Radical Economics 0709917333

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Radical Economics Bruce McFarlane

C§6OM HELM London & Canberra

©1982 B. McFarlane Choom Helen Ltd, 2-10 St Cohn's Road, London SW11 British Library Cataloguing in Publication Data .

Radical economics. Economics 2. Radicalism Title 330 ISBN 0-7099-1733-3

Printed and bound in Great Britain by Billing and Sons Limited Guildford, London, Oxford, Worcester

CONTENTS

Preface Introduction

13

Part One: Orthodox Economics and Its Problems

1. The Philosophical Bias in Modern Economics

37

2. The Cambridge School of Economics

51

3. Kalecld or Keynes?

69

Part Two: The Radical Response

4. Political Economy and Futurology: Economists' Responses to Economic Crisis

89

5. Ricardian Economics and Its Revival by Radicals

110

6. Neo-Ricardians and Their Marxist Critics

131

Part Three: Marxian Economics

'7. Orthodox and Maudan Theories of Economic Growth

153

8. Lenin's Revolutionary Economics

164

9. Imperialism in Theory and Practice

172

Part Four: Socialist Altemarives

10. The 'Law of Value' in the USSR

197

11. Political Economy of Self-management in Eastern Europe

216

Index

229

PREFACE

Confrontation within economics is 150 years old. In the last century it was vigorously pursued by the Ricardian economists in the UK and in France by Sismondi. At the turn of the century Henry George exercised enormous influence in the USA and Australia, not only for his solution to the problems of growth and income distribution-a single tax on land-but for his criticism of the ideas of professional economists. After 1896 Veblen and other 'institutionalists' launched criticisms on ].B. Clark, then the doyen of neo-classical economic thought, and extended their influence on public discussion of economic matters. Coming closer to our own time, many economists have criticized both the capitalist economy iN its everyday workings and the writings of supporters of a Keynes-neo-classical synthesis ('bastard Keynesianism' in Joan Robinson's terminology). Such an assault began to develop strongly in the 1960s, and resulted in the publication of new curricula for university students and new readings, textbooks and think-pieces to accompany them. In America the most influential have been

D. Mermelstein (ed.), Economics, Mainstream Readings and Radical Critiques; Tom Christoffel, et al., Up Against the American Myth Howard Sherman, Radical Political Economy, and Richard C. Edwards (ed.), The Capitalist System. In the UK Francis Green and P. Note compiled Economics: an AntiJ

Text in the early 1970s and Issues in Potiticaf Economy in 1979, while

Lawrence Harris and Ben Fine produced a number of works to challenge both neo-classical and right-wing Keynesian strongholds. At Sydney University there is a strong tradition of a questioning political economy, although this would not have been immediately obvious from reading lists and curricula- In the nineteenth century there was Cinderella, followed in 1912 by Irvine, the first Professor of Economics. In the 1970s, a 'Political Economy Movement' was founded which holds conferences and produces the Journal o f Australian Political Economy. In the 1980s such groups, as well as ecologists and critics of the economics of world mineral exploitation, seem likely to dominate the empirical side of economics.

As these contributions are to be dissected in later chapters, they will only be referred to briefly here, and it will be sufficient to make one

Preface

key point of interpretation. Few of the more radical economists have had a Marxist approach to political economy. Critiques of them which lump the 'old Left' (Sweezy, Dobb, Braverrnan) in with the new radicals not only cause confusion, but misunderstand the deep underlying difference between radical and Marxians political economy. In the following pages I take a wholly different view to such a conflation of the two schools. The major works by 'realistic"economists2 up to 1968 tend to concentrate on income distribution, racism, sexism, ecological damage, nuclear futures and the possibility of race war leading to the collapse of civilization. Today's economics, by contrast, is more likely to concentrate on value, the labour process, technological une1nployment,3 effective demand, monopoly and stagnation, inflation, finanzkapital, ownership and control, the state in economic life and non-capitalist modes of production.4

In this work, I take up the insights of political economy in the nineteenth century, the American institutionalists, maverick but influential writers like J-A. Hobson, H.D. Dickinson (UK), and Irvine (Australia) and l970s economists of the Cambridge school. The aim is

to show that moral outrage, while important in the 1960s and the 1970s, was only a part of the analysis previously developed by Hobson, Veblen, Irvine and others. In their theoretical constructs a number of earlier economists made really good contributions to the theory of income distribution and capital which foreshadowed the later 'Cambridge controversies'5 of the 1960s and 1970s, of which more later. They also made important contributions to issues raised by important economists like Wallas and JB. Clark, but never incorporated into mainstream economics, especially issues related to the need for a

more dynamic analysis-given that the modern industrial system is featured by trade cycles, cobweb cycles and economic instability in its forward movement. An historical account of the Ricardian and the rise of the 'marginal utility' school of economists is followed by an examination of the responses to the apparent dominance of marginal utility economics in university education. These responses occurred largely in the 1970s, but have their parallels in the great interest taken by the man in the Street during the 1920s, 19305 and l 9'70s in the role of banks ('fuIlny money' theorists, Douglas Credit) and the hold of Henry George over

many in political life who grappled with the economic problems that defied solution by professional economists.

For the man in the street does have a fascination with some of the

Preface

big questions discussed by economists, such as: What is the cause of the economic crisis which set in after 1974? Does its severity indicate that manldnd has no future? What is to be done? Is social change desirable OI' possible? The man in the street was quite correct in many of the suspicions he entertained in the 19305 and l9'10s: that the working of a number of institutions, like banks, insurance companies and treasuries, were indeed 'contributors to crisis', but I have tried to also show the necessary working out of these institutions and their policies in the context of our modern industrial system. This has been done in order to get away from mere moral indignation at the working of such

economic agents and multinational corporations. Outrage alone cannot lead to any clear perspectives on where we are heading in economic life. To take an example from Cuba. When Castro and his revolutionary forces took power, they found they would have to develop new institutions to replace the worldng of the foreign exchange market in its impact on the Cuban economy, to replace one-man management of sugar plantations, etc. But in order to do that effectively, they also found it necessary to study how the ingredients of Cuba's dependent economy actually worked. It proved impossible to abolish such mechanisms overnight, without a prior knowledge of the role and

function of market forces and associated mechanisms. If we do not take the close study of such functions into account, the analysis will, to use Joan Robinson's memorable phrase, 'lack grit'.

Notes l. Examples would be Assam Lindbeck, Political Economy o f the New Left

(Harper and Row, NY, 1970), and D. Mermelstein (ed.), Economics: Mainstream Readings and Radical Critiques (Random House, NY, 1970). 2. Examples include Richard C. Edwards, Michael Reich and T. Weisskopf,

The Capitalist System (Prentice Hall, London, 1972), chapters 5-10; Howard Sherman, Radical Political Economy (Basic Books, NY, 1972), chapters 5-11, Tom Christoffel, David Finkelhor and Dan Gilbert, Up Against theAnlerican Myth (Holt, Rinehart, NY, 1970), chapters 13-25; and Maloolm Caldwell, The Wealth of Some Nations (Zed Press, London, 1977), chapters 1-5. 3. L. Carmichael, Technological Unemployment (Amalgamated Metalworkers' and Shipwrights' Union, Sydney, 1980). 4. E. Mandel, Late Capitalism (New L e f t Books, London, 1975), chapters 3-9; P. Mattick,Marx Against Keynes (Porter Sargent, Boston, 1969), chapters 5-9, Tom Bottomore and Patrick Goode, A usfro-Marxism (Clarendon, Oxford, 1978),

chapter VI, R. Rowthorn, Capitalism, Conflict and Inflation (Lawrence and

Preface Wishaxt, London, 1980), chapters 5-9; H. Braverman, Labour and Monopoly

Capital (Monthly Review Press, NY, 1973), chapters 2-6.

5. G.C. Harcourt, Some Cambridge Controversies in the Theory of CapftaI (CUP, Cambridge, 1972), and G.C. Harcourt and N.F. Laing, Capital and

Economics (London, Penguin, 1972).

INTRODUCTION Change is not natural, not normal . . . fixity is. Robert A. Nisbet, Social Change and History: Aspects of the Western Theory o f Development, p. 270.

Nineteenth-century Stirrings by Radical Economists The very first professors of political economy were appointed to UK universities in the 1820s. Among the first were Oxford (1825), King's College, London (late l820s), and Trinity College, Dublin (1832). In the 1870s the new subject was to flourish, and we could begin by asking why. In part the answer to this question can be found three and four decades later. Official enquiries were made into university education, as British capitalism found itself increasingly under threat from the growing power of the German and American economies. As a result, education for the upper and governing classes was revised and the

emphasis moved away from the classics and towards modern studies: science, technology and economics.

In the 18205, however, circumstances were rather different. Indeed, the early political economists had great difficulty in getting their subject

accepted by the major universities-Oxford and Cambridge. In some measure this was due to their commitment to industrial capital at a time when those same Oxbridge colleges were dependent for their income on extensive land ownership throughout Britain, on a landlord

class under fire from the rising bourgeoisie. There was also a growing fear in the 1820s to contend with: that interest in political economy by the lower orders might lead to a rising interest in politics and political activity. The early UK economists got their leg in, however, because (as they repeatedly stated) the subject political economy actually offered a means of pacifying the working class- After the Napoleonic wars, English workers began undertaking extensive resistance to their economic subjugation in factories and farms and to their political repression in being denied the vote and the right to form trade unions. Strikes, riots

(Peterloo), machine-smashing (Luddism), barn-burning ('Captain' Swing, whose peaceful meeting was attacked by Cambridge students and

Dons wielding clubs), and clandestine political organizations (the Cato 13

14

Introduction

Street Conspiracy) were the order of the day. In such circumstances, state repression and a savage penal code formed the basis of the protection of the property of the rich. The new

political economists, however, proposed to add a social theory that would help quell the discontent of the laboring class. As Michael White has pointed out, they repeatedly stated this aspect that: the workers must come to understand that their interests coincide with the industrial capitalist; and that their prosperity, like that of the middle class is depen dent on the institution of private property and the free play of capital. Such an appreciation of the harmony of

interest would be the inevitable outcome of the spread of enlighten1nent.1

This need to develop the 'right kind' of political economy was made more vital by the fact that other doctrines were abroad which denied any 'harmony of interests' between labour and capital. As one eminent economist put it: Can the laboring classes be safely left to suppose, as many a demagogue is ready to tell them, that inequality of condition is inexpedient and ought to be abolished, that a general spoilation of the rich and equal division of property would put an end to poverty forever'?2

Who were these pro-labour demagogues? One of them was a former naval lieutenant and journalist, Thomas Hodgsldn, who was very active in workmeng-class circles in the 1820s and 1830s. He wrote and lectured

widely, almost exclusively to worldng-class audiences. His political position was that of an egalitarian Godwinite anarchist. On education he thought 'it would be better for men to be deprived of education than to receive education from their masters, for education, in this sense, is no better than the training of the cattle that are broken to the yoke'.

Hodgsldn's best book was a short one published in 1825: Labour Defended Against the Claims of Grlpitaf. In it he argued that human labour is the source of all wealth but that the private ownership of property ~-both capital and land-enabled the rich to exploit the direct producers of that wealth and live off their labour. He also polemicized with some v i g o r against those economists whom he regarded as apologists for the employers, including Mill, Adam Smith and Ricardo.

His book concluded with the sentiment that 'the best means of securing

In production

15

the progressive improvement, both of individuals and nations is to do justice and allow l a b o r to possess and enjoy the whole of its produce'. Hodgskin has received a bad reception by history. HE waSiargely ignored in orthodox circles, while in Marxist circles he fared little better, since he received over 50 pages of critical discussion in Marx's fourth

-

volume of Capital published as Theories of Surplus Value. In his customary fashion, Marx subjected him to vigorous criticism, although allowing him some sympathy as part of the 'opposition to his

economists'. HodgsM stands with Ravenstone and Bray as m early critic of the claims of the economists. William Thompson's An Inquiry into the Dfsnibution o f Wealth in 1824 complemented Hodgskin's work by analysing monopoly power in the labour market and in calling for the wide dissemination of a new, radical political economy. The Ricardian socialists, then, defended labour, while Senior, Whately, Ure, and other

orthodox economists strongly criticized the activities of the lower classes where they led to reduction of hours worked, demands for political advancement or the destabilizing of existing patterns of income distribution.

In France, the main economist opposing the orthodox theory was Sismondi (1773-1842), who wrote an influential ,text on political economy and several shorter pieces on effective demand and economic crisis.8* Sismondi had an interesting, uncornpromizing standpoint. Economic crisis was endemic, he argued, because the level of workers' consumption regulates overall production yet is restricted by the low

wages and poverty which capitalism produces as part of its 'self-regulation' As capitalism develops its productive forces, the problem will become even worse, and any public policy such as state-organized re distribution

of wealth would have to be radical indeed to have any effect. Colonies were not brought into Sismondi's analysis, so that a possible receptacle for excess savings (as stressed in the theories of ].A. Hobson, radical economist, and Rosa Luxemburg, Maridst) was not considered. From endemic excess savings the necessary conclusion followed: a permanently expanding capitalist social and economic system was a priori , and in practice, impossible. of England, for example, he wrote: In this astonishing country, which seems to be submitted to a great experiment for the instruction of the rest of the world, I have seen production increasing while enjoyments were diminishing. The mass of the nation here, no less than the philosophers, seem to forget that the increase of wealth is not the end in political economy, but its

16

Introduction

instrument in procuring the happiness of all. I sought for this happiness in every class and I could nowhere find it.

'industrial

Sismondi went on to state the necessity for a new system of labour association under which the public sector would expand while the achievements of production would benefit those engaged in it, and in which half the profits of enterprises would be distributed among the associated workers. There is evidence that Sismondi had some immediate influence on John Stuart Mill. In fact, there is a case

for the argument that John Stuart Mill with his views on state intervention to reduce inequality is as much the fountainhead of social democracy as of the modern 'liberal' parties. This point cannot be gone into here. It is sufficient to note that from a reading of Mill's Au tomography it would appear that Harriet Taylor increasingly

influenced him in the direction of socialism. Perhaps this reached a peak when Mill wrote in 1848: The form of association, which, if manldnd continues to improve, must be expected in the end to predominate, is not that which can

exist between a capitalist as chief, and work people without a voice in the management, but the association of labourers themselves on terms of equality, collectively owning the capital with which they carry on their operations, and working under managers elected and removable by thernseIves.4 Marx was later to criticize Sismondi for not seeing that a stimulus to total effective demand could come from independent spurts in the need for and supply of capital goods (such as 'bunching' in replacement

needs, new innovation). Yet Sismondi, whose position was radical and not neo~Mar>dan, stands high for his important theoretical pages on

the concept of effective demand, for which he later received accolate for having, with Malthus, challenged the leading position in political economy of Say's Law of markets which ruled out insufficient

effective demand with its perspective that 'supply creates its own demand'. This point should not be overdone, however. As the Cambridge post-Keynesian school were later to hint, Say's Law in Ricardo's hands did have some advantages that both Malthus and Sismondi overlooked- Say's Law clarified the nature of savings and investment.

It allowed the trade cycle to be studied properly. Investment included the unintended accumulation of stocks, and avoided the confusion in

the writings of later Keynesians where an attempt was made to show

Introductio n

17

savings and investment can be one thing, a function, and not, an observable point, at the same time. In a sense, as Say's Law emphasized, economic decisions are interconnected, and an expansion of production

in one direction may set in train a multiplier effect of increased demand for expansion in other directions.

Sismondi also had a growing influence on the workers' movement in Europe and his kind of under-consumptionism has deeply penetrated the left parties of Western countries. However, an even more popular concept among radicals was soon to follow: taxation of land values. The peak of its political and intellectual appeal came with the 'single tax' movement of which an AmeriCan printer, Henry George (183997) was the main inspiration. George ran for Mayor of New York City in 1886 and nearly won. George suggested5 taxing away the 'unearned increment' that accrued to landowners and using the proceeds for collective consumption and investment. The book became the all-time best seller on an economic issue. A most interesting contribution was made between 1890 and 1912 by Theodor Her tzka in Austria. Criticizing capitalism on Sismondist lines, he sketched the radical institutional changes needed to overcome poverty, trade cycles and the political disadvantage of the lower orders. He also anticipated many of the debates about socialist economic models and socialist economic theory which later broke out in the I920s and 1960s. In Hertzka's suggested socialist economic system a number of co-equal 'functional councils', all popularly elected, would administer social and economic affairs in their localities. Instead of central planning, market forces would play a leading role in the determination of the level and structure of production .6 Nor should one leave out the work of 'engineering economists' on

the economics of public sector undertaldngs. A dozen 'engineering economists' made important contributions, which l will list briefly here, since they are ignored in neo-classical textbooks, though some

have been praised in Schumpeter's History of Economic Analysis or noticed by specialists. Perhaps the earliest was a French army engineer, Le Prestige Vauban (1633-1707), who did thorough studies of the costs and benefits of fortifications. Giovanni Ceca (1647-1734), a University of Mantua engineer, published mathematical economic analysis of public sector expansion. A.N. Isnard (1749-1807) of the French public works department published Traits cI'es Rfchesse5, an early hydraulic model of the economy or 'general equilibrium' model which, with Louis Poinset's Elements de Statique, were taken over by Wallas, key figure in

the foundation of general equilibrium analysis.7

18

Introduction

S_ystematic cost-benefit discussion of freight rates and construction of-roads was carried- out in 1832 by Henri Napier (1 ?85-1836), to 1 gunnar H un of freight was the prerequisite for public 1

goods to EE provided economically. His contemporary, Joseph Minard (l'78I- 1870), taught public finance at the Paris School of Engineering and gave an early version of how best to choose between variants of an investment project with a given output target, using compound interest

to look at how 'present value' of capital changed. Italian-born hydraulics engineer Dupuit wrote a number of books on flood control of the Loire river, and then turned to price and investment policies in the public sector. He constructed a curve to represent the utility derived by the consumer from using a bridge, and in his 'On the Measurement of Utility of Public Works' (1844) worked out what a consumer would be prepared to pay. He concluded that projects like railroads with large fixed costs should adopt discriminatory pricing in order to utilize their capacity. Similar work was done by English engineer Fleeming Jerkin, of University College, London. Belgian railway engineer Alphonse Belpaire8 and American Charles Ellette were interested in such problems of railway economics as returns on investment, cost structures and price discrimination. They were also, by sheer necessity, interested in the land of location economics developed by I_aunhardt10 (1832-1918) and E. Cheysson (1836-1910). These engineer-economists had theoretically solved the problem of how to find a point of minimum transport cost (i.e. where total freight costs per unit are at their lowest). The nineteenth century, then, was rich in the po-fi-ticaleconomy of' public works. Such writers were influenced by their use of calculus and other methods from mathematics. In the twentieth century this trend

became a fetish at the hands of professional economists, who lacked the vision of the engineers in supporting the idea of a viable public sector, and of course, lacked their contact with everyday life and practical construction work. First Frank Knight, and then Irving Fisher , hitched economic theory firmly to Newtonian mechanics, ignoring Alfred M.arshall's warning that 'the mecca of economics lies in biology rather than mechanics'. Knight was to claimll that mechanics was a 'sister science' to economics, while Irving Fisher insisted12 that there is:

a rough correspondence between the play of economic forces and mechanical engineering

.

. . in fact the economist borrows much of

the basic vocabulary from mechanics. Instances are equilibrium,

Introducrfon

19

stability, elasticity, expansion, inflation, contraction, flow, efflux, force, pressure, resistance, reaction, movement, friction.

It is interesting to note how many of the successful economists from this point of view have come from 'outside'. Not only do we have such founding fathers of economics as Petty and Quesnay (who were doctors) but we also have chemists (Colin Clark) and we have hydraulic engineers (Isnard, Dupui'), mathematicians (Von Neumann) and mathematical physics men (like R.M. Goodwin of" Cambridge and Pro f. John Blatt of Sydney). That means that many of the lasting contributions of neo-classical economics have come from men not professionally trained in this type of economics. In fact, when the economics profession became fully 'profs ssionalized' in the twentieth century much of the vigour of the engineering-economists was lost, as specialization and reliance on mechanical analogies were both overdone. Within economics itself a reaction now developed, centred on Cambridge, England. This reaction was first outlined in Marshall's

Principles of Economics (1882), continued by Arthur Cecil Pigou (Professor of Political Economy at Cambridge after the l 920s). Pigou noted approvingly13 Marshall's reticence in pushing too enthusiastically a

concept like 'elasticity' (which came to him while he sat on a roof at Palermo shaded by a bath cover): Marshall has not been followed here by later writers. We have partial and total elasticity of production, elasticity of discounting, elasticity of expectations and elasticity of substitution. I doubt whether Marshall would have thought much of these. I can hear him sniff at economic toysJohn Maynard Keynes in his practice departed from the kind of mathematical apparatus constructed by neo-classical economists, being

more influenced by Russell-Whitehead on the link of mathematics to philosophy, and his own research on the theory of probability. As Pasinetti has pointed out,14 there is a different land of 'causation' in Keynes' approach : The most striking fact which emerges clearly is Keynes' clear break with the sixty-ye at-old tradition of marginal economic theory and his return to the methods of analysis of the earlier classical economists of the beginning of the nineteenth century . . . Like

Ricardo he is always looking for fundamentals. He singles out for

20

Introduction

consideration the variables he believes to be the most important . . . The characteristic consequence of this methodological procedure [is] the emergence of systems of equations of the causal type . . as opposed to a completely interdependent system of simultaneous equations.

In more modem times Cambridge-school economist Nicholas Kaldor has spoken of the need to use 'rule of thumb', 'the state of the news' and 'stylized facts' to develop a theory of economic fluctuations and a theory of economic growth. He placed heavy emphasis on behavioural hypotheses of this kind,15 rather than the neo-classical analysis of movements around equilibrium points.

The Land Transfer Programme: Radicals attack Neo-classical Economics

What stirred up many economists after 1890 was the emergence of a new theory of income distribution which appeared to justify the existing capitalist arrangements governing the 'rewards' to capital and labour. This controversial theorem was the 'co-ordination of the laws of distribution' on a unifying principle Marginal productivity') by .1.8. Clark in America and Philip Wicksteed, a London clergyman and friend of George Bernard Shaw.16 Interestingly, J.B. Clark openly defended the 'justice' of capitalist rules of the game of distribution, provoking replies from T. Veblen, C. Ayers and J.A. Hobson. Wicksteed attracted rather less controversy, perhaps because of his view, expressed in

Commonsense of Polftical Economy, that:

the more we analyse the life of society the less we can rest upon the economic harmonies, and the better we understand the true function of the market, in its widest sense, the more fully shall we realise that it never has been left to itself, and the more deeply shall we feel that it must never be. Economics must be the handmaid of sociology. The issue that realistically-minded economists had to face as the nineteenth century drew to a close was this: according to the new 1890s version of 'marginal productivity' theory, 'rent' and 'transfer earnings' which took some account of the supply side could be combined to explain the return to the 'factors of production' instead of doing this purely from the side of demand.17 Analysis of supply had largely been

ignored, notably in the theories of the Austrian SchoOl, although

In production

21

Marshall at Cambridge with his concept of quasi-rent and freelance economist J.A. Hobson both grappled with it. The argument emerged slowly, and bits were added to marginal

productivity theory by J.B. Clark, Hobson, Marshall and Stuart Wood; all aimed at co-ordination of the laws of distribution according to some unifying principle, and to move theory away from neglect by Austrian economics professors of the supply side and failure to emphasize the rent-earning capacity of factors of production which was involved with the appearance of short-run barriers to quick expansion of their supply. Eventually the theory of income distribution which emerged admitted that while competition between employers will eventually lead to the factors of production being paid an amount equivalent to their 'marginal contribution' to production, various friction and 'institutional factors' would produce short-run monopoly-type earnings (quasi-rents) over and above the (competitively-determined) 'resource-transfer' level of payment. From the viewpoint of the economy as a whole, labour and capital receive 'transfer earnings' which is the level of payment necessary to prevent movement of land, labour and capital between industrial and agricultural sectors in response to price signals, while rent will be any earning over and above what is necessary to keep such a factor or production in existence. Institutionalist economists, paradoxically, played some role in malting the rnarginalist approach to income distribution more realistic. However, at the end of the nineteenth century, a counter-attack on the rightist version of neo-classical economics (and on the heart of its logical system, the marginal productivity theory of distribution and capital theory) was launched by Thorstein Veblen. This critique constit» uted a very important part of the rigorous strand of radical economics

(as opposed to mere 'pop-sociology'). In 1898 Veblen18 began what was to become a series of assaults on neo-classical theory. Apart from suggesting a better 'vision' of how Western economies work, he questioned the neo-classical analysis of the structure of production and of the capital stock. There was, in fact, a sophisticated attack involved in Veblen's work foreshadowing later ideas by Joan Robinson, Kregel and Harcourt. Veblen also focused attention on the theory of capital used by 'marginal productivity' theorists, especially its American expositor John Bates Clark. The Veblen contribution was a set of ideas whose time had come, for much of the general drift of Veblen's misgivings had been foreshadowed seven years before by Stuart Wood and six years before by J.A. Hobson.19

While a great deal has been said concerning Veblen's acid comments

22

Introduction

on wealth in Theory o f the Leisure Class and about his institutionalist treatment of capitalism in The Theory o f Business Enterprise, such attention may have hbscured Veblen's direct theoretical challenge to the structure of neo-classical theory.20 For he pointed out that 'capital is a pecuniary fact, not a mechanical one, [it] is the outcome of a

valuation, depending immediately on the state of mind of the valuers', and went on to suggest that capital in business practice has an 'immaterial character'. If this were so, J.B. Clark could not discuss 'transfers of capital'-any pecuniary concept of capital contradicted Clark's theory.21 'Capital', then, would need to be specified and placed within a particular set of social relations to develop an adequate theory of its role in distribution. Veblen went on to show that .l.B. Clark, like Wadras, had toyed with the idea of discussing the dynamic movement in the economy. While Wairas had mainly given this up22 (except for particular problems like

hog-cycles), J.B. Clark had succeeded only in presenting a 'deranged static state'.23 The reason was traced to the unsatisfactory foundations for 'dynamics' inherent in his marginalist analysis.24 As hog-cycles demonstrate, output reactions to price are as important as the price reactions to other prices beloved by Walras and other general equilibrium theorists or even the price reactions to output changes of 'partial equilibrium' theory. English institutionalist economist J-A. Hobson made two basic interventions: first to introduce the idea that factors of production earn rent as well as transfer earnings. As part of this analysis he co-ordinated the laws of distribution on a non-marginalist theoretical foundation. Second, he provided a theory of economic crisis based on imbalance of the capital goods and consumer goods sectors.

In an article of 1891 entitled 'The Law of Three Rents',25 Hobson had mixed in institutionalist forces to explain why a common principle, other than 'elasticity of substitution' or some other marginal principle, could produce a common unifying distribution law, explaining the returns to the factors of production and why some of them receive monopoly rents.

Hobson made the elementary point that since the marginal productivity theory of distribution of Jevons and Wallas was a demand side approach only, it could not contribute significantly to a situation where restrictions on the supply of factors dominated the processes of distribution. Each 'share' in the national cake accruing to land, capital and l a b o r , respectively, contains both a minimum payment (to induce

supply at all) and a rent. He showed that if there is a difference in the

Introduction

23

amount of difficulty of procuring the supply of land, laoour and capital, that difference will be measured by the relative rise in the rent level of the rent-paying portion of each factor's "reward" and by a corresponding alteration in the aggregate product accruing to each. After an initial attempt as a young man to defend Say's Law of markets, Hobson accepted the criticism of it by a business colleague, Mummery. He went on to suggest that rnarginalist economics was missing major points2!5 about the real interdependencies and

complementarities between investments as well as factors of production, and the interaction between the monetary and physical spheres." This led him to sketch both a primitive version of an input-output system and to Marx's former distinction between a capital-goods and a consumer-goods sector and the need to analyse the intricate relationship between them. Since the output of the consumer goods industries was restricted by an unequal distribution of income, investment opportunities involving expansion of the capital goods sector would, Hobson pointed out, be inevitably choked off. Hence savings would become 'excessive', a pool of frustrated investment potential would form which could not

find profitable outlets. One outlet that would be tried, as Hobson cornplained,28 would be the export of capital to other countries, comprising the 'economic taproot of irnperialisrn'. Together with the

'Colonel Blimp' mentality of returning army officers and colonial administrators, it would lead to imperial wars such as the British assault on the Boers. The theory of crisis pursued by Hobson was of great historical importance, and among other things, influenced Lenin's doctrine on imperialism. However, his solution, that of a liberal state intervening

to make income distribution more even, sustain effective demand and reduce excess savings, did not carry conviction in a world of turbulent trade cycles and class struggles. Certainly few believed that such a course would effectively 'abolish' capital export and imperialism with it.

Hobson's political economy pushed him to support a mixed economy with some socialist elements: The strong distrust of officials (dubbed `bureaucrats') may seem excessive in view of the general ability, honesty and public spirit in our services. I think it is excessive so far as the socialization of our monopoly and routine industries is concerned. For in these industries the incentive of free competition is either absent or is wasteful.

I

24

In zvoductfon The danger that besets Labour Socialism is its failure to recognise the fact that over a large area of industry, prize money in the shape of

profit must continue to be a serviceable method of getting the best results of inventive ability, risk and enterprise into the products of industry. The notion that a sense of public service will operate upon all types of mind SO as to get the best they have to give in contributions towards technological and business ability cannot be accepted for purposes of present practical progress.29

Radical Economists and the Public Sector

What socialist ideas were embodied in the writings of neo-classical

economists? The answer is-not many. Wicksell in Sweden, Weiser in ' Austria and Walras m Switzerland held to views which challenged the results of the worldng out of market forces. Their position seems to have been that a model of the economy could be constructed which would show ideal allocations of resources, correct "shadow" prices to charge for the use of factors of production, and the most effective choice of rival investment variants for achieving a fixed bill of goods. 'Imperfections' could be cleared up by government- Perhaps HD. Dicldnson in 1939 summed up the issue most succinctly when he said

'the beautiful systems of economic equilibrium described by BohmBawerk, Marshall and Cassel are not descriptions of society as it is, but prophetic visions of a socialist society of the future'.30 Dicldnson, of course, was wholly in favour of this conclusion. He sketched a 'market-socialism' in which market forces, unhampered by monopoly rents and inequality in the distribution of income, would

operate in both the consumer goods and the labor markets- The central audiorities would construct a series of accounting prices for capital and intermediate goods which would reflect the working out in practice of such economists' categories as 'elasticity of substitution', scarcity, 'opportunity-cost', etc. Prices reflecting these ideas would be worked out and handed down to relatively independent public corporations, which would be asked to set prices at a level close to

'marginal cost'. Oligopolistic firms which enjoyed decreasing costs due to scale economies or favourable location would be taxed and the proceeds paid into a 'marginal cost equalization fund' which would be used to finance collective consumption or new accumulation of capital carried out on behalf of the community as a whole.

Schumpeter, often seen as providing apotheosis for general

Introduction

25

equilibrium systems of the Wallas type, made some interesting comments on the adequacy of neo-classical economics in dynamic situations and for use in socialist economies. He did this in a little-known introduction to the Japanese edition of his Theory of Economic Development in 1937. After pointing out that Wallas' technique 'effectively embraced the pure logic of, and interdependence between economic quantities', he went on to say that it is 'applicable only to a stationary process." Schumpeter says 'I felt strongly that Wallas' views on the passive nature of economic life were wrong'3l and so he turned for dynamics to Karl Marx, who accounted for economic change by a theory 'which does not merely rely on external factors propelling the economic system from one equilibrium to another By implication, Wallas' theory would have little relevance to social change 01' the 'economics of socialism' since it is not true that economic life in such a system is 'essentially passive and merely adapts itself to the natural and social influences which may be acting on it', as Wallas had maintained.32 Wicksell wrote on the side of worker-managed economies, arguing that the rate of capital accumulation would be enhanced in a collectivist society and achieved in a less wasteful way than under capitalismSchumpeter has described this view as Wicksell's 'radical liberalism'. One of Wicksell's points was that while in the interests of efficiency, l a b o r would be paid its marginal productivity during working life, on retirement workers should also be paid a pension close to their previous peak income, so that a part of the industrial profits created by their labour would be returned to them as compensation for wear and tear

on the commodity they had sold: human capital. Some neo-classical economists also saw that marginal utility theory led not only to ideas of 'user-cost' and 'consumer surplus' (developed

by Dupuit and Marshall), but also to the need for increased total utility in the economy by re-distribution of income in favour of lover income groups. Although there were reactionaries who tended to oppose this development in a fairly ideological way (JB. Clark, Pareto and, to a lesser extent, F.Y. Edgeworth), the activity of Professor Pigou at Cambridge and some of the French economists pointed to a stronger sympathy with the working class, more akin to Wicksell's call (Lectures, Vol. 1, p. I) for economics to become a revolutionary science. I am certainly not going to argue here that the work of most economists was motivated by 'the evil intent of apologetic'. It is sufficient to establish the conservatism of the economics profession in the self-image of economists as 'pro fessionals' who attempt to turn

'political economy' into a more rigorous 'economic science' with a

26

In troductfon

'rigor' akin to mathematical physics, and to the widespread (if sometimes unconscious) adoption of positivist philosophy. These issues are explored more fully in Chapter l . Moreover, as shown in the next section, it is clear at the technical level that very similar ideas to important parts of neoclassical economics have been put forward by members of the Communist Par ties of Poland, the USSR and Hungary. These areas covered marginal cost pricing for agricultural goods produced from regions of different fertility and location, the use of compound interest in the choice of investment projects, and linear programming methods for choosing the most efficient combination of (say) railways and roads, or thermal and hydro power. At a different level, some 'socialistic' ideas crept into economic theory by way of the transmission belt of 'public utility economics'. Many people worldng for railways, rivers and port authorities became defenders of the public sector itself. While they approached their task mainly from the engineering efficiency viewpoint, a number (Gustav Cassel, Hugo Meyer) came to be enthusiasts for public sector works. Of course, it could be argued that the radical-liberal ideas of Wicksell, Weiser and Walras (and later in the 1930s Dicldnson) are not really 'socialist' because those writers preferred to 'clean up' the workings of market forces by appropriate taxation and redistributive fiscal policies, rather than by wholesale expropriation of private property through the nationalization of the means of production, distribution and exchange. Clearly there is something to this, especially when one looks at the political influence and political practice of the most prominent twentieth-century exponent, C.A.R. Crosland, in his Future o.rfSoci'aZ£5/71

written in the 19505. However, such a curt dismissal of a huge

corpus of work on economic theory and public policy would be to miss many insights and gems of analysis. Certainly the best of the economists with whom I have worked (notably Dobb and Kalecld) did not take so pre-emptive a view. Perhaps many radicals failed to spell out the worldngs of a society where workers hire capital directly without any intervention by private owners, the workers themselves acting as self-managing investors.33 In

worldng out the principles and operation of such a 'market socialism' of the 'self~rnanagement' type, many of the contributions of neoclassical marginal economists of radical bent would be relevant, if only 'investment

for their analysis of the 'imperfections', 'market imperfections' and behaviour (e.g. discrimination against new 'perversities' in workers in favour of capitaldntensive equipment) that such a series

'2'1

In Iroduerion

of new institutions would throw up.34

The Debates About Socialist Planning and its Effectiveness Planning for dynamic growth. How easy it sounded to traditionalist socialists-and how difficult and politically loaded in practice! Sacrifices are involved in each choice of an investment path. If the wrong choice is made, morale and labour productivity of the current

generation of workers will fall-as we have seen in Poland since 1956. In the West in the 19205 there was a debate launched which began questioning whether planning was feasible, indeed a priori' possible at aIl.35 In the United States concern at this time was, however, directed

at a much more preliminary stage of the debate about public sector economics-the nature of the modern corporation35 and the decline of competition in markets.3'/ In Britain Professor Pigou made important, relevant suggestions for taxing 'diminishing returns' industries and subsidizing others.38

Yet it was in the Soviet Union (where art and culture were experiencing a renaissance in the pre-Stalin atmosphere of the 1920s) that

economic science made the biggest leap forward for the period 1919-29. Translations of articles written at that time39 indicate the richness of the theory of economic growth as a foundation for public policy (in tum this theory was based on insights of Rosa Luxemburg and Tug an Baranovsky). An American scholar has described the debate about planning and industrialization in the USSR at this time as a 'singularly exciting chapter in the history of economic doctrines,'40 while a former participant in exile in the US agreed.41 The discussion was taken

forward by the examination

of the relationship between the model

of G.A. Feldman of 1928-9 and the Western Harrod-Doinar model of the 1950s, and of the Kovalevsky model43 of Gosplan in the late twenties. All of this material throws severe doubt on the claim of Lionel Robbins that planned economic development (in his terminology, 'authoritarian collectivist growth') took place largely in the absence of a theory of planned economic development.44 Nearer to the truth about this exciting period of the development of economic science in the Soviet Union was American Evsey Dornar's comment that the Soviet growth theorists Feldman and Kovalevsky, like Tug an and Luxemburg before them had 'come closest to developing a substantial theory of economic growth'.45

A close study of the brilliant theoretical studies of G. Groman and

28

Introduction

V. Bazarov (Menshevik economists of USSR Gosplan in the 1920s) reinforces this conclusion, while a serious examination of their

theoretical writings and statistical analysis of alternative strategies for growth and investment46 will form in the reader's mind an appreciation of just how good 'public sector economics' was in those days.47 This can be reinforced by including the 'balanced growth' advocates, like Lev Shanin,48 who were most often in a minority in the USSR, as well as Preobrazhensky who advocated unbalanced growth of sectors, not

only in his better-known The New Economics but his later, more sophisticated, work (taking into account major objections by his critics).49

The 1930s public policy debates were dominated in the West .by the impact of the ideas of §.M. Keynes and M. Kalecki. These I will leave for discussion in Chapter 3. Obviously, with the future of the capitalist system uncertain a whole number of new solutions were put forward. Clearly, too, the institutional restraints on effective resource mobilization posed by monopoly, inheritance and the 'unacceptable face of capitalism' in the form of r e t i e r s came under ever closer scrutiny. Dickinson produced a most interesting little book, Institutional Revenue, in 1932 and Dobb, who wrote Capitalist Enterprise and Social Progress in 1925, followed it with Political Economy and Capitalism in 1938. The problem of economic dynamics proved too difficult for those raised on Jevons, Marshall and J.B. Clark. Work on this crucial area both in the West and in Russia tended to t`a]1 to natural scientists who, in periods of a crisis of confidence among economists, have more than once shown an ability to step into the breach. The need to develop a non-lMear theory of business cycles was obvious to such people-the difficulty of the mathematics involved having prevented economists

making much headway. So it came about that a French physicist, Le Corbeiller, suggested dealing with the trade cycle by means of the theory of relaxed oscillations50 - a view taken up by Samuelson in 1950, when he suggested that the cobweb theorem, one non-linear theory of economics, had been solved-and now gave guidance to policy makers in the agricultural sector. lt followed that other areas might also be solved by

a new non-linear mathematics.5l Russian scientists in 1935-9 developed methods ot" nonlinear mechanics with the idea of applying them to electronic circuits. They included the writings ofAndronov, Kryloff, Bogolivhoff and Mandelstam,52 ideas which must have made their impact on Leonid

Kantorovich's Leningrad economic studies for improving the efficiency

Introduction

29

of Soviet planning, although he himself was content at this time to 'sell' linear pro gr arming, a much lower level of difficulty in mathematical economics, to the Soviet authorities. Among Western economists there was also a most interesting debate about the 'economics of socialism' spilling over into the I930s, and taking issue with radical economics. Von Mises, following the Dutch economist Pierson who wrote in similar vein in 1903, argued that a socialist economy was a priori impossible. In a 1920 article, followed by the book Socialism, Mises

maintained that a socialist economy would lack a market for factors of production and hence could not efficiently decide between a more and a less economical allocation of investments and workers, it could be in no sense a 'rational' economy: It is precisely in the market that the prices of goods and labour power which form the basis of circulation is formed. Without a price mechanism there can be no means of calculation: prices could never be directed by economic considerations. In the socialist commonwealth every economic change is an under taking whose success cannot be determined in advance or retrospectively estimated. There is only groping in the dark-socialism is the abolition of rationality.53

Economists in the 1930s (with the exception of Marxist academics like Dobb and Sweezy) answered Mises, but they did so by advancing a number of solutions to the problem as he had posed it. The professed answers and solutions of Dickinson, Lerner, Hall, Durbin and Lange all constructed a counter-factual model in which a system of prices would function, and would be determined (within the institutional framework

and limitations of a socialist political system) by market or quasi-market forces.

In the most 'market-socialist' solution, H.D. Dickinson suggested54 managers could bid competitively for capital goods and consumers could do the same for consumer goods. In Lange's scheme,55 quasimarkets would operate for capital goods, while there would be no

actual competitive bidding, there would be 'accounting prices' handed down from planners to socialist managers. Such prices would incorporate scarcity rents, the opportunity-cost of capital 'frozen' in investment projects and other 'economic' elements, as well as planners' preferences alone. What these economists established was a theoretical answer to the attack of Pierson and Mises: there would be no a priori reason

why the problem of optimal planning and allocation solutions in

30

Introduction

a socialist economy could not be found. One should notice, though, that these solutions gave away many unnecessary points to anti-socialist criticism. Since the 'Virginia School' today returns to Mises, it is worth looldng at this a little more closely. First, Mises had set up a very 'unreal' model of how capitalism itself worked. Later work by Arrow and others was to show that with different incomes and tastes as between 'voters', no optimal solutions could be found, except in the single case of a dictator laying down all the preferences and rules of distribution. Second, as Dobbs and Peter Wiles57 maintained, the notion of

optimum allocation being bandied about was essentially a static one, starting from given quantities of productive resources and given consumer's wants. When the problem is put in a more dynamic setting, key quantities, previously treated as data, became dependent variables

of development policy and were no longer usefully conceived of as market-price determined. Sraffa's rehabilitation of the distinction between 'natural prices' (with their more long-run characteristics) and

short-term market prices has tended to underline this point. Third, a doubt arose as to the stability of a Dicldnson-type economy. Might there not develop the familiar disproportionate, jerky, uncoordinated growth of various sectors, fluctuations in production and recurrent crises? It was suggested that some loss of perfection in achieving the economists' optimal allocation of resources might be worthwhile if such latent instabilities and uncertainties could be removed by a more centralized control of investment (if not production) than was allowed for in the Dicldnson and Lange models. It was increasingly accepted in the 1930s that the overall rate and structure of investment which a community undertakes cannot be left to a

market system to decide, but is a crucial question of public policy affecting a country's rate of growth and the balance of its present and future satisfactions-decisions which need collective decision in some formWorld War II found economists working in ministries and planning

organs. Those who remained in universities were largely preoccupied with war loans and war finance, or with worldng out the implications of the 'Keynesian Revolution' in economic thought for post~war planning

and reconstruction. The best known results of this intellectual endeavour were radical programmes: William Beveridge's Full Employment in: a Free Society, and in Australia H.C. Coombs' 'Wltite' Paper, Fu!! Employment in Aus2lrr;r£lr'a (1945), the latter was adopted in part by UNO.

In production

31

Notes 1. M. White, unpublished Ph.D. thesis, University of Adelaide, 1981. This thesis examines the conditions of production of the work of Senior, Whately, Jevons, Marshall and Lloyd. 2. Ibid. On the death of the economist Whateiy (Senior's successor to the Political Economy chair at Oxford) in 1830, his daughter auctioned his extensive collection of rare wines gained from the spoils o f his services t o privilege as both Professor and Archbishop. Local labourers collected sufficient money to buy and drink a small quantity in celebration of his departure. 3. S. de Sismondi, Nouveaux Principles d'Economfe Politique (3rd edition, Paris, 1951). Also useful are Sismondi, 'Two Papers on Demand', translations republished in International Economic Papers, No. T (Macmillan, London, 195 T),

pp. 7-39. 4. J.S. Mill, Political Economy (1845), Book VI, Chapter vii. 5. Henry George, Progress and Poverljv (Appleton, 1880).

6. G.D.H. Cole,A History of soczlalrst Thought (Macmillan, London, 1956), Vol. III, Part II, pp. 559-65 7. See W. Jaffe, 'A.N. Isnard, Progenitor of the Walrasian General Equilibrium Model', History ofPo!z'tfca! Economy, Spring, 1969. 8. R.M. Robertson, 'Jevons and his Precursorsl Econometrics, Vol. 1 9, No. 3, July 1951. 9. R . Ekelund and D.L. Hooks, 'Joint Demand, Discriminating Two-Part

.

Tariffs and Location Theory: An Early American Contribution', Western Economic Journal, March 197210. Robertson, 'Jevons and his Precuisors', p. 18. 11. F.H. Knight, The Ethics' of Compe1'it1'on (New York, 1935), p. 85. 12. Irving Fisher, Matfrematfcai Investl'gatllons into the Theory of Value and Prices' (Augustus Kelley, NY, 1961 ed.), p. 24.

13. A.C. Pigou, Al.y'i'ed Marshall and Current Thought (Macmillan, London, 1953), p- 24. 14. L.L. Pasinetti, Growth and Income DMributfon (CUP, Cambridge, 1974). See further discussion on this point in Chapter 3 below. 15. N. Kaldor, 'Capital Accumulation and Economic Grow'rh', in J.A. Lutz and D.C. Hague (edSs), Proceedings ofa Conference held by the International EeonomfcAssociatfon (Macmillan, London, 1961), pp. 177~222.

16. The 'Co-ordination of the Laws of Distribution' was attempted by way of marginal productivity theory by various neo-classical economists in the period

of the 1890s, building on an incomplete attempt by Ievons in 1870. The main idea was that the share of land was based on an objective (Ricardian) standard determined by location or fertility, while there were also 'subjective rents' accruing to labour and capital owners. This was written by ].B. Clark, 'Distribution as Determined 'by a Law of Rent', Quarterly Journal of Economfcs, April 1891, the second was by P. Wicksteed, The Co-ordination of the Laws of D istributfon (Macmillan, London, 1894), who used Euler's theorem to put all three factors of production on a common basis. 17. For a concise textbook account of the issues of 'quasi-rent' and 'transfer

earnings', see A. W. Stonier and D.C. Hague,A Textbook of Economic Theory (4th edition, Longman, London, 1972), pp. 326-34, and R.G. Lindsey,An In troducrfon to Positive Economics (Weidenfeld and Nicolson, London, 1969), pp- 436-51. 18. T. Veblen, 'Why is Economics not an Evolutionary Science?', Quarter-fy

Journal of Eco;rromics, 1898, 'Professor Clark's Economics', Quarterly Journal' of

32

In production

Economics, 1908; and 'The Limitations of Marginal Utility', Journal o_fPolitical Economy, 1909. 19. In a thesis presented to the University of Sydney in 1956, I pointed out that the American Stuart Wood in 'A New View of the Theory of Wages', Quarterly Journal of Econorrzics, October 1888 and July 1891, paralleled Hobson's later institutionalist critique of the 'laws of distribution'. But I-lobson's feat was in turn ignored by neo-classical economists. G. Stigler in Production and DzlVributfon Theories (Macmillan, NY, 1953) dismissed him in one line, and Edgeworth, Papers on Political! Economy, Vol. 1 (Macmiilan, London, 1916), while noting his existence (as well he might, having blocked I-Iobson's appointment to London University), did not go on to discuss his contribution. 20. I am indebted to Dr D.L. Clark (School of Economics, University of New South Wales) for this observation. 21. T. Veblen, 'Professor Clark's Economics', Quarterly Journal of§conornfc:s, 1908.

22. As noted by Joseph Schumpeter in his preface to the Japanese edition (1937) of` Schumpeter, Theory ofiiconomfc Development, The preface is reprinted in RN. Clemence (ed.), Essays ofJ.A. Schumpeter (Addison-Wesley, Cambridge, Mass., 1951). 23. T. Veblen, 'The Limitations of Marginal Utility',.fournai of Po!ftfcaI

Economy, 1909. 24. See also Chapter 7, footnotes 12 to 16 below. 25. J.A. Hobson, 'The Law of Three Rents', Quarterly Journal of Econornics, April 1891. 26. I.A- Hobson, The Industrial System, pp. 118-23. 27. Ibid., oh. 2.

28. J.A. Hobson, Imperz'az'ism (1902). 29. A development of these views is in J.A. Hobson, Confessions ofan

.

Economic Heretic (Allen & Unwire, London, 1938), chs. XIV-XVI 30. H.D. Dickinson, The Economics of Socialism (Oxford University Press, Oxford, 1939), P- 20531. ].A. Schumpeter's 'Preface' was reprinted in R.V. Clemence (ed.), Essays of J'.A. Schumpeter (Addison-Wesley, Cambridge, Mass., 1951), p. 159.

32. Ibid., p. 158. 33. Some glimmerings can be found in K. Wicksell, Value, Capital and Rent (Allen & Unwire, London, 1954), pp- 91, 98, 102, 120-1, 127-8. Some other more recent writings on self-managed workers' collectives as investors, are in-

sightful. Sec R. Marris, 'discussioN in Richard Portes (ed.), Planning Ana' Market Relations (Macmillan, London, 1971), I .E. Meade, 'Labour-managed Firms in Conditions of imperfect Competition', Economic Journal, Sept. 1974, pp. 81 '724, and the debate in Journal of Econornic Lfterarure, December 1972, and Journal of Law and Economics, October 1973, pp. 275-302. For Yugoslav practice in relation to attempts to counteract perverse behaviour of units of 'associated labour', see Mal. Broekmeyer, 'Self-Management in Yugoslavial', Annals of the .4 rrierican A academy of Po!itllc.eI and Social Science, May, 1977, pp. 133-40, and A. Marino, 'A Realistic Basis Has been Formed for Material and Social Developlnent', Yugoslav information Bulletin (League of Communists, Belgrade), November-December, 1980, pp. 1-6. 34. To give some examples which arise when the maxfmand of the firm becomes earnings per man instead of gross profit or the present value of future investments. In this case, if new members of the collective are co-opted, then net income per worker may fall, producing a bias against employing more fellow workers- Again, if prices rise and the value of marginal products rises less than

average earnings per we tker in value, a gain accrues to the collective (and per

Introduction

33

member) if someone from the work group is expelled. A11 gain here if the size of the collective is reduced, even if output also falls. 35. Ludwig Von Mises, Socialism (Cape, London, 1936). 36. A. Berle and Gardiner C. Means, The Modern Corporation and Private Property (Macmillan, NY, 1925). 37. See Arthur Burns, The Decline of Corrrpetzfion (McGraw Hill, NY, 1936). 38. A.C. Pigou, The Economics of Welfare (Macmillan, London, 1920). 39. See N. Spulber (ed.), Soviet Strategy for Beonomfc Growth (Indiana UP, Indiana, 1964). 40. A. Erlich, The Soviet IndustrM{tl2:ahlon Debate 1924-28 (Harvard UP, 1960). 41. N. Jasny, Soviet Economists of the Twenties (CUP, Cambridge, 1972). 42. M. Dobb, Soviet Economic Development Sf:-ice $9/ 7, 6th ed. (Routledge and Kevan Paul, London, 1966), PP- 360-1 43. A. Kaufman, 'Origin of the Political Economy of Socialism', Soviet Studies,

.

Vol. 4, No. 3, 1953. 44. L. Robbins, The Theory ofEcorlorriz'c Development in the History of Economic." Thought (Macmillan, London, 1968), p- 119. 45. ED. Dornar, Essays slrz the Theory ofEeorzomfc Growth (OUP, New York, 195'F), p. 1. 46. Spulber, Soviet Strategy for Econorrzic Growth. 47. Jasny, Soviet Economists of the Twenties. 48. L. Shamir, 'The Economic Nature of OUI Commodity Shortage,' cited iN Spulber, pp. 205-211. 49. E. Preobrazhensky, 'Economic Equilibrium in the System of the USSR' originally published in Vestnik Kornmunistfcheskos'Akademfi, No. 22, 1927, pp. 19-71 reprinted in Spulber pp. 124-173. 50. Le CorbeiUer, 'Les Oscillations de relaxations Econometrica, July 1933. 51. P.A. Samuelson, Foundations ofEconomfcAnalysfs, (Harvard University Press, Cambridge, Mass., 1948) 52. N. Minorsky, Introduction to Non-I.ire or Mechanics (Edwards, Ann Arbor, 1947), pp. 2~3. 53. L. Von Mises, Socialism (Cape, London, 1936) _ 54. H.D. Dickinson, The Economics of Socialism (OUP, Oxford, 1939), pp. 65-117. 55. O. Lange and FM. Taylor, On the Economic Theory of Socia£fsm, (University of Minessota Press, Minneapolis, 1938) 56. M.H. Dobb, Po fitfcaf Economy and Capitalism, (Routledge, London,

.

.

1937), Ch. viii. 57. P. Wiles, °Scarcity, Marxism and G o s p ' , OxfordEconomic Papers, 1957.

PART ONE:

OFITHODOX ECONOMICS AND ITS PROBLEMS

1

THE PHILOSOPHICAL BIAS IN MODERN ECONOMICS The whole development of economic theory in the classical line until this day must largely he explained as determined by the need felt to isolate and render innocuous the ultra-radical premises in the basement of economic theory. Gunnar Myrdal (Nobel Laureate in Economics),

Journal of Social Policy, vol. 1, 1972 The purpose of economic theory is to make those who are comfortable, feel comfortable.

Lord Balogh

A Problem of Method In a sense, the concern about the relevance and methodology of economic theory which flared up in the 1960s Ami 1970s was by no means new. As previous discussion indicated, this uneasiness was gathering pace and depth. Over four decades ago Cambridge economist Maurice Dobb had already concluded that Marshall's neo-classical economics 'always embodied a certain amount of eclecticism' despite its 'rococo facade

of exceptions and modifying hypotheses', while 'its method in the determination of the value of the factors of production-land, l a b o r and capital-meets with stricter limitations . . . the result is most complex and at the same time more questionable'.1 In 1964, T.W. Hutchison anticipated? the critique that was about to break and decided to tackle it head on with a toughminded deface of the weakest spot in the neoclassical armour-the attempted distinction between (a) 'positive' economics which can be described as neutral, value-free, (b) 'normative' economics, explicitly spelling out value judgements and ideology

embodied in the assumption of one's economic argument, and (c) the 'art' of political economy. Yet during the 1960s and 19705 the dissatisfaction grew apace. While books such as Tom Weiskopf et al., The CapitaliSt System, Howard

Sherman, Radical Political Economy, or D. Mermelstein, Econorrzrlcs: Mainstream Readings and Radical Ciitiqtres, may have remained disperse d, piecemeal critiques, a number of writers refused to be enmeshed in the methodology of the orthodox economic school. They began to look for

a fore! perspective or 'meta-theory' in exploring the 'epistemological 37

38

The Philosophical Bias in Modern Economics

terrain' shaped by both bourgeois economics and the radical alternative offered by Galbraith, Heilbroner and Sherman.3 In making this shift they increasingly joined hands with the older Marxian school of political economy4 which provided some clues on how to use the category 'critique' in order to bring out the hidden philosophical terrain from which ideological notions and economic analysis emerge. This procedure

was soon to be sharply distinguished from a mere criticism of the concepts and categories of 'bourgeoiS sconomic theory, which was seen a necessary but not sufficient part of such a critique.5 Part of the impetus for this line of attack came from radical movements; ecologists, radioal-liberal futurologists, black liberationists, women's liberationists, as a book like The Capitalist System (ed. T. Weiskopf) clearly shows. In particular, ecologists challenged the view that there can be a 'value free' science of economics or indeed any 'neutral' social science. They argued that, on the contrary, a creative value-based or normative approach is an intrinsic part of the development of the major theories of the social sciences. This contrasted with the relative poverty of economics in its contribution to (say) ecological

problems-a contribution which claimed to be 'value free'. As one important environmental economist comrnented,7 'much economic

analysis suffers from such unacknowledged biases and tends to overestimate the immediate benefits, while underestimating the more elusive social and environmental costs which may be borne by society in general, or another nation, or by succeeding generations

Here the theories of Thomas Kuhn came into the picture. in the Structure o f Scfentife Revolutions he argued (echoing F- Engels) that theoretical progress takes place because one set of questions and answers, or °paradigm', is replaced by another which appears to tally better

with objective reality. This raised an important question with radical overtones: is there a process of competition between paradigms, rather than a naturally evolving objective science? Yet Kuhn himself was critiCized 8 for his l.heory's conservative implications and its acceptance of the old atomistic-mechanistic (Newtonian) conception of nature, an approach which, it was claimed, 'objectifies' nature. At its most pedestrian level, however, the hostility to economic theory was based on a rather simple-rninded uneasiness about the realism of its assumptions. Both dogmatic Marxists and free enterprise enthusiasts described these as being so abstract as to be literally misleading. The theories of imperfect competition suggested in the 1930s by Joan Robinson and E.H. Chamberlin were criticized from the Right by P.W.S. Andrews in llafarzufacturirtg Business (1952) on such grounds. A

The Philosophical Bias in Modern Economics

39

sect of younger conservative economists developed around this attack, comprising H.R. Edwards, E. Brunner and others, who continued to complain about the lack of empirical relevance of Joan Robinson's assumptions in the book Imperfect Competition.

The appeal of this right-wing critique was pitched at the student who found deductive reasoning difficult and pure description of how firms set prices much more congenial. It lacked any analysis of the actual functioning of inequality, profiteering, monopoly, etc., for a capitalist economy. Nevertheless, the question of excessive abstraction is important in the story of the decline of the popularity with students in

universities of orthodox economics over the last two decades. It deserves furrier elaboration. Let us begin with the neo-classical assumptions of a typical economics textbook-say Lindsey or Samuelson. The starting point is economic nlan~a key assumption of the corpus of modern economics. 'Economic man' is a mechanistic homunculus with fixed patterns of tastes and attitudes to work, about which he is fully informed. He has an excellent calculating ability which enables him always to reach his preferred sonic

position. He has perfect foresight. Few of the sophisticated economists believed in this creature whole~ heartedly. F.Y. Edgeworth in Mathematical Psychics (1881) was one of the few who did. But three~quarters of theoretical economics still proceeds as if he did erdst. Most neo-classical economists even after the debates of the 1970s still carry on as if they believed in him, as if he was a good starting point for a theoretical model, as if the obviously oversimplified atoms involved in his construction did not matter much, and as if the imperfections of foresight only made reality a little fuzzier than theory -which was to be expected anyway.

Such an approach embodies an erroneous psychology as Keynes acknowledged in his essay on Edgeworth, yet is the cornerstone of the structure of the neo-classical school and of 'economaths', which was developed by P.A. Samuelson of the Massachusetts Institute of Technology, USA, and, as a branch of the academic text-book industry, began in about 1938 to enjoy worldwide popularity into the 1950s. Another charge against modern economaths has been narrowness of vision- The l9'10s saw a strong and growing objection, for example, to the use of orthodox economic theory as a prism through which to study comparative economic' systems. Basically the question was this. If you set up an idealized model of a market economy in which there is free c o p e titian and then you use this as a prism by which to view and to

judge the socialist economies (China, USSR, Eastern Europe), then a

40

The Philosophical Bias in Modem Economics

blinkered view is involved. For this approach ignores the different

objectives, cultural peculiarities and social ownership patterns that exist, for example, in the USSR and Eastern Europe. Moreover, it condemns every non-market socialist economy to the original sin of irrationality. In fact nothing brings out the limitations of mainstream economics more than its crassness when challenged to illuminate problems of the socialist economy. Thus Gomulka was praised by Western economists for raising Polish coal and food prices to a level

nearer 'equilibrium' prices in order to reflect 'opportunity costs But millions of Polish workers relied on coal for fuel and space heating, while the rise in food prices cut their real wages. So they rose in revolt and deposed the Gomulka regime, forcing the Gierek government to abandon such economic reforms .in 1976 and other governments to do the same in 1980. The political naivety of many East European economists who acknowledge their fascination with Western mainstream theory is quite astonishing in this regard. Even more surprising though, is the idealization by Western economists of" Yugoslavia's system (one which comes closer to the market model of the orthodox economist's textbook than the other East European countries). We also have die complete misunderstanding of the Liberman reforms in the USSR as 'restoring capitalism' and the trivia of Western analysis of Chinese economics. Among other failures of Western economics which came to be acknowledged by leaders of the profession itself were: no satisfactory explanation of stagnation, no adequate theory of wages, and a neglect of questions which arise under the rubric of 'imperialism P.A. Samuelson, as the main defender of mainstream economies, has not been idle in replying to these points. He argued9 that any failure of the

mainstream approach is a failure of nerve, rather than of technique. There is a lack of confidence (he conceded) among orthodox economists when confronted with growing crises of the system, pollution, ecological damage, imperialism, racism and sexism. Yet, Samuelson argued, it is possible to apply the already well-established techniques of economic theory -its 'box of tools' to these very areas of social and economic life. Thus the theory of 'external economies and diseconomies of scale' can be applied to pollution, the theory of` 'human capital' developed by G.S. Becker and Jacob Mincer can explain inequalities in income distribution and the worsening position of Negro and women workers, the theory of international trade can be adapted -..

to explain economic imperialism between nations, and so on. This

solution has been tried and is there for all to see by perusing any copy

The Philosophical Bias in Modern Economics

41

of the Chicago Journal? of Polirical Economy that has been issued since 1972, or by closely examining the writing of the 'Virginia School?10 However, this new development towards relevance will not convince

anyone who really understands the limitations of mainstream economics. For what 'Virginia School' economists and Samuelson are saying amounts to this: all one needs is to apply the existing mainstream structure to new areas. But this is no longer possible. As Leontief and Tliurow have pointed outlet -it is the very scientific means which economists use which are largely at fault- Even if Samuelson, in future editions of his Economics, takes note of the criticisms listed above, he will miss the basic issue -textbook neo-classical economics has become a science of mystification, it excludes problems of ideology and, above all, it excludes what philosophical critique could bring out- that capitalist society inherently produces the acute problems of growth and allocation and threats to the quality of life. Since the contradictions are deeply embodied in the structure of production pursued in a profit-based system, adj vestment by taxes and subsidies will have only marginal effects. Of all the major gaps in mainstream economics, the mostlserious one (as Samuelson acknowledges) is that it has not come up with an explanation for creeping inflation. Here, the 'institutional school' and the Left have an explanation which could never, given its biases and method, be produced out of Samuelson's mainstream economics or the writings of the Virginia School. This is the simple point that after l 964L, the Vietnam war was financed by a series of deficit US budgets, while the Brenton Woods Agreement of 1944~7l (recognizing American hegemony over the international capitalist system) allowed the Americans to flood Europe with printing press dollars, knowing that

they would be universally accepted at a fixed exchange rate of one ounce of gold to 35 dollars. Such an explanation is not limited to 'excess liquidity' but to the changed economic power balance within the capitalist world market, deep international crisis of the capitalist world economy and inter-imperialist rivalry . Samuelson's counter-attack took the form partly of an assault on Galbraith's institutional economics. He was joined by Friedman,13 although Samuelson was the more subtle: he argued that much of what Galbraith says about 'private affluence, public squalor', and the 'new industrial state' may be applicable to the USA, but is not necessarily true of capitalism generally. For example, he argued that Galbraithian ideas were not relevant to the United Kingdom, which he felt (with

Friedman) needed a more right-wing approach, more unemployment to

42

The Philosophical Bias in Modern Economics

curb l a b o r , tighter fiscal and monetary policy, cuts in government spending, a smaller welfare state, and so forth. Yet the 'Phillips curve' approach to inflation had been tried out in Britain by both Denis Healy and Margaret Thatcher and it simply did not work. This indicates that analysis along the lines of stagflation being the result of militant economism of unions or increased class struggle over a declining national cake might be more fruitful. Perhaps there is even something of a Kaleckian 'political trade cycle'13 operating in Britain. Certainly Samuelsonian economics, even its more stylish Treasury version, looks less and less relevant for the deep-seated 1980s crises of the British economy. Samuelson conceded in 1973 that the denial made by radical economists that you can meaningfully disentangle facts and values carries some weight. His method of deface was simply to suggest that more values might be put into mainstream economics. In this way he avoided any real confrontation over the methodology of mainstream economics and especially over the underlying methodology of mainstream economic theory even on the fairly rare occasions when it came up for discussion. Part of this debate is the role of positivism, the Philosophical view that facts and values can be distinguished, leading to an objective, value~free social science. To this we IIOW turn.

Positivist Philosophy and the Definition of Economic Theory

The problem here can be discussed under two headings: (a) definitions of economics and assessment of its scope, and (b) methodology of the positivist school.

In Scope and Method 0f PoliticaI Economy (1892) John Neville Keynes summed up how a positivist philosopher approached economics. Distinguishing positive economics from 'normative' economics, and

from the 'art' of political economy, he argued that: a positive science may be defined as a body of systematized knowledge concerning what is, a normative or regulative science as a body of systematized knowledge relating to criteria of what ought to be,

and concerned therefore with the ideal as distinguished from the actual, and art as a system of rules for the attainment of a given end. The objective of a positive science is the establishment of uniformities, of a normative science the establishment of ideals, Of an art the

formulation of precepts.

The Philosophical Bias in Modern Economies

43

Yet with the notable exceptions of Nassau Senior and Longiield,1'* political economy before J.N. Keynes (1892) was seen as something different: as a study of human society at work in producing wealth. For Sir James Steuart in Principles ofPoliticaZ Economy (1767), 'what economy is in a family, political economy is in a state'. For Friedrich Engels it was 'the theoretical analysis of modern bourgeois society', a view later echoed by the conservative economist F.H1. Knight, who thought modern economics was an aspect of the individualistic, liberal outlook on life, of which capitalism, or the competitive system, or free business is the essence.15 Sismondi, the nineteenth-century economist, thought that political economy was best treated as a 'moral science where all facts are interwoven and where a false step is taken if one single fact is isolated and attention is concentrated upon it alone'. The science of economics for him had to be based on experience, upon history and upon observation. Human conditions were to be studied in detail: allowance must be made for the period in which a man lived, the country he inhabited, and the profession he followed if the individual's role in economic processes and the influence of economic institutions upon him successfully traced. Social institutions and political organizations were bound to powerfully affect economic life: the abolition of the English Corn Laws and the effect of this could not be decided by theoretical arguments alone -they would have to take account of the various methods of cultivating the soil.

Much of these earlier discussions on method also involved the aim of political economy. To the classical economists, political economy was the science of wealth, or 'chrematistics', as Aristotle called it. But

for more radical political economists like Sismondi, the real object of economic science should be man; to consider wealth by itself and to forget "man" was a sure way of rnaldng a false start. That is why the French political economist gave such prominence to a theory of distribution alongside the theory of production . What Sismondi implicitly acknowledged here was that the way the

object of economics is defined already contains a choice that is implicit and full of consequence. Thus, to assert that the objective of the economist's advice is efficiency, is to narrow one's view of a technocratic approach to economics (and to the role of the economist in society). It would tend to exclude all reference to the analysis of the transformation

of economic structures from the scope and heart of the science.

44

The Philosophical Bias in Modern Economics

This brings us to the whole issue of valuefree economicsthe possibility of which is canvassed in almost every textbook. It is a conception which grows out of early Austrian psychology circles and later out of an approach used by Lionel Robbins which is now the common methodology used in textbooks. Take, for example, Lipsey's An Introduction to Positive Economics (1969). in spelling out his argument Lindsey stated that science consists of 'logic' and 'fact' which can be presented as a coherent whole, while 'political economy' is a nonscience, composed of ideology, values, ethics and politics. For this author, statements can be 'tested empirically against the facts and methodology and concl usions form the core of positive, scientific economics'. At least the influential textbook of Lipsey (and of Milton Friedman in his Essays in Positive Economics) did raise such issues explicitly an d forthrightly. Usually the mainstream textbooks implicitly accepted the positivist definition, as if all economists agreed on it. Yet we have

had some variations on a definition ranging from the absurd to the ridiculous. Thus for Samuelson, Hancock and Wallace (Economics, Australian ed., 1970), economics became : the study of how men and society choose, with or without the use of money, to employ scarce productive resources, which could have alternative uses, to produce various commodities over time and distribute them for consumption, now and in the future, among various people and groups in society.

A prominent American textbook (Lloyd G. Reynolds, Economics), simply retreated into the claim that 'we all know what economics is

about. My argument will be that the implicit positivism in these textbook definitions will not do, further, that uncritical acceptance of such a position introduced serious distortions into the study of the evolution of history of economic thought. The methodological stance of positivists working as economists involves the acceptance of a number of positivism's worldng rules. 16

The first is that economics is only entitled to record what is manifested in experience.17 Second, social science must deal with individual

concrete objects and not with 'metaphysical concepts' like 'essence', or 'social relationships Thus, for a positivist economist, 'capital' can only be a piece of machinery or a paper claim to a future return on assets.

It can never be, as in Lenin's work,18 an embodied social relationship

The Philosophical Bias in Modern Economics

45

expressing certain class relationships. Third, and most important, there is the sharp distinction posed by positivists between value judgements or normative statements (which can never be scientific) and the

'objective facts'. Actually this refusal to call normative statements 'scientitid is an essential feature of positivist method . But can there be value-free judgements which the academic must stick to, even if the 'concerned citizen' does not? Is it really possible to believe, with Hobbes, in a 'language purged of passion-evoldng words"? Surely it is obvious that the very selection of facts requires a prior theoretical stance. An economist cannot block out and ignore the social aspects of what he is doing. Rather, social science has always

depended on certain preconditions-including the existence of a ruling class ideology which a regime will tend to promote and to encourage the departments of economics within the universities to promote. Now, why is it 'objective' to study only the existing reality? Why is the 'real' only that which exists now, rather than alternatives which do not immediately appear? An economist, above all, should ask that question. For example, it may be more 'objective' to study the capitalist economy by looldng at feudalism (out of which it grew) or a noncommodity society like that in Papua New Guinea villages (its opposite) or even socialism (the future society it points to), instead of merely studying in detail the everyday workings of the market in commodities. Again, being 'objective' is not the same as being nonpartisan. Lenin, for example, believed the pursuance of a class science was good, but he still had a high regard for scholarship and r i g o r . Marx made a judgment about socialism being more humane and efficient than capit alism. That did not prevent his analysis of the worldngs of capitalism from being scientific and deadly accurate. Marx's methodology transcended the

ideological position adopted by one class,19 as he applied, his 'ruthless criticism of all that exists'. As is well known, this also included

Marxism itself as an object. Further, one can arrive at values in an objective manner, as described above, so that the sharp fact/value dichotomy is unnecessary. If you want to be 'scientific' you need not be a mathematician or fact-grubber, to be scientific might also include having a grasp of the total social reality. A person who knows how to

apply such a 'meta-theory' may often contribute more than the economist who cuts himself off from politics, sociology, anthropology, etc. Moreover, a science cannot be depicted solely in terms of its method, one has to look also at its application. The application of positivism to

economic questions leads to an absurdly idealized individualism, a crude

46

The Phflosophieal Bias in Modern Economics

behaviorism and an ideological stance which turns into a professional ideology. For example in neo-classical economics (and in its general equilibrium version), individual agents become the units of analysis, and their behaviour is explained almost exclusively in terms of subject~ Ive rationality. The capitalist class is thereby removed from the centre

of the stage of the model. Capitalists, defined now as mere 'owners of capital stock', are put on the same level as labourers and landowners. This particular neo-classical paradigm historically reduced all the elements entering into value and distribution to a common denominator which was the fact that they bear utility or disutility arid are thus exchangeable. The classical framework of Adam Smith and Ricardo, by

contrast, consisted of irreducible categories-social classes with their specific revenues are one example. The professional ideology that emerged amongst the practitioners of orthodoxy was that of the model-builder who is uninvolved politically, who merely lays out the options for a government, e.g. for an ICBM bombing programme. The model is always seen to be realistic for having been built out of 'facts' the idea that a model which is highly abstract rather than concrete can be at least as realistic, provided it brings out clearly the operation of an economic system, seems outside the comprehension of a positivist. If one adopts a positivist stance 20 there arise serious implications for the study of the history of economic thought. Thus Schumpeter's History of Economfc Analysis attempted to distinguish a history of economic thought (which would include journalists, cameralists and

pamphleteers) from a history of economic analysis. The teleological evolution of tooled knowledge became, in his studies, the object of scientific investigation, and Schumpeter thereby thought of economics

becoming a science. John Maynard Keynes (son of }.N. Keynes), while he emphasized the 'state of the news' more than Schumpeter, also held

that 'the theory of economics does not furnish a body of settled conclusions. It is method rather than a doctrine, an apparatus of the mind, a technique of thinldng'. Most historians of economic thought21 followed Schumpeter and J.N. Keynes (the father of Maynard Keynes) in their positivist method of trying to disentangle 'objective economic tools' from 'economic thought'. Then they reinforced their line but compounded the error by trying to project Lionel Robbins' dentition of positive economies both backward into time and forward into the future. But this procedure itself then ceased to be 'positive' and 'objective': historically, i t can be

shown that whichever definition was used gave a different starting point

1716 Philosophical Bias in Modern Economics

47

for the development of economic science. Thus Blanqui began his history with the Babylonians, because he was interested in thinldng about economic institutions; McCulloch began his discussion of the history of economic science with the French Physiocrat, Quesnay, because he considered his to be the first worldng out of the laws of production and distribution of wealth. Marx regarded Sir William Petty in England and Boisguillebert in France as the first economists because they discovered abstract general relations, such as l a b o r , the division

of lab our, money and value. For the positivist modern neo-classical economists Stigler/'32 and BIaug,23 by contrast, the 1870s are treated as the years in which the allocative problem came to the fore and economics thereafter acquired a scientific character. It is interesting to see why, as in Blaug's and Stigler's histories, the most recent developments in economic theory appear generally also as the best. I believe that this follows from their acceptance of positivism in the very definition of economics. For the argument runs something like this: if we have accumulated scientific generalities, if we have well established uniformities (which have not yet been falsified), if we have a positive economics, then we have a yardstick by which to judge earlier theories. The theories that will be considered scientific will tend to be

those at the end of the teleological process of sharpening and refining objective analytical tools. These will be (inevitably) the most recent: neo~cl assicism in the 1870s, Keynesianism in the 1940s, Friedmanism in the l970s and the Virginia School in the Reaganite 1980s.

A conclusion now suggests itself: before classical political economy (in the hands of Smith, and Marx especially) was turned into economics, attention was mainly not on a study of prices or of scarce resources, but on a study of social relations, a study of culture. It asked why the

productive forces of development, the process of accumulation and development of machinery, unfold within the context of business enterprise; why industrialization takes the form of capitalist development. Yet the modern positivist definitions of economics I have cited-notably those used by Reynolds, Samuelson and Hancock-have tended to rule out vital issues of social theory, while the hidden methodology of such books ensured that the economic student tended to look at the world through a prism which defends the .status quo, which defends capitalist reality by an appeal to its rationality. From this angle, such texts are more "vulgar" in their apology than the openly apologetic Time magazine24 which puts the central problem of the industrial system down to 'private ownership of most industry'. Time does not bother to construct the economists' euphemisms about the 'mixed economy? lt

48

The Philosophical Bias in Modern Economics

lauds the profit motive and cannot envisage another solution to the problem of economic development. It does not (as do many orthodox economists) defend profit amidst a lot of chatter about the 'marginal productivity of capital' or the 'reward for waiting' (i.e. capitalists' abstaining from present consumption). Of course not every economist, nor even every 'marginalist' in his

method, is a conscious defender of capitalism. Radicals occasionally emerge from their ranks-as with Knut Wicksell who once said that 'the very concept of political economy, therefore, or the existence of a science with such a name, implies strictly speaking, a thoroughly revolutionary programme'.25 More recent examples would be Res rick and Hymer, outstanding graduates of the American academy who 'defected' to the radical side. Yet good intentions must be distinguished from the results of the method. Wicksell ended up by producing a theory which bolstered and strengthened Swedish capitalism-even if the political economy of his

collectivist state required considerable government intervention. At the other end of the political spectrum, Oxford professor and longtime editor of the Economic Journal, F-Y- Edgeworth,26 apparently noticed no contradiction between his support for objectivity, logical processes and not communicating to pupils 'the teacher's opinions on burning questions of the day', with Nos other lament that

abstract reasoning . . . never seems to have swayed larger masses. How many hundreds of socialists have been bred on the Hegelian subtleties of Marx! It cannot be supposed that such mystic formulae are altogether of the nature of incantations sung by those who are preparing to use the knife.

The simple conclusion that I would point to is that the plea for 'academic excellence', 'objectivity', 'scientific r i g o r ' which one so often hears from social scientists can easily turn into an unconscious conservative political standpoint. Remoteness from ordinary people and the privileges of academic life act to reinforce any such tendency. In their practice, many economists discussed in this book have been able to combine `rigour' with commited scholarship, and, by grasping social reality as a whole, to give us a picture equally as realistic as the most concrete of empirical positivists.

T716 PhiZosophz'caI Bias in Modern Economics

49

Notes 1. M.H. Dobb, 'Economicsz The Cambridge School', Encyclopaedia o f the Social Sciences, 1931. 2. T.W. Hutchison, Positive Economics and Policy Objectives, (Allen & Unwire, London, 1964). 3. A conservative review of Sherman's Radical Political Economy (Basic Books, NY, 1972) notes 'his almost nonchalant manner in borrowing from bourgeois economics See H.H- Segal in Business and Soeieljv Review, No. 4, 1972{3, p. 102. 4. M. Dobb, Theories of Value and Distribution Since Adam Smith (CUP, Cambridge, 1973), Ch. 1, E. Roll, 'The Decline of Liberal Economics`, Modern Quarterly, August 1933; R.L. Meek, Economics and Ideology (Chapman Hall,

London, 1967), Chs. 4 and 12. 5. See Richard J. Bernstein, The Restructuring o f SociaI and Political Theory (Blackwell, Oxford, 1976), PD. 181-236.

6. Brian Easlea, Lie)eration and t f l e A i m s o f Science (Chatto and Windus, London, 1973). For the view of an academic economist along these lines see F. Stillwell, Normative Economics (Pergamon Press, Sydney, 1975). 7. Hazel Henderson, quoted in Australian Financial Review, 29 May 1972. 8- For criticism of the Kuhn thesis see H. Skolimoski, 'The Myth of Progressl Ecologist, Vol- 4, No. 7, August/September 1974. Also see M. Blaug, Economic Theory in Retrospect (Irwin, Illinois and London, 1979), for a review of Kuhn, Lakatos and other writers who have raised the notion of the meaning of 'progress' in economics. 9. Paul A. Samuelson, 'ilfafnstream Economics and its Crr'tics', lecture delivered at the Australian National University, Canberra, 22 March 1973. 10. R.B. McKenzie and G. Tullock, Political Economy: An Introduction to Modem Economics (McGraw Hill, NY, 1979), gives an accurate and wide-ranging guide to the way Virginia School economists apply orthodox technique of economists to draw their conclusions in favour of de-regulation, dis ran fling of large parts of the welfare state and more aggressive free enterprise. The US government under Reagan and the Australian government under Fraser both employ the services of Virginia School economists as advisersl l . W.W. Leontief, Presfden till Address, American Economic Association, December 1971, and Lester C. Thurow, 'Economics, 1977', Daecfefus, 19?8, pp. 79-94. Thurow's analysis gives many examples from econometrics of the weak-

messes referred to here. 12. Milton Friedman, From Galbraith to Economic Freedom, Occasional Paper 49 (Institute for Economic Affairs, London, 1977). 13. See M. Kalecki, 'Political Aspects of Full Employlnent', in M. Kalecki, Selected Essays on The Dynamics o f the Capitalist Econ my (CUP, "anlbridge, 1971), pp. 139-45. 14. Nassau W. Senior, Drummond professor of political economy at the University of Oxford, 1825-30 and 1847-52, wrote his Outline o f f Science of

PoliNcaIEcotiomy in 1836. He tried to overthrow the definition of political economy used by such conservatives as J.B. Say and render it yet safer. He argued that existing definitions were too wide, were 'far exceeding the bounds of a single treatise' (p. 2) so that 'it has acted by misleading economists both with respect to the object of their science and the means of attaining it' (p. 2). He went on to distinguish clearly (much more sharply than Say or Malthus) science and art of

political economy. The scope of political economy is narrowed to 'pure theory' 'interesting

instead of wandering into 'the more

but far loss definite fields by which

the narrow path of political economy is surrounded As a result 'the business of

50

The Philosophical Bias in Modern .Economics

50

the political economist is neither to recommend nor to dissuade but to state

general principles which if is fatal to neglect'. Mountfield Longtield in his L lectures on Political Economy (1839) echoed Senior's view on this point. See R.C. Black, Longteid, for the very similar position of that economist. 15. F.H. Knight, On the History and Method o]"Economfcs (University of Chicago Press, Chicago, 1956), Chapter 1. 16. L. Kolakowski, Positivist Philosophy (Pelican, London, 1972). 17. See R.G. Lipsey, An Introduction to Positive Economics (Weidenfeld and Nicolson, London, 1969), and Robert v. Eagley, The Structure o f CIassical Economic Theo/'fy (Oxford University Press, NY, 1974). 18. V.I. Lenin, Who the Friends o f the People Are (Foreign Languages Publishing House, Moscow, 1951), p. 44.

19. Marxists in the period 1900-36 were apt to hold that the working class will be the last 'class' in history, so an act of partisanship on its behalf was not to

support sectional interest, whereas bourgeois economic and political science was thought to he attached to a particular class in decline in a particular epoch. This view has been challenged by many current Marxian schools and is complicated by problems of the actual behaviour Of working-class parties, as shown in Robert Michels, Political Par ties (Free Press, NY, 1962). 20. As does any modern textbook, or indeed .pioneer at the margin like G. Debreu, Theory o f Value (Yale University Press, New Haven, 1959). 21. See L.H. Haney, .4 History of Economic Thought (Macmillan, NY, 1942), pp. 34, G. Stigler, 'Originality in Scientific Progress', Economfca, November 1955 22. G. Stigler, Theories ofPmduction and Distribution - The Formative Period (Macmillan, New York, 1963). 23. M. Blaug, Economic Theory In Retrospect (Irwin, Illinois, 1962). 24. 'Can Capitalism Survive"', Time, 14 July 1975. 25. K. Wicksell, Lectures on Political Economy (Routledge, London, 1934),

p. 1. 26. F.Y. Edgeworth, 'The Objects and Method of Political Economy', in Edgeworth, Papers Relating to Political Economy, Vol. 1 (Macmillan, London, 1925), pp. 3-12.

2

THE CAMBRIDGE SCHOOL OF ECONOMICS My own scholarship has covered . . . questions like welfare economics and factor-price equalization, turnpike theorems and osculating envelopes, non-substitutability relations in Minkowski-Ricardo-Leontief-Metzler matrices of Mosaic-Hicks type, or balanced budget multipliers under conditions of balanced uncertainty in locally impacted topological spaces and molar equivalences. Paul A. Samuelson, neo-classical economist and Nobel

laureate in Economics, 'Economists and the History of Ideas', A merman Economic Review, no. 52 (March 1962), p. I Neo-classical theory is a story for the faithful. Those of us

outside the flock in our unguarded moments tend to regard it in much the same way as Bertrand Russell saw theology . . . Time and effort spent on fine points of neo-classical theory appears to heretics and the Damned as a shocking waste of scarce intellectual resources. E.J. Nell, Cambridge School economist, Annals o f the American Academy of Scfeftce, 1972, p. 447.

The development of 'Cambridge School' economics consists of four phases. First there was the period when Cambridge was associated with the orthodox economics of Alfred Marshall, John Neville Keynes and A.C. Pigou. The second phase dates from the 1970s when Piero Sraffa arrived and encouraged people to develop a root-and-branch criticism

of the categories of perfect competition and equilibrium as used in neo~ classical economies, as well as exposing logical contradictions in large areas of the theory! This led on to loan Robinson's theory of imperfect cornpetitionl The third phase opened with Richard Kahn and others discovering the 'rnultiplief and going back to Marx's distinction between a capital goods sector and a consumer goods sector. Keynes then wrote his various contributions to the 'Keynesian Revolution' in 19304 and in 1936, with the General Theory offnterest, Employment

and Money, a book that inspired a theory of economic dynamics at Cambridge, headed by Harrod and Kaldor. The latest, fourth phase is the subject of much of this chapter. It has come to be called the development of a 'post-Keynesian' school of

economics with radical critique of mainstream views on a number of

51

52

The Carnbrzdge School of Economfcs

issues. The question that has necessarily been raised, as a consequence , is whether Marshall, Keynes and Sraffa (whose work spans all phases of the unfolding Cambridge analytical contributions) are 'compatible bedfellows'.5

One of the greatest ironies of modern economics is that Cambridge economics is associated with the strongest attacks on 'neo-classical' thinldng6 -- yet one of the founders of this very economic scaffolding

was Alfred Marshall, longtime professor of economics at Cambridge I Marshall, like his counterpart on the Continent, Leon Walras, built up his model of the economy on the axis of 'equilibrium Unlike Wallas, he did not seek a general equilibrium in all markets, but more a price-by~price, firm by firm, industry~by-industry analysis of how combinations of output and price were reached. The distinctive Marshallian style was to apply the processes involved in supply and demand to long-term (normal) prices? Unlike Sraffa, Marshall was concerned with long-run equilibrium prices. Sraffa and then Keynes criticized the original, simple forms of Mai'shalTs theory of pricing. While Marshall distinguished various time periods, he tried by the use of 'representative firms', 'nol'mal' and 'average' prices, wages and profits, to merge the various time periods together. But when he

introduced the principle of substitution8 as a universal one for explaining changes in demand for consumer goods and for land, labour and capital, he brought about a decisive break with the classical political

economy of Ricardo and Smith. As we have seen, the classical school did not seek a general principle to which the spheres of value , production and distribution would be reduced, but kept these spheres separate.

Keynes got back to the classical spirit to some extent in the causality he used, in his ability to utilize 'stylized facts' and in his concern with wage-earners' reactions to wage reductions and investors' concern with the 'state of the news', made a break with the methods and views of Marshall. This in turn inspired the dynamic economics of Harrod and the analysis of growth and distribution which has become associated th the 'post-Keynesian' school of Kaldor, Robinson and Pasinetti.

Contribution of R.F . Harrods

Although originally a student at Oxford, R.F. Harrod became a strong

The Cambridge School of Economics

53

Keynesian and moved to the Cambridge position when he became a member of the 'Circus' discussing the evolving General Theory of Keynes at Cambridge in the early 1930s. Harrod's growth theory9 is concerned with the rate of growth in output: g = AY . The growth rate of the economy is g. The national income or o u t p u t s Y. So g is determined by both the increase in output that takes place between two successive periods, and the level of output from which growth takes place. What determines Y? In the simple two-sector private enterprise model, output consists of two sorts of goods-consulnption goods designed to satisfy current needs, and investment goods designed to satisfy future wants. 'Consumption-to repeat the obvious-is the sole end and object of all economic activity . . . Aggregate demand can be derived only from present consumption or from present provision for future consumption' (Keynes). YA=c°+1

=

=

where YA value of total output produced, CO value of output of consumption goods, I = value of output of investment goods. What determines C0? C~goods are produced with respect to short-term expectations about the level of demand in the current period. For growth purposes, it is reasonable to assume that in each period the output of C-goods is adjusted to the demand for them, and SO abstract from the conventional short-run distinction between 'intended' and 'unintended' investment. The Keynesian assumption is that CO C, where C is the value of C-goods purchased by consumers. We shall assume that CO

=~'

C, and so have Y = C + I. (This is the conventional Keynesian

'equilibrium' level of Y.) The simplest model we can then have is that: Y+C:I,C

cY; I is given by 'animal spirits',

so»thatY= 1 . I

1-c

_L.1 s

This means that, for given s, the level of Y depends on the level of I, and (if s is constant), the rate of growth in Y is equal to the rate of growth in I. Hence g = AY is determined by entrepreneurs' investment Y decisions. What determines I? Investment-goods are produced with respect to the long-term expectations about the future level of demand. Investment

(net) constitutes an addition to the capital stock, and hence increases

54

The Cambridge School of Economics

the productive capacity of the economy, and the increase in productive capacity which it generates is equal to the expected increase in demand which induced it. So we may write: AP = qrl, where AP is the increase in productive capacity due to the investment, and equals the expected AY which induced it, or is a 'quality' coefficient which defines the relationship between actual investment and the increase in productive capacity which it generates. The higher is qI, the greater is the potential growth in output made possible by a given period's investment.

Harrod argued that AP must be clearly distinguished from AY, the actual increase in output produced in response to an increase in demand. The relationship between the actual investment expenditure made, and the increase in the value of actual output associated with it, is given by : AY q.I Here Harrod is very typical of the Cambridge School in that for him the growth of output was determined by the growth in demand. Harrod's model is highly useful for economic policy in both developed and underdeveloped countries for it gives a number of global or highly aggregated strategic variables which determine the rate of growth: G =b' i where G rate of growth of national income, s savings ratio and b = capital/output ratio. The Harrod equation shows

=

=

=

that the rate of growth of output can vary directly with the savings ratio and inversely with capital/output ratio. The Harrod equation is derived from the following relationships (where S = total savings, K real capital, 6K/K : rate of growth of real capital);

=

( 0 - S = constant (LU) K = I b.y = s(Y) thus HG = s, (v) 6K/K

(ii) 6K/Y (iv) G so' = (s/b*lK = s K .K E

=

= b = constant Y

=i

b

The rate of growth of output given by (iv) implies 8 rate of growth of capital given by (v). The model is constructed for capitalism and the warranted rate of growth of output (G) refers to a rate of growth which is consistent with the savers' desiresin given conditions of technology . Has this model anything to tell us under conditions of perspective economic planning as part of economic policy? Suppose that the plan aims at the highest possible rates of growth of income, consumption and employment. If the rate of increase in production of wage goods is equal to that of the population, then 'Harrod Savings' will accrue. For example, with a population growth of 2 Pei' cent pa. and a capital/output ratio of 3:1 it is necessary to invest S per cent of national income to

permit wage goods to grow at 2 per cent in succeeding years. Then the

The Cambridge

Sehooé' of Ecorzomics

55

savings ratio will be constant at 2 per cent each year. The 'Harrod' model shown in Table 2.1 sketches the movement in key variables

over the plan period. Table 2.1: Model I

Year 1961 1962 1963 1964

1965 1966

National income 13500 13770 14045 14326 14613 14905

Harrow Savings 810 826 843 860

Increment in output each year

Increment in employment over base Yell

270 275

1.90 3.84

281

5.82 7.84 9.90

817

287

895

293

Assumptions: (1) capital/output ratio is 3:1- (2) population growth rate is 2 per cent p.a. (3) populationzlabour force ratio remains constant.

Model I procures each year certain savings which 'just accrue' to the economy and are available for investment in a number of spheres. But this is all the model can tell us in its practical application-no special relationship has been postulated between stock of capital and output of each of the capital goods and consumer goods departments. There are no policy implications on the way Harrod Savings should be distributed so as to obtain maximum growth rates or how Harrod Savings should be distributed in consumption capital and investment capital such that in each period the employment and output capacity of the system increases, and a balance is main Mined between the additional demand for consumer goods and the supply of consumer goods and between additional demand for fixed capital and the supply

of fixed capital. Hence, as with much aggregative Cambridge theory, the basic factors in the strategy of economic development are ignored ..... the time lag between investment and output, the value added and surplus value per worker, capital per worker, etc. These factors are incorporated into model II (Table 2.2), which

would appear to contain the minimum number of factors to guide the planner. (The model incorporates also the consumption-income multiplier of value 1-8, i-e. an additional output of 100 worth of consumer goods allows an increase of income of ISU. The marginal consumption requirement in relation to an increase in income of l is 0.55 and the

It Iapow =z'z QIQHL 360

553 684 844

477

o~ "Y N

O\

Hence :

i, = (so - sw) YP + P = 1 . 1 Y so-sw Y

(1)

SW

_ sosw_-So ..

(2)

where Y is the national income, W = income of l a b o r (wages), P = income from property (profit), I : investment, SW = savings from wages, SP = savings from profits, Sw = share of savings from wages, so = share of savings from profit. In Kaldor's equations, income distribution and accumulation rate were rigidly connected with each other. For example, when So and so are given, the share of profit in the national income is determined exclusively by the rate of accumulation. Kaldor used this relation to explain two basic problems in the theory

of growth: the problem of economic equilibrium, and the factors determining the economy's growth rate over the long term. On the problem of equilibrium, Kaldor assumed that the introduction of the distribution so-makes the mechanism into the model-with the proviso that system more stable and more capable of automatically restoring equilibrium. Kaldor believed that any change in I in relation to Swhich in Harrod's model tended to produce cumulative processes of decline or growth in production -triggered off the mechanism of

so

income redistribution, which adapted S to the new level of I. inflationary processes had an important part to play in this re-

distribution of income. Kaldor assumed that rising investment and general growth of demand under full employment will result in a faster growth of prices than of wages, diereby changing the distribution of income in favour of profit and reducing the share of the worldng class.

Because savings from profit were higher than those from wages, this would result in a growth of savings. The equality of S and I will be restored. If, conversely, investment and overall demand tend to decline, prices will tend to drop faster than money wages, distribution will tend to change in favour of the workers, savings will decline, and the equality of S and I will also be re-established (in economic writings, this mechanism is known as the 'Kaldor effect'). Consequently, in this short-term model, national income distribution

is a function of the fluctuating growth of investment and aggregate

The Cambridge School of Economics

61

demand, and the dynamics of relative prices. In the analysis of long-term growth factors, national income distribution also has the decisive role to play. It follows from the equations given above that provided so and So are constant, any increase in the rate of accumulation and, consequently, of the growth rate, will require 311 increase in the share of profit in income (§), and any reduction in the rate of accumulation will tend to reduce it. Thus, the rate of accumulation is a key factor behind the long-term tendencies in national income distribution.

Kaldor's formula, showing the dependence of distribution on the rate of accumulation, contains the Sp '-SW coefficient, which he defines as the 'coefficient of sensitivity of income distribution', since it indicates the change in the share of profits in income which follows upon a change in the share of investmeNt in output. The greater the excess of so over sw, the smaller the influence, the closer so to So, the greater the dependence of distribution on the rate of accumulation. Some criticisms of Kaldor's model might run along the following lines: (1) While Kaldor's model includes essential techno -economic relations taldng shape in certain conditions between accumulation, economic

growth and national income distribution, the rigid assumptions behind the model do not always correspond to the actual state of things. For instance, it follows from Kaldor's model that any increase in growth rate over the long term could be achieved only through a re-distribution of the national income in favour of profit and an increase in the rate of accumulation. Actually, any increase in growth rate requires an increase in the rate of accumulation only if the capital-output ratio remains constant or increases, yet statistical analysis shows that in

some periods the growth rate can also be increased under a falling capita output ratio, through greater efficiency of capital inputs.

(2) Kaldor's abstract model also takes no account at all of the vast unproductive expenditures which burden modern capitalist society , especially government military spending. The introduction into his model of state income with a corresponding 'propensity to save' could open u p a source of growth and rising, rates of accumulation other than

the incomes of workers. (3) Finally, Kaldor's assumption of invariable shares of the saved income-s and so-is much too rigid. Empirical analysis of these problems slliows that these shares tend to change, depending on income growth and many other factors.

Two other features of Kalcior's work are especially worthy of notice 1

62

The Cambridge School of lfconomfcs

his insistence on disaggregating Keynesian aggregative variables and his theory of the growth process in the underdeveloped countries of the Third World. In a celebrated article, 'Stability and Full Employment', in the British Economic Journal of December 1938, Kaldor examined the instability of capitalism and the consequent weaknesses of Keynesian macrosconomic policy against severe economic crisis. The main thrust of Kaldor's argument is that in concrete situations, a position of full employment for capitalism is a highly unstable one: a small pressure in either direction (growth or fall in growth rate) is very likely to give rise to a rapid cumulative movement. This will either be "uphill" into inflation and subsequent collapse of output and employment levels or straightaway downhill into falling production and falling demand. If this is the case, then stabilization policies framed in terms of Keynesian aggregates (especially 'Total Investment) will be too general and unselective to smo they de-stabilizing tendencies. Kaldor's example here is a situation in which there is are ady a large amount of excess physical capital in industries producing capital goods, but relatively little in the consumer goods sector. Suppose now, the Keynesian 'steering' instruments (fiscal and monetary policies) are manipulated to boost total effective demand. Unless the increase in generated 'effective demand' is distributed between the capital goods and consumer goods in the appropriate proportions, "expansion" may simply lead to full capacity working in one department of industry (with consequent price rises) while in the other department there remains a substantial unemployment problem. Not only that, but even if full employment could be achieved in both departments, any shift of expenditure between investment and consumption may start a tendency

to decline in one which may rapidly communicate itself to the other. This 'structural' approach to capitalist dynamics is reminiscent of Marx's Vol. II o f Capital with its breakdown of total industry into 'Department l ' (capital goods) and 'Department 2" (consumer goods) sector. It was also used by Lenin in W e So-Called Question of ll/Iarke fs and A Characterization of §conomic Roman hCism, as well as by Michal Kalecki in his celebrated article on Trade Cycles in 1933 and 1935. Kaldor's merit here is to use the approach as a criticism of rightWing Keynesianism which wanted to keep analysis at the level of broad aggregates and to maintain a strong role for private business investment. Kaldor hits at both these attempts. On the first one he says that full employment means not only a

certain level of total real income but 'it presupposes a division of real

The Cambridge School oj"Ecorzomics

63

income between real consumption and real investment in a certain proportion' (p. 644)- So unless there is a correspondence between the distribution of the excess capacity on the one hand, and the distribution of additional demand on the other, expansion will be arrested and may relapse into slump because of the appearance of bottlenecks at critical points in the economy, long before substantial inroads have been made into excess capacity and unemployment elsewhere. On the second issue, Kaldor was surprisingly forthright, and together with the writings of S.S. Alexander (an American) we get a flavor of what 'Left Keynesianism' was like at its height. For Kaldor says (pp. 653 and 557):

As investment activity continues at a high level, excess capacity of equipment is bound to make its appearance. Once redundant capacity appears, it will be almost impossible to maintain activity undiminished, unless State investment activity is extended so wide as to replace private investment. (my italics) Finally, 1 would like to mention briefly Kaldor's work on the Third World. In 1963 he sketched a model for handling the dynamics of these

very different lands of society during a lecture at the Australian National University. The brilliance of that lecture did not deserve the rather dull and muted audience response, although the reception was probably not the reason for the long delay in publication until its appearance in 1975 in the Quarterly Journal of Economics. For Kaldor after 1957 took a keen interest in the economic problems of less developed countries.

.

Essentially his theoretical contribution in the 1975 QJ'E article is to

argue that Keynesian-Kaleckian features of a Third World country (imperfect competition, a high degree of monopoly, class income,

distribution dependent on what capitalists spend) would apply only to its industrial sector. Side by side would be the primary sector supplying food and raw materials and involving 'non-Keynesian' features (competition, 'Marxian' long~run unemployment). The different 'laws of motion' of each sector would therefore need to be studied, as well as the factors affecting the terms o f trade between the industrial and primary sectorsa phenomenon that would greatly affect the speed and distribution of economic development. Kaldor was an innovator in economic theory, and adjusted his theory to concrete situations in a way rare among university economists. He was not a 'revolutionary' in economic theory

and policy, but he did believe in radical reform. Above all, he saw

64

The Cambridge School o.f Economics

through many of the pretensions of orthodox economic theory in his article 'The Irrelevance of Equilibrium Economics', in Economic Journal, December 1972, in which he concluded: Taken at its purest and most abstract level, the pretensions of this equilibrium theory are modest enough. Although Debreu describes the subject-matter of his book as 'the explanation of the price of commodities resulting from the interaction of the agents of a private ownership economy,' it is clear that the term 'explanation' is not used in the ordinary everyday sense of the term. It is intended in a purely logical and not in a 'scientific' sense, in the strict sense, as Debreu says, the theory is 'logically entirely disconnected from its interpretation.' It is not put forward as an explanation of how the actual prices of commodities are determined in particular economies or in the world economy as a whole. By the term explanation' Debreu means a set of theorems that are logically deducible from precisely formulated assumptions, and the purpose of the exercise is to find the minimum 'basic assumptions' necessary for establishing the existence of an 'equilibrium' set of prices (and output/input matrices) that is (a) unique, (b) stable, (c) satisfies the conditions of Pareto optimality. This paragraph, it might be thought, is expressed in too technical a language. But it opens up the thought that the general equilibrium economists'll pretensions to have established "uniqueness" have been destroyed by P. Sraffa,12 their claim to have established 'stability'13 has been destroyed by Kaldor himself in articles already cited, while the whole exercise of establishing 'optimality' has also been undermined

thoroughly~by K.J. Arrow,14 a pioneer of the theory. Some of the issues raised by Kaldor in his survey article may puzzle those coming at political economy for the Iirst time- Hopefully, however, they will have learned from him something of the state of affairs in orthodox economic theory. It remains to be said that no convincing replies to Cambridge theory have come yet from the other side. University lecturers plough on, teaching mainstream economics

regardless.

loan Robinson's Contribution

The best statement of the Keynesian revolution was Introduction to the

The Cambridge School of Economics

65

Theory oj"Ernployment (1937) by Joan Robinson, Keynes' younger colleague at Cambridge- Robinson was also the author of one of the best expositions of the Marxism revolution in economics when, after studying Marx during a stay in France, she produced An Essay on Marxian Economics (1942). The role of this little book in shaping post-

Keynesian economic theory at Cambridge should not be underestimated. While Robinson played aspects of Marx's labour theory of value where it appeared to rely on 'incantations' and to be sprinlded with the 'holy water' of faith rather than tough analysis, she also legitimized the idea of looldng seriously at Marx's theory of economic growth and capital accumulation-something unheard of before her magrzus opus, published in 1956 under the title The Accumulation o f Capital. With Sraffa pushing people into discussing Marx's problems in the more familiar terminology of professional economists15 (the Standard Industry, the distribution of surplus by the uniform rate of profit), the 'II/larxian' content of Cambridge economics took its place alongside the Keynesian one15 to give the Cambridge School its distinctive characteristics, as may be seen in the Cambridge Journal of Economfcs, establishe d

in 1976 in reaction to a rightist 'take-over' of the Economic Journal. RobinsonS contribution to economic policy debate on wages, unemployment, monetary and fiscal policy and trade policy have been very great, being spread over many articles and books on these issues.17 The theoretical scaffolding for the post-Keynesian school which has influenced the Cambridge Economic Folicy Group in the direction of full employment, import controls and expansionary monetary policy, came with the 1956 contribution and subsequent elaboration of the discussion in it about the interaction of technical progress, labour supply and capital accumulation in different situations.

The Robinson contribution started, then, with Keynes' revolution. For her, the central themes to hang on to were the theory of effective demand in which is integrated a theory of money and the interest rate ; a theory of the general price level, an analysis of the impact of an uncertain future on the present (later to be elaborated by G.L.S. Shackle), thus 'locking Keynes' analysis securely into historical time'.18 Over time, Robinson (who had written The Economics o f lmperfect Competition in 1933), came to appreciate Kalecld's version of the Keynesian revolution, because it introduced the degree of monopoly and sensible

points about financial limits to the growth of firms into the analysis of effective demand and the trade cycle.19 She took up many of the points about the long-run development of the economy raised by Harrod and, being dissatisfied20 with some aspects

66

The Cambridge School

of Economfc5

of the Harrod model, developed her own analysis of the growth process, culminating in the definitive 'post-Keynesian' work The Accumzdation

of Capital (1956), a title which nonetheless recalled Rosa Luxemburg and Vol. It of Marx's Capital (although Robinson's model of 'expanded reproduction' was in net terms rather than Marx's 'gross' categories). The second post-war concern earned Robinson the title of a 'champion of the Cambridge (UK) School," for she became locked in battle with Cambridge (USA) over the theory of capital and growthin particular with Samuelson as repre sentative of neo-classical rnain~ stream analysis.21 This debate was less remote from policy questions than would appear at first sight. While a detailed account of the 'Cambridge Controversies'22 appears at first blush to be about the choice of technology, the meaning of interest and profit and a query about neo-classical tools of analysis such as the 'aggregate production t`unction°, this hides the more basic issues being raised by the Cambridge (UK) side: a different 'vision' as to how the capitalist economy actually works (a vision strongly influenced by Keynes and Kalecki rather than by neoclassical theo1y)23 and a strong emphasis on the way output movements affect wage and profit shares (again reflecting the Kalecldan influence). As one reviewer of the Cambridge contribution put it:

The question of distributive shares is either a or the-depending upon the revolutionist's predilections in these matters -- central issue

in the Cambridge credo. Whether the revolutionists are engaged in reswitching or capital~reversing, or in following Sraffa through his paces as he constructs a composite-commodity numerate that will

be invariant to the price effects of changes in distributive shares or in caviling against the marginal productivity principle, or in exploring

the Keynesian reaches of their heritage, the question of distribution shares is never really out of the limelit.24

It is these two aspects of current Cambridge economics: the 'alternative vision' of how the capitalist economy works and the emphasis on district utile shares that have been relevant to economic policy recommendations. They have obvious implications for the scope to be given to 'free market forces', for the line to be taken by government on the 'state of the news' to which businessmen adjust, and for action on distribution shares (hence wages or income policy) that can be taken by government. These two distinctive aspects have also affected the kind of reception

that has been given to the Cambridge School. This has included not

The Cambridge School of Economics

67

only the strong objections of Friedmall's monetarist policy-advisers, but also a highly critical reception from Marxist economists.

Notes 1. P. Sraffa, 'The Laws of Returns Under Competitive Conditions', Economic Journal, December 1926. 2. Joan Robinson, The Economics oflrnperfect COmpetition. 3. D. Patinkin and I .C. Leith, Keynes, Cambridge and the Genera! Theory (Macmillan, London, 197T). 4. Keynes' best statement of this is in his 1930 article 'Inflation and Defllation'. See Chapter 3 above. 5. G.C. Harcourt, 'Marshall, Sraffa and Keynes: incompatible Bed1;lellows"', Economics Department Papers, University of Adelaide, No. 3, 1980. 6. G.C. Haifcouxt, Some Cambridge Controversies in the Theory of Capftal, (CUP, Cambridge, 1970). .T.A. Kregel, Theory of Capita! (Macmillan, Studies in Economics, London, 1976) and The Theory of Growth (Macmillan, 1972), outlines the critique. 7. Harcourt, 'Maishall, Sraffa and Keynesl 8. Alfred Marshall, Principles of Economics (Macmillan, London, 1972 edition), be. 295-9. 9. R.F. Harrod, Towards a Dynamic Economics (London, 1948). 10. N. Kaldor, Essays on Economic Stability and Growth (Duckworth, London, 1960). 11 . Of which the prototype is Gerard Debreu,A Theory of Value (1959). 12. Sraffa showed that under perfect competition 'equilibrium' is indeterminate. See his 'Laws of Returns under Competitive Conditions',Economic Journal,

1926. 13. K.J. Arrow showed in his Social Choice and Individual Values (p, 40)

'introduction

that under perfect competition, once you get off the equilibrium point the firms are all price-takers and no one can get back onto equilibrium again. 14. KJ. Arrow, Social Choice and Individual Values (1963), criticizes the optimality approach o f Pareto and shows its severe Limitations. See also E.K. Hunt's to EK. Hunt and J.G. Schwartz, A Critique Ecorzornic

.

of

Theory (Penguin)

15. See the argument in Chapter 5 above. 16. See the argument in Chapter 6 above. Robinson has also introduced a 'Marxian' flavour in another way. Taking up many of the Kaleokian ideas and methods she began a process whereby much of Keynes was re-read as if Kalecki and Keynes were saying the same things. Since Kalecki's original inspirations included Marx, Tug an and Luxemburg, a Marxian vision crept into Cambridge economics.

17. Joan Robinson, Colle.;-ted Economic Papers, Vols. 1-5 (Basil Blackwell, Oxford, various dates), J. Robinson,Econornfcs: A n Awkward Corner (Allen & Unwire, London, 1966). 18. G.C. Harcourt, 'loan Robinson', in D. Sills (ed.}, International Encyclopedia of the Social Sciences (Biographical Supplement), Vol. 18. 19. loan Robinson, 'Kalecki and Keynes', Collected Economic Papers, Vol. 3,

pp. 92-3. 20. Joan Robinson, 'ML Harrod's Dynamics', Economic Journal, 1949, pp.

68-85.

68

The Cambridge School #Economics

21. Joan Robinson, 'Comment on Samuelson and Modigliani', Review of Economic Studies, 1966, and 'The Unimportance of Re-Switching', Quarterly Journal ojlEconomics, February 1975, pp. 32-9. 22. Harcourt, 'Joan Robinson

23. Bruce McFarlane, 'Michal Kaleckils Economics', Economic Record, March

1971. 24. A.L. Levine, review of M. Blaug's 'The Cambridge Revolution-Sucoess Failure', Journal of Economic Literature, 1975, p. 1323.

or

3

KALECKI OR KEYNES? The tragedy of investment is that it causes crisis because it is useful . . . doubtless many people will consider this theory paradoxical. But it is not the theory which is paradoxical but its subject~the capitalist economy.

Michal Kalecld I expect to see the State, which is in a position to calculate the marginal efficiency of capital-goods on long views and on the basis of the general social advantage, taking an ever greater responsibility for directly organising investment. John Maynard Keynes, The General Wzeory of EmpZoyrnent, Interest and Money, p. 164

Only a relatively short time ago, a widely used economic text was able to conclude that 'modem economics is neo-Keynesian economics'.l In the 19705 the anti-Keynesian policies adopted in the UK, Australia and the USA under the prodding of Friedmanite 'monetarists', Virginia School 'born again' free-marketeers and Hayeldan troglodytes have turned this conclusion around. It is fashionable to argue that the 'Keynesian revolution' in economics now fails to explain 'stagflation' (simultaneous increase in unemployment and inflation) scientifically or

to guide the 'finer~tuning' of the economy that was so much a feature of the 1950s and 1960s. This chapter will try to refute some of these recent claims by restating the Keynes-Kaiecld 'vision' of how capitalism works (and

drawing attention to differences between the two); by looldng at the 'bastardization' of the Keynesian model at the hands of 'mainstream economists', and by examining the extent to which there is utopianism in a Keynesian outlook in so far as it relates to the role of the state as an economic instrument, the possibilities for income re-distribution and the 'socialization of investment' under a capitalist system. As we saw in the introductory chapter, Ricardian economics had triumphed in the UK, but with the fatal flaw that it assumed Say's Law of Markets. Modern 'Ricardians' have now recognized this with their call to introduce problems of effective demand into the 'data' and

concerns of neo-Ricardian analysis.3 Say's Law in a crude form (supply creates its own demand) became implicit also in the leading representatives of neo-classical orthodoxy: Jevons, Marshall and Pigou. However, 69

70

Kalecki or Keynes?

the Great Depression of the 1920s and 1930s threw such a key assumption into serious doubt and the economic theory built upon it

into confusion. Keynes' role after 1930 was increasingly to provide the most consist~ ent and coherent attempt to resolve this 'first crisis of economic theory' (to use Joan Rolbinson's terminology), by developing new categories which would both allow economists to explain the trade cycle and the politicians to advance practical remedies for economic slump- The role of his successors of the 'bastard Keynesian' school4 was to concentrate on the level of private investment and its determination, to alter Keynes' methodology5 and to rob it of its welfare-state orientation and robust causality. The author of the 'revolution' himself felt that his work involved a sharp, often painful, break with his colleagues, orthodox predecessors

and adversaries: The composition of this book has been for the author a long struggle of escape from the natural modes of thought and expression. The ideas which are here expressed so laboriously are extremely simple and should be obvious. The difficulty lies, not in the new ideas but in escaping from the old ones which ramify for those brought up as most of us have been into the comer of our minds.6 Closer examination of Keynes' understanding of the development of economics suggests it was formal and often superficial. He wondered at times whether there was 'anything in that Marx chappy',7 and seems not to have noticed the role of die Tableau Ecorzomique nor to have been familiar with Russian economists of the turn of the century. He

was not well acquainted with his Swedish counterparts,8 nor with the rich 'underworld' of economics, despite his references to Hobson and Gesell. Keynes re-defined the 'classical school' to include the followers of Ricardo, §.S. Mill, Marshall, Edgeworth and Professor Pigou. This is a key point in understanding Keynes' revolution. Acceptance or rejection of Say's Law was made the central factor in assessing authors. But Say's Law was only one aspect of the development of nineteenthcentury economic thought. Its other weaknesses were as vital: confusions over the source of value and profit, the difficulties in distinguishing 'productive' and 'unproductive' l a b o r , and a theory of crisis rooted in a tendency to explain crisis in terms of factors imported from outside

the system, such as the sphere of agriculture (a tradition continued

Kaleekf

or Keynes?

71

by the Cambridge School of today).9

Nowhere did Keynes apple c i t e the importance of the 'positivism' of the economics he was attacldng. As we saw in Chapter l , this underlying methodology allowed the continuing existence of an intellectual body of thought that was out of step with changing reality. When the 1920s forced Keynes to take actionabout a hopelessly outdated economic Meow, he still found the previous time-hono ured influence of Say's Law 'something of a curiosity and a mystery'.10 In fact Keynes' lack of clarity and understanding about these developments made his 'revolution' less penetrating (if still more influential) than that of Kalecki. The latter economist was keenly aware of the important theoretical debates between O. Bauer, Rosa Luxemburg, Lenin, Pannekoek, and Grossman. Also he was brought up on the pre-Bolshevik Marxian rnacroeconornic theorist Tugan-Baranovsky. All the issues of 'equilibrium', of Say's Law-type assumptions, of the need to distinguish the consumer goo ds sector and the capital goods sector had been thrashed out by the above writers. It was left to Keynes and his disciples to re-discover them with the technique and vocabulary of the non-Marxian school.11 This is not a pedantic point ~Keynes' attitude to the history of economic thought is crucial in deciding how far he got in his 'struggle to escape'.

Methodological Foundations of Keynes' General Theory

The Keynesian model began, properly speaking, with an article of 1930 entitled 'Inflation and Deffation' attacking the 'crowding out of private investment' theses of" the 1929 'Treasury view'. This rather neglected

article" shows that state expenditure will act as a positive cure for unemployment and that 'orthodox Treasury dogma' had only concluded that diere was a 'crowding out' of private investment by assuming a fixed 'investment fund' exists so that private investment would fall, part pass with rising public works expenditure. Such a theory, Keynes pointed out, ignored three sources which would be mobilized to enable new investment to provide a net addition to the amount of employment: savings which had previously been dispersed to the unemployed; savings which were running to waste through lack of adequate credit; and a reduction in the net amount of foreign lending (capital export). Destruction of the 'Treasury view' did not lead straight on to a 'real' theory of economic crisis in terms of real investment in plant and

equipment and movements in output and employment: there was first

72

Kalecki or Keynes?

the detour of the Treatise on Money. However, by 1936 Keynes (with the help of Cambridge colleagues) had got his model right. He now constructed a General Theory around three 'independent variables' which, in combination, determined the limits within which the capitalist system fluctuated. These were: the 'marginal efficiency of capital', the rate of interest and the 'consumption function'. The value of any single one of the three could not be deduced or inferred from the others. The consumption function was the relationship between movements in income and movements in consumption-a rise in income tended to produce a less-than-proportionate increase in consumption. As the gap

(Keynes' 'Savings') tends to grow between income and consumption, problems of effective demand arise which must be countered by expanding state or private investment Ol' by redistributing income to lower-income groups with a lower 'propensity to save'. The 'marginal efficiency of capital' Keynes defined as the anticipated return on any additional unit of investment. How does this come into 'crisis management"? When, in the opinion of investors, the stream of anticipated income which, in the mind of investors, constituted this 'marginal efficiency of capital' fell too close to the current rate of interest (je. to the cost of borrowing money), then the additions to the stock of capital (Keynes' definition of real investment) would tend to fall. To stop this, a gap would need to be opened up between the m.e.c. and the rate of interest. This final variable, the interest rate, was for Keynes determined by the strength of the natural desire that people with 'animal spirit' have for speculation or more ordinary people have for holding their assets in "liquid" form and by the quantity of money stock in existence. The latter could be controlled by the Central Bank, so that

indirectly, via the 'comparison of money rate of interest with m.e.c.' mechanism, the rate of investment could be affected. What common ground did the revolutionary Keynes have with his adversaries, the neo-classical diehards? The main arena of 'failure to escape' was the continued use he made of one firmly unswept cobweb in a 'corner of his mind' -the neo-classical theory of income distribution. With regard to capital, Keynes explained the process whereby the marginal efficiency of capital declined in terms of the scarcity of capital and its 'marginal productivity`. As more capital was accumulated in relation to other 'factors of productions the marginal productivity of capital tended to fall and the rate of return going to capital also "naturally" fell. The contradictions here, the tautologies involved, were

simply missed by Keynes.

Kalecki or Keynes?

73

Labour was also judged by the 'law of marginal productivity' to a limited extent. Keynes conceded to the older theory the point that under the strict conditions of a given state of equipment and techniques the real wage rate earned by a unit of labour had a unique (inverse) correlation with the volume of unemploy1nent.13 True, he went on to show the lack of usefulness of these assumptions, but his reluctance to cut this final tie with 'marginal productiiNty' doctrine is clear to see. We now come to the major differences between Keynes and what went before him- The first is that in the causation, which is not in terms

of 'equilibrium' wage rate being achieved by 'supply and demand' and then a certain volume of total employment being offered. Rather, employment depended on production plans, which, in turn, depended on expected sales. Sales depended on consumer demand and the demand for capital equipment and stocks of semi-tinished goods. This

was in direct opposition to his adversaries' thesis that employment depends on the profits of the employers and how many men were prepared to work at the lower market-wage level. 'Effective demand', once introduced, showed up logical fallacies of neo-classicists. Wages were treated by them one-sidedly as the cost of production to the individual entrepreneur. Reduce wages, profits increase and more employment could be offered. But as Keynes and his followers pointed out, this result was not true if the other aspect of 'wages' was taken into account; wages were not only the costs of production of the individual employer, they were also the markets, the buyers' purchasing power for the products of all employers. While one employer might

gain if money wages and real wages were reduced, all employers taken together would be unlikely to do so -the market would collapse and unsold stocks of goods would pile up. Here was a beautiful example of

the fallacy Of composition -what is true of the part (one employer) is not true of the whole (all employers). The next difference with orthodox economists was over what determined the level of savings. In the older theory, the rate of interest equilibrated the supply of savings (based on thrift) with the demand (based on the productivity of firms). For Keynes, investment decisions, through their effect on the total level of' income, determined the total level of savings. Income level replaced the rate of interest as the 'equilibrator' of savings and investment, and, of course, the essence of Keynes' message was that savings and investment might be brought into equilibrium at a low level of income which actually involved massive unemployment.

No wonder then that Keynes, having disputed the theoretical

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scaffolding of the economists he was attacking, went on to oppose policies based upon them: wage cuts to encourage employment and higher interest rates to tap extra profit, increase the savings supply and hence investment. These strategies against unemployment could only accentuate the level of seriousness of an economic crisis.

Critiques of Keynes At a time of great controversy about Keynesian economics and counter~ attacks O1'1 economic policies based on it, some sorting out of real and imagined criticisms is needed The first criticism centres on variables Keynes left out of his economic model. Thus for many years the possibility was raised that the consumption function, in the form that Keynes had expressed it, was not constant.14 Some critics went on to use this example to make a more general claim that Keynes' simplifying assumptions were the wrong ones, so that policy prescriptions based on them would fail to achieve their objectives. However, research by Modigliani and the early Friedman pointed to a number of factors reasserting the constancy of a re formulated consumption function. These were a 'ratchet effect' which arose from household consumption being linked to the previous peak level of income achieved, and a 'demonstration effect' involved when household income was affected not only by permanent (or regular) income but by transitory income-in which case consumption depended on expectations about regular income. All of these refinements tend to

_

point to a certain robustness of Keynes' simplifying assumptions, it indicates that they can be relaxed without violence to the results, rather

than undermining his conclusions. Monetarists have criticized15 Keynes' rejection of the quantity theory ofrnoney, arguing that there is, after all, a strong link between an increase in the money supply and the general price level and so 'money does matter'. Friedman gets this result by allowing for time-lags and finding statistical correlations. Part of the differences here relate to Keynes' method. His 'propensities' and 'functions' are not fixed and cannot easily be given stat-

istical representation. They tend to be influenced by the 'state of the news'. In Keynes' view, the idea of increases in money supply causing an increase in the general price level was not causally sound: an increase in the general price level could temporarily follow an increase in money stock because of some other factor, such as a 'cheerful item of news', or because the slack

in the manufacturing sector had given out, and price mark-ups increased

Kaleeki or Keynes?

75

as bottlenecks were met with at the same time as money supply was going through the pipeline. At any rate, in the 1940s, Keynes did modify his theory to give a more active role for money and expectations about price level movements as contributors to inflation. Friedman, it might be noted, has continually modified his own analysis. The demand for money now contains an influence from the (money) rate of interest, and the money supply is not the only active factor in inflation. Moreover,

M reply to Kaldor, he has admittedl6 the course of inflation could be influenced by 'the potential for real economic growth, the state of expectations, the exchange-rate regime and the course of prices in the rest of the world'. This would appear to bring the latest version of

'monetarism' closer to Keynes' chapter on liquidity preference, the only real difference being that Friedman has expectations of inflation already 'written in' to his modelKeynes' main centre of attention in 1936 was his assault on the economic policies of the day and on other academic economists. Unlike Kalecld,17 he did not proceed primarily through an analysis of the trade cycle, and thereby obtained more immediate publicity (which Kalecki shunned). However, in 1937 and later in the 1940s, Keynes drew attention to the slump phase of the trade cycle by pointing out that a blow to confidence could remain so shattering that monetary policy would not be able to influence a resumption of private investment by opening the scissors between the money rate of interest and profit expectations. In this case, he pointed out, unless there is deficit financing by governments, the community would have to wait for the replacement investment or for the new capita] equipment required by long-term growth. (At this time Keynes was in contact with R.F. Harrod who was working on a simple model of economic dynamics, a first version of

which was published as 'Essay on the Trade Cycle' in 1939, an essay which Keynes had some difficulties in supporting owing to the 'comparative static' quality of his own economic model.) The Marxian school has made a number of criticisms of Keynes, some more convincing than others.18 Objection was made to Keynes' explanation of interest in subjective,

a-social terms, rather than as a component of economic surplus dependent on the rate of profit. In exposing the 'illogical' parts of Say's Law, Keynes posed too rigid a dichotomy between production and consumption. Too passive a role was given to consumption vis-ri-vis private investment, which are interdependent and not independent categories, as Keynes sometimes seemed to suggest.

More significant Marxian criticism related to the high level of

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aggregation involved in Keynes' manipulation of his variables. Broad "aggregates" like total consumption, total savings, total income tended to mask important distinctions and destabilizing influences at the key points of the systern.19 In particular, mere expansion of effective demand need not cure 'disproportions` between various branches of industry. Maurice Dobb pointed out20 Stabilisation policies framed in terms of aggregates (et. certain investment totals) will be too general and unselective to smother destabilising tendencies near their source . . . it may happen that there is a large amount of excess capacity in industries producing

capital goods and relatively little in consumer goods industries. Unless the increase in demand is distributed between capital goods and consumer goods in the appropriate proportions, expansion may lead to full-capacity output in one department of industry and consequential price rises, while there still remains a substantial unemployment problem in the other department of industry. Moreover,

even it full employment had been attained in both departments, any shift of expenditure between investment and consumption may upset the position and start a tendency to decline in one of the two departments, which may later communicate itself to tire other. This conclusion was shared by the 'left Keynesian', N. Kaldor, who said 'full employment not only means a certain level of real income, it also implies a real income of a certain proportion . . . it presupposes a

division of real income between real consumption and real investment in a certain proportion'.21 ironically, the leftist criticism of Keynes here was echoed in 1944 by his arch-enemy on the Right -F.A.

Hayek." Kalecld also adopted a two-sector approach which he derived from his studies of Tugan-Baranovsky and Rosa Luxemburg. More important, he foresaw 'stagflation' in his 1930s writings.

Kalecki's Model of Economic Crisis

Kalecld was an engineer by formal training and a self-taught economist who came to substantially the same conclusions (in a paper written in Polish and French in 1933 and published in English in Econorrzetrica in 1935) as Keynes arrived at in The General Theory in 1936. He reached his theoretical perspeclive through a study of Marx, Rosa

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Luxemburg and Tugan-Baranovsky, but also through his own experience of poverty and unemployment during the Great Depression and a life of hardship before 1940. Unlike Keynes, he did not have 'a struggle to escape' from the deadhand of the orthodox framework, symbolized by Pigou, Marshall and Co, with their implicit acceptance of Say's Law of Markets. Because of this, his presentation was uncluttered and the original ideas are fresh and unencumberedCertain parts of his work on effective demand and stagflation need to be mentioned-issues which are pertinent to our own times-which see calls for reductions in real wages, for sizeable inroads into public sector spending and hawldsh demands to halt the progress of the labour movement in altering income distribution. For on all of these topics, Michal Kalecld had precise, clear and wise things to say. Perhaps the best way of illustrating this is by reference to Kalecld's theory of the political trade cycle, which Fiewel considers 'is likely to rank in imper lance to his role as protagonist and "generalizer" of the general theory of unemployment'. Kalecld showed that in the slump, either because of political pressure from the citizens, or even without it, public investment will be undertaken to prevent large-scale unemployment, investments largely financed by borrowing. But if attempts are made to apply this method in order to maintain a high level of employment into a period of boom or inflation, a strong opposition of business leaders is likely to be encountered. Kalecld thought that the captains of industry would be wanting to restore 'discipline in the labour market', while the growing inflation rate is to the disadvantage of small renters and bigger finance capitalists. In this situation, Kalecki argues23 'a powerful bloc is likely to be formed between big business and the renter interests, and they would

probably find more than one economist to declare that the situation was manifestly unsound. The pressure of all these forces, and especially of big business, would most probably induce the Government to return to the orthodox policy of cutting down the budget deficit." A curious side issue noted by Kalecld in the course of discussing the political business cycle is the hostility of private business circles to both

any public investment which is not of the hospitals or schools variety and to subsidizing of mass consumption. One would have thought that the latter would be to their liking because by subsidizing mass consumption the government would not be embarking on any sort of 'enterprise'. However, this is not the case, for here a moral principle of the highest importance is at stake. The fundamentals of capitalist

ethics require that 'you shall earn your bread in sweat' -unless you

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happen to have private means. As we saw, Keynes strongly attacked24 the Treasury's 1929 view that there is a fixed fund of resources to be allocated between the public sector and the private sector, so that in times of recession the private sector must be 'given room to breathe' by way of savage cuts in public

sector activity. Indeed, Keynes' multiplier analysis was partly designed to refute this view, and to ridicule such a static 'fixed fund' approach to the problem. Kalecki implicitly agreed. In criticizing Keynes on the marginal efficiency of capital in his own review of the General Theory , Kalecld said that the extra output that would flow from a rise in investment following an increase in the marginal efficiency of capital should never be forgotten in a dynamic system~it creates more optimism and more resources. Two other fallacies had to be exploded to develop the effective demand approach to macro-dynamics. First there is the line that wage rises lead to unemployment-a theme so popular today. Kalecld pointed out in Selected Essays on the Dynamics of Capitalism (p. 156) that until fairly recently it was accepted that if wages are raised, profits

decline pro Santo. Even though in the analysis of other phenomena, Say's Law was not adhered to, in this case the preservation of purchasing power was not put to doubt. In the case of the rise in wage rates, the reconstruction of capita] equipment in line with the higher spending on wage-goods and lower outlays on investment and capitalist consumption was emphasized, as well as the tendency to higher unemployment as a result of substitution of capital for l a b o r that has become more expensive. Although even today quite a number of economists would argue in this fashion, the fallacy of

this approach is fairly widely recognised, even though it may be countered by various economists in a somewhat different way.

'm

There then follows Kalecki's own inimitable refutation of all this. Keynes, as I have argued earlier, did it differently. As we have shown, he drew attention to the fallacy of composition involved assuming what is true for the part is true for the whole. What will expand employment in one firm (e.g. lowering of wages) need not help to extend employment opportunities for all firms or for the economy laborers' wages are not only costs of production, they are also mass purchasing power, a crucial element in effective demand, without which the extra production of that par ticular firm will not be sold.

The second fallacy was Pigou's attempt to show that full

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employment in a stationary state will be established automatically, provided that wage-earners would 'act competitively'-that is, provided

wage rates would continue to fall as long as any unemployment was in existence. Keynes developed a refutation of this. Kalecld, of course, also realized that the 'bourgeois right' of the individual worker to negotiate a wage reduction with his employer was unrealistic, given that the whole raison d'éz're of modern trade unionism is precisely to prevent this happening and to deny individual workers the power to exercise this 'right'. However, to understand fully Kalecki's refutation of orthodoxy it is necessary to go further and to examine Marx's influence on Kalecld and the relationship between Marx and Kalecld. As is well known, Karl Marx argued that the capitalist system, as a 'mode of production', was propelled by certain social contradictions, that the very forces which operated to yield an equilibrium of its elements generated counter-forces which periodically disrupted that equilibrium. Conflict and interaction were of the essence of the system. After the publication o f Das Kapital, Marxist economists looked at the factors which disturb 'steady growth' concentrating on the tendency towards a falling rate of profit and on the failure of those capitalists who are accumulating capital to spend these reserves at a steady rate on new stocks of materials and on the replacement of fitted equipment. Such writers have opposed the smooth mechanical models of bourgeois economists shaped in terms of equilibrium situations and smooth vectors Of movement. All of these points are found in the general theory of capital accumulation developed in Vol. I o f Capital, which droved that even if all goods are sold at their full value under the laws of supply and

demand, and Say's Law25 could operate, it is still the case that ultimate breakdown would follow.26 Marx argued, then, that crises were the inevitable by-product of capitalist society: 'the real barrier to capitalist production', he wrote, 'is capital itself°. As a concrete example of this general point, we can look further at the tendency of the rate of profit to fall. Marx himself called this 'the most important law of modern political economy It is an economic process which sets off a definite political reaction by corporations and the state.

To elaborate: Marx argued that as the ratio of capital equipment per worker rises (a higher 'organic composition of capital' in his terminology), there develops a tendency for the rate of profit on capital to fall. While there are certain 'counteracting tendencies' which offset this effect

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(to which Marx devotes a whole chapter), what clearly emerges is that such falls in Me rate of profit are inherent in the iNteraction of capital accumulation and technological progress (the introduction of new machinery) and that their appearance will tend to arrest the process of further investment, or looldng at the long term, they will constitute a progressively increasing drag on the process of expansion of capital. However, as Marx explains, not only has capital had to migrate to seek higher rates ofproiit, but it must expand in order to 'realize' existing investments already made. There will be a tendency, in response to this two-fold need, for capital to be exported, even if the absolute mass of pro fits is growing. Large corporations at first overcome the tendency of the rate of profit to fall by receiving monopoly super prof rs at the expense of the non-cartellized industries. But competition

for the mass of profits increases and while large capitals are in a stronger position to hold their own, even they face falling profit rates as crisis develops. As Marx points out,27 a fall in the rate of profit connected with accumulation necessarily calls forth a competitive struggle. Compensation of a fall in the rate of profit by a rise in the mass of profit applies only to the total social capital, and to the big, firmly placed capitalists. The new additional capital operating independently does not enjoy any such compensating conditions, lt must still win them, and so it is that a

fall in die rate of profits calls forth a competitive struggle among capitalists, not vice versa. The role of the large firm and of the degree of monopoly in this process has also been a centre of attention in the Steindl-Kalecld analysis,23

which can explain the check to the rate of investment posed by the degree of monopoly. After this is established, it is also possible to show that, whether it is the whip of the falling rate of profit, or simply a low marginal rate of profit in monopolistic industries, eventually the need for action emerges, because of the necessity of realizing' or capitalizing investments already made. To elaborate the first point. The Steindl-Kalecki model looks at stagnation in the capitalist economy resulting from movements in internal forces. The perspective is, with Marx, that 'the real barrier to capitalist production, is capital itself . . .' Rejecting the exogenous' explanations of investment and stagnation presented by Alvin Hansen and other supporters of the vanishing investment opp or tunities theory

(which emphasize declining population, contraction of technical frontiers,

Kaleckz' or Keynes?

SI

'indebtedness

the passing of the stage of the great capital-using inventions), Steindl develops an endogenous model of investment slow down. There are two major elements of the model: entrepreneurs invest because they have saved, and two key factors determine the rate of of business and the degree of investment-the relative utilization of capacity. The former means that the greater the internal savings of business in relation to external indebtedness, the greater the inducement to invest. The latter acts as a controller of investment, the increase in the level of excess capacity acting to inhibit new investment. Steindl's model divides the economy into a monopolistic and a competitive sector. In the monopoly sector there are monopoly profits

and inelastic profit margins and so it is difficult to eliminate excess capacity. In the competitive sector, profits are more precarious, profit margins more flexible and surplus capacity more easily forced out. Now we may introduce Kaleckils idea,29 that 'the workers spend what they get and the capitalists get what they spend'. Thus total profits equal capitalist's investment plus capitalist's consumption and the rate of profit is determined by the rate of accumulation and the

propensity to save of capitalists. Under these assumptions, with a given rate of growth of investment, any increased share of profits accruing to the monopoly sector involves a reduced rate of prof! in the competitive sector. Then, as the importance of the monopoly sector increases, the internal accumulation of the capital in the compotitive sector is reduced, and thereby the rate of investment. Now the problem is that this reduction in investment cannot be offset by more investment in the rnonopolv sector. This is because the marginal rate of profit (taldng into account not only new capital but the need to capitalize on previous investment locked up in

the capital stock) is low or even negative. It follows that any check to the rare of investment results in excess capacity. In a competitive regime, this would be eliminated by pricecutting and the closure of marginal firms. But the higher the degree of

monopoly, the less likely it is that this mechanism, so beloved of our 'orthodox' economists, will operate. The more likely result is that in

the monopoly sector, profit margins are inflexible in the face of a fall in demand. So excess capacity remains, and enterprises in this position must eliminate excess capacity by slowing the rate of investment. The Kalecld-Steindl way of looking at the economy, and indeed at other social systems,3*3 is more realistic than the Keynesian macroeconomic ones, which ignore the degree of monopoly and the role of class struggle in income distribution in their continued use of

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assumptions that 'competitive market forces will win out'. Investment ought to be seen, as in Mar>