the differing saving behaviour of the wage-earners and profit- receivers and the pricing policies of the wage goods (more generally, consumption goods) sector. Employment would tend to settle at a level where there were sufficient consumption goods produced to provide the wages of wages-earners in the investment goods sector as well as those of wage-earners in the consumption goods sector itself. Given the rate of investment and the employment required for the production of capital goods to meet it, the prices of consumption goods, the money- wage rate, and the productivity of the wage-earners in the consumption goods sector between them would determine the surplus per person in the consumption goods sector available for wages in the investment goods sector, and so the required level of employment overall. (For simplicity, we abstract from rentier consumption and wage-earner saving.) This framework led naturally in the context of development to a discussion of the sorts of land reform that would best serve to raise productivity and therefore the potential surplus in the agricultural sector. In the late 1970s, Joan was still uncritical of Chinese experience. Having pointed out that the drawback of small holdings was that each family had to produce a range of products so that land would not be specialised to its best use, she argued that the then Chinese system of large com- munes divided into small teams combined the advantage of intensive use of labour with control over the use of land in large units. She felt that this provided a strong incentive for teams to put in extra work to improve their land in schemes organised on an appropriate scale because they collectively shared in any improved income that resulted (Joan Robinson, 1979b pp. 52–53). She comments wryly on land reform in parts of Latin America, that was ‘intended to save the peasants from exploitation’ but had ‘been turned into a more efficient, because less brutal, method of exploiting them’ by making them wage-labourers on commercial farms (1979b, p. 54). For capitalist systems it was easy to show in this framework that full employment was unlikely to occur. But this was not inevitable in the context of development, which also would have to take into account foreign exchange constraints associated with trade and lending and borrowing and the Kaleckian view that the workers must have some extra jam today rather than wait for a tomorrow, which, in reality, often never came. It was within such a framework that Joan commented on

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different institutional forms, actual and ideal, the roles and limitations of government, and what behaviour could and would be expected of citizens at work and in their own community.

9 Return to Marx

The most balanced way to end therefore is, I believe, with the Bhaduri and Joan Robinson (1980) paper; ‘Spring Cleaning’ is too pessimistic and nihilistic. (I chaired the session at the Eastern Economic Association Meeting in Montreal in 1980 at which Joan Robinson gave this paper. No one was game to respond to her challenge despite my scolding of them for timidity (Joan Robinson, 1980f).) In the former paper, Sraffa provides a classical cum Marxist framework of the sphere of production, on the one hand, and of the sphere of distribution and exchange, on the other. Keynes and Kalecki (via Marx) provide the dynamics, the realisation or not of the potential surplus, short period by short period, culminating in a theory of cyclical growth. Joan Robinson was especially influenced by Kalecki’s version, but Richard Goodwin’s contributions belong to the same tradition. And he always pointed out that he owed much to Joan Robinson in the development of his eclectic approach to modelling the cyclical growth of modern capitalism. See, for example, Goodwin and Punzo (1987). It is no accident that, for the 30 years he taught at Cambridge, he had a prominent role in Joan Robinson’s circle. In Joan Robinson the profession has been well served by the provision of a role model. She was often difficult to work with; but she also had that combination of first-class intelligence, keen powers of observation, a passionate desire to know how things worked and how to make them work better, especially for those least able to defend themselves, and that ability to structure and communicate in a clear and intelligible way a usable system of thought that characterises the greatest members of our trade.

Notes

† This chapter incorporates views previously set out in Harcourt (2001, 1998). I am much indebted to the incisive studies by Pervez Tahir (1990a, 1990b) of Joan Robinson’s views on development. I am, of course, alone responsible for the views expressed in the chapter. 1. Sometimes, though, her language was ambiguous – this, I think, was one cause of the intense irritation experienced by Abba Lerner in his review of the book (Lerner, 1957).

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2. To be fair to Keynes, though in reply to Ralph Hawtrey’s criticisms he distinguished between existence and stability problems he did develop the concept of shifting equilibrium as the most sophisticated method to arise from his new theory (Collected Writings XIV, 1973, p. 181). 3. Tahir (1990a, pp. 102–3) refers to an exchange of letters between Joan and Harrod on the imminent decline in the British population. (Harrod’s letters, 12–17 January 1938, may be found in Joan Robinson’s papers in King’s College Modern Archives.) Harrod was concerned about the Brits being outbred, while Joan was concerned to relate population policy to the need to establish and support ‘decent living standards evrywhere’ (Tahir, 1990a, p. 103), see, for example, Joan Robinson (CEP, II, 1960b, pp. 107–13). 4. It has been pointed out to me that she was ‘then well past the age of youthful naïveté, [that] [s]he had a settled ideological position which led her to put the best possible construction on what she saw ... to believe what she was told by the representative of the regimes’. I think this attributes far too much sense of realpolitik to Joan; she lacked judgment, she had little tactical sense or guile, and she never developed an acute sense of orders of magnitude. But her utopian idealism, a search, as Paul Samuelson (1989, p. 136) put it, for that ‘ “true socialism” [which] was her first and ever love, not the pretenders who took its name in vain’, was a life-long constant in her psychological make-up. Samuelson added: ‘Who is to say that her value judgements were wrong, or other than noble?’ Certainly not this writer.

References

Bhaduri, A. and J. Robinson (1980), ‘Accumulation and Exploitation: An Analysis in the Tradition of Marx, Sraffa and Kalecki’, Cambridge Journal of Economics, 4, 103–15. Bradford, W. and G. C. Harcourt (1997), ‘Units and Definitions’, in Harcourt and Riach (eds), pp. 107–31. Dobb, M. H. (1954), On Economic Theory and Socialism. Collected Papers, London: Routledge and Kegan Paul. Feiwel, G. (ed.) (1985), The Theory of Normal Prices and the Reconstruction of Economic Theory, London: Macmillan. Galenson, W. and H. Leibenstein (1955), ‘Investment Criteria, Productivity, and Economic Development’, Quarterly Journal of Economics, 69, 343–70. Goodwin, R. M. and L. F. Punzo (1987), The Dynamics of a Capitalist Economy: A Multi-sectoral Approach, Cambridge: Polity Press. Harcourt, G. C. (1963), ‘A Critique of Mr. Kaldor’s Model of Income Distribution and Economic Growth’, Australian Economic Papers, 2, 20–36. Harcourt, G. C. (1993), Post-Keynesian Essays in Biography: Portraits of Twentieth Century Political Economists, London: Macmillan. Harcourt, G. C. (1994), ‘Kahn and Keynes and the Making of The General Theory, Cambridge Journal of Economics, 18, 11–23. Harcourt, G. C. (1995), ‘Joan Robinson, 1903–1983’, Economic Journal, 105(423), 1228–43.

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Harcourt, G. C. (1998), ‘Two Views on Development: Austin and Joan Robinson’, Cambridge Journal of Economics, 22, 367–77. Harcourt, G. C. (2001), ‘Joan Robinson and Her Circle’, History of Economic Ideas, 9, 59–71. Harcourt, G. C. and P. A. Riach (eds) (1997), A ‘Second Edition’ of The General Theory, vol. 2. London and New York: Routledge. Harris, D. J. (1975), ‘The Theory of Economic Growth: A Critique and Reformulation’, American Economic Review, Papers and Proceedings, 65, 329–37. Harrod, R. F. (1939), ‘An Essay in Dynamic Theory’, The Economic Journal, 49 (193), 14–33. Harrod, R. F. (1948), Towards a Dynamic Economics: Some Recent Developments of Economic Theory and Their Application to Policy, London: Macmillan. Kahn, R. F. (1929; 1989), The Economics of the Short Period, London: Macmillan. Kahn, R. F. (1954), ‘Some Notes on Liquidity Preference’, Manchester School of Economic and Social Studies, 22, 229–57. Kaldor, N. (1934), ‘A Classificatory Note on the Determinateness of Equilibrium’, Review of Economic Studies, 1, 122–36. Kerr, P. (ed.) in collaboration with G. C. Harcourt (2002), Joan Robinson. Critical Assessments of Leading Economists, 5 vols. London: Routledge. Keynes, J. M. (1936), The General Theory of Employment, Interest and Money, London and Basingstoke: Macmillan. Keynes, J. M. (1973), The General Theory and After: Defence and Development, in D. Moggridge (ed.), The Collected Writings of John Maynard Keynes, vol. 14, London: Macmillan. Kregel, J. A. (1976), ‘Economic Methodology in the Face of Uncertainty: the Modelling Methods of Keynes and the Post-Keynesians’, Economic Journal, 86, 209–25. Luxemburg, R. (1951), The Accumulation of Capital, London: Routledge Kegan. First published in 1931. Robinson, J. (1937a), Introduction to the Theory of Employment, London: Macmillan. 2nd edition, 1969. Robinson, J. (1937b; 1947), Essays in the Theory of Employment, 2nd edition, Oxford: Basil Blackwell. First published 1937. Robinson, J. (1951–80), Collected Economic Papers, Oxford: Basil Blackwell. Robinson, J. (1951a), Collected Economic Papers, vol. I, Oxford: Basil Blackwell. Robinson, J. (1951b), ‘Marx and Keynes’, in Collected Economic Papers, vol. I, Oxford: Blackwell. Robinson, J. (1951c), ‘Introduction’, to the English edition of Rosa Luxemburg’s The Accumulation of Capital, reprinted in Joan Robinson (1975b), pp. 59–73. Robinson, J. (1952a), The Rate of Interest and Other Essays, London: Macmillan. Robinson, J. (1952b), ‘The Model of an Expanding Economy’, Economic Journal, reprinted in Joan Robinson (1975b), pp. 74–87. Robinson, J. (1953a), ‘The Production Function and the Theory of Capital’, Review of Economic Studies, 21(2), 81–106. Reprinted in abbreviated form with a postscript in Joan Robinson (1960a), pp. 114–31. Robinson, J. (1953b), On Re-Reading Marx, in Joan Robinson (1973a), pp. 247–68. Robinson, J. (1955), ‘Marx, Marshall and Keynes’, in Joan Robinson (1975b), pp. 1–17.

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Robinson, J. (1956), The Accumulation of Capital, London: Macmillan, 2nd edition, 1965, 3rd edition, 1969. Robinson, J. (1960a), Collected Economic Papers, vol. II, Oxford: Basil Blackwell. Robinson, J. (1960b), Exercises in Economic Analysis, London: Macmillan. Robinson, J. (1961a), Essays in the Theory of Economic Growth, London: Macmillan. Robinson, J. (1961b), ‘Own Rates of Interest’, Economic Journal, 71, 596–600. Robinson, J. (1962a), Essays in the Theory of Economic Growth, London: Macmillan. Robinson, J. (1962b), ‘Review of H. G. Johnson, Money, Trade and Economic Growth’, Economic Journal, 72, 690–92. Reprinted as ‘The General Theory After Twenty-five Years’, in Collected Economic Papers, vol. III, Oxford: Blackwell, 1965, pp. 100–102. Robinson, J. (1965a), ‘The General Theory After Twenty-Five Years’, in Collected Economic Papers, vol. III, Oxford: Basil Blackwell, pp. 100–2. Robinson, J. (1969b), The Economics of Imperfect Competition, London: Macmillan. 2nd edition. Robinson, J. (1973a), Collected Economic Papers, vol. IV, Oxford: Basil Blackwell. Robinson, J. (1974), ‘History versus Equilibrium’, Thames Papers in Political Economy, Thames Polytechnic, London. Reprinted in Joan Robinson (1979a), pp. 48–58. Robinson, J. (1975b), Collected Economic Papers, vol. II, Oxford: Basil Blackwell. 2nd edition. Robinson, J. (1977c), ‘Michal Kalecki on the Economics of Capitalism’, Bulletin of the Oxford Institute of Economics and Statistics, 39, 7–17. Robinson, J. (1979a), Collected Economic Papers, vol. V, Oxford: Basil Blackwell. Robinson, J. (1979b), Aspects of Development and Underdevelopment, Cambridge: Cambridge University Press, 2nd edition, 1981. Robinson, J. (1980f), ‘Spring Cleaning’, Cambridge, mimeo. Published as ‘The Theory of Normal Prices and the Reconstruction of Economic Theory’, in Feiwel (1985b), pp. 157–65. Robinson, J. (1985), ‘The Theory of Normal Prices and the Reconstruction of Economic Theory’, in Feiwel (ed.) (1985) pp. 157–65. Sen, A. K. (1960), Choice of Techniques: An Aspect of the Theory of Planned Development, Oxford: Blackwell. Shove, G. F. (1944), ‘Mrs. Robinson on Marxian Economics’, Economic Journal, 54, 47–61. Strachey, John (1935), The Nature of Capitalist Crisis, London: Gollancz. Sraffa, P. (1925), ‘Sulle relazioni fra costo e quantità prodotta’, Annali di Economica, 11, 277–328. Sraffa, P. (1926), ‘The Laws of Returns Under Competitive Conditions’, Economic Journal, 36, 535–50. Sraffa, P. (1936), ‘Letter to Joan Robinson’, reprinted in W. Bradford and G. G. Harcourt (1997), ‘Units and Definitions’, ch. 7 in Harcourt and Riach (eds), pp. 130–31. Sraffa, P. (1951), ‘Introduction to D. Ricardo, Principles of Political Economy and Taxation’, in P. Sraffa (ed.) with the collaboration of M. H. Dobb, Works and Correspondence of David Ricardo, vol. I, Cambridge: Cambridge University Press.

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Sraffa, P. (1960), Production of Commodities by Means of Commodities: Prelude to a Critique of Economic Theory, Cambridge: Cambridge University Press. Tahir, P. (1990a), Some Aspects of Development and Underdevelopment: Critical Perspectives on Joan Robinson, unpublished Ph.D dissertation, Cambridge. Tahir, P. (1990b), ‘Making Sense of Joan Robinson on China’, mimeo, Cambridge. Tahir, P., G. C. Harcourt and P. Kerr (2002), ‘On Joan Robinson and China’, in Kerr (ed.) with Harcourt (2002), pp. 267–80.

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The starting point must be Alfred Marshall (even though Keynes called Malthus ‘the first of the Cambridge economists’ and Keynes’s successors were increasingly to draw on classical political economy and Marx for inspiration). Marshall though was responsible for the foundation of the Economic Tripos (in 1903) and also, in large measure and at least until very recently, for the approaches to economics in Cambridge even as we know them today. The Marshallian tradition has it that economists should explain how the world works and then, if it does not work well or fairly, do something about it (within well-defined limits). This should be done by theorising, doing applied work and formulating plausible policies. The approach to applied economics emphasises the importance of relevance in economics, incorporating the lessons of history, the institutional context and previous social and political conditions, gathered under the rubric of the ‘rules of the game’. Theory and measurement are interdependent, feeding back and modifying and expanding one another. This tradition has characterised the contributions of the Faculty’s Department of Applied Economics, a research institute which started in 1945 with Richard Stone (one of four Cambridge recipients of the Nobel Prize) as its first Director. Shockingly, it no longer exists, following an internal coup and takeover. Marshall’s major contribution was his huge Principles of Economics, first published in 1890. It went through eight editions in his lifetime, as volume I for the first five as he initially intended to write two or three more volumes. What would have been the structure of Marshall’s

* Originally published in J. E. King (ed.), The Elgar Companion to Post Keynesian Economics, Cheltenham, UK and Northampton, MA: Edward Elgar Publishing, pp. 44–51.

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ideal Principles? In the first volume he wrote about the nitty gritty of economic life – what determines the prices and quantities of commodities produced, what determines the wages, salaries and employment of different sorts of labour, what determines the rates of profit in various industries, i.e. a theory of relative prices and quantities. He introduced systematically into economics the use of supply and demand functions and curves in order to analyse the formation of prices and quantities in, principally, freely competitive markets. His second great contribution was to recognise in a deep way that time is the most elusive, difficult yet relevant concept affecting economic life. To try to capture this insight Marshall used three analytical concepts: the market, short and long periods. The first deals with existing stocks, the last two with flows. The short period is an analytical device which takes in a period long enough for employment and production but not for the number of firms, amounts of machinery available and numbers of skilled labour to change; the long period is long enough for firms to enter or exit and for amounts of machinery available and supplies of labour to change (the methods of production known at the start of the long period, however, are not allowed to change). These are not one-to-one descriptions of real life, but analytical devices which exploit the concept of ceteris paribus. The economist decides what may or may not vary, in order to get a grip on intricate interconnecting processes and so develop theories of prices and quantities of commodities, and of the services of the factors of production. Money does not get a mention except as a ticket – something in which to measure things; it has little to no analytical role. Everything is done in real, relative terms. Though Marshall understood general equilibrium analysis and had a general equilibrium model in an appendix, he preferred to use partial equilibrium analysis, examining one firm or one industry only, in order to make the analysis manageable and obtain definite results (the limitations of which were explicitly stressed). Money entered the scene properly when Marshall (in a never properly spelt-out second volume) developed the quantity theory of money in order to describe what determined the general price level. He argued that, at least in the long period, what was happening in the real sector and what was happening in the monetary sector of the economy – banks and the financial sector generally, the formation of the general price level – were independent of one another. Money was basically a veil. In the short period it was admitted that monetary matters could have real effects, though this was not worked out systematically because of the constraint of the dichotomy between the real and the monetary. The role of monetary institutions, including central banks, was to so control the monetary

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side of the economy that the underlying real factors operating in a competitive environment were not handicapped in their determination of the allocation of resources, with supplies and demands responding to each other and tending to bring about a sort of social optimum. This was only a sort of social optimum. The Marshallian tradition did not contain an uncritical defence of laissez faire – poverty, unemployment, unsatisfactory working conditions were all recognised, along with a limited role for government to tackle them. Nevertheless, logically, it was required to argue that, if there were competition, there were strong forces to ensure the production of goods and services that people wanted by businesspeople who were able to employ their capitals as they wanted and workers who could do the jobs they wished to. Only then was it possible to argue that in the long period it was the quantity of money which determined the general price level, as long-period levels of activity and employment could now be regarded as givens along with the long-period value of the velocity of circulation. As to the limitations of the outcome even in these circumstances it was Pigou, Marshall’s successor, who developed the economics of welfare, analysing what happens, and what to do about it, if social costs and benefits were not matched by their private counterparts that the competitive system threw up. His influence is alive and well today under the guise of externalities. Pigou, drawing on his mentor, established another aspect of the Cambridge tradition, that our subject should be, first and foremost, fruit-bearing rather than only light-bearing. This view is to be found in the many editions of The Economics of Welfare. An interest in the causes of poverty and inequality, as well as in the distribution of income, reflects this strand. It is especially associated with the writings of James Meade, David Champernowne, Amartya Sen and Tony Atkinson (who explicitly acknowledges Meade’s inspiration and example). Keynes was Marshall’s most distinguished pupil. He dominated Cambridge economics from the 1920s until his death in 1946 and beyond. His work in the late 1920s and in the 1930s significantly extended and radically changed the Marshallian tradition in which he was brought up. He was driven, as were/are all the outstanding Cambridge economists, by an intense seriousness: a desire to understand the world, especially why it malfunctioned, and how to make it a better place. Trained as a mathematician, Keynes was also a fine philosopher as well as a great economist. He always regarded economics as a branch of moral philosophy. Three strands of his philosophical understanding are especially relevant for the Cambridge economic tradition: first, that in a discipline such as economics there is a spectrum of languages

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running from intuition and poetry through lawyer-akin arguments to formal logic and mathematics, all of which are relevant for particular issues, or aspects of issues, in the subject; secondly, that in the workings of complex economic systems, the whole may be more than the sum of the parts; and thirdly, two questions learnt from Marshall, what are the principles which guide sensible (sometimes not so sensible) people doing the best they can in situations of inescapable uncertainty and what are the systemic effects of their behaviour? The significance of these strands was made most explicit in the 1930s when Keynes was writing The General Theory. In the 1920s and especially the 1930s he started to rethink drastically how the world worked, initially with his close ally, Dennis Robertson, who was a bridge between Marshall and Keynes, but who, in the end, tragically split with Keynes (a personal tragedy for him and also a professional one for the development of economics). As Keynes was rethinking Marshall’s monetary theory, others at Cambridge were starting to rethink (and in the case of Piero Sraffa ultimately reject) Marshall’s theory of the determination of prices and quantities at the level of the firm and industry. Sraffa published two fundamental papers in the mid-1920s, one in Italian (1925), the other in English in the Economic Journal (1926). Both contained an attack on Marshall’s method, i.e. the extremely limited practical applications of partial equilibrium analysis (and, he thought then but for different reasons, general equilibrium analysis). But he also suggested that monopoly rather than free competition was the better model of how markets worked, that firms’ prices and outputs were constrained by demand rather than by rising supply prices and costs. The appropriate model was therefore one of mini-monopolies surrounded by mini-monopolies so that they had to take account of their actions and other firms’ reactions when setting prices. The 1926 paper helped precipitate the imperfect competition revolution developed by Gerald Shove, Richard Kahn and then Austin and especially, Joan Robinson. Her 1933 Economics of Imperfect Competition, though still Marshallian/ Pigovian in construction, greatly altered the emphasis and details of the results in this tradition. Sraffa had abandoned the tradition by 1930 and had started on the long trail which would lead through his edition of Ricardo’s works (Sraffa with Dobb, 1951–55, 1963) to Production of Commodities (1960), both a critique of the foundations of neoclassical theory and simultaneously a rehabilitation of the approach of classical theory including Marx. Joan Robinson only joined him, more or less fully, in the post-war years, Kahn probably never fully and Shove and Austin Robinson not at all.

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Keynes became more and more dissatisfied with Marshall’s way of looking at the economy as a whole, especially the view that we could talk about prices and quantities independently of what was happening in the financial and monetary sectors generally. He also changed the emphasis from the long period, the central core of Marshall’s economics, to the short period, including designing policies for other than that ‘long run [in which] we are all dead’ (Keynes, 1923, 65). A Treatise on Money (1930), two volumes, was meant to be Keynes’s magnum opus but it was too constrained by the Marshallian tradition to be successful. So in the 1930s he started again, aided by the remarkable group of young economists in the so-called Cambridge ‘circus’, Kahn, James Meade, Austin and Joan Robinson, Sraffa, as well as by Roy Harrod in Oxford. What did he do in his authentic magnum opus, The General Theory, published in 1936? The 1920s in the United Kingdom and then the 1930s in much of the advanced industrialised world was characterised by mass unemployment. Economic theory, though, said that at least in the long term it could not occur if impediments to competition were removed. Keynes, working through his rational reconstruction of the traditional analysis, decided that it was wrong, that there could be a failure of overall demand so that people and machines could be involuntarily idle for considerable periods of time and that there were not strong or indeed any forces at work in an unregulated economy that tended to redress these situations. Why? Principally because important expenditure decisions had to be made in situations of inescapable uncertainty about the future. This was especially true of investment decisions, the desire to accumulate, which drove capitalist systems along. Keynes showed that there were no persistent forces at work which, at least on average, could produce enough investment to absorb the resources released by what the community would voluntarily save at the full employment level of income where all those willing to work under existing conditions would have jobs. In situations of unemployment there was no way in which those who were willing to work, but who were involuntarily unemployed, could signal to employers that it would be profitable to employ them. And indeed, it would not be profitable unless there were to be a simultaneous, autonomous rise in the total demand. It followed therefore that there was a coherent logical case for government intervention; Keynes had provided an explicit theory with which to rationalise the commonsense policies which were being put forward at the time. A barrier to this being perceived before was the real-monetary dichotomy, with money only a veil. But, as it is also a store of value, people

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could hold it and other financial assets rather than spend. In Keynes’s view this second reason for holding money plays an important part in determining the pattern of the rates of interest. The forces concerned may not be such as to give a pattern which induces a rate of accumulation of real things which offsets full employment saving. We now have an integrated theory of the real and monetary, of a monetary production economy. All members of the ‘circus’ influenced Keynes but Kahn, his favourite pupil, was especially influential in the making of The General Theory: first, as a remorseless critic of the quantity theory as a causal explanation of the general price level; secondly, through his work on the short period in the late 1920s, in which he made it a subject worthy of analysis in its own right (though still at the level of the firm and industry); and, thirdly, with James Meade, through his 1931 article on the multiplier, which provided an essential concept for Keynes’s new system, showing how investment created saving and not the other way round, as in the traditional view (Kahn, 1931). The General Theory (and a few following articles) were Keynes’s great theoretical contribution to economics in the past century and the Cambridge contribution has built on these foundations ever since: developing policies to run a war-time economy including keeping inflation in check, using Keynes’s concept of the inflationary gap; designing the required international institutions for the post-war world at Bretton Woods, in order to remove the contractionary, deflationary biases built into the operation of much of the world economy (here Keynes leaves us, dead at the ridiculously early age of 62 in 1946); and, thirdly, in the post-war period developing long-term theories of distribution and growth over time. With this last it was some of Keynes’s colleagues in the circus – Kahn, Joan Robinson, Sraffa – together with Nicholas Kaldor (who came to Cambridge from the LSE in the post-war years), Richard Goodwin and Luigi Pasinetti, who were the pioneers. Within the post-war development of growth theory their work stands out as peculiarly Cambridge in that it draws on insights from the classical political economists, Marx and Keynes, initially in response to Harrod’s original and seminal writings just before and after World War II (Harrod, 1939, 1948). One basic question was whether capitalist economies could maintain full employment of labour and capital over time when both the employment-creating and the capacity- creating effects of accumulation were taken into account, together with the classical concern with technical progress, embodied through accumulation itself. In the Cambridge approach (which includes Michal Kalecki’s

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contributions, principally through Joan Robinson) investment led and saving responded, through changes in both output and distribution, taking note of differences in saving propensities at the margin as between wages and profits (and their recipients). (Kaldor flirted with being Jean Baptiste Kaldor for over a decade by assuming that growing economies were fully employed and letting changes in distribution do all the work.) The ultimate goal, probably only reached by Kalecki and Goodwin, was to model descriptively the movement of industrial societies over time. Joan Robinson and Kahn prefaced this objective with Golden Age analysis, walking before they ran, getting definitions and concepts clear and precise before tackling the much harder task of disequilibrium dynamic analysis. Ever impatient, Kaldor’s writings in the 1950s and 1960s were meant to be descriptive analysis, theories to explain his famous ‘stylised facts’ of economic growth, increasingly in the 1970s and 1980s by means of cumulative causation processes. Neoclassical growth theories, though similarly stimulated (irritated?) by Harrods’ writings, tackled his conundrums – the instability of the warranted

rate of growth (gw), the unlikely correspondence of gw with the natural

rate (gn) – by explicitly concentrating on the supply side and the long- term effects of substitution possibilities in production. Initially aggregate production functions as well as multi-sector n-commodity models were used. This led to the Cambridge critique of capital and marginal productivity theory generally, associated especially with Kaldor’s, Joan Robinson’s and Sraffa’s writings on value, distribution and capital theory. Also, through Sraffa’s contributions and Joan Robinson’s writings on Marx and her absorption of Kalecki’s approach, the central classical/ Marxist organising concept of the surplus – its creation, extraction, distribution and use – was integrated into the Cambridge approach and tradition. Pasinetti’s ‘theoretical essay on the dynamics of the wealth of nations’ (1981) is the most systematic and comprehensive development of the classical and Keynesian elements outlined above, thus making him the senior living heir of this strand of the Cambridge tradition; see Pasinetti (2007) for a comprehensive account of his take on the Cambridge tradition, his own approach and the best way toward. Finally, the tradition is marked by an interest in the history of our subject and the relevance of our predecessors’ writings for current issues. Marshall set the example; Keynes’s biographical essays reflect it (though he was not always the most accurate or reliable historian of theory); and Joan Robinson’s writings are characterised by references to the insights of past economists, often in order to back up her current interests and

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interpreted accordingly (see Harcourt and Kerr (2009))! The two greats, though, are Kalecki’s only two English gentlemen, one an Italian and the other a communist, Piero Sraffa and Maurice Dobb. Sraffa’s edition of Ricardo’s works and correspondence (with the collaboration of Dobb) and his attempt to rehabilitate the classical approach in Production of Commodities are extraordinary examples of scholarship and theory combined. Dobb was the foremost Marxist economist of his era and his writings and influence still defuse through modern work, even when those affected are not aware of it. Dobb, together with Phyllis Deane and Robin Matthews and their colleagues, also left a distinctive stamp on our understanding of economic history. I have tried to make clear what I understand to be the Cambridge tradition. I have to say that many of the present decision-makers in the Faculty have done their best to suppress this tradition and to replace it with approaches which reflect what they see as the best practice of leading American Departments.

References

Harcourt, G. C. and Prue Kerr (2009) Joan Robinson Houndmills, Basingstoke, Hampshire: Palgrave Macmillan. Harrod, R. F. (1939), ‘An Essay in Dynamic Theory’, Economic Journal, 49, 14–33. Harrod, R. F. (1948), Towards a Dynamic Economics, London: Macmillan. Kahn, R. F. (1931), ‘The Relation of Home Investment to Unemployment’, Economic Journal, 41, 173–98. Keynes, J. M. (1923), A Tract on Monetary Reform, London: Macmillan, C.W., vol. IV, 1971. Pasinetti, L. L. (1981), Structural Change and Economic Growth: A Theoretical Essay on the Dynamics of the Wealth of Nations, Cambridge: Cambridge University Press. Pasinetti, L. L. (2007), Keynes and the Cambridge Keynesians: A ‘Revolution in Economics’ to Be Accomplished Cambridge: Cambridge University Press. Sraffa, P. (1926), ‘The Laws of Returns Under Competitive Conditions’, Economic Journal, 36, 535–50. Sraffa, P. (1960), Production of Commodities by Means of Commodities: Prelude to a Critique on Economic Theory, Cambridge: Cambridge University Press.

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9780230_284692_15_cha13.indd 209 12/23/2011 5:06:03 PM 9780230_284692_15_cha13.indd 210 12/23/2011 5:06:03 PM 13 New Labour and Constitutional Reform: Why not Introduce Compulsory Voting in all Elections? (2000)*

New Labour, though keen to reform the United Kingdom constitution (or lack of it), has never considered one obvious, simple constitutional change which is democratically desirable and helpful to New Labour’s cause – the introduction of compulsory voting in all elections.† When I first came to the United Kingdom in 1955 as a research student in economics at King’s College, Cambridge, I was amazed to learn that voting was voluntary, not compulsory as it was in my native Australia. (That the polling day was on Thursday, a working week day, at least for part of it, not on Saturday, was also a surprise.) Why do I think compulsory voting is a good thing in a democratic society? Let me first make explicit that voters under such a system would be fined if they did not turn up to vote (if they also failed to apply for an absentee vote); but they would not be penalised if they spoilt their ballots because they did not wish to vote for anyone or any party. It would still after all be a secret ballot and only the voters would know what they had done in the polling booths. In spite of this, informal votes, as these are called, do not under such systems amount to anywhere near the proportion of people who do not bother to vote in voluntary voting systems. (Moreover, part of the informal vote results from people having been unable to follow the (usually simple) instructions on how to vote, i.e. how to fill in the ballot paper.) Compulsory voting is a good thing because by finding out the views of virtually the entire eligible

* Originally published in Soundings, Issue 16, Autumn 2000, pp. 35–39.

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voting populations, we get, probably as near as is possible in an imperfect world, a true sense of people’s preferences. In Australia, of course, compulsory voting for the House of Representatives in the Federal Parliament is coupled with preference voting for individual candidates and parties. So the ultimate outcome of an election often depends on second preferences. For example, when the Australian Labor Party (ALP, note the historically determined spelling of Labor) split in the 1950s, the right-wing, anti-Communist, Roman Catholic faction formed a separate party, the Democratic Labour Party (DLP) and gave their second preferences to the Liberal (read Conservative) Country (read National) Party coalition. This resulted in the ALP being out of government for 23 years. A further feature of Australian elections is that the party faithful hand out ‘How to vote’ cards to voters as they arrive (at a legally determined distance from the polling booths). The hope is that the voters will follow the suggestions of their party and so stop preference drift occurring. By and large this is successful, though there is always a minority of donkey voters who just vote 1, 2, 3 ... down the card. This favours persons whose last names begin with ‘A’; and they have a better chance of being selected by their party, especially during those years when a candidate’s party affiliation was not put on the ballot paper. In 1961 the Menzies government nearly went out following a credit squeeze that got out of control and raised unemployment to above 2% (!!!!). A North Queensland conservative was elected as a result of donkey vote ‘preferences’ for the communist candidate Aarons, and this allowed the re-election of the Menzies government with a majority of one! Despite these examples, I think the Australian procedure is a good one; but I will not argue for its introduction in the United Kingdom as I want to concentrate on the prior need to have compulsory voting, and on the merits of this system. But I ought perhaps to point out that if the UK had compulsory voting and the Australian preference voting system, and if New Labour gave its second preferences to the Liberal Democrats, and if the Lib-Dems returned the compliment, and if their voters followed the ‘How to vote’ cards, I do not see how the Conservatives could ever form a government again! In Australia, who the Democrats give their preferences to (they are similar to the Lib-Dems – too decent to be Tory, too snobby to be Labor) – can be vital for the outcome. An implicit assumption in the case for voluntary voting is that, regardless of income or social class, or other defining characteristics of groups of voters, getting to vote is the same, as easy and as difficult, for everyone. But this is clearly nonsense. The scales are inevitably weighted against the least privileged members of the community. As

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they are the ones most likely to vote for the more progressive parties, there is an in-built bias against the latter and in favour of the more conservative parties. Voting on weekdays has a similar effect, though now that the weekend blurs imperceptibly into the week this may not be as important. At one stroke, compulsory voting would produce that most sought after of modern institutions, a level playing field for all. Of course, initially, it would be unwise to stress the advantage that compulsory voting offers to New Labour; but it is reasonable to point out that the resulting level playing field is a valid argument if we want elections that more truly reflect the overall preferences of voters. There have been a number of disquieting trends in democratic countries in recent decades, which compulsory voting would do something to offset. The most marginalised and least privileged groups have ceased to vote, in disproportionate numbers, because philosophical trends and the distribution of power, income and prosperity have combined to mean, increasingly, that governments can ignore their needs. We have a cumulative, self-fulfilling process, which is inequitable, socially destabilising and dangerous. If these groups had to vote, even within the structures of modern democratic capitalist societies, more emphasis would need to be put on their situation, as all parties would then be competing for their votes. An individual vote is, of course, neither here nor there and does not count. But, collectively, votes can make a difference. We have a classic case of the fallacy of composition – what I do in isolation has a different outcome from that which will result when all ‘I’s do it at the same time. In an ideal world no doubt, voluntary voting would be preferable – witness the inspiring sight of South Africans lining up to vote in the first election of the post-apartheid regime, an action of vital significance and importance for those who previously had been disenfranchised. It was a sight which ought to have shamed the United Kingdom’s often apathetic and cynical voters, especially those who do not bother to vote or even inform themselves about what the issues are and how each party proposes to tackle them. An unwillingness to vote is an awful judgement on the present state of society, reflecting the decline in com- munal solidarity and the lack of appreciation of past struggles to gain this basic right. I suspect it is partly a by-product of the rise of the self-interested individual associated with the Thatcher years (the decline in social capital is the current buzz words phrase) – there is a widespread assumption that the only person to look after is yourself and perhaps your immediate family, and that misfortune is by and large the fault of those who suffer it. After all, capitalism is institutionalised greed and selfishness,

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and modern vulgar followers of Adam Smith (of the Wealth of Nations) forget – they probably never knew – that his precondition for the viability and beneficial effects of a competitive economy in which self-interest guided decisions and actions was the prior creation of institutions which fostered altruism in various dimensions of social life, often through government measures. This was the central theme of his Theory of Moral Sentiments. (Smith was not, of course, a democrat – in his book, Demos is at best, placed third, with Philosopher Kings (no queens) in second place, and rank and wealth first. Perhaps he would have supported New Labour?) New Labour is always stressing individual responsibility in return for individual rights. This surely implies that a requirement to vote would be the first responsibility of a citizen of a society with a democratic constitution, and the benefits which that bestows. As Michael Rustin (26 June 2000) says of this: ‘The main thing is that they should have to make the effort to carry out their civic responsibility’. The argument for compulsory voting is strong for general elections; it is perhaps even stronger for European and local elections where turn- outs are abysmal, as they have tended to be also for some of the new devolved assemblies. Australians and Australian society are very democratic, for all our faults, and one reason for this is, I believe, that we are required to exercise our democratic rights by compulsory voting in both Federal and State elections. (These are held more frequently than corresponding elections in the United Kingdom, probably too frequently to allow for the implementation of sound and thoughtful economic and social policies.) The United Kingdom, again for all its faults, has pioneered the creation of some of the institutions which characterise democratic societies, not least the creation of an uncorrupt civil service – another institution which is not properly valued in modern Britain. Compulsory voting seems an obvious, simple and desirable change which would help to begin the task of offsetting current cynical and apathetic trends – which could ultimately destroy what the pioneers of democracy began to create.

Note

† I am most grateful to Michael Rustin for asking me to write this essay and for setting out arguments on which I have freely drawn.

9780230_284692_15_cha13.indd 214 12/23/2011 5:06:03 PM 14 The Economic Policies of Gordon Brown and the Treasury: Stability for What? (2001)* with John Grieve Smith

Gordon Brown is almost unique among Chancellors in the pains he has taken to set out the basic principles on which he believes economic policy should be conducted, and the rules which should govern the Treasury’s budgetary policy. He did this most succinctly in his lecture to the Royal Economic Society’s Millennium Conference in July 2000;1 and more recently the Treasury have covered the same ground in more detail in a 350-page handbook on economic policy, Reforming Britain’s Economic and Financial Policy: Towards Greater Economic Stability.2 These guidelines, which faithfully reflect the prevailing neo-liberal orthodoxy, deserve more critical attention than they have so far received. The Thatcherite revolution in the 1980s replaced full employment by price stability as the primary objective of economic policy. This remains the key feature of New Labour policy, despite its recent reaf- firmation of ‘full employment’ as a key objective. The basic principle is now that unemployment should not be allowed to fall below a level that threatens price stability. The Bank of England’s remit, in particular, is couched entirely in terms of an inflation target. Government responsibility for the state of the economy should be limited by making monetary policy the responsibility of an independent Bank of England and eschewing any active role for fiscal policy in maintaining a stable level

* Originally published in Soundings, Issue 20, Summer 2002, pp. 57–63.

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of demand. The power of financial markets, particularly in a global context, must be acknowledged and propitiated.

Demand management

Gordon Brown’s familiar keynote is ‘stability’. It has not always been clear, however, what is to be held stable. Left to its own devices, the economy is unstable: demand and activity tend to fluctuate, and the rate of inflation varies. If greater stability in output and employment is to be achieved, measures must be taken to stabilise demand. In other words demand management is essential. That means that whoever is in control of economic policy must be free to vary whatever instruments are available to affect demand, i.e. tax rates, public expenditure or interest rates, in a counter-cyclical manner. This may seem obvious, but at one time Mr Brown and his advisers seemed to be treating ‘stability’ as referring also to stability in such instruments (i.e. tax rates, interest rates, etc). In the event, he has maintained this position on budgetary policy, and ruled out counter-cyclical variations in taxes or public expenditure, but he supports the active use of monetary policy to help stabilise demand. Although the current doctrine is that ‘fine tuning’ is dead, the Treasury have initiated a system under which interest rates are fine-tuned to a degree never hitherto imagined, with the Monetary Policy Committee agonising monthly whether to change interest rates by 0.25 per cent! Monetary policy is to be directed to one simple objective – ‘price stability’, the common misnomer for a steady rate of inflation. It is not altogether clear whether the inflation target is the sole objective of monetary policy in the belief that this will also optimise the stated objectives of high and stable growth and employment, or whether they believe that low inflation should be the over-riding objective for its own sake – which was the position effectively adopted in the Thatcherite revolution, in response to the inflation crises of the 1970s. Given, however, their reiterated statement that there is no ‘trade off between inflation and unemployment’, it is difficult to see why inflation should be the only variable targeted. The emphasis on the ‘symmetrical’ inflation target highlights the point. If inflation falls to 1.5 per cent, why should the Bank of England try to get it up to 2.5 per cent again, unless a relax- ation in interest rates would be good for employment? The use of the phrase ‘trade-off’ confuses the causal relation. There can be little doubt that low unemployment and strong demand make it more difficult to curb inflation; and, conversely, higher unemployment

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and weak demand, other things being equal, tend to keep down the rate of inflation. On the other hand, nobody has ever believed that higher inflation will in itself be a cause of lower unemployment. Certainly at no time during the post-war period did the Treasury deliberately go for higher inflation, as Gordon Brown and his advisers so often seem to suggest.

The Golden Rule

The worry today is that monetary policy on its own is unlikely to be sufficient to counter any threat of a serious recession. In that event a more expansionary fiscal policy would be essential. So far, however, the Treasury have shown no willingness to adopt any ‘discretionary’ budgetary measures, such as temporary tax cuts or increases in public expenditure, to increase demand. The Pre-Budget Report did indicate that by maintaining existing tax and expenditure plans, the Treasury would allow the ‘automatic stabilisers’ to take effect (i.e. lower tax revenue and higher social security payments). But there was no suggestion that they would be prepared to go any further and take any deliberate measures to expand demand. To do so would conflict with the Chancellor’s Golden Rule that the current budget should be balanced over the business cycle. It is intriguing that although the Chancellor is happy with ‘discretion’ in the case of monetary policy, he favours ‘rules’ for fiscal policy with almost religious fervour. The distinction appears to be based on the idea that a group of economists can be trusted to make decisions in the public interest, but a Cabinet minister cannot. This is very flattering to the economics profession, but hardly very democratic – are we to leave foreign policy to the diplomats and defence policy to the military? There is no particular sanctity in the rule that the current account budget should balance over the cycle, and government borrowing should equal public investment; it is purely arbitrary. In economic terms the government’s net claim on resources reflects the overall balance between (a) current and capital expenditure and (b) revenue. Therefore in terms of its effect on demand the rule implicitly suggests that the Treasury’s contribution to expanding or contracting demand will depend solely on variations in public investment – back to early Keynesianism! In social terms (or inter-generational accounting), a few moments’ reflection will suggest that there is no inevitable validity in the idea that current expenditure solely benefits current taxpayers and capital expenditure benefits future taxpayers – so that it is all right to borrow for the latter, but not the

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former. Just as current expenditure on winning the second world war benefited future generations, so today’s expenditure on education or health may have benefits for many years to come. There is in reality no economic or social justification for the Chancellor’s Golden Rule – much as financial markets may like it. Moreover, though the Chancellor has committed himself (properly in our view) to planning public expenditure in the light of the medium to longer term needs of the economy, he has not coupled this with the necessary corollary that variations in taxation will be needed from time to time to maintain macro-economic stability. Indeed, given the mul- tiplicity of tax changes over the last three years it would be strange if the need to vary the fiscal stance were not a factor involved. Financial commentators frequently raise the question of whether the current ‘fiscal stance’ is appropriate to the state of the economy, and the Treasury assure us it is. But by ‘appropriate’, they virtually always mean tight enough to curb inflation, rather than loose enough to stimulate flag- ging demand.

Full employment

The most fundamental revolution in recent years has not been in the use of the tools of demand management; the change lies more in the purpose and direction of such use. Whereas after 1945 the prime objective was to maintain full employment, that is no longer so today. During the 1970s the prime objective became to reduce the rate of inflation, whatever the cost in terms of unemployment. Since then, maintaining a sufficient pool of unemployed (i.e. the NAIRU – ‘non-accelerating rate of unemployment’) to limit inflation has remained the over-riding objective. That this remains so has been made quite clear in the Treasury’s Budget Reports during Gordon Brown’s Chancellorship. This emphasis most obviously reflects the general tendency to refight the last war, in economic as in military strategy. But in political terms, Mrs Thatcher’s election victories at a time when unemployment was at a previously unthinkably high level of over 3 million made it plain that for the majority of the electorate mass unemployment had become acceptable as an anti-inflationary weapon. This in turn reflected the fact that the shift in power away from employees and trade unions consequent upon the abandonment of full employment suited the powerful echelons of society whose views tend to dominate the media. On both a national and international plane, the key characteristic of current approaches to fiscal and monetary policy is their contraction-

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ary basis. This is characteristic both of Gordon Brown’s ‘prudent’ fiscal policies and the EU Stability and Growth Pact. The latter puts strong limits on the freedom of member countries to run budget deficits, and hinders the use of expansionary measures in a recession, such as Europe faces today (2002). How does this square with New Labour’s readoption of ‘full employment’ as a major objective in the face of the decline in unemployment during their first term in office? The Government’s approach to the unemployment problem has been particularly confusing. Ministers tend to speak as though it can all be put right by supply side measures, such as Welfare to Work etc. In other words the jobs are there, if only the unemployed were willing or capable of taking them. This is clearly not the case, particularly in parts of the country hit by the decline in traditional industries, like coal and steel. The more sophisticated version peeps out of the back pages of the Budget Report, and is now explicitly stated in the Chancellor’s article: Layard’s thesis that by increasing the competition for jobs, such measures can make it possible to have lower unemployment without sparking off higher inflation, i.e. they reduce the NAIRU. The tacit implication is that the present Government would like to see ‘full employment’ – in the sense of lower unemployment than the present 1½ million ILO unemployed – provided it does not upset the balance of power between unions and employers established by the Thatcherite revolution – in other words without a return to the more egalitarian society associated with post-war full employment, and with no need to work in harmony with trade unions and employers to achieve non-inflationary wage settlements.

International

On the international side, the Chancellor’s credo has little new to contribute. As regards the EU he has stated that ‘we are challenging the old claim ... that tax harmonisation and a federal superstate run by the European Commission are the next stage after monetary union’. But apart from the fact that a federal state would be run by an elected government not by the Commission, tax harmonisation is an intergovern- mental not a federal issue – a federal government would levy uniform European taxes in its revenue raising fields, not harmonise national taxes. Tax harmonisation is a key issue not only in Europe, but also on a wider international context. There are a growing number of instances where effective taxation makes international co-operation and harmonisation of rules and rates essential. This will soon be true of taxes on

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financial transactions which can take place anywhere on the internet, for example, the stamp duty on share transactions. It applies to many of the dealings of the mobile rich and their use of tax havens. It is strange that a Labour Chancellor should be ‘putting the case for tax competition and against tax harmonisation’. The corollary would be a gradual reduction of taxes on the rich and companies, and an increasing bur- den on Middle England and the lower paid. (To look on the bright side, however, perhaps this means that he will reduce taxes on wines and spirits in the next Budget!) On the wider question of reforming the global financial system, the Treasury has said little beyond renewing the call for greater transpar- ency and better surveillance. Despite the Chancellor’s affirmation of the ‘high ideals and public purposes’ of Bretton Woods, he has so far shown no awareness of the need for fundamental reform of the global financial system. Like other finance ministers and most financial commentators in this field, he sees the problems as lying between one or more countries in difficulty and the IMF (or World Bank), rather than as a matter of the mutual interaction of debtors and creditors, or those with strong currencies and those with weak ones. A fundamental point in Keynes’s and White’s approach to Bretton Woods was to try to establish some symmetry between deficit and surplus countries, with obliga- tions on both sides in the process of readjustment. Creditor countries had an obligation to move back into balance as well as those in deficit. Although Keynes’s original proposals to penalise persistent creditors were not embodied in the final Agreement, it did include the Scarce Currency Clause permitting discriminatory restrictions against imports from a persistent creditor. Given the fact that the country most likely to be hit by this was the US, it was a remarkable sign of the spirit of the times that the original proposal came from White and was accepted by the American negotiators. Today it is more important than ever to recognise that the strong, as much as the weak, have a role to play in financial crises. The Asian Crisis was not solely a matter of over-borrowing by participants in the Asian Miracle. It was also a matter of over-lending by financial institutions in the West. Similarly, in the field of exchange rates the EU cannot raise the level of the euro on its own; it can only be done in conjunction with the authorities responsible for the dollar and the yen. Joint action is the key to tackling such problems. What is missing in the global field at present is any concept of combined action to stabilise financial markets and exchange rates. This is partly due to the large number of countries involved – although that does not stop the

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more powerful ones getting together for defence purposes. There are more encouraging signs of regional economic co-operation – not only in Europe, but also to a lesser extent in Asia and the Americas – where more manageable numbers of countries are involved. The Treasury’s minimalist efforts towards greater co-operation to tame global financial markets contrast embarrassingly with the grand designs of its wartime predecessors. It is to be hoped that the greater emphasis on international co-operation sparked off by the terrorist attacks in New York and Washington will lead to new efforts to reform the global financial system.

Notes

1. Gordon Brown, ‘The Conditions for High and Stable Growth and Employment’, Economic Journal, 3, May 2001, pp. C30–C44. 2. H. M. Treasury, Reforming Britain’s Economic and Financial Policy: Towards Greater Economic Stability, Palgrave Macmillan, 2002.

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The fire-fighters’ dispute (in 2003) is but a most visible symptom of fundamental and, as yet, unsolved problems of the British industrial relations and political systems. Nothing is to be gained by apportioning blame or blasting particular groups for being pig-headed, stupid or just plain greedy. The capitalist system is institutionalised greed, a characteristic which its admirers from Adam Smith to Milton Friedman – and now old and new Thatcherites – have singled out for praise, because of the desirable side effects which, they argue, result from it. It is easy to understand that people could be annoyed at the incon- veniences and hardships caused by interruptions to supplies of essential services from the public sector. But it should also be remembered that the wage-earners supplying these services face a genuine dilemma if they feel that they are not paid properly for supplying them. Just because they supply essential services, if they signal that they will always behave ‘responsibly’, i.e. never strike, ruthless employers and/ or governments can exploit the situation so that the relative position of these wage-earners deteriorates. That is, there are forces here which tend to push both sides to extremes rather than attract them towards a compromise somewhere in between. When we combine this with the deficiencies of the British industrial relations system, which overall has long been close to anarchy – certainly it lacks systemic co-ordination – and with the treatment of workers in the public sector and of unions generally over the past twenty years or more, it is not surprising that we have the present burst of industrial troubles. The real surprise is that they should have been so long in coming.

* Originally published in Soundings, Issue 23, Spring 2003, pp. 99–102.

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Modern governments have felt impelled to implement overall anti-inflationary packages. One strand of them should have been to guarantee, as a general rule, real wages, so that overall money-wage restraint could be made more acceptable to wage-earners. Overall money-wage restraint in turn should help to lower the rate of inflation, especially if there were also in existence institutions which signalled to wage-earners that other groups are also being asked (even induced) to show restraint. Of course, just to state this is to reveal how much these ingredients have been missing over the last two decades. Yet real wage resistance has long been a fact of life, and not an unrea- sonable one. It reflects a deeply embedded sense of fairness which is frustrated when real wages are not maintained. In addition, incomplete control of the rate of increase of money incomes in periods of unanticipated inflation means that traditional income relativities tend to become more and more unstuck and this, too, leads to a growing sense of injustice. The present industrial unrest reflects, at least in part, these factors.

What is to be done?

The first thing is to guarantee the maintenance of real incomes as a general rule. If people know that their real incomes are protected, they are much more willing to accept cuts in special circumstances, for example, a rise in the real price of energy, or a permanent worsening in the terms of trade. Moreover, in a collective bargaining system such as we have in the UK, there would no longer be as great an incentive for each group to go for the highest possible increase in money-wages from fear of falling behind other claimants. The overall outcome in this changed environment would be a lower overall rate of increase of money incomes and prices. Over and above the protection of real incomes should be an additional amount, the size of which is determined by the rate of price inflation which is felt can be absorbed, and which it is the government’s job to determine (certainly not the Central Bank’s, or at least, not alone). This amount would serve to tackle anomalies, and take in overall productivity increases, ruptured relativities, special scarcities and the like. We need to create a centralised institution to decide which groups should share in this amount and how much each of them get at any moment of time. It would be necessary to establish by agreement through the institution, drawing on the submissions from representatives of government, capital and labour, the overall pattern of relativities for which

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there was a general consensus and to which the actual structure eventually would conform. But it would be understood that achieving this might take considerable time, because of the constraints imposed by the overall rate of price inflation which it is thought could be absorbed. (There are, of course, hints of this principle in the present discussions of the fire-fighters’ dispute.) Underlying this whole construction should be a starting general rule that all income receivers could expect their money incomes to change in such a way that changes in the cost-of-living and in overall productivity would be covered. This ensures that the potential rise in prosperity over time resulting from capital and labour acting as complements at the level of the economy as a whole is made available to all citizens (including pensioners!). Not only would this be equitable, it is also efficient. For if such a principle were to be combined with a return to full employment, it would serve to encourage investment in high productivity, often expanding industries, and hasten the movement of resources out of low productivity, often declining industries. The resulting environment of a much higher rate of increase of overall productivity would allow the constrained rise in money incomes nevertheless to be associated with agreeable rises in real incomes. There would then be more chance of solving the dilemma (first pointed out by Michal Kalecki in 1943!) that there is a world of difference between getting all classes to accept a return to full employment after a deep slump, on the one hand, and to be willing to accept sustained full employment when the balance of economic, political and social power shifts increasingly from capital to labour, on the other. It should also be obvious that the workings of the euphemistically entitled flexible labour markets of this country, so often cited as the government’s pride and joy, tend to produce exactly the opposite result as far as the potential rise in overall productivity is concerned. This has the corollary that a quid pro quo for socially beneficial behaviour by wage- earning groups would not be forthcoming. As Gordon Brown is so keen to raise productivity, perhaps he should consider those arguments. The alternative is to continue to use unemployment in order to make the sack effective; create a potential but on the whole never fully realised surplus for domestic and international accumulation; and allow ‘managers to manage’. In reality such an alternative only leads to rising social and industrial unrest, such as we see occurring at the present time.

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Fire-fighters and modernisation

Aspects of the present fire-fighters’ dispute and the debate about ‘modernisation’ in general over the past two decades are relevant to the discussion above. From the point of view of most UK employers and the present government, ‘modernisation’ is virtually equivalent to ‘let managers manage’. Cost reductions and efficiency gains are argued to be almost exclusively found in reduced labour forces, combined with changed hours and working conditions generally and an atmosphere of intimidation associated with the ever present fear of the sack. The reduction of producers’ (read ‘wage-earners’) interests and rights in favour of consumers’ interests and rights is stressed. Such ‘principles’ seem to underlie the Bain Report and Number 10’s usual stance. There is another approach to ‘modernisation’, which underlies the official arguments of the fire-fighters: it is the attainment of cost reductions and efficiency gains through team-work combined with cooperation between employer and employee. Suggestions for change arise from those who will directly have to implement them, that is to say, the wage-earners involved. These are discussed systematically and sym- pathetically with employers, who also play an active role in arriving at agreed strategies and providing the necessary investment and organisa- tional backup. Something like this seems to have occurred over recent decades in the fire fighting service and, indeed, at times with the employers most close to the wage-earners in the present dispute. As a result real gains in productivity have been made, while, at the same time, ensuring the safety of the public and the fire-fighters themselves. But because of the failure simultaneously to implement a fair and equitable overall incomes policy, one which moreover would be efficient in the sense of meeting macroeconomic inflation targets, the fire-fighters have become increasingly disaffected, as have most other wage-earners in the public sector. This is not to mention those in low paid, feebly or not at all unionised occupations, whose voices are rarely heard – or, if heard, have no effective way of being heeded. The proposals outlined in this essay put forward a package deal designed to tackle all those issues and, hopefully, to usher in more harmonious relations in the work place and society generally.

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9780230_284692_18_cha16.indd 227 12/23/2011 5:07:48 PM 9780230_284692_18_cha16.indd 228 12/23/2011 5:07:48 PM 16 The Vital Contributions of John Cornwall to Economic Theory and Policy: A Tribute from Two Admiring Friends on the Occasion of His 70th Birthday (1999) with Mehdi Monadjemi

Introduction

G. H. first met John Cornwall in 1963 and M. M. was his doctoral student at Southern Illinois University from 1970 to 1972. John and G. H. were both on leave from their respective universities (Tufts and Adelaide) in Cambridge during the latter’s most exciting decade of the post-war years. Ken Arrow and Bob Solow were both spending a year there, Solow to give the Alfred Marshall Lectures on two mythical creatures, ‘Joan’ and ‘Nicky’ (with only one of the real creatures, Joan, able to attend, as Nicky was in Australia). Frank Hahn and Robin Matthews were writing Hahn and Matthews (1964) and Piero Sraffa’s (1960) book had only recently been published. The ‘Secret Seminar’ was in full flight and the members of the Faculty of Economics and Politics (which included the Department of Applied Economics) read almost like a Who’s Who in modern economics, young and old. John and G. H. saw a great deal of each other; G. H. found John to be the nearest to an Australian an American was ever likely to be! They had endless discussions on economics and other matters. John wrote a comment (entitled ‘Wham’) on the first draft of Hahn and Matthews’s survey of growth theory, and advised G. H. on the two-sector model which he was then developing (Harcourt, 1965), introducing him to the term ‘recursive’ to describe the method used in it.

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M. M. met John at Southern Illinois University in Carbondale in 1970 as a graduate student in a seminar course in advanced macroeconomics. The course was offered in the autumn of 1970, its purpose being to generate ideas for graduate students to pursue in their doctoral dissertations. A dozen students enrolled, all enthusiastic to gain inspiration from the professor of economics newly appointed from Tufts University. Given his distinguished background – Cornwall had been a student of James Duesenberry and he had published several articles in prestigious economic journals, such as the American Economic Review, the Quarterly Journal of Economics and the Review of Economics and Statistics – we felt proud to be his students. John based the course on monetary transmission mechanisms, with particular emphasis placed on the countercyclical behaviour of housing in the United States. His approach was likely a result of his working at that time on Cornwall (1972), or else his observation of the two severe downturns in housing construction in the United States in 1966 and 1969. He introduced us to many leading articles in the area of housing cycles, although it became clear that no previous study had emphasised disintermediation as a prime cause of housing downturns, as did John (see Cornwall, 1972). Because I was so impressed by John’s teaching and research lead- ership in the seminar course, I enthusiastically enrolled in another of his courses (on economic dynamics and growth) in the winter of 1971. So many students had become aware of Cornwall’s reputation by then that the class was three times larger than the previous one. Almost all of the economics graduate students participated. John directed us towards many leading articles in growth theory including Harrod (1959) and Domar (1947), where for full employment of labour and capital to be maintained, output must grow at the warranted rate which, in turn, must equal the natural rate of growth. He also introduced us to several articles by Robert Solow, including Solow (1956, 1957, 1970), and also Denison’s (1964) embodied technological growth model. During the semester, he referred to his conversations with Solow and discussed the neglected role of demand in neoclassical growth theories. This objection is still relevant and is still apparent in John’s recent writings on growth (see Cornwall, 1970; Cornwall and Cornwall, 1994). The remainder of this chapter is organised as follows. Cornwall’s major intellectual contributions to M.M.’s economic thinking are discussed in the penultimate section, following G. H.’s discussion of John’s contributions to economic theory and policy.

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Cornwall’s growth schema

When John came to Cambridge in the autumn of 1963, he had more in common with the first generation of Keynesians – Austin and Joan Robinson, Richard Kahn, Nicky Kaldor, Dick Goodwin – than with the more neoclassical (though also Keynesian) economists either encamped or visiting – James Meade, Robin Matthews, Frank Hahn of the locals, Ken Arrow and Bob Solow of the visitors. He had just published his lead article in the QJE, ‘Three paths to full employment growth’ (1963), and was reading Alexander Lamfalussy’s Investment and Growth in Mature Economies (1961). The seeds of the first of his six (to date) great books were being planted (see Cornwall, 1972, 1977, 1983, 1990, 1994; Cornwall and Maclean, 1984). In those days, Cornwall was an optimistic and enthusiastic Keynesian as far as his theoretical structures were concerned. (Another great influence was his PhD supervisor at Harvard, James Duesenberry, especially the approach which Duesenberry took to growth and cycle theory. To John, Duesenberry ‘was the first economist [he] had known who understood the need for economic theory to have explanatory power’ (Cornwall, 1992, p. 98)). He was also vitally interested in the long-term historical episodes of modern capitalist economies, the formation of institutions and their role in the political economy of societies. His politics were left-wing by any standards and remarkably so by those of the USA – he and Arrow were doves on the Vietnam War, for example, whilst the need for conscious intervention by the state in economic life was never a stumbling block for John, either then or now. He was (and remains) a vigorous democrat who hated injustice and underprivilege and who wished to see them eliminated, especially if they arose from needless malfunctionings of the economic system. John was keenly interested in but also most critical of growth theory, both Keynesian and neoclassical alike. His starting point was a profound critique of Harrod’s basic approach, which implied that the warranted

and natural rates of growth, gw and gn respectively, could be analysed as though their values were independent of each other – as though the factors responsible for one were entirely, or at least overwhelmingly, separate from those responsible for the other. John regarded this as an incorrect extension of the Marshallian distinction between demand and supply and of the factors responsible for them to the analysis of

the economy as a whole. How can it be argued that gn is independent

of gw (and vice versa)? For surely the potential rate of growth of the economy due to the growth of the labour force and of its efficiency

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due to technical advances (neutral or biased) cannot be regarded as

independent of the demand factors subsumed in gw? The rate of growth of potential productivity is directly dependent on the rate at which new things are embodied by investment in the stock of capital goods (and, now increasingly, in the stock of human capital as well). That is to say, it is dependent on effective demand and the rate of accumulation, the

latter either being equal to gw, or related to it in the sense that the ways in which rates of actual accumulation move depend upon their rela-

tionships (and those of planned accumulation) to gw itself. So growth in a Keynesian setting has to be seen at the very least as the outcome of the interrelationships of the supply and demand fac-

tors underlying gw and gn, taking into account the considerable overlap → involved, especially in the direction gw gn, though Cornwall initially → stressed the relative strength of gn gw in a system of some mutual

determination. Hence gn itself can affect expectations and therefore

whether or not actual growth equals gw. John’s approach to the theory of growth was always to proceed from this basic foundation, one which leads immediately to path-dependent processes and the notion of cyclical growth (in the sense of Goodwin) rather than to steady-state growth (separate from the cycle) in the sense of the Keynesians, or the pure neoclassicals or even the neoclassical Keynesians, such as Meade, Solow and Swan.1 Another of John’s criticisms of conventional growth theory concerned its neglect in any but the most mechanical sense of technical progress. Repeatedly we find him arguing that in the real world, technical advances and demand changes leading to the need for large structural changes in economies are so rapid that models which concentrate on the properties of the ultimate steady-state equilibria on which the model economies converge (if they do) have little relevance. This is because the calendar time required for this convergence process is so much greater than the calendar time necessary for changes in technical knowledge (and their application) and in tastes and demand to occur. The latter are often induced through advertising and other devices. John was also critical of the almost universal use of perfectly competitive microeconomic market structures in growth theory. These points of view made him, on the one hand, as critical of Joan Robinson’s and Richard Kahn’s Golden Age analysis as of the Solow/Swan model and, on the other, partial to Kaldor who, while he thought of steady growth as a ‘stylized fact’, was nevertheless always impatient to have his models apply directly to real world situations. John’s approach rejected the strategy of Joan Robinson, Kahn and also Pasinetti of going through

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the preliminary stage of Golden Age analysis in order to get various key relationships clear and concepts defined in the simplest but also the most abstract setting.

Phases of capitalism

With this theoretical approach, John set about interpreting the various phases of the history of capitalism, using the OECD countries as his lab- oratory and extending and modifying his basic models as post-war capitalism moved through its ‘Golden Age’ – the ‘long boom’, as the Marxists called it – to the unstable ‘stagflation’ era and now to the most recent phase of relative stagnation (when compared to the mostly remarkable performances of economies during the ‘long boom’) and inflation rates near or at the ‘Golden Age’ values. At each stage, Cornwall has identified both the strengths and weaknesses of the economy, distinguishing between transient characteristics and those likely to last. He has also identified the presence of contradictions, whether inherent in the workings of the systems themselves, or resulting from faulty diagnosis by policy-makers or the deliberate designs of the dominant classes in society. John has always robustly, even brutally, called spades spades! In recent years, Cornwall has become increasingly gloomy about the possibility of implementing sensible and enlightened policies in the advanced capitalist economies whether they act alone or together (which he now sees as necessary if not sufficient if these economies are to overcome their individual and collective problems). The problem is not so much one of diagnosis, though this is a serious problem in its own right, but lack of political courage, wisdom and goodwill in political decision-making centres. John remains faithful to Keynes – to his economic analysis, views on the educational role of economists, and on the role of the state and its public servants, whose motivation may be summed up in Harrod’s (1951, pp. 183, 192–93) phrase, ‘the presupposi- tions of Harvey Road’. This last referred to the class of intelligent, well- trained and disinterested persons who analysed situations, gave advice, and were driven by a desire to make their societies more rational, fair and humane rather than to maximise their incomes or status (though the latter often occurred if they were good at their jobs). Having made coherent and explicit the sources of the strengths and weaknesses of the years of the ‘long boom’, John turned to the subsequent phases. There he identified at least two major factors at work: first, the increasing dominance of the Keynesians by the monetarists, and then, the new classical macroeconomists, that is to say, the return

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to dominance of those whom Keynes dubbed the classical economists in the provision of explanation and policy. In particular, this implied a resurgence of the view that a capitalist economy is strongly self-regulating provided only that competitive institutions rule in all its markets and activities – and especially in its labour markets. Large domestic monopolies or oligopolies are but the powerless price-takers of the competitive model when set in the world scene, according to Milton Friedman who, at the same time, would cheerfully smash a labour union whenever he saw one. Second, John identified as a major issue the implementation of the recommendations of the McCracken Report (1977), the authors of which were mostly pragmatic Keynesians who were turning their attention to the emergence of inflationary pressures. The latter were associated with the profound sociological changes that had taken place over the course of the ‘long boom’, whereby the balance of political, social and economic power had moved progressively from capital to labour (with the leaders of labour itself becoming the most articulate, educated and confident set in history); the breakdown of the Bretton Woods institutions and ‘rules of the game’; the financing of the war in Vietnam in the USA as though the US economy were a peacetime one; and the first oil shock. Cornwall singled out for detailed criticism the McCracken strategy of a short sharp shock to the system – read: quickly create high levels of unemployment – to rid it once and for all of inflationary expectations, coupled with the belief that the system would then move back to the full employment trend rate of growth of the Golden Age with (early) Golden Age rates of inflation. John could not accept this analysis because he felt that it lacked a proper understanding of the behaviour of the labour market and of the behaviour of business people in general. He attributed much of the successful performance in the early to middle years of the ‘long boom’ to the behaviour of labour itself. In many of the OECD economies, labour voluntarily imposed self-restraint on money-wage increases. This allowed notions of ‘fairness’ with regard to increases in real wages and patterns of wage relativities to be met by the underlying growth in productivity, redistributions through taxes and expenditure in the public sector, and full employment itself. (Not all OECD countries were so blessed: John distinguishes two main models, the one described above which he calls ‘a social bargain strategy’ (Cornwall, 1997, p. 400), the other ‘a market power strategy’ (Cornwall, 1997, p. 399). In the latter, wage settlements are the outcome of a collective bargaining process in which little account is taken of common interest or national goals.)

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John also believed that the relatively fixed exchange rate regimes operating in the years of the ‘long boom’ and especially the controls on capital movements kept speculation in check and allowed any deficits in the balance of payments, themselves not alarmingly large in those countries which experienced them, to be addressed without resort to unduly drastic retrenchment policies.

Institutional change and economic breakdown

The happy conjunction of events and results that characterised the ‘Golden Age’ unravelled during the next twenty years or so. Well- established norms were ruptured towards the end of the period, labour generally became more militant and strove for maximum gains from the money-wage bargain regardless of the systemic outcome, and disil- lusionment with ‘big government’ became increasingly widespread both within and between countries. John analyses what he dubs the systemic ‘inflationary bias’ which emerged as the ‘Golden Age’ progressed. This is associated with real wage resistance and the ‘fair’ pattern of wage relativities, neither of which would be surrendered in the event of an exogenous shock to the system – oil price rises, for example, or secular changes in the terms of trade which necessitate real income adjustments. He feels that attempts to rid the economy of its inflationary tendencies by contracting demand are doomed to failure because whatever short- term success they may have will not be maintained. This is partly (but importantly) because contraction has a negative impact on the rate of accumulation which in turn affects the rate of growth of productivity. When the upturn, either natural or policy induced, occurs, there is not a high enough rate of growth of productivity to meet the renewed money-wage demands without the resurgence of inflation, especially as wage-earners aim at increases in real wages which embody a catch-up element. Cornwall, like Marx and Keynes, appreciates that the processes at work in capitalism often imply basic contradictions, that the measures taken to get labour and its costs under control (the euphemism is flexible labour markets) adversely affect the ‘animal spirits’ and so the desire of capitalists to invest. Those in the real world, as opposed to the mathematical models of it, know that reviving ‘animal spirits’ after a policy-induced shock is an incredibly difficult task to perform quickly, or even at all. This is especially so when financial capital dominates industrial and commercial capital, so that the rewards for risk-taking appear, and often are, much greater and more obvious in the former’s sphere than in the latter’s. As a result, long-term real investment

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projects associated with much-needed structural change are increasingly neglected, not least because the brightest (if not necessarily the best) are attracted to the huge rewards from finance capital. These destabilising elements have been reinforced by other institutional changes, especially the floating of exchange rates and the deregulation of financial markets, together with the huge technical advances which have tended to make at least the financial aspects of the operations of capitalism ‘one-world capitalism’. Devaluations are likely to be ineffective, partly because of real wage resistance, partly because of the huge rise in the proportions of total foreign exchange transactions accounted for by speculative transactions. This leads to one-way speculative-induced movements of currencies which greatly affect the domestic cost of living (through increases in the prices of imports, importables and exportables) in the countries concerned. John may be inclined to revise this generalisation a little following the recent British experience. In autumn 1992 the UK was forced to leave the European Exchange Rate Mechanism and, as a consequence, experienced the devaluation which many British Keynesians were advocating. The then Tory government ridiculed their suggestion until it was forced upon them. They then attributed the beneficial results of the devaluation, including the absence of the offsetting reactions which John had predicted, to their own coherent, explicit policy wisdom.2 Increasingly, John has been adopting a hysteresis analysis of labour markets, combined with a critique of the usefulness of the concept of the natural rate/NAIRU. He rejects the first variant because he does not accept that the world may be thought of as a competitive Walrasian general equilibrium system in the way in which that fine Marshallian scholar, Milton Friedman, first defined the natural rate, so that the latter was a resting place without any involuntary unemployment present. John is, of course, willing to concede that in any situation-specific episode, there could be a level of statistical unemployment (or indeed levels) at which the forces making for accelerating price rises would be offset by those making prices go in the other direction, resulting in a sustainable constant rate of change of prices.3 However, he is not willing to admit that such a position has any optimum or necessarily desirable properties – much less, that it would be free of undesirable, unacceptable levels of involuntary unemployment and worsening distributions of income and property. He also criticises those who come some way to meet him by admitting that not all unemployment at the NAIRU is voluntary, only to claim that, nevertheless, it is all classical, associated with ‘too high’ real wages rather than a lack of effective demand.

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Indeed, he believes that real wages can never be too high because they are set in the product market (except in the unlikely case where the labour force is governed by one big monopoly union).

Financial disintermediation and the housing cycle

My main encounter with John Cornwall was when he agreed to be my dissertation supervisor. It was an honour to be able to write a dissertation under his supervision. The problem of choosing an appropriate topic was quickly resolved when John suggested an empirical study of post-war housing cycles in the United States, using quarterly flow of funds data. He stressed the use of quarterly data because annual data are incapable of showing the turning points of households’ portfolio substitution and mortgage flows during short cycles. John strongly supported the idea of housing-led recovery, a view that is now dominant in industrial countries with developed financial sectors. Many studies in the 1960s (such as Albert, 1962; Guttentag, 1961; Maisel, 1963; Sparks, 1967) attempted to provide theoretical explanations for the post-war housing cycles in the United States. John’s explanation departed from these studies, however, by taking account of ‘the portfolio adjustments undertaken by the household sector in response to changes in different yield differentials’ (Cornwall, 1972, p. 185) and emphasising the supply of funds and the process of disintermediation as a primary cause of housing cycles (Cornwall, 1972, pp. 173–201). He argued that most of the liabilities of thrift institutions (TIs) (savings and loan associations and mutual savings banks) are held by households. Furthermore, during the 1960s and 1970s, 75 per cent of total residential mortgage flows were, on average, accounted for by TIs. Naturally, any significant change in the liabilities of TIs would produce a substantial change in total mortgage flows and residential construction expenditure. John stressed the process of ‘disintermediation’ as a major cause of downturns in the housing market. In fact the word ‘disintermediation’ was introduced in the financial literature during the so-called credit crunch of 1966, when all of the financial intermediaries in the United States experienced an unusual loss of deposits to the capital market. The main cause of disintermediation is a rise in the rates on capital market instruments relative to the rates paid by financial intermediaries on their deposits. This change in the yield differential provides an incentive for households and other depositors at financial intermediaries to reduce or withdraw their funds and place them directly on the market. In the 1960s, the widening of the yield spread between securities and

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deposits was mainly due to the inflexibility of the rates paid on deposits. This rigidity was in turn due to the long-term nature of the assets held by the intermediaries which caused a slow turnover of their portfolio. At a time when market rates were rising, if these institutions had attempted to increase their deposits and match the increase with an increase in rates on their assets, the higher rates on deposits would have applied to all deposits, whereas the higher rates on assets applied only to newly acquired assets, which were a fraction of total deposits. At the time, mortgage rates in the United States were fixed for the life of the mortgage. During tight money periods, the yield spread between capital market instruments and deposits widened and the flow of deposits into financial intermediaries declined. This process of disintermediation in turn affects mortgage lending and expenditure on housing. The most severe bout of disintermediation occurred during the unusually tight money period of 1966, when all financial intermediaries experienced a drastic loss of deposits to the capital market. This development forced financial intermediaries to reduce their mortgage lending and was soon followed by a sharp decline in residential construction expenditures. Similar and equally severe developments occurred during 1969. In short, John argued that ‘thrift institutions are an important source of construction loans to tract builders. If the flow of funds into these thrift institutions is cut back, as it would be in a process of disintermediation, mortgage lending and housing must be affected, unless other lenders make up for the cutback in mortgage lending by thrift institutions’ (Cornwall, 1972, p. 116). The title of my dissertation, which involved a theoretical and empirical analysis of housing cycles in the United States during the post-war period, was ‘Savings Deposits, Residential Mortgage Credit, and Housing Starts’. Guided by John, the theoretical part of the study emphasised household portfolio adjustments and the consequent effects of these adjustments on mortgage flows and housing expenditure. The empirical analysis employed quarterly flow of funds data, which was relatively new at the time, building an econometric model for TIs’ savings deposits and mortgage flows. John also suggested that the dynamic properties of the model would shed some light on the countercyclical behaviour of residential construction during the post-war period. Most of the studies from the 1960s that attempt to explain the countercyclical behaviour of housing assume that the demand for commercial credit is sensitive to changes in aggregate economic activities, but relatively insensitive to the cost of funds, whereas the demand for mortgage credit is sensitive to the terms of credit but relatively stable with

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respect to changes in economic activities. Moreover, lenders have a high cross-elasticity of demand for mortgages with respect to bond yields. Based on these assumptions, changes in aggregate economic activities create forces which cause mortgage flows and residential construction to move counter cyclically. John remarked on the need to provide some form of analytical explanation for the countercyclical behaviour of housing. Figure 16.1, an extract from my dissertation, summarises my response to his suggestion. In Figure 16.1, DM and SM are the demand for and supply of residen-

tial mortgage funds and Or0 and OA are the initial equilibrium mortgage rate and quantity of mortgage funds, respectively. DF and SF are

the demand for and supply of non-housing funds and O9r09 and O9A9 are the initial equilibrium bond yield and quantity of funds respectively. As aggregate economic activity increases, DF shifts to the right more than DM, hence bond yields rise relative to mortgage rates, that

is, r09r91 > r0r1. Given lenders’ high cross-elasticity of demand for mortgages with respect to bond yields, they shift from mortgages to bonds, hence SF shifts to SF9 and SM shifts to SM9, and the supply of mortgage

credit declines. This causes the mortgage rate to rise to Or2 and with a highly elastic demand for mortgage funds, the quantity of mortgages demanded falls, OB < OA. On the other hand, the equilibrium quantity of non-housing funds expands, that is, O9B9 > O9A9. When economic activity decreases, the opposite movements take place and the equilibrium quantity of mortgage funds demanded and supplied increases.

Rate Rate DF9 SF DF SM9 SM SF9 r91

r92 r2 r9 r 0 1 DM9 r0 DM

OOB A Quantity of 9 A9 B9 Quantity of mortgage funds funds Figure 16.1 The market for residential mortgage and non-housing funds

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Cornwall (1972, pp. 117–18) argues that ‘during the boom, as the demand for loanable funds begins to outstrip the supply, interest rates, especially those on primary securities, begin to rise absolutely and relative to rates paid on fixed-price near monies. This induces the non- financial domestic holders of funds to bypass financial intermediaries, and to place them directly in the capital markets.’ Anderson (1964) shows that in the tight money periods of 1953, 1957 and 1959, the inflow of deposits into the Boston mutual savings banks were at their lowest levels, whilst outflows in the form of withdrawals were at their highest levels. A similar type of development was experienced by savings and loan associations when, from 1960 to 1968, their inflow of deposits declined by 1.8 per cent. My supervisor wanted to see an econometric study of housing cycles emphasising changes in the flow of funds as a source of instability in the housing market. Sparks (1967) comes close to adopting this approach. His study places heavy emphasis on the mortgage market and the flow of savings deposits at the financial intermediaries. Sparks’s regression results may be criticised, however, for estimating the supply of mortgage credit without using a mortgage rate in the equation. It is difficult to interpret Sparks’s regression as a supply function, because it is neither a reduced form model nor a true supply function which should include a mortgage rate. Sparks’s study can also be criticised for using annual data. John encouraged me to use quarterly data to explain households’ responses to changes in capital market conditions and the effect of such changes on mortgage lending. The response of savings deposits to changes in the market rate of interest is so quick that low-frequency data may fail to indicate these responses. The main object of my dissertation was to develop an econometric model capable of testing the hypothesis proposed in Cornwall (1972), that fluctuations in residential construction are largely explained by changes in the flow of funds at thrift institutions. The model consisted of an equation for changes in household holdings of savings deposits at the TIs, and a simultaneous equation model for the mortgage market consisting of a demand and a supply function. The statistical results, based on quarterly data from 1953 to 1970, produced a statistically significant coefficient for the yield spread between the savings rate and the corporate bond rate in the equation for savings deposits. Furthermore, simulation experiments indicated that changes in interest rates lead to changes in mortgage flows and housing cycles ahead of cycles in economic activity, and in particular that changes in the yield differential between TIs’ deposit rates and corporate bond rates in recession

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and boom periods are consistent with the countercyclical behaviour of mortgage flows at thrift institutions. In short, my dissertation showed that the salient role played by TIs in conjunction with the inflexibility of savings deposit rates account for the countercyclicality of the housing market – precisely the view that is maintained in Cornwall (1972). It is interesting that widespread bankruptcy among major mortgage lenders during the early 1980s has been attributed to the substantial disintermediation that occurred during this period. From 1980 to 1986 about 600 out of 4000 TIs failed (Brumhaugh, Carron and Litan, 1989). Brumhaugh and Carron (1987) blame regulatory constraints and the inability of TIs to adapt to rising interest rates for the crises of 1980s, drawing renewed attention to a point first emphasised in Cornwall (1972). It seems that John’s perceptive conjectures during the 1960s and 1970s were all too amply confirmed by the experience of the 1980s.

Conclusion

John has always had a fiercely independent mind; he was scornful of the mainstream equilibrium economics which dominated the courses when he first became an economist.4 As he reveals in his fascinating autobiography in Arestis and Sawyer (1992), he approached economics by reading widely in the originals of his own and other disciplines, ultimately developing an approach that has embraced the dynamic analysis of growth and distribution, historical knowledge and an awareness of how institutions form, change and affect economic processes. To read his books – again, as an independent free spirit, he has resisted the fashionable cringe to the natural scientists’ approach of only publishing articles – and see his views evolve as concrete situations change is both a privilege and an inspiration to his friends and admirers, ourselves amongst them. So happy 70th birthday, John, and here’s to many more birthdays, appropriately interspersed with your enlightening and courageous writings.

Notes

1. It is significant that Solow (1994, p. 379) has recently stated his agreement with this view (even though those who followed his initial lead have usually missed the point entirely). 2. In a comment on a draft of this chapter John wrote: ‘What I maintained in the 1990 and 1994 books was that devaluations accompanied by AD policies aimed at achieving full employment would fail, because the devaluations would be offset by speculation and real wage resistance. The 1992 devaluation

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worked because, unlike Mitterand’s efforts in the early 1980s, it was not accompanied by strong stimulative AD policies.’ (Emphasis in original) 3. Indeed, he stresses that many such positions may exist at any given point in time. This claim is important because it makes Cornwall’s long-run Phillips curve (LRPC) negatively sloping, not vertical. All of the points along this negatively sloping LRPC involve stable inflation, with the realised outcome depending on aggregate demand and the policies that affect it. The entire structure is then subject to hysteresis effects, as movements along the LRPC can also result in shifts in the position of the LRPC itself. 4. John suggests that his response was based on measured argument rather than scorn, but we think he combined both!

References

Albert, W. W. (1962) ‘Business Cycles, Residential Construction Cycles, and the Mortgage Market’, Journal of Political Economy, 70, 263–81. Anderson, P. (1964) ‘Mutual Savings Banks and Tight Money’, New England Business Review, January, 10–11. Arestis, P. and M. Sawyer (eds) (1992) A Biographical Dictionary of Dissenting Economists, Aldershot, Edward Elgar. Brumhaugh Jr, D. and A. Carron (1987) ‘Thrift Industry Crises: Causes and Solutions’, Brookings Papers on Economic Activity, 2, 349–455. Brumhaugh Jr., D., A. Carron and R. Litan (1989) ‘Cleaning Up the Depository Institution Mess’, Brookings Papers on Economic Activity, 1, 243–83. Cornwall, J. (1963) ‘Three Paths to Full Employment Growth’, Quarterly Journal of Economics, 77, 1–25. Cornwall, J. (1970) ‘The Role of Demand and Investment in Long-Term Growth’, Quarterly Journal of Economics, 84, 48–69. Cornwall, J. (1972) Growth and Stability in a Mature Economy, London, Martin Robertson. Cornwall, J. (1977) Modern Capitalism: Its Growth and Transformation, London, Martin Robertson. Cornwall, J. (1983) The Conditions for Economic Recovery: A Post-Keynesian Analysis, London, Martin Robertson. Cornwall, J. (1990) The Theory of Economic Breakdown: An Institutional–Analytical Approach, Oxford, Basil Blackwell. Cornwall, J. (1992) ‘John Cornwall’, in P. Arestis and M. Sawyer (eds), A Biographical Dictionary of Dissenting Economists. Cornwall, J. (1994) Economic Breakdown and Recovery: Theory and Policy, Armonk, NY, M.E. Sharpe. Cornwall, J. (1997) ‘Notes on the Trade Cycle and Social Philosophy in a Post- Keynesian World’, in G.C. Harcourt and P. A. Riach (eds), A ‘Second Edition’ of The General Theory. Cornwall, J. and W. Cornwall (1994) ‘Growth Theory and Economic Structure’, Economica, 61, 237–51. Cornwall, J. and W. Maclean (1984) Economic Recovery for Canada, Toronto, James Lorimer.

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Denison, E. F. (1964) ‘The Unimportance of the Embodied Question’, American Economic Review, 54, 90–94. Domar, E. D. (1947) ‘Expansion and Employment’, American Economic Review, 37, 34–35. Guttentag, J. (1961) ‘The Short Cycle in Residential Construction, 1946–59’, American Economic Review, 51, 275–98. Hahn, F. H. and R. C. O. Matthews (1964) ‘The Theory of Economic Growth: a Survey’, Economic Journal, 74, 779–902. Harcourt, G. C. (1965) ‘A Two-Sector Model of the Distribution of Income and the Level of Employment in the Short Run’, Economic Record, 41, 103–17. Harcourt, G. C. and P. A. Riach (eds) (1997) A ‘Second Edition’ of The General Theory, 2 vols, London, Routledge. Harrod, R. F. (1951) The Life of John Maynard Keynes, London, Macmillan. Harrod, R. F. (1959) ‘Domar and Dynamic Economics’, Economic Journal, 69, 451–64. Lamfalussy, A. (1961) Investment and Growth in Mature Economies, New York, Macmillan. McCracken, P., G. Carli and H. Giersch (1977) Towards Full Employment and Price Stability, Paris, OECD. Maisel, S. J. (1963) ‘A Theory of Fluctuations in Residential Construction Starts’, American Economic Review, 53, 359–83. Monadjemi, M. (1972) ‘Savings Deposits, Residential Mortgage Credit, and Housing Starts’, unpublished PhD dissertation, Department of Economics, Southern Illinois University. Pasinetti, L. L. and R. M. Solow (eds) (1994) Economic Growth and the Structure of Long-Term Development, London, Macmillan. Solow, R. M. (1956) ‘A Contribution to the Theory of Economic Growth’, Quarterly Journal of Economics, 70, 65–94. Solow, R. M. (1957) ‘Technical Change and the Aggregate Production Function’, Review of Economics and Statistics, 39, 312–20. Solow, R. M. (1970) Growth Theory, Oxford, Oxford University Press. Solow, R .M. (1994) ‘Concluding Comments’, in Pasinetti and Solow (eds) (1994). Sparks, G. R. (1967) ‘An Econometric Analysis of the Role of Financial Intermediaries in Postwar Residential Building Cycles’, Determinants of Investment Behavior, New York, National Bureau of Economic Research. Sraffa, P. (1960) Production of Commodities by Means of Commodities: Prelude to a Critique of Economic Theory, Cambridge, Cambridge University Press.

9780230_284692_18_cha16.indd 243 12/23/2011 5:07:49 PM 17 Wilfred Edward Graham Salter, 27 March 1929– 10 November 1963 (2007)*

Wilfred Salter was born on 27 March 1929 at Cottesloe, Perth, the eldest of three children of Harold Peter Salter, health inspector and May, née Dunderdale, a music teacher. Salter was educated at Wesley College (1942–46) and the University of Western Australia (1948–52), obtaining first class honours in 1953. He represented the University at rugby union football. He married Moira Joan Burke, a welfare officer, on 5 December 1952. They had two children, a son and a daughter. Salter went to Clare College, Cambridge in 1953 on a Hackett Travelling Scholarship to do a Ph.D supervised by Brian Reddaway who was soon to become the Director of the Department of Applied Economics (DAE) in succession to Richard Stone. Salter’s dissertation was the base on which was erected a modern classic in economics, Productivity and Technical Change, published by Cambridge University Press in 1960 in the distinguished series of DAE monographs. He won the Stevenson Prize in 1954 for the best essay by a graduate student who had done up to six terms of research. He was awarded his PhD in 1955. After Cambridge he went to Johns Hopkins University in Baltimore on a post doctoral research fellowship for the academic year 1955–56. There, he added an analysis of US empirical data to the UK data of his dissertation. On returning to Australia in September 1956 to a research fellowship at the Research School of Social Sciences at the Australian

* Originally published in J. E. King (ed.), A Biographical Dictionary of Australian and New Zealand Economists, Cheltenham, UK and Northampton, MA: Edward Elgar Publishing, pp. 243–45.

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National University, he prepared under the careful, encouraging and expert guidance of Trevor Swan, the manuscript of his 1960 book. He also delivered a paper, ‘Growth and the capital stock’, to section G of A.N.Z.A.A.S. in Adelaide in August 1958 and published two articles in the Economic Record – ‘The production function and the durability of capital’ (April), Salter (1959a) and ‘Internal and external balance: the role of price and expenditure effects’ (August), Salter (1959b). He appeared with Eric Russell at the request of Bob Hawke, who had been a contemporary at the University of Western Australia and who was then the research officer of the ACTU, as a witness for the unions in the 1959 Basic Wage case. Salter supplied the empirical evidence (Salter (1959c)), Russell, the theoretical case for adjusting money wages for effective productivity plus prices (one of the key policy recommendations in Salter’s 1960 book). In 1960 Salter became an assistant secretary in the cabinet division of the Prime Minister’s Department in Canberra. John Pitchford (2002) wrote that ‘[h]e took an active part in working out economic policies on almost every front; “his performance deeply impressed the old Canberra hands, even when they disagreed with him” ’ (169). He obtained leave in July 1962 in order to join Harvard University’s development advisory service, going to West Pakistan as economic advisor to the government. He died of heart disease on 10 November 1963. Two more publications were ‘Marginal labour and investment coefficients of Australian manufacturing industry’ in the June 1962 Economic Record and ‘Productivity growth and accumulation as historical processes’ in a 1965 IEA volume edited by Austin Robinson. Trevor Swan wrote in his heartfelt and elegant obituary note in the December 1963 Economic Record that ‘Salter never held a permanent post in any university ... To his mind the work he did in a few fruitful years were essentially by way of preparation. Despite his already great achievements, [his] name ... invokes the echoes of “unfulfilled renown” ’ (487). Salter’s August 1959 article in the Economic Record, which analysed ‘price and expenditure effects, provided an incisive examination of the problems of achieving equilibrium between full employment and balance of payments in a small open economy’, Pitchford (2002, 169). Moreover, his early work as an undergraduate on measuring factor income in the productive sectors in Western Australia (1953) and the measurement of Australian production (1954) (so impressive that it was made into a book), his evidence to the Arbitration Commission (1959) and his other papers served to cluster brilliantly around the outstanding jewel in his crown, the 1960 book.

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In the book Salter developed Marshall’s analysis to explain why machines of different vintages could operate side by side in firms and industries when the latest vintages had greater expected quasi-rents than the older vintages. Salter stressed that understanding economy-wide productivity trends required study of behaviour at the level of the firm and industry. (His IEA paper was the culmination at the level of the economy of his preceding firm and industry analysis.) The solution to the posed conundrum of different vintages operating side by side was that the older vintages only had to be expected to cover their variable costs (bygones are bygones) in order to continue operating while the latest installed vintages had to be expected to cover total costs in order to be installed. The core of the macroeconomic, systemic consequences of this finding is that the overall productivity regime to be established, both its level and rate of increase, depends upon the rate at which money wages increase over time. Should they rise at the rate determined by overall productivity plus prices, high productivity industries will be encouraged to expand, low productivity industries to contract or even shut down, implying overall the maximum rate of increase in overall productivity in a given situation and so potentially in average real incomes. (This was the principal message of the Russell/Salter evidence in 1959 and in subsequent papers by Russell and others in later decades.) If money wages were to be adjusted according to individual firms’ and industries’ rates of increase of productivity, these systemic effects would be lost, overall productivity would increase at much lower rates and citizens generally would be denied an equitable share in the potential overall increase of prosperity in the economy. (The Russell/Salter rule is part of a package deal of policies designed to maintain full employment.) Salter was one of the pioneers of the development of vintage models and of how technical progress was embodied in stocks of capital goods by gross investment expenditure. The death of Wilfred Salter at such an early age (34) was a personal tragedy for his family and an irreplaceable loss for both the Australian and the world economics profession. His researches and writings provide superb examples of how to fashion elegant and relevant theory which at the same time is in the appropriate form to provide inferences which can be tested through careful empirical studies.

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References

Pitchford, John (2002), ‘Salter, Wilfred Edward Grahm (1929–1963)’, Australian Dictionary of Biography, Volume 16, Melbourne: Melbourne University Press, 169–70. Salter, W. E. G. (1953), The Measurement of Factor Income Generated by Productive Sectors in Western Australia, mimeo. Salter, W. E. G. (1954), The Measurement of Australian Production, Perth: University of Western Australian Press. Salter, W. E. G. (1958), ‘Growth and the Capital Stock’, Section G, A.N.Z.A.A.S., Adelaide, August, mimeo. Salter, W. E. G. (1959a), ‘The Production Function and the Durability of Capital’, Economic Record, 35, 47–66. Salter, W. E. G. (1959b), ‘Internal and External Balance: the Role of Price and Expenditure Effects’, Economic Record, 35, 226–38. Salter, W. E. G. (1959c) ‘Statement of Evidence, 1959 Basic Wage Case’ (mimeo). Salter, W. E. G. (1960), Productivity and Technical Change, Cambridge: Cambridge University Press. Second edition, 1966. Salter, W. E. G. (1962), ‘Marginal Labour and Investment Coefficients of Australian Manufacturing Industry’, Economic Record, 38, 137–56. Salter, W. E. G. (1965), ‘Productivity Growth and Accumulation as Historical Processes’, in E. A.G . Robinson (ed.) (1965), Problems in Economic Development, London: Macmillan, 226–91. Swan, T. W. (1963), ‘Wilfred Edward Graham Salter: 1929–1963’, Economic Record, 39, 486–87.

9780230_284692_19_cha17.indd 247 12/23/2011 5:08:22 PM 18 Peter Karmel: A Tribute (2009)*

In November 2008 Bob Wallace and I visited Peter Karmel at his home in Canberra. We had our photo taken (by Joan Harcourt) with a copy of Economic Activity (1967), which had just been reissued by Cambridge University Press. It was Bob’s and my first book and Peter’s third (his two previous books were Applied Statistics for Economists (1957) and The Structure of the Australian Economy, co-authored with Maureen Brunt (1963)). We had a very happy hour and a half natter, ranging far and wide over Peter’s life, current affairs and books read recently and in the past. Sadly, it was the last time we were to see our much admired and highly valued friend and former colleague. Peter was the still very young Professor of Economics at Adelaide (he was 28 when appointed in 1950) when I came to Adelaide in March 1958 to my first lecturing post. As an undergraduate I had heard him give the G. L. Wood Memorial Lecture in the early 1950s and he had interviewed me for the Adelaide post in Belfast (where he was on leave and I was doing a PhD at Cambridge) in early 1958. I came to know him well at Adelaide before, to our great collective chagrin, he went to Flinders as its first Vice-Chancellor in 1962. When he called us into the tearoom to tell us the news, we all moaned about our lot at losing him and it was almost only as an afterthought that Frank Jarrett congratu- lated him on his new post! Peter was a wonderful head. He was democratic and approachable; he also created the fiction that each one of us was his most trusted confidant so that when decisions were taken, they were almost always approved of because he had found out what the dogs were bark- ing beforehand. He created an atmosphere of exciting intellectual

* Originally published in Agenda, vol 16, no. 1, 2009, pp. 63–66.

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teamwork, with all of us joining in, often in the tearoom, in discussions of economic and other issues, which fed into the creation of our and his papers. It was an extraordinarily happy and productive period with Peter, Eric Russell, Ron Hirst, Frank Jarrett, Russell Mathews, John Grant, Bob Wallace, Keith Hancock, Hugh Hudson, Donald Whitehead, Maureen Brunt, John Dillon, Alan Powell, Allan Barton – I could go on but you get the picture of a youthful and outstanding department. Rightly, Peter is greatly admired for his splendid work as a University Administrator, for his contributions to higher and secondary education, for his roles in all manner of major government reports, and for his input into the arts, not least the remarkable collection of paintings and sculptures that he and Lena built up at their Canberra home. But he was also an absolutely first-class economist with a capacity for work at an intensity for the whole day which most of us could not sustain for even two hours, if at all. His PhD at Cambridge in demography, predicting population growth by looking at male fertility, was highly original and extremely technical; it resulted in a number of papers in brownie point journals. I read his PhD dissertation when I was in Cambridge in the 1950s but I would be kidding if I said I could do anything other than admire it. So I shall write about some of his other economics papers which I think I understand more. Peter and Bob Wallace published a seminal article in the first ever issue of Australian Economic Papers in September 1962. Its title is ‘Credit creation in a multi-bank system’. It concerned the fallacy of analysing the banking system by using a representative bank as opposed to a population of interacting banks. Their work – rather, the issue – was not taken up again until a couple of years ago in a paper in the Cambridge Journal of Economics, whose authors had to be referred to Bob and Peter’s paper. They – Bob and Peter – were decades ahead of the pack in exposing the fallacy of using single representative agent models in macroeconomic analysis. Through a number of carefully worked out cases, going from the simplest to complex ones, they illustrated how misleading the traditional method of examining the effects of changes in the conditions under which banks worked could be. They analysed whether convergence on a new equilibrium position or fluctuations around it would result, using both analytical and simulation approaches to get a ‘feel’ on the problems. Their exposition exhibits deep economic intuition allied with technical analysis which gives the reader confidence that the authors are completely on top of what they are doing, so much so that the authors could call in the expertise of Ren Potts, then the

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Professor of Applied Mathematics at Adelaide, to go even further than Bob and Peter had. Peter also collaborated with other Adelaide mathematicians – B. C. Rennie and George Sved – when he took issue in the December 1959 Economic Record with John Pitchford and Alf Hagger who had published a note in the 1958 Economic Journal on the possibility of multiple rates of return on investment projects when some of the expected cash flows, ‘net yields’, were negative. Peter showed ‘that, if a project is termina- ble at any stage during its [expected] lifetime and provided that the scrap value is always non-negative, the marginal efficiency of the trun- cated project expected to have the highest marginal efficiency will be a unique value’ (430). Negative net yields were shown to produce multiple values ‘only in very special circumstances’. Further examination of the latter showed that the findings depended upon whether funds accumulated from the project were or were not expected to earn at the rate of return internal to the project – this result also bore on whether the choice of technique by comparisons of internal rates of returns gave an unequivocal guide to project selection. The paper is marked by crystal clear exposition, helpful diagrams and supporting algebraic proofs, including an addendum criticising Sam Soper’s further note on the same issue in the March 1959 Economic Journal. We always thought in Adelaide that Roy Harrod, then editor of the Economic Journal, made an error of judgment in accepting the notes by Pitchford and Hagger, and Soper, but not Peter’s definitive critique of them, and his own positive contributions. Perhaps most of all, Peter was a major player in the formulation of wages/incomes policy for Australia, though I must immediately add that, in my view, Eric Russell and Wilfred Salter made the most profound – and correct – contributions here. In his most substantial article on these issues – his Presidential Address to Section G, A.N.Z.A.A.S. in Perth in August 1959 – he acknowledges ‘great indebtedness’ to Eric’s Statement of Evidence to the Arbitration Commission in the 1959 Basic Wage Case. There Eric argued that average real wages should be tied to effective productivity – national productivity adjusted for the terms of trade. Peter’s Address was published in the December 1959 Economic Record. The relevant pages are pp. 353–54 and n. 19, p. 366. Peter’s Address was entitled ‘Inflation, productivity and growth’. It contained a comprehensive analysis of the interrelationships between the three and some well thought out links between the analysis and policy. Peter was especially keen to get away from the then Australian practice of regarding growth of the economy as ‘a residual objective’.

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He wanted it placed on the ‘same footing’ as full employment without (much) inflation, and an equitable distribution of income including systematic provision of public infrastructure. He was especially critical of demand management practices that cut back public then private investment first and much of the Address was taken up with detailed analysis of the links between investment and productivity changes and price responses. The Address is a model of clarity and sustained, joined up arguments, with the formal analysis presented in footnotes. Peter belonged to the generation that was brought up on the Trinity of The General Theory, Value and Capital and The Foundations and he followed Hicks’s example of persuasive prose in the text (Eric used to say that Hicks (not Peter!) wrote so well he made the confusions clear) and the mathematics in footnotes or appendices. Evidence of Peter’s wide reading abound in the Address. For example, in discussing growth the contributions of Frank Ramsey and Roy Harrod clearly underlie his analysis. On the specific issue of wages/incomes policy, he had not yet come to Eric’s (and Salter’s) view that money wages should be adjusted for both overall productivity and prices, though Peter does make a reference to the classic 1957 Russell–Meade paper in the Economic Record on how the Australian economy works which was the foundation of Eric’s views. Peter took a pragmatic view on how ‘close’ to full employment we should aim to be. He was sceptical of Paish’s view that some slack was necessary in order to allow resource allocation to do its thing through the relative price mechanism because Peter had a real sense of the need for buoyant ‘animal spirits’ to sustain private investment at levels which would lead to productivity increases associated with the embodiment of new ideas in the capital stock through investment. Though much of the analysis stresses equilibrating processes, his understanding of interrelationships over time is certainly consistent with virtuous cumulative causation processes occurring. Peter was a wonderful teacher, clear, enthusiastic and able to put over large amounts of material which nevertheless all but the weakest students could absorb and understand. I took over his first year course in ‘Outlay’, when he was appointed to Flinders and he let me see his very full lecture notes. They are the inspiration for our co-authored book with Bob Wallace, Economic Activity. All of us taught this first year course, Bob, when I left for Cambridge in 1963. I taught from its proof sheets at Cambridge when Robin Matthews went to Oxford in 1965 and I took over from him the first year macro course. One of my listeners was Mervyn King, now Governor of the Bank of England. I am

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delighted to report that three times in public (to my knowledge) he has paid tribute to its contents and presentation, saying in effect that it formed the basis of his understanding of macro economics. As Allan Barton noted in his splendid Eulogy at Peter’s funeral (5 January 2009), Peter’s Applied Statistics for Economics, which grew out of Peter’s second year course at Adelaide, ‘significantly updated the teaching in this area of economics’; it was ‘an instant success’ and was adopted as ‘the text book’ for many years. Peter was a great economist, public citizen, a humane liberal thinker who always wanted to apply his discipline to improving the lot of his fellow Australians, especially those who were not as gifted as him nor had had his opportunities. He had an earthy sense of humour, innu- merable friends and no real enemies (though Bob Menzies treated him very badly over the Vernon Report). Most of all, Peter was a tremendous, devoted family man. He and Lena had six children and 16 grandchildren. The family was the centre of his being and he and Lena formed the most wonderful team. Peter described Lena as ‘the rock upon which the family has been built’. The Karmels also gave superb Faculty parties and were kind, supportive yet really down-to-earth friends, always calling things as they were. It was (is) an enormous privilege to have known them.

References

Karmel, Peter 1959a, ‘The Marginal Efficiency of Capital’, Economic Record 35(2): 429–34. Karmel, Peter 1959b, ‘Some Reflections on Productivity, Inflation and Growth’, Economic Growth 35(2): 349–63. Meade, J. E. and Russell, E. A. 1957, ‘Wage Rates, the Cost of Living and the Balance of Payments’, Economic Record 33(1): 23–28. Pitchford, J. D. and Hagger, A. J. 1958, ‘A Note on the Marginal Efficiency of Capital’, Economic Journal 68(271): 597–600. Soper C. S. 1959, ‘The Marginal Efficiency of Capital: A Further Note’, Economic Journal 69(273):174–77. Wallace, Bob and Karmel, Peter 1962, ‘Credit Creation in a Multi-bank System’, Australian Economic Papers 1: 95–108.

9780230_284692_20_cha18.indd 252 12/23/2011 5:10:04 PM 19 John Richard Wells, 1947–1999 (1999)*

John Wells, the economist, died on 27 October 1999, aged 52. An extraordinarily wide cross-section of people came to his funeral service in Cambridge, for John was admired for his powerful economic and political analysis and loved for his integrity, kindness and, when his wretched health allowed it, enormous enthusiasm and energy. In the address it was rightly said that though he was an academic he was not a snob (!); and that he was, it had also to be said, a member of the awk- ward squads of all the walks of life to which he belonged. Wells grew up in South London in a family of modest means. Scholarships took him to Dulwich College, and then to Queens’ College, Cambridge in 1965 to read Modern Languages. He soon switched to Economics, obtaining a First in Part II in 1969. He went to the University of California, Berkeley, to do research on development processes in Brazil. He obtained a Master’s Degree (1971) and worked as a research assistant for Albert Fishlow. He returned to Cambridge to write a doctor- ate on ‘Growth and Fluctuations in the Brazilian Manufacturing Sector’ (1977) while working as a Research Officer in the University’s Centre for Latin American Studies. In 1975 he was appointed to a University Assistant Lectureship in the Faculty of Economics and Politics; he became a University Lecturer in 1978, a position which he held until he took early retirement last summer. He was a Fellow of King’s (1976–88). He was a consultant for several international bodies, working on applied economic issues in Brazil and Chile especially. John was subject to volatile mood swings which periodically affected his performance and finally led to his early retirement. He set himself, I believe, impossibly high standards and was distressed when he could

* Originally published in The Independent, 1999.

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not always attain them. When on top of his form he was superb in the lecture room and supervisions and a caring, considerate colleague. He rewrote his lectures every year and took great care with hand outs for his courses. The place where he was most likely to be found was the copying room of the Austin Robinson Building! John hated injustice and unfairness. He was fearlessly outspoken, whether discussing the lot of the wretched of the earth in developing countries or the emerging underclass, poverty and unemployment in Thatcher’s Britain and beyond. For many years he was an active member of the Labour Party. He provided advice (unpaid) for Margaret Beckitt, Harriet Harman, Neil Kinnoch, John Smith and Gordon Brown. He resigned when Tony Blair became leader, believing the Party to have become unprincipled, uncaring about the most vulnerable in society and illiterate on macroeconomic policy. He condemned their refusal to raise government spending and taxation, to contemplate an appropriate incomes policy to go with a commitment to full employment; and the reliance on that coarse and blunt instrument, the interest rate. John was teased (but admired) for taking over from the late Nicky Kaldor the provision of a steady stream of letters on topical economic issues to the broadsheets. The letters were thoroughly researched; they witnessed to John’s superb feeling for orders of magnitude and what statistics could and could not mean. Arguments were clear and logical but the passion that motivated them could be discerned. He also wrote for what some might consider fringe outlets, Red Pepper, for example; there he applied the same standards of academic excellence as in his more orthodox publications. John was not a careerist and he spent a large amount of time on issues he cared about. He did publish a number of outstanding pieces of applied economics, especially his writings on Brazilian development where typically, he analysed the issues and extent of poverty in that most unequal of societies. They included his path-breaking and widely referred to article on the diffusion of con- sumer durables in Brazil (1977). With Bob Rowthorn, he did innovative research for their book, Deindustrialisation and Foreign Trade (1987). Initially their findings were met with scepticism but they are now recognised as fundamentally sound. Sadly John was never to finish two large projects, one on development in Latin America, the other on British economic history and policy in the post-war period. Because of his mood swings, John could sense slights and take great offence. Mostly, though, he was positive and helpful, so much so that people were sometimes reluctant to ask him things, for he would do much empirical work to back up a casually mentioned conjecture. He

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was devoted to his students. Sometimes he could be a severe taskmas- ter; yet his pastoral care and basic intentions were admirable; further examples of the impossible standards which eventually took their toll of his psychological resources. The ancillary staff remember him for his kindness, infectiously hearty laugh, sharing birthday celebrations and warmly welcoming newcomers. John was a genuine democratic socialist who lived his principles. John Wells married Terry Bunch in California in 1971. They were divorced in 1981. For much of his teaching career, John was a loving single parent to their son, Christopher, who survives him.

9780230_284692_21_cha19.indd 255 12/23/2011 5:10:30 PM 20 Second Address at the Memorial Gathering for Alister Sutherland, Trinity College, 30 October 2004 (2004)

May I thank Gill for asking me to speak today? It is an honour and a privilege to do so. Alister and I were friends for nearly 40 years and colleague for many years. Joan and I received kindness and hospitality from Alister and Gill. Alister and I enjoyed many a natter when we met up in the Faculty and at our colleges. I admired Alister for his integrity, courage, stubbornness and principle, his fund of kindness and wry humour, his loyalty and especially his love of family. This last was characterised by unfailing support and courage in tragic adversity and by quiet pride in achievements, traits exemplified by Gill too. They were an admirable team, an inspiration to their friends. My brief is to speak of Alister as an economist and of his contributions as a University lecturer and College supervisor in Cambridge. Born in Yorkshire, schooled at a Leeds primary school and Leeds Grammar School, after National Service in the RAF, Alister learnt his trade at St John’s, Oxford and Nuffield, followed by spells at Yale and Wesleyan Universities in the States. He came to Cambridge in 1966, first to Trinity and then to the Faculty in 1971. I must start by saying that though Alister taught at UCL and Cambridge, he was very much an Oxford person. He had the characteristics of the very best Oxford graduates in economics: a fund of common sense principles, a respect for concepts and figures and what they really meant, a keen critical mind, a desire to match down-to-earth theory

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with practical, workable applications and policies. The Cambridge economists whose approach Alister’s most resembled were Brian Reddaway and Austin Robinson. (Both Austin and Alister were initially admitted to read classics.) Alec Cairncross was one of his great champions. Alister did not publish very much over his working life as an academic – there seem to have been two bursts in the 1950s and 60s and then in the 1980s. His publications are all recognisably vintage Sutherlands – remorseless logic, attention to concepts and details, directed always to empirical understanding prior to application, the exposition sometimes acerbic and biting. I rather like the opening to a Comment in Oxford application Economic Papers in 1965 that the ‘article ... evokes both admiration and exasperation’. The topics he wrote on were very much applied microeconomic problems, to do with agricultural subsidies, transport puzzles, control of monopolies and restrictive practices, different tax schemes. As Jo Carey has told us, he also wrote official reports where the same characteristics were present. His lectures were not a success – he knew too much, too many details, the structure that was no doubt clear in his mind escaped all but the brightest and most attentive of his listeners. His supervisions – they really should be called tutorials for they were very much on the Oxford model – were not for the faint-hearted. At first pupils read their essays, although in later years, especially as teaching groups grew larger, he adopted the Cambridge practice of taking essays in beforehand and writing comments which prefaced the supervision discussion. Criticisms were pungent, not always tactful. There were interruptions while Alister consulted his library, pulling out books, saying you must read this, and this, and this. (Marshall’s pupils often staggered home from supervisions at Balliol Croft weighed down by piles of books pressed on them after he had heard their essays.) I am told that Alister’s supervision pupils in Nick Crafts’ cohort nicknamed him ‘Star’, a play on his name as well as reflecting the critical illumination they received. Alister wanted his pupils to be knowledgeable, to understand, to think for themselves, to build up their arguments on the basis of thorough homework on the literature, not the pap of textbooks. Alister had high standards, no more so than in examining. He always fought against what he thought of as dumbing down, especially any attempt to give ‘too many firsts’. He was stubborn and often inflexible at examiners’ meetings, but always for what he saw as proper reasons, there was no hint of malice or meanness of spirit involved and certainly none of self-aggrandisement. This was true also of his intellectual arguments with colleagues, no malice, only a passionate search for truth and

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correct behaviour, for proper educational practice. One of his Trinity colleagues told me that though they had huge brawls about teaching and the nature of economics, these never affected their personal relationship, that he valued Alister as a colleague for his support and great kindness. Alister had a detailed knowledge of the statutes and regulations of the University and the College. I thought our Faculty was barmy not to have used these talents by making Alister Academic Secretary of the Faculty Board. One of his Faculty colleagues who liked and admired him, said Alister was a fearless, old-fashioned liberal in all that he did. Another colleague also used the phrase ‘old-fashioned’ as a compliment and concluded that Alister was in the most fundamental sense a good man, a judgement I fervently endorse. So we have him: cranky sometimes, stubborn always, often inflexible, yet striving for proper values and determined to make his subject one that served to understand and attempted to make the world a better place, especially for the underprivileged. He hoped that his pupils would see this and do likewise. He was an irritant who helped our oyster Faculty and his oyster College create better pearls than they otherwise would have done, even though they were not ever consciously aware of this themselves. Alister Sutherland belonged to, alas, a vanish- ing breed of selfless, honest university and college good citizens. My life (and I’m sure yours too) has been enriched by knowing him and I miss him dearly.

9780230_284692_22_cha20.indd 258 12/23/2011 5:10:53 PM Part VII General Essays

9780230_284692_23_cha21.indd 259 12/23/2011 5:11:19 PM 9780230_284692_23_cha21.indd 260 12/23/2011 5:11:19 PM 21 ‘Despised and Rejected’ (1995)

A self-described ‘Australian patriot and a Cambridge economist’ and ‘Jewish Methodist,’ dissenter G. C. Harcourt is best known for his writing both about the Cambridge capital-theory controversies and about post-Keynesian pricing and investment theory. In addition, he led Australian protests against the Vietnam war, for which he ‘received more death threats than most people have had hot dinners, as well as one actual attempt when someone tried to blow up our car.’ His essay notes a possible family link to Joshua Gans, who helped with this project.1 Many thanks for your letter of April 3. I am very glad to respond, first, because, as it happens, four of my best known papers were all initially rejected by journals, and secondly, because my maternal grandfather’s name was Gans, so how could I not respond? (He came from Frankfurt– are we relations)? Let me tell you the tales. You have my permission to name and quote me.

1) 1963 ‘A Critique of Mr. Kaldor’s Model of Income Distribution and Economic Growth’, Australian Economic Papers, Volume 2, June 1963, 20–36. This paper developed from lectures I gave to intending honours (third year) undergraduates in Adelaide. Nicky Kaldor claimed in 1955–56 that his Keynesian macro theory of distribution only worked in the long period when the economy was at full employment. (He never made fully coherent his reasons for believing that the long-period position was a full employment one.) But in 1957 in one of his growth models, and in 1959 in Economica, he had the same mechanism working in the short period as a necessary part of the process whereby the economy moved towards its long-period position. So I asked the question: what

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pricing behaviour must the business people in the consumption goods and investment goods sectors follow in order that the distribution mechanism works in the short period while full employment prevails? I found that very peculiar and different behaviour as between the two sectors was required. I sent the paper to Nicky and we had a long and vigorous correspondence. He agreed I had picked him up on some loose statements in his published work but he was reluctant to accept my arguments. Nevertheless, he urged me to send the paper to the R. E. Studs (where his own paper appeared initially) and he told me he would recommend its publication to the editors, so that our differences could be aired. There then ensued a protracted correspondence between the managing editor (Dick Lipsey) and myself. One of the referees (who turned out to be John Black) would not accept my arguments and so Dick got several other people to look at the paper and surrounding exchanges and he himself went through the material. As well as Kaldor’s recommendation, Joan Robinson, to whom I sent the paper, thought that I had really pinned down where Nicky Kaldor went off the rails as ‘Jean Baptiste’ Kaldor and was most supportive of me (and scathing of the editors of R. E. Studs whom she thought were ruining what once had been a fine outlet for the irreverent young of the trade). Anyway, after several rewrites, trying to answer their various criticisms, the paper was rejected and when I was on leave in Cambridge in 1963–64, Frank Hahn (who was then one of the editors of R. E. Studs), with his usual tact, finesse, and sensitivity, passed onto me what he called ‘the whole horrible Harcourt file’! In the meantime I had submitted the paper to AEP (I was assistant editor but it was independently refereed), and it was accepted in 1963. The sequel is amusing. Nicky asked me to give the paper to his research students seminar in King’s in 1964. He took the precaution of sending Hahn to see me on the morning of the seminar to tell me that my model was over-determined (it was not). In the seminar Nick behaved abomi- nably, shouting me down, or changing the subject, or the assumptions whenever I got near a telling point, smirking the while to the assembled research students who dully supported the great man. Luckily Luigi Pasinetti (we had been graduate students together in the 1950s and were then Lecturers in Cambridge) insisted on some semblance of fair play. What I didn’t know was that I was going down with mumps and so was well below form as I felt awful. However, I do remember going up to one particularly arse-licking graduate student afterwards; I picked him up by the lapels and said ‘Look, son, if you want to grease Kaldor at my expense, at least do your bloody home work first!’

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I should add that Nicky and I subsequently became firm friends. You will find an affectionate and appreciative evaluation of him and his work by me in Economica, May 1988.

2) 1966 ‘Biases in empirical estimates of the elasticities of substitution of CES production functions, ‘Review of Economic Studies, Vol. 33 (3), July 1966, 227–33. This paper arose out of a review I wrote of Minhas’ book for the Econ J. and a review article of Salter’s 1960 book, which I wrote for the Econ. Rec. I asked the question: Suppose we grant neoclassical economists everything they desire except that the world contains vintages? Will the ACMS method give unbiased estimates of the elasticities of substitution of capital for labour of ex ante CES production functions? I made up a number of plausible stories with the vintages present and showed that, when we fitted the ACMS equation to the observations on values added and wages, there were substantial and unsystematic biases present in the estimates of the elasticities of substitution (the true values of which we knew). I sent the paper to R. Econ. Stats., which kept it for a long time, then sent it back by surface mail, saying that they had published enough on C. E. S., so no go. In the meantime, I had spoken to Mike Farrell about the paper and he urged me to submit it to R. E. Studs (he was one of the editors at the time); so when it came back I did. There were two referees’ reports. One saw exactly what I was trying to do, and recommended publication with a few minor alterations and additions; the other who was an econometrician, thought that I had raised an interesting problem but that I was quite incapable of working out the nature of the econometric biases involved (that was not the purpose of the paper). Luckily Farrell showed good judgment, he only took notice of the first referee and R. E. Studs accepted the paper, which thus became my one excursion into the pages of what Dennis Robertson used to call ‘the green horror’. I told Y. K. Ng that the necessary condition to be a theoretical economist was to publish in R. E. Studs and that the sufficient condition was to do so in J E T. When he had done both, he sent me a post card: ‘I am now necessary and sufficient.’

3) 1976 (with Peter Kenyon) ‘Pricing and the Investment Decision’ Kyklos, Vol. 29, 1976, 449–77. I wrote the first draft of this paper in Cambridge in 1966 and sent it to the Bulletin of the Oxford University Institute of Statistics and Economics. It was refereed by G. B. Richardson, one of the great unsung heroes of modern economics, who liked the idea–my paper was a

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fore-runner of the class of mark-up models associated with Al Eichner and Adrian Wood–but not the execution. When I returned to Australia (Adelaide) in 1967 I put the paper away and it was not until Peter Kenyon came to work with me in the 1970s that I thought seriously about the problem again. Here is the story: in 1974 I had major surgery, losing half my inside and spending three weeks in the Royal Adelaide Hospital. With great foresight I had taken a monkey mask to the hospital with me, intending to put it on before I was wheeled into the operating theatre. Unfortunately, I was given the softening up injection before I could get the mask out of my case. A less resourceful person would have said ‘Bygones are bygones.’ But not me. The day I left hospital, instead of going home, I first went to a seminar by Peter on his research-to-date (the Econs. Dept. in Adelaide is next to the R A H) and, of course, I walked in with the monkey mask on. While listening to Peter’s progress report, the solution to the criticism that G B R had made came to me. As soon as I got home I sketched out the basic model of our paper and told Peter to put the ‘scholarship’ around it. We submitted it to the Econ. J. for I thought my old chums Brian Reddaway and David Champernowne (who were then joint editors) would like it as down- to-earth stuff based on observation of actual business behaviour rather than deductions from a simple axiom. Alas, neither the referees nor the editors did like it and Brian chickened out of telling me this directly by asking David to do so, on the grounds that he, Brian, was a good friend of mine! Where, D.C. asked ruefully in the rejection letter, did that leave him?!

4) 1976 ‘The Cambridge Controversies: Old Ways and New Horizons – or Dead End?’ Oxford Economic Papers, vol. 17, March 1976, 25–65. This last one has a serious and unpleasant side to it, a fore-taste of the narrowness and ruthlessness of the mainstream as they recovered confidence in the 1970s and decided (at least tacitly) to purge the profession of dissent. As you may know, I wrote a survey article on capital theory for the second issue (June ’69) of the J E L which was then edited by the great liberal editor, Mark Perlman. I followed this with a book published in 1972 by Cambridge University Press, Some Cambridge Controversies in the Theory of Capital. In 1972–73 I had a year’s study leave from Adelaide at Clare Hall, Cambridge and I gave seminars based on the themes of the book at upwards of 50 different places! Out of this odyssey grew this paper which was a sequel to the book. One version was given at the AUTE conference at the Warwick in April 1973 and was published in the volume of the conference in 1975.

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However, I wanted to reach a wider audience so I sent a copy to Mark Perlman. He liked it, said he thought it ‘better’ than the 1969 J E L survey and asked me to publish it in the J E L. However, the editors decided that they did not have the space for it, so that I should send it to George Borts at the A E R with his (Perlman’s) blessing. Borts kept it for a year, then rejected it, enclosing reports from ‘two scholars in the area’ who said, in effect, that (a) the topic was not a very interesting one and (b) that my views on it were so superficial as not to be worth publishing anyway. At the same time as this article on a ‘not very interesting’ topic was being rejected, Borts was enthusiastically accepting a paper by Gallaway and Shukla on ‘The neoclassical production function’ (A E R, 1974), the objective of which was to rehabilitate the N P F and refute the Cambridge, England critique. As five minutes (or at least 20 minutes) reflection would have shown him their argument was irretrievably flawed as David Laibman and Ed Nell, (A E R, 1977), and Pierangelo Garegnani, very quickly established. My article was soon accepted for publication (after additions) in Oxford Economic Papers, the home of probably my best known paper (other than the J E L survey) ‘The Accountant in a Golden Age’ (1965). When at the end of his period as editor Borts was tackled about ideological bias, he said, in effect, that Mavericks could establish their own journals and publish there, why should he have to waste the space of mainstream outlets on them. I am sure there is a moral here! Please excuse this shameful and egotistical self-indulgence. Thank you for writing to me and good luck with your project. I would like to see what you say generally in your paper and also specifically what you say about me, if you decide to use any of this.2

Notes

1. Arestis and Sawyer, eds, A Biographical Dictionary of Dissenting Economists, p. 232. 2. They did not. You had to be a Nobel Prize winner or a Distinguished Fellow of the AEP or J. B. Clark Medal Winner to get a guernsey in the JEP article.

9780230_284692_23_cha21.indd 265 12/23/2011 5:11:20 PM 22 Speech to Commerce Graduates at the University of Melbourne (2003)

First, may I express appreciation and delight at the honour my alma mater has done me today? Coming to the University of Melbourne in 1950 to read (as we pseudo-poms would say) for the Degree of Bachelor of Commerce was to enter a paradise I have never left. I owe an immea- surable amount to that time at the University and at Queen’s, especially to my teachers and fellow students then, as now, an overlapping set of friends. I am therefore more than delighted that Allan Barton, Maureen Brunt, Marj Harper, Joe Isaac and Bob Wallace are able to be here today; as I am that Joan, Tim and Jo, John and other members of our clan are here. Overriding all other reasons why the University of Melbourne was paradise was that it was where I first met Joan. Secondly, may I offer warmest congratulations to those who graduate today and who are to practice what Maynard Keynes once called ‘our miserable subject’ – though anyone less miserable than the ever optimistic and usually cheerful Keynes would be hard to find? Properly understood, ours is not a miserable subject. I include economics and accountancy under the rubric of commerce; a great merit of the course at the University of Melbourne is that it always insisted that both disciplines be studied. Double entry bookkeeping is an invention of major importance. Without it neither modern society as we know it nor the ability to keep the books of the local tennis club (Lou Golberg’s stated objective for Accountancy 1A) would have been possible. The overriding aim of our subject is to find out how the economic, social and political dimensions of our societies interrelate and work and if, as is inevitable, we find malfunctions, the greatest impact of which is on

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those least able to defend themselves, to do something about them. A noble calling, I think, and the people I admire in our profession are noble people – and also fun. Let me quote the tribute that Sir James Mackintosh, the Scottish philosopher, paid to Malthus and Ricardo after their deaths. ‘I have known Adam Smith slightly, Ricardo well and Malthus intimately. Is it not something to say for a science that its three greatest masters were about the three best men I ever knew?’ You are now admitted to this tradition; you inherit their legacy and that of others like them. Your degree, if it was like mine, was not strictly vocational. Rather, it was an education in critical thinking about difficult but important issues. It has equipped you with a structure of thought into which you may fit the puzzles which your employment and your life will present you. It has introduced you to the genuine thrill of following arguments where ever they lead and no matter how unpalatable the conclusions; again like Smith, Ricardo and Malthus, I hope you become ‘the most scrupulously honest of [persons] who track down [their] ideas, regardless of where they lead’. I also hope your training will allow you to provide solutions to hard questions; or sometimes – and this is the mark of the greatest economists, a lesson which my friend and mentor, the late Eric Russell, stressed – it will lead you to the realisation that there may be no satisfactory or even any solutions, at least not within the boundaries of what economic analysis can legitimately provide. Most important of all, may I quote Joan Robinson’s favourite remark of Keynes (who was often reproached for being inconsistent)? ‘When someone persuades me I am wrong, I change my mind. What do you do?” Please do put this in large letters over your mantelpiece. Much of your training will have included analysis of that great overriding institution of our society and time, the market. As with the role of mathematics in economic analysis, the market is a splendid servant but a bad master. Again like mathematics, while it has a rightful place, it should not have a monopoly. As Walras told us, the market (if competitive) is optimum for organising the production and purchase of consumption goods but it is not necessarily so in the investment goods and government sectors, and certainly not in the education sector. There, its influence is destructive, tending to destroy that essential environment in which original, creative and critical thought may flourish. So I hope your time here has been one in which, in cooperation with your teachers and fellow students, you have been able to jump intellectual hurdles together – and that you have not thought of yourselves as customers, nor have been treated as such.

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My generation of university teachers was an extremely lucky one for we enjoyed the Golden Age of university education in the twentieth century. Our students also could look forward with confidence to secure and satisfying futures. Alas, this is no longer true. Yet pessimism is uncalled for. As university students you have been offered the opportunity to realise your intellectual potential in a great university and in the company of like-minded people. Such a realisation has fitted you to become good citizens as well as to be creative, critical and productive. Please retain all your lives the enthusiasm and child-like curiosity which university teaching and environments at their best foster. Do continue to work hard and play hard, to support family and friends alike, fight injustice and under privilege with the weapons you have acquired here: in a nutshell, live the good life to the full. May I also congratulate your families and friends who are here today and whose support and care, I am sure, greatly helped you through to graduation and whose pride in your achievements is so pleasing to behold, to my mind, the major reason for holding graduation ceremonies? I regard these ceremonies as very special days and I feel most privileged to have been asked to play a part in this one. As my mother always taught me to say, thank you very much for having me.

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‘The accountant in a Golden Age’ Cambridge University, 18–20, 22–5, (Harcourt), 22–3 34–8 accumulation, 37, 92–4, 133, 141, 156, capital 189–90, 192–3, 194–5, 206, 235 accumulation of, 141, 189–90 ACMS methodology, 134, 139, 142–4 demand for, 116–17 aggregate demand, 93, 153–4, 189 capital goods, 114–15, 118–19, 195 aggregate production functions, capitalism 118–20, 141–2 Golden Age of, 21, 23, 28, 92, 207 aggregate supply, 93, 153, 189 instability of, 62–3 AK models, 71–2, 74–5 Marx on, 88–90 animal spirits, 92, 121, 235 phases of, 233–5 anti-inflationary measures, 223 capital-reversing, 26–7, 99–110, 115, anti-Semitism, 13 118–20, 137–8, 142 anti-war movement, 25–7 capital theory, 26–8, 60–1, 68, 102–3 Arrow, K. J., 72 controversies over, 112–25, 131–48 Arrow-Debreu model (AD), 35–6 neoclassical, 113–19, 137–8 Asian financial crisis, 220 production function and, 140 Asimakopulos, Tom, 27–8, 30 central banks, 202–3 Australian Economic Papers (AEP), 30–1 Chamberlin, Edward, 56–7, 59–60 Australian Labor Party (ALP), 25, 29, 36 Champernowne, David, 100, 101, 103, 104 Bank of England, 215 Chick, Victoria, 30 Baumol, William, 91, 160 China, 191–3, 195 benevolent dictator, 139 Chomsky, Noam, 26 ‘best-practice’ techniques, 134–6, Christianity, 14–15 139–40 Clapham, John, 55, 58, 59 Bhaduri, Amit, 26, 102–3, 190 Clark, J. B., 124 Bharadwaj, Krishna, 33 Cobb-Douglas production function, ‘Biases in empirical estimates’ 131, 132, 136–7, 147n15 (Harcourt), 263 Cochrane, Don, 17 Blair, Tony, 44 Cohen, Avi J., ix, 112–30 Blankenburg, Stephanie, ix, 2, Cohen, Jon, 29, 30 55–83, 157 communism, 36, 193–4 Blaug, Mark, 123, 137 competition Bliss, Christopher, 120 imperfect, 204 Böhm-Bawerk, E. von, 119, 123, 124 perfect, 58 Bretton Woods, 206, 220 competitive value, 61, 69 Brown, Gordon, 215–21 compulsory voting, 211–14 constant-elasticity-of-substitution Cairns, Jim, 16, 37–8 (CES) production function, 23–4, Cambridge capital theory 132, 134, 135 controversies, 112–25, 131–48 constitutional reform, 211–14 Cambridge economic tradition, 201–8 consumption goods, 195

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convergence, 127n10, 232, 249 time and, 117–18 Cornwall, John, 5, 229–41 EU Stability and Growth Pact, cost curves, 56–7, 59–60 218–19 credit crunch, 237 evolutionary economics, 158–62 ‘A Critique of Mr. Kaldor’s Model of exchange rates, 220–1 Income Distribution and Economic fixed, 29 Growth’ (Harcourt), 261–3 flexible, 36, 236 cumulative causation, 36, 68, 123, external economies, 64–5, 70–1 147n14, 169, 207 externality, 74–5

Davidson, Paul, 30, 34 factor prices, 135 demand factors of production, 66, 73–4, aggregate, 93, 153–4, 189 131–2, 135, 202 for capital, 116–17 Ferguson, Charles, 137 management of, 216–17 finance motive, 162, 174 democratic socialism, 13–14, 36 financial intermediaries, 28, 237–41 Department of Applied Economics, fire-fighters dispute, 222–5 201 firm size, 66 deregulation, 236 fiscal policy, 217–19 developing countries, 191, 192–4 Fisher, Franklin, 23 development, 194–6 Fisher, Irving, 100, 119, 124, 142 Dillon, John, 32 Fisher, Malcolm, 20 diminishing returns, 61–2, 71–2 fixed exchange rate, 29 disguised unemployment, 191 flexible exchange rates, 36, 236 distribution, 31, 207 Forster, E. M., 1 Dobb, Maurice, 16, 192, 208 fossil production function, 147n15 Dow, Christopher, 19 Friedman, Milton, 36 Downing, Dick, 18 Fukuoka, Masao, 27 dynamic theory, 152 full employment, 21–3, 37, 189, 206, 215, 218–19, 251 econometrics, 43, 139–40, 142 Fundamental Marxist Theorem Economic Journal symposium (1930), (FMT), 39 59, 60, 63–71 economic policy, of Gordon Brown, Garegnani, Pierangelo, 101, 109 215–21 general equilibrium, 36, 62, 63, 67–8, economics, future of, 43–4 75–6, 120–2, 204 The Economics of Imperfect Competition general price level, 202–3 (Joan Robinson), 184–5 The General Theory (Keynes), 17, 31, economic theory, 38–41, 55–6, 38, 171–9, 185–7, 205, 206 158–62, 229–41 global financial system, 220–1 Economic Tripos, 201 Golden Age of capitalism, 21, 23, 28, education, 30 92, 207, 235 endogenous growth theory (EDT), 68, Goodwin, Richard, 140, 196 71–7, 79n9, 79n10, 127n10 government expenditures, 36–7 equilibrium, 103 Grieve Smith, John, ix, 215–21 general, 36, 62, 63, 67–8, 75–6, growth 120–2 Harrod model of, 152–7 long-period, 65, 139, 147n12 Karmel on, 250–1 partial, 61, 62, 64, 68–9, 75–6, 204 growth cycle, 140

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growth theory, 92–4, 131, 142, 206–7, Isaac, Joe, 16 231–3 iso-quants, 134–5, 138–9 see also endogenous growth theory (EDT) Jenkins, David, 167–70

Harcourt, G. C. Kahn, Richard, 184–6, 188, 204, in Adelaide, 20–2 206, 207 anti-war movement and, 25–7 Kaldor, Nicholas, 18, 27, 35, 125, 156, autobiographical essay, 11–46 188–9, 261–3 at Cambridge, 18–20, 22–5, 34–8 Kalecki, Michal, 16, 30–1, 140, 194–6 early life, 12–13 Karmel, Peter, 5, 11, 21, 248–52 education of, 15–20 Kay, John, 23 major influences on, 11–15 Kenyon, Peter, 18 political views of, 13–14, 25–7 Kerr, Prue, 16 religious views, 13–15 Keynes, John Maynard, 17, 38, 67, Harris, Donald, 92 153, 161, 171–9, 185–6, 203–8 Harrod, Roy, 152–7, 189, 206 Keynesians, 203–8 Harrod model of growth, 152–7 Kinda-Hass, Bogulslawa, 30–1 Hawke, Bob, 21 King, John, 11 Hayek, Friedrich, 124–5 King’s College, 18–20 Heertje, Arnold, 43 Knight, Frank, 56 Henderson, Hubert, 15, 19, 63–4 knowledge, 71, 73–6 Henderson, Ronald, 18 Krugman, Paul, 171–9 heterogeneous capital goods, 114–15, 118–19 labour, 102 Hicks, J. R., 15, 29 heterogeneous, 126n3 Holy Spirit, 14 skilled, 95 Hopkin, Bryan, 19 labour markets, 224, 236 Horne Addresses, 36 labour theory of value (LTV), 86–92, housing cycle, 237–41 95, 160 Howson, Sue, 29 La Nauze, John, 16 land reform, 195 imperfect competition, 204 learning, 72 incomes policies, 37 long period, 57, 59, 141, 147n10, 186, increasing misery, doctrine of, 95 202, 205 increasing returns long-period accumulation, 133 debates on, 55–71, 76–7 long-period cost curve, 56–7, 59–60 EDT and, 71–7 long-period equilibrium, 65, 139, industrial relations, 222–5 147n12 inflation, 28, 206, 216–17, 224, Lydall, Harold, 23 235, 250–1 innovation, 63, 73, 76 macroeconomics, 29 institutional change, 235–7 modern, 71, 160 intellectual biography, 34–5, 42 new classical, 30, 68, 75 interest rate, 120, 237–8 marginalism, 69, 70–1, 75–6 internal rate of return (IR), 41 market period, 57, 202 investment, 22–3, 123, 156, 195, Market Whys and Human Wherefores 207, 235–6 (Jenkins), 167–70 investment decisions, 24–5, 56, 205 Marris, Robin, 18

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Marshall, Alfred, 55–8, 64, 68–70, 76, population, 193–4 185, 201–3 Prest, Wilfred, 26 Marshall Lectures, 23 price-makers, 18 Marx, Karl, 2, 16, 33, 56, 84–96, 153, price mechanism, 193 160, 187–8, 196, 207 prices, 18–19, 156 Massaro, Vincent, 31–2 endogenous, 116 mathematics, 42 factor, 135 Matthews, Robin, 134 general price level, 202–3 McCracken Report, 234 relative, 122 McFarlane, Bruce, 11 scarcity theory of, 113–16 Meade, James, 21, 35, 93 price stability, 215–18 measurement, 60–1 price-taking model, 56, 58 Meek, Ronald, 91, 92 Price Wicksell effects, 104–5 Minhas, B. S., 23–4, 135 ‘Pricing and the Investment Decision’ modernisation, 225 (Harcourt), 263–4 Moggridge, Don, 29 Principles of Economics (Marshall), Monadjemi, Mehdi, ix, 229–43 55–6, 201–2 monetarism, 30 private property, 74 monetary institutions, 202–3 production, 56 monetary policy, 216–19 factors of, 66, 73–4, 131–2, 135, 202 money, 205–6 production function, 23–4, 103, 105, 112 quantity theory of, 202–3 aggregate, 118–20, 141–2 money incomes, 37 capital theory and, 140 money wages, 223 CES, 132, 134, 135 monopoly, 64 Cobb-Douglas, 131, 132, 136–7, Morishima, Michio, 162 147n15 mortgage lending, 238 fossil, 147n15 surrogate, 119, 120 nationalisation, 14, 28–9 productivity, 22, 195, 246, 250–1 neoclassical theory, 113–19, 121–2, profitability, 156 137–8, 155, 187, 188, 190, 204 profits, 121, 156 net present value (NPV) rule, 41 pure knowledge, 58–9 new classical macroeconomics, 30, putty capital, 118–19 68, 75 New Labour, 211–14, 219 quantity theory of money, 202–3

Oakley, Alan, 16 R&D models, 73–5 one-commodity models, 109, 114, Ramsey, Frank, 139 118–19, 122–4, 127n10, 155 real incomes, 223–4 output, 207 realism, 69–70 realistic knowledge, 59 partial equilibrium, 61, 62, 64, 68–9, real-monetary dichotomy, 205–6 75–6, 204 Real Wicksell effects, 104–5 path dependence, 66, 118 Reddaway method, 40–1 perfect competition, 58 redistribution, 28–9 Perlman, Mark, 3, 26, 34, 158–62 relative prices, 122 Pigou, A. C., 58–9, 61, 64, 70–1, 203 religion, 13, 14–15 planned economies, 24 representative firm, debates on, planned investment, 22–3, 154–5 55–71, 75–7 political economy, 21–2 reserve army of labour (RAL), 89–90

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reswitching, 26–7, 99–110, 115, Sraffa, Piero, 16, 20, 23, 31–5, 60–5, 118–20, 137–8, 142 68–70, 76–7, 78n6, 78n7, 90–2, Riach, Peter, 38 100, 102, 116, 123, 138, 184, Richardson, G. B., 19 187–8, 204, 207, 208 Robbins, Lionel, 63 stability, 215–18 Robertson, Dennis, 63–4, 66 Steedman, Ian, 39 Robinson, Austin, 35, 204 Stiglitz, Joseph, 33–6 Robinson, Joan, 4, 15, 19–20, 34, Stone, Dick, 17 35, 92, 100–3, 107–9, 112–13, Stretton, Hugh, 26 117–18, 121–3, 132, 140–1, supply, aggregate, 93, 153, 189 156–7, 183–97, 207 surplus, 88, 94, 122, 195 accumulation of capital and, surrogate production function, 119, 120 189–90 surveys, 41–2 at Cambridge, 185–6 Sutherland, Alister, 5, 256–8 in China, 191–3 Swan, Trevor, 131, 155 on development, 194–6 early life, 184–5 Targetti, Ferdinando, 30–1 imperfect competition and, 204 Tarshis, Lorie, 29 influences on, 184 tax policy, 217–20 Marx and, 196, 207 technical progress, 73, 77, 131–2 Sraffa and, 187–8 Thatcher, Margaret, 28 Rothschild, Kurt, 17 Theory of Moral Sentiments (TMS), Russell, Eric, 21, 34 168–9 time, 67, 117–18, 202 Salter, Wilfred, 5, 134, 244–6 transformation problem, 87–92, 160 Samuelson, Paul, 2, 84–96, 101, 105, A Treatise on Money (Keynes), 205 119–20, 135, 142 Tucker, G. S. L., 16 Sardoni, Claudio, 16, 93 saving, 121, 156, 207 unemployment, 191, 216–17, 224, 236 scarcity, 73, 120, 122 University of Melbourne scarcity theory, 138 commencement speech, 266–8 scarcity theory of price, 113–16 utilisation function, 132, 133 Schumpeter, Joseph, 3, 62–3, 67, 77, 158–62 Veblen, Thorstein, 121, 124, 125 Sen, Amartya, 20, 192 Velupillai, K., 100 short period, 57, 59, 141, 202, 205 Vietnam War, 25–7 short-period cost curves, Viner, Jacob, 56 59–60 voting, compulsory, 211–14 short-period utilisation, 133 Shove, Gerald, 63, 65–7, 188, 204 wages, 156, 222–3, 237 Silbertson, Audrey, 24 Wallace, Bob, 11, 21 Skidelsky, Robert, 161 Walras, Léon, 62–3, 159 skilled labour, 95 Wells, John, 5, 253–5 small open economies, 36–7 Whitehead, Donald, 28 Smith, Adam, 56, 113, 168, 188 Wicksell, Kurt, 189–90, 192 Solow, Robert, 23, 24, 39–40, 100, Wicksell effects, 104–5, 114–16, 118, 118, 119, 125, 131, 132, 136–7, 122, 123, 124 142, 155 Wicksteed, Philip, 14, 15–16 Solow-Swan model, 72 speculation, 236 Young, Allyn, 64, 70–1, 76–7

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