1. 1 The Cambridge “school” of Economics Maria Cristina Marcuzzo Sapienza, Università di Roma Fighting market failure. Collected essays in the Cambridge tradition of economics, Abington: Routledge 2012 and (with A. Rosselli, ed.), Economists in Cambridge. A study through their correspondence, 1907-1946, London: Routledge 2005.

2. 2 What is a school? “An alliance of persons, a community of ideas, an acknowledged authority, and a combination in purpose, which banded them into a society apart” (Higgs 1897)

3. 3 Was the Cambridge group a school? Shared common times and places, (neither a necessary nor a sufficient condition to constitute a school) A “ group ”, rather than a school: Intellectual sharing Partnership and communication Not a shared doctrinal core, but common critical attitude One of the most powerful attempt at building an approach to economics alternative to the mainstream. Cambridge approach as the bequest of these economists

4. 4 Four Stages One of the most powerful attempt at building an approach to economics alternative to the mainstream. a) the Marshall era, up to the mid-1920s; b) the Keynes era, up to the mid-1940s; c) the Golden Age, up to the early 1970s; d) the “Fall from Grace”, up to the early 1980s. Later period: a recognizable group in Cambridge that shared an opposition to neoclassical economics and drew mainly on Keynes’s and Sraffa’s heritage

5. 5 Marshall ’ s era Marshall introduced the new degree in economics in 1903 and created a community of disciples that kept his teachings alive well after his death, shared the mission he set for economics were perceived and perceived themselves as a group of scholars with a well-defined identity The School included almost all the members of the Faculty of Economics and Politics, C.W. Guillebaud (1890-1971), H.D. Henderson (1890-1952), F. Lavington (1881-1927), G. S. Shove (1887-1947), D.H. Robertson (1890-1963), M.H. Dobb (1900- 76), and E.A.G. Robinson (1897-1993

6. 6 Keynes and Post-Keynes period More problematic to define the group Whom should be included? Until Keynes ’ s death in 1946: R.F. Harrod (1900-78), R.F. Kahn (1905-89), N. Kaldor (1908-86), M. Kalecki (1899- 1970), J. Meade (1907-95), J. Robinson (1903-83), P. Sraffa (1898-1983), R. Stone (1913-91) Post-war period: W. Godley (1926-2010), R. Goodwin (1913- 96), G. Harcourt, R. Marris, L. Pasinetti, A. Singh are to be added What did they share?

7. 7 The Marshall era Marshall’s vision in his Inaugural lecture in Cambridge (Marshall 1885, 1925): “to increase the numbers of those, whom Cambridge, the great mother of strong men, sends out into the world with cool heads but warm hearts, willing to give some at least of their best powers to grappling with the social suffering around them” Curriculum: a) great weight to modern economic and political history and applied economics; b) mathematical formalism discouraged; c) pre-eminence attributed to theoretical analysis over simple data collection or manipulation. Acute awareness of its embeddedness in historically determined totalities.

8. 8 The Marshallian heritage Marshallian school of industrial economics: Sydney Chapman, David Macgregor, Walter Layton, Frederick Lavington and Philip Sargant Florence Marshallian “old guard” of faithful pupils – Pigou, Robertson and Shove – who resisted the Keynesian revolution Pigou ’ s welfare economics: identification the divergences between marginal private net product and marginal social net product Market failure justifies the corrective action of the State.

9. 9 Keynes’s era arrival of Sraffa in Cambridge in 1927 marked the onset of upheaval with new and subversive ideas. famous 1925 and 1926 articles which had driven Keynes to invite him to Cambridge, showing that Marshall ’ s supply curve of an industry in perfect competition was built on assumptions both unrealistic and inconsistent with the partial equilibrium approach. Sraffa ’ s deeply impacted on the Marshallian hegemony, marking a new phase: origin of imperfect competition theory two major works, The Treatise on Probability (1921) and The General Theory of Employment, Interest and Money (1936), signpost Keynes ’ s contribution to Cambridge economics.

10. 10 Keynes’s approach During the same period the Treatise on Money (1930), besides A Tract of Monetary Reform (1923). Continuity in the approach to human behaviour resting on the two pillars of conventions and expectations, supported by a notion of probability, to be evaluated with evidence and judgment, as guide to action. Understanding how opinions are formed is instrumental to transforming them through the joint effects of persuasion and artfully designed institutions, with the ultimate aim of attaining the common good

11. 11 Keynes’s favourite pupil following a path opened up by Marshall, Kahn stressed the importance of the short period because of the nature of the particular decisions involved, characterized by the time horizon to which they apply; forger of a formidable analytical tool – the multiplier - which allowed Keynes to determine the equilibrium level of income as equality of investment and saving. Kahn introduced the aggregate supply function as a means, together with the aggregate demand function, to determine the price level

12. 12 Joan Robinson, the most renowned Cambridge Economist besides Keynes From imperfect competition to extension of the General Theory to an open economy and the long period Brought concepts by Marx and Kalecki within the accepted box of tools drawn upon by the economist A latecomer and potentially an outcast in the all-male club of Cambridge economists

13. 13 Opposition The Keynesian revolution was opposed by the old Marshallian guard; Robertson, objected to the short-period approach on the basis of his own approach in terms of a succession of periods; Challenged the theory of liquidity preference, favouring the idea of the rate of interest as the price that brings the demand and supply of loanable funds into equilibrium Pigou: cut in money wages reduces unemployment. Paved the way to the interpretation of the underemployment equilibrium of the GT as rulting from rigidity in money wages.

14. 14 The golden age after War World II the reputation enjoyed by the most famous Cambridge economists attracted students from all over the world Taking the academic year 1961-62 as an example, they went to Cambridge to study Economic Dynamics with Kaldor, Employment, Prices and Growth with J. Robinson, Wages Policy with Kahn, Planned economies and Welfare economics with Dobb, Price and Production in an expanding economy with Goodwin and Pasinetti. number of students (Part II Economics Tripos) nearly trebled in less than twenty years, from 72 students in 1952 to 212 in 1968, with a growing non-British percentage. not many changes were made to the composition of the Faculty, nor indeed to its size

15. 15 Post-War Cambridge Until the end of the 1960s, the generation under the influence of Keynes who ruled the Faculty and taught the main courses in economics, with the support of no more than a dozen younger lecturers, some of whom, like Harcourt and Pasinetti, kept the tradition of their mentors alive, while others, like F. Hahn, C. Bliss or A. Sen, took different routes. Economics developed along two routes which converged for a few years subsequent to publication of Sraffa ’ s Production of Commodities by Means of Commodities, as the capital controversy raged throughout the 1960s and 1970s, only to diverge again in its aftermath.

16. 16 First Route Post-Keynesian theory of growth and distribution: joint effort, first by J. Robinson, Kahn and Kaldor, and later by Goodwin and Pasinetti. Kaldor: profit earners have a higher propensity to save than wage earners Robinson: off the golden age path: when the rate of accumulation and the rates of growth of population and technical change are not such as to guarantee a steady growth in equilibrium with full employment Goodwin: dynamic interaction between the distribution of income and the accumulation of capital, which formalized Marx ’ s insights Pasinetti: in steady growth the rate of profit is equal to the ratio between the rate of growth and the capitalists ’ propensity to save and does not depend on technology or on the workers ’ propensity to save

17. 17 Second Route reappraisal of classical political economy re-interpretation of Ricardo led to the idea of two distribution theories(formalized by Kaldor and Pasinetti) the construction of a theory in which the principle of equating marginal costs and benefits found no room PCMC: Given the quantities produced and the technical conditions of production for each commodity, the prices are determined by a system of simultaneous equations, under the conditions that profit must be equal in all sectors the distribution of the surplus not made dependent exclusively on the technical conditions of production, but influenced by other economic, political and social causes.

18. 18 Capital Controversies Sraffa brought compelling elements to the critique of the concept of capital outside the short-period over time the value of the quantity of capital may change as a consequence of a change in distribution Sraffa showed that the same technique could be adopted as the most profitable at different rates of wages (the so- called “ re-switching"). the substitution of labour for capital when the rate of profit rises relatively to the wage lost any meaning neoclassical failure to distinguish between changes in the conditions of producing a given output, when the quantity of physical capital is altered, from changes in the value of that capital, due to variations in wages and profits.

19. 19 The Fall from Grace By the late 1970s the generation which had given Cambridge its fame and prestige had retired Failure, on their part, in selecting and promoting suitable candidates to become their successors Cambridge was conquered by a new generation of economists who set themselves up as opponents rather than followers (Hahn, Das Gupta) Cambridge still holding on to its old-fashioned system of teaching mainly to undergraduates and through supervisions, giving little weight to post-graduate lectures and courses In the meanwhile the top US Universities had established themselves as the leading centres of post-graduate education in economics.

20. 20 Outdated research agenda or change in the political climate? In the 1970s Friedman ’ s his attack on Keynesian policies Monetarism and the rational expectations revolution conquered the discipline Sraffa ’ s critique of neoclassical theory was rejected by the establishment Gulf between Cambridge and outside world Change in the political climate: from government intervention to free market and liberism, Internal division in the Cambridge group (neo-Ricardians and post-Keynesians)

21. 21 Is the Cambridge tradition still alive ? Cambridge authors still source of inspiration and at least three research environments building upon the main threads of the Cambridge tradition Marshallians: “industrial district”, historical embeddedness of the economic process, evolutionary vision, cognitive approach Post-Keynesians: importance of money and income distribution; role of effective demand, mistrust in flexibility of prices Sraffians: long-period prices and convergence of market prices, distributive variables, critique of intertemporal equilibrium

22. 22 Cambridge heritage resting on two pillars rejection of the ‘ classical ’ conclusion that market forces are always at work to bring the economic system to full employment of resources market, taken as synonymous with supply and demand, is a misleading arena for representation of the rules of production and distribution.

23. The Importance of Keynes Maria Cristina Marcuzzo Sapienza Università di Roma Whose Welfare State? Beveridge vs Keynes in R. Backhouse and T. Nishizawa (eds), No Wealth but Life: Welfare Economics and the Welfare State in Britain 1880-1945, Cambridge: Cambridge University Press 2010, pp. 189-206.No Wealth but Life: Welfare Economics and the Welfare State in Britain 1880-1945 The General Theory in Keynes’s biographies in R. Dimand, R Mundell and A. Vercelli (eds), The General Theory After Seventy Years, Basinstoke: Palgrave Macmillan 2010, pp. 28-42. The General Theory After Seventy Years Keynes and CambridgeKeynes and Cambridge, in R. Backhouse and B. Bateman (eds), Cambridge Companion to Keynes, Cambridge: Cambridge University Press 2006, pp.118-35.

24. 24 J.M.Keynes (1883-1946)

25. 25 GT, p. xiii ‘ It is astonishing what foolish things one can temporarily believe if one thinks too long alone, particularly in economics (along with the other moral sciences), where it is often impossible to bring one ’ s ideas to a conclusive test either formal or experimental. ’

26. 26 P. Sraffa (1898-1983)

27. 27 R.F. Kahn (1905-1989)

28. 28 J.V. Robinson (1903-1983)

29. 29 From Keynes’s Room

30. 30 The key to the economics of Keynes Premise: ‘ we cannot hope to make completely accurate generalisations ’ (GT: 254,) because the economic system is not ruled by ‘ natural forces ’ that economists can discover and order in a neat pattern of causes and effects Implication: task of economics is to “ select those variables which can be deliberately controlled and managed ” (ibid)

31. 31 Origin of GT: exercise in persuasion Harrod draws attention to the readership to “ His aim...was to convert his professional colleagues ” (1951: 461) Keynes censured the majority of the economic profession for their inability to change habits of mind which, when added to the “ habits and instincts of the ordinary man, bred into him for countless generations ” (CWK IX: 327), made engagement in experiments conducive to practical results even more difficult.

32. 32 Origin of GT: threat of totalitarism “ The General Theory was projected against the background not just of the world depression, but of its political and social repercussions: specifically, the spread of communism and fascism ” (Skidelsky 1992: 440). “ The authoritarian state system of today seem to solve the problem of unemployment at the expense of efficiency and of freedom...it may be possible by a right analysis of the problem to cure the disease whilst preserving efficiency and freedom ” (GT: 381).

33. 33 Origin: against “tacit assumptions” Moggridge: Keynes ’ s deep dislike of those premises in economics which are found out to be false or ill-conceived: Fallacy of composition

34. 34 Message of the General Theory rejection of the “ classical ” conclusion that market forces bring the economic system to the full employment of resources aggregate economic behaviour does not have the same outcome as individual economic behaviour, so what is good for the individual may not be good for the whole sustain the level of investment – “ stabilizing business confidence ” it is “ wise and prudent statesmanship to allow the game to be played, subject to rules and limitations ” (GT: 374) main task of economic policy: “ managing ” rather than “ transmuting ” human nature The goal is to change the environment within which individuals operate, so that moral and rational motives become the spring of action of the collectivity as a whole

35. 35 Deficit Spending? Keynes in favour of some state intervention against exclusive reliance on market mechanism not in favour of high taxes to pay for social benefits and pensions, the costs of which ought to be borne out by employers: in favour of making the State accountable to the taxpayer for the goods and services provided, Keynes was closer to being a liberal than a champion of pervasive State intervention in society.

36. 36 Conclusion Keynes’s intellectual and political legacy: building the future on confidence in rules, persuasion and individual liberties.

37. Sraffa and his reasons against ‘marginism’ Maria Cristina Marcuzzo Sapienza,Università di Roma and Annalisa Rosselli Università di Roma Tor Vergata In Cambridge Journal of Economics, 35, n. 1, 2011, pp. 219-231

38. 38 Premise Sraffa ’ s criticism of the use made of marginal method in economics (or ‘ marginism ’ as he often called it) is a constant element in his thought his reasons against it remained fairly unchanged from the 1920s to the 1960s first we take a look at Sraffa ’ s conception of science secondly, from the unpublished papers, we investigate the reasons why he believed that marginalist method did not satisfy scientific criteria finally we review the relevant published writings to find out any further clues to his arguments and criticism.

39. 39 The conception of science: materialism Marxist convictions upheld during Sraffa ’ s university years He cultivated studies in the natural sciences (physics and chemistry in particular) as from the 1920s when he approached political economy he had already largely embraced materialism, or in other words a philosophical position that has matters of the mind depending on the phenomena of matter Epistemological position: seeking out objective causes to account for phenomena.

40. 40 Bacon’s principle ‘ Efficient causes ’ are facts of the past that act on the present: ‘ final causes ’ are facts of the future that act on the present. The existence of the latter is at best dubious and they are better called ‘ illusions ’ (D3/12/10/61 (1)) [Winter of 1927-28] The scientific study of economic phenomena requires the identification of material elements, which Sraffa identifies with the efficient causes. The conditions necessary to identify the concrete elements of economic reality are the observability of magnitudes and their measurability in physical terms.

41. 41 Two notions of cost I From the notes for the course on Advanced Theory of Value, which he gave in 1928-31: For Petty and the Physiocrats cost [ … ] is a stock of material that is required for the production of a commodity [..]This cost is therefore something concrete, tangible, and visible, that can be measured in tons or gallons. It stands therefore at the opposite extreme of Marshall's cost, which is absolutely private to each individual, and can only be measured (if at all) by means of the monetary inducement required to call forth the exertion (D2/4/3/21).

42. 42 Two notions of costs II The classical P[olitical] E[conomy] dealt only with the first sort of causes, i.e. of ‘ material things ’ that have existed in the past. Modern economics deals with the second class, i.e. hopes for the future, such as utility,abstinence, disutility, etc.; these things, it must be noticed, refer only to the foresight of future acts (Winter 1927-28) Now it is clear that Marshall is not enquiring in the same sort of things as Ricardo did – the difference between two quantities of ‘ corn ’, i.e. of measurable material objects; Marshall is enquiring into what the producer thinks is such a surplus. Marshall ’ s surplus therefore does not depend upon the objective magnitude of the things, but upon the ‘ intentions ’ of the producer, the ‘ views ’ he takes, and the action he ‘ proposes ’ to take [...] the two kinds of surpluses belong to different orders of things, to different universes, and are incomparable. The one is suited for the study of the ‘ motives to do ’ of producers, the other of the ‘ ability to do ’, i.e. to the objective necessity (May-July 1928)

43. 43 Objective vs. Subjective Magnitutes Objective criterion: gets rid of the ideology and metaphysical elements that exist only in the minds of the economists; takes into account magnitudes which are objectively measurable (i.e. the measurement is independent of who does it), because only those magnitudes can be compared between different agents and times (this is not the case of utility). there are subjective or purely mental forces (expectations, beliefs, or motivations), but they are not observable nor measurable.

44. 44 Sraffa ’ s epistemological position Sraffa was acquainted with 20 th -century physics casting doubts on the certainty of results in classical mechanics (i.e. Heisenberg ’ s demonstration in atomic physics of the impossibility of knowledge of the object itself given the interference produced by the observer) Sraffa aimed to construct an economic theory which would be as free as possible of non measurable concepts and unobservable entities.

45. 45 Measurement of economic magnitudes Preoccupation with measures recurring in numerous contexts in Sraffa: objection, well into 1929, to the labour theory of value, since the ‘ amount of labour ’ has no precise meaning given as labour differs in quality Ricardo ’ s invariant measure of value standard commodity in PCMC objections to measurement of capital in value terms quest of a criterion for measurement valid in theoretical (as oppose to statistical) analysis.

46. 46 Two types of measurement One should emphasize the distinction between two types of measurement. First there was the one in which the statisticians were mainly interested. Second, there was measurement in theory. The statisticians ’ measures were only approximate and provided a suitable field for work in solving index number problems. The theoretical measures required absolute precision. Any imperfections in these theoretical measures were not merely upsetting, but knocked down the whole theoretical basis (Contribution to Corf ù Conference, 1958)

47. 47 Marginism is not scientific For Sraffa there are three types of magnitudes in economics: those that are directly measurable in production and consumption processes (acres of land, tons of grain, etc.); the purely subjective magnitudes (such as sacrifice or utility), which are not observable and cannot be measured; magnitudes - such as marginal productivity - which can be brought about by experiment only. all marginal magnitudes share the nature of being a sequence of mutually exclusive alternatives (i.e. we cannot observe n and n+1 units of factors at the same time)

48. 48 …. [demand and supply curves, marginal productivities, which form the basis of Marshall ’ s theory, (or, rather, Pareto ’ s) ] do not exist at any one moment, nor during any period of the recurrent steady process of production and consumption. They are alternatives, only one of which can exist in anyone position of equilibrium, all the others being thereby excluded [ … ] Therefore they cannot be found by merely observing the process or state of things, and measuring the quantities seen. They can only be found by experiments ….But the experiments have an entirely different significance: they actually produce facts which would otherwise not happen at all; if the experimenter did not step in first to produce them, and then to ascertain them, they would remain in the state of ‘ unknown possibilities ’, which amount to the deepest inexistence(D3/12/13/3) [October 1929]

49. 49 Counterfactuals? marginal magnitudes are not propositions regarding happenings that cannot be subjected to experiment (i.e. counterfactuals: what would have happened to European history if Napoleon had won at Waterloo) the experiment of measuring production upon adding the n+1th factor can be carried out, but it cannot be claimed that the variation in production observed thanks to the experiment measures the marginal productivity (ceteris paribus do not hold) What is the nature of experiment?

50. 50 Nature and outcome of the experiment By means of the experiment measurement is made of the product obtained with n+1 units as compared with that obtained in different circumstances in the preceding instance with n units but what do we measure? only the difference between two average products, obtained in circumstances other than those obtaining before. no grounds to conclude that the marginal variation is the contribution of the marginal unit.

51. 51 Not a genuine calculation But while the former [the average product] can be discovered by observation, the marginal product can only be found by comparing two successive average products, which are incompatible and can exist only in different circumstances and at different times. The question is, are the potential, hypothetical returns which would be obtained by additional doses part of the existing situation? (D3/12/46) [post 1955]

52. 52 Against calculation at margin? Sraffa ’ s charges against marginal method: Realism: change in economic realities hardly ever manifested itself in the form of infinitesimal variations in magnitudes that leave the overall structure unchanged Consistency: logical impossibility of continuity in the production function with infinitesimal variations in one factor alone if there were more than two factors: Marshall is constantly on the defensive against objections to continuity based on facts … This is not the basis on which this [my argument] is based. That can be granted in detail, wherever it is possible; it is against the logical possibility of the type of continuity assumed. That type is only possible with two factors (D3/12/42/12)[29 March 1963] Sraffa does not rule out scientific analysis of observable ‘ margins ’ (i.e. Ricardian rent)

53. 53 Against marginism in the published writings Sraffa (1925, 1926 and PCMC) 1925: two particular arguments, one taken up in Production of Commodities, the other dealt with in a footnote Distinction in Wicksteed between margins that he calls ‘spurious’, which depend on the varying productivity of heterogeneous doses of a factor, and ‘pure’ margins, in which the marginal productivity depends not on the nature of each single dose of the factor, all being homogeneous, but on the overall number used Example: Ricardian definition of extensive and intensive rent. The former arises from the different fertility of lands which can all be simultaneously cultivated, while the latter is the outcome of application of successive identical doses of capital and labour to the same plot of land.

54. 54 Wicksteed’s distincion In Preface to PCMC Sraffa acknowledges that Wicksteed’s distinction is not groundless, although Sraffa reverses Wicksteed position Only ‘ spurious ’ margins – which Wicksteed wanted to exclude from economic analysis -can find a place in Sraffa ’ s theory, because they are observable given the objective fact of their existence. Caution is necessary, however, to avoid mistaking spurious ‘ margins ’ for the genuine article. Instances will be met in these pages which at first sight may be indistinguishable from examples of marginal production; but the sure sign of their spuriousness is the absence of the requisite kind of change. (enphasis added) [(Sraffa 1960: v)]

55. 55 The “requisite type of change” In the 1925 article Sraffa denied the foundation that Wicksteed had given to his distinction between spurious and pure margins Decreasing marginal productivity is not a physical law deriving from the technical conditions of production, but results from the rational behaviour of the economic agent. It is he/she who decides to use techniques or factors of production in decreasing order of productivity As Sraffa wrote in the notes written in preparation of the 1925 article, it is like ordering a row of soldiers according to their different height or arranging soldiers of the same height on the steps of a stair. In both cases the decreasing order is the result of a choice (D1/40).

56. 56 Change or difference? A crucial element in Sraffa ’ s rethinking between 1925 and PCMC was the distinction between change and difference: The fundamental difference is that the extensive (different qualities of land) is truly a purely timeless, or geometrical representation: all the different lands exist simultaneously, at one instant, they and their products can be ascertained, distinguished and measured at one instant, without changing anything in the present arrangements.On the contrary, the intensive (successive doses of capital and labour on a piece of land) diminishing returns do not exist at any one instant. We can only find these diminishing returns by change, or movement: that is to say, we require time (D3/12/13/23(2)) [Summer 1929]

57. 57 Extensive and intensive rent From typescript Margins and margins (1950s): The names usually given to the two types, ‘ extensive ’ and ‘ intensive ’, conceal rather than describe the essence of the distinction. This is that the first is based on the difference between situations which are mutually compatible and can coexist at the same time, since they involve the payment of different rents on different qualities of land; while the second is based on changes in the situation on a single quality of land which represent a transition from one to another state, the two states being incompatible and mutually exclusive, since they determine two different rents on the same quality of land. The former compares two or more ‘ returns ’ existing side by side within a given set of circumstances: the latter compares successive returns obtained in different circumstances - it implies a comparison between the actual return and a potential alternative return. ( D3/12/46/50)

58. 58 Criticism of supply and demand Second argument against marginism in the 1925 article, (Sraffa 1998: 358-9fn), relates to the nature of the demand and supply curves: If the supply curve is to be considered one of the elements that determine price, it is not sufficient that only the point of equilibrium is significant. At least those points in the immediate vicinity must also be significant; since these represent precisely the forces that will be set in motion when an accidental shift of the equilibrium position occurs, and that would tend to re-establish that position (ibid. 358).

59. 59 Against determinism Much later, in one of the versions of note on ‘ Margins and margins ’, Sraffa commented thus on the nature of the curves of the marginal analysis: This is nothing less than a declaration of faith in universal determinism, for nothing less can support the belief in the actual existence of a prescribed path which must inevitably be followed, whether by the consumer or by the producer, such as is described by the demand- and supply-curves: for no observation, however minute, of the existing situation (in our case, of the existing methods of production) can bring out the path along which they must move in any given circumstances. (D3/12/46/52)

60. 60 From 1925 to PCMC Neither of the two arguments (distinction between pure and spurious margins, determinism) finds its way into the 1926 article, although they remain the object of intensive and continuous reflection in the unpublished writings. In Production of Commodities it is only the result that emerges, clear enough as far as intentions are concerned but rather less so in respect of reasons against marginism. It is [...] a peculiar feature of the set of propositions now published that, although they do not enter into any discussion of the marginal theory of value and distribution, they have nevertheless been designed to serve as the basis for a critique of that theory. (Sraffa 1960: vi)

61. 61 Final considerations I The reasons Sraffa brought against marginism were numerous and grew on him as from the late 1920s. Over the years Sraffa refined and honed his critique as the focus of his analysis shifted towards construction of his own theory, which did not require marginal magnitudes to determine prices. Production of Commodities demonstrates the non- necessity of marginal analysis by constructing a counter-example.

62. 62 Final considerations II only the ‘ prelude ’ to the critique proper, is was to follow From one of the many drafts of the Preface (14 December 1957): The sketch now submitted to the public has grown out of a projected critique of the marginal theory of production and distribution, to which it was to serve as foundation. It has however seemed better to publish this material by itself so that it may be judged on its own merits. The critique may, or may not, follow later. (D3/12/46/29) PCMC never meant to be an alternative to neoclassical analysis, i.e. competing with it in terms of scope and generality. It was meant to show, as in other approaches (from input-output analysis to game theory) that we can do without it.

63. 63 Maria Cristina Marcuzzo Sapienza, Università di Roma In Classical Economics versus Modern Theories. Essays in Honour of Heinz D. Kurz, Vol. 2, (C. Gehrke, N. Salvadori, I. Steedman, and R. Sturn, eds), Abingdon: Routledge 2011, pp. 185-206. The ‘elusive figure who hides in the preface of Cambridge books’. An appraisal of Richard Kahn’s contributions

64. 64 R.F. Kahn 1905-89

65. 65 Perfectionist and Collaborator “You must not get into the habit of never doing your own work but always someone else’s for them. In the first place you will get subconsciously (or consciously) badly irked by it yourself and in the second place you will end up by getting the credit for everything of any merit published by anyone during your life-time! (JMK to RFK, 13 August 1934, in RFK 13/57/58)” “He had great repugnance to the thought that there might be an error attached to his name” (JVR i/8/7).

66. 66 Structure The theory of competition: market imperfections and entrepreneurial behaviour The Keynesian approach and relations with Keynes The Economics of Welfare National and international monetary theory: the role of the institutions Wages and inflation

67. 67 Market imperfections and entrepreneurial behaviour Fellowship Dissertation (1929): theory of imperfect competition. Collaboration with J. Robinson, discussion with Sraffa and Chamberlin Set of papers on the behaviour of firms and price formation Imperfect competition and the marginal principle (Kahn 1932), The problem of duopoly (Kahn 1937) Oxford studies in the price mechanism (Kahn 1952a)

68. 68 Trial and error method Pursuit of maximum profit by firms as ‘ trial and error ’ method not as manifestation of an optimizing rationality not as marginal calculation on the part of the entrepreneurs Skepticism of ‘ mark up pricing ’ (by Kalecki and post- Keynesians)

69. 69 Relations with Keynes Economist closest to Keynes: in academic work and speculative activities Multiplier article Collaboration from the Treatise to the General Theory Leading role in orienting Keynes ’ s thought in certain significant aspects short period analysis aggregate demand and supply method

70. 70 The Economics of Welfare ‘ Some notes on ideal output ’ (1935): Pigou ’ s findings in the Economics of Welfare are of very limited application, in relation to problems of unemployment ‘ Tariffs and the terms of trade ’ (1947):an exercise in measurement of the advantages of intervention on market mechanisms

71. 71 National and international monetary theory: the role of the institutions Some notes on the liquidity preference (1954) Kahn ’ s monetary theory not (optimizing) choice of positions on the basis of identification of certain behaviour (or utility) functions, but represents individuals ‘ as divided between best guess and uncertainty ’ Experience as economic adviser to and executive director of big organizations. Advocate of a Buffer Stock scheme for raw materials: “ speculation in the public interest ”

72. 72 Wages and Inflation In the 1970s in the front line against Monetarism Essays against a background that saw the waning of incomes policy, and full employment, as government objectives Kahn arguments have become topical again appearing as enduring and forceful as ever: the role of aggregate demand and income policies to fight depression The role of international institutions to stabilize markets

73. Joan Robinson Three Cambridge Revolutions Maria Cristina Marcuzzo Sapienza,Università di Roma in Review of Political Economy 15: 4, 2003, pp. 545-60

74. 74 Relationship with Kahn, Keynes and Sraffa  JR was associated with three major revolutions in economic theory in Cambridge between the 1930s and the 1960s: imperfect competition, effective demand and the critique of the marginal theory of capital.  Developments associated with the work of three people with whom she had a close relationship: Richard Kahn, John Maynard Keynes and Piero Sraffa  Focus on the interplay of these revolutions in the context of the personal and intellectual relationships which shaped them

75. 75 Kahn  JR and RK met in 1928; for more than 50 years their relationship shaped their intellectual and emotional lives  Speculation on the nature of their collaboration, in particular on The Economics of Imperfect Competition (1933)  Kahn ’ s Fellowship Dissertation, The Economics of the Short Period (1930): determination of the equilibrium condition of the firm when the assumption of pure competition is abandoned; ingenious method of measuring market imperfection  Unpublished article on the “ Marginal Principle ” : equilibrium conditions fully lay out

76. 76 The Economics of Imperfect Competition  JR began writing it between late 1930 and early 1931; nicknamed “my nightmare”  Kahn checked every single passage, with the final work done on the proofs by mail as Kahn was in America  Starting point: Sraffa’s proposal ‘to re-write the theory of value, starting from the conception of the firm as a monopolist’  Aim: to extend the marginal technique to all market forms, to provide an answer to the challenge posed by Sraffa who questioned the consistency of the Marshall-Pigou apparatus.

77. 77 Sraffa’s arguments  Sraffa: challenged the assumed symmetry of demand and supply in the determination of relative prices of individual commodities produced in competitive conditions (Sraffa 1925, 1926)  Sraffa: partial analysis requires the heroic assumption that the cost and demand conditions of different commodities must be independent.  Sraffa: rationale for having first decreasing and then increasing costs is questionable since they rested on an entirely different set of causes (changes in the output of an individual firm and changes in the output of the industry) and that, in general, they were incompatible with perfect competition.

78. 78 Robinson’s counter-arguments  Robinson ’ s defense of the Marshallian methodology: provided underlying assumptions are explicitly stated, decreasing and increasing costs can be derived consistently; in a more general theory of competition, it is possible to allow for different cost and demand conditions, with perfect competition as a special case,  “ The essential distinctions are [....] between perfect competition and imperfect competition, and between an analysis in which time factors are admitted and an analysis in which they are ignored ” (Robinson, 1969, p. 129)

79. 79 Was Imperfect Competition a revolution or a turning point ?  Genuine revolution or a turning point?  A turning point: a fresh start on a different track, which may or may not subvert previously held convictions or results.  A revolution: changes the way we think about fundamental questions and it is generally opposed to prevailing ways of thinking.  At the time it was written the book appeared to provide a way to rescue the Marshallian approach from Sraffa ’ s critique and it gave Robinson academic prestige  In the early 1950s JR became a severe critic of her book and dismissed it as “ a blind alley ”

80. 80 Keynes: early stage  Circus: from late 1930 to the Spring of 1931  April 1932: JR’s article shown to JMK: “A parable on saving and investment’  May 1932: Manifesto, debating a point raised in JMK’s lectures.  October 1932 accepted “Imperfect competition and falling supply price” for the EJ  November 1932 JMK’s unflattering report on EIC for Macmillan.  Kahn urged her to pursue her involvement in Keynes’s work and persuaded Keynes to take her seriously.  June 1935, Robinson asked, along with Harrod, Hawtrey and Kahn, to read the second set of proofs of GT

81. 81 Keynes: later stage  JMK ’ s initial reservations about JR ’ s efforts to popularise and extent the GT, but in the end praised Introduction to the Theory of Employment  Keynes supportive of her academic career, when she applied to become Faculty Lecturer in 1935, and stepped in to prevent others from harming it.  Difficult moments in the relationship when JR was defending Kalecki ’ s work against JMK ’ s criticism

82. 82 JR and the Keynesian Revolution  Presentation of the main argument of the GT in terms of ‘ demand and supply for the output as a whole under the influence of JR and RK  Use of the short-period supply curve derived in conditions of a given degree of competition.  Common belief in the validity of the Marshallian apparatus (supply and demand plus marginal analysis): effects on prices and output of consumption goods following an increase in investment (Kahn ’ s multiplier)  Much later JR ’ s had second thoughts about the assumptions made in GT: Kalecki ’ s framework (markup pricing and constant marginal cost) believed to be superior to JMK ’ s

83. 83 Sraffa  JR and Kahn attended Sraffa’s lectures in 1928-29: implications of his revival of the classical approach not understood  JR dedicated to Sraffa, Economics is a Serious Subject (1932), defending the methodology of making unrealistic assumptions  While writing EIC JR was apprehensive of Sraffa ’ s criticisms  Only after the war Sraffa ’ s work again had a major impact on JR.  Sraffa ’ s Introduction to Ricardo ’ s Principles made her see “ a gleam of light on the question of the rate of profit on capital. ”

84. 84 Capital Measurement Conundrum  What did the ‘corn economy’ reveal to JR?  Problems with Ricardo’s value theory: any change in distribution between wages and profits alters the relative values of commodities, including those produced with the same quantity of labour;  R’s corn-ratio theory, albeit ‘at the cost of considerable simplification’, rendered distribution independent of value.  JR ’ s On Re-reading Marx (1953); and “ The production function and the theory of capital ” (1953) unmasked the neoclassical failure to distinguish between the conditions necessary for producing a given output from the rules of its distribution, in the form of wages and profits.

85. 85 Interpreting Sraffa  JR interpretation: ‘ different factor ratios cannot be used to analyse changes in the factor ratio taking place through time ’ : in time the value of the quantity of capital may change (i.e for change in the rate of profit or wages)  Impossible to discuss changes (as opposed to differences) in neo-classical terms; on the contrary in classical theory distribution is independent of production  reminiscent of Sraffa ’ s interpretation of Ricardo ’ s failure to distinguish between differences in the value of a given output due to conditions of production and changes in the value of a given output due to the rule of distribution

86. 86 Dividing line  Sraffa: question of measurement of the quantity of capital pertains only to the question of measuring the magnitude of aggregate of commodities, not to the question of comparing two different aggregate of commodities at two different points in time as JR interprets it  JR: critique of the concept of equilibrium itself, and not only of neoclassical equilibrium; distinction between historical time and logical time  JR: JMK’s approach (discussion of “events”, in terms of processes taking place in actual history) more relevant than Sraffa’s (comparisons of logically possible positions)

87. 87 Two Strands  The two strands in Cambridge economics (one from JMK, one from Sraffa) never fully integrated in the work of JR.  Open question: can and should be integrated ?  Three times – imperfect competition, the theory of employment in the long period, Post-Keynesian approach – JR attempted to integrate Sraffa within a Marshallian and Keynesian framework.  JR unsuccessfully tried to convince the Keynesians that gulf between Keynes and Sraffa could be bridged and the Sraffians that there was no incompatibility with Keynes’ theory  At heart an “analytical optimist”

88. 88 An enduring struggle  ‘I have realised more than ever after this do how much one’s whole personality is involved in one’s “purely intellectual” work. I think the reason I have done so much more with a much weaker brain than any of us is because of my extremely simple minded attitude’ (letter to Kahn, 3 Nov 1952)  Not “simple minded”, but intellectually daring  Three Cambridge revolutions rightly associated with her name

89. An Agenda for Alternative Economic Thinking Maria Cristina Marcuzzo Sapienza, Università di Roma In B. Dasgupta (ed.) Non-Mainstream Dimensions of Global Political Economy-Gobal Crisis and Labour Abingdon: Routledge 2013, pp. 115-28 and Re-embracing Keynes. Admirers, Scholars and Sceptics in the Aftermath of the Crisis in T. Hirai, M. C. Marcuzzo and P. Mehrling (eds), Keynesian Reflections. Effective Demand, Money, Finance and Policies in the Crisis, Delhi: Oxford University Press 2013, pp.3-23.

90. Market Failure and Idea Failure An intellectual framework that blinded economists and policy- makers” (De Grauwe 2010) resulting from the systematic use of erroneous assumptions and hypothesis in current macroeconomics. Modern macroeconomics deals with God-like creatures: they know the statistical distributions of all the shocks that can hit the economy. As a result, they can make scientifically founded probabilistic statements about all future shocks The assumptions of rational expectations and efficient markets have created an intellectual framework that blinded economists and policy-makers, preventing them from seeing the bubble and the dangers that these create for systemic stability

91. Proposals within the orthodoxy Blanchard (2008): problem can be “fixed” by introducing a more sophisticated explanation of the real and nominal wage rigidities Dahlem Report (2008):interconnectivity (network analysis); the informational role of financial prices and financial contracts; construction of indicators warning of bubble formation Buiter 2009: “behavioral approaches relying on empirical studies on how market participants learn, form views about the future and change these views in response to changes in their environment” The “return to Keynes” mainly a lip service with very little original work done on those aspects of Keynes which are relevant to the present recession and crisis of economics

92. The Return to Keynes 2008-9 crisis has seen an upsurge in the wave of references to Keynes Which aspects of Keynes’s analysis and recommendations do economists wish to see accepted and implemented and which are still rejected and misunderstood? “Is the return to Keynes” plea matched by original research into his work? In the face of unqualified admirers and sceptics alike, scholarly investigation into Keynes’s writings more than ever is called for.

93. Aggregate demand and deficit Standard “return to Keynes” argument: more important to address a failure in aggregate demand than to worry about the size of the government deficit Opposition to this view: 1) Cato Institute Manifesto: 237 signatories against “we need action by our government…to jumpstart the economy” (Obama, Jan 2009) 2) Letter to Sunday Times: 20 signatories advocating more reduction of Britain’s budget deficit “to support a sustainable recovery” (Feb. 2010). 3) G.Osborne (UK Chancellor): fiscal discipline needed to take Britain off “the road to ruin” (Oct 2010)

94. Anti-Keynesian arguments  “Lessons” from history Hoover and Roosevelt did not pull the United States economy out of the Great Depression in the 1930s More government spending did not solve Japan’s “lost decade” in the 1990s  “Lessons” from theory: Growth depends on reforms that remove impediments to work, on lower taxes and on competition Empirical studies show that value of public spending multiplier is not large

95. Keynesian counter-arguments Rejection of the claim that public expenditure crowds out a corresponding amount of private expenditure There is no theory to justify the “right” size of deficit nor the amount of government spending Unemployment due to insufficient effective demand, not rigidities in prices and wages Restricting the fiscal space (as the European monetary system) means imposing a deflationary bias Crisis in the US: a distribution of income problem, i.e. a private debt which has increased to offset the fall in wages and salaries

96. Return to another Keynes Financial crisis has forced us to take on board Keynes’s division of economics between: “the study of those economic activities in which ‘our views of the future are...reliable in all respects’ and the study of those in which ‘our previous expectations are liable to disappointment and expectations concerning the future affect what we do today” (General Theory) To acknowledge the failure of economics to take uncertainty seriously

97. What is the return to Keynes about?  The return to Keynes not just about government spending and injection of liquidity, but also: international cooperation on finance, primary commodities and international payments coordination and rules in markets and behavior, to fight irrationality and unreasonableness rational behavior under uncertainty:  the economy cannot be managed as an individual business  individual self-seeking behaviour does not guarantee a stable economic order rationality bounded by knowledge, judgment and experience.

98. Notion of Uncertainty A probability relationship is a rational belief in the conclusion from the knowledge of the premise The “weight of the argument” expresses the confidence in that probability Uncertainty is of lack of a probability relationship. It applies to cases in “which no rational basis has been discovered for numerical comparison. It is not the case here that the method of calculation, prescribed by theory, is beyond our powers or too laborious for actual application” (Treatise on Probability) Keynes’s uncertainty rejects the presupposition that risk can be measured and allocated in such a away as to prevent uncertainty of the outcomes

99. Drivers of the research agenda  In finance: to build on Keynes’s insights: Unarbitraged margins preventing the law of one price from prevailing in financial markets The Beauty contest – picking what one thinks others are most likely to think that others think are the best choices Noise trading: uniformed agents derail the operations of rational agents Istitutional Reforms: to take action to smooth prices and output of primary commodities and agricultural products which play a crucial role in international trade (Buffer stocks schemes) Strong links between fluctuations in prices of primary commodities and agricultural products on the one hand, and financial crisis and structural trade imbalances on the other

100. Lessons from Sraffa Demand and supply functions of goods and factors, whereby prices and distribution are determined, are constructed on the “unscientific” method of marginal analysis. Distribution not governed by marginal productivity of factors Separation of the rules governing production and distribution The core of the theory and considerations outside the core (history, social factors )

101. The challenge to the orthodoxy Agreement the pitfalls of orthodoxy does not entail agreement on which are the alternative routes There is an identifiable “neoclassical” core to which methodological and substantive objections (Keynes and Sraffa) can be made Incentives needed to break through the “guild system” of the profession

102. “ New thinking”, but also “New practices” Change needed in the systems for evaluating the quality of research in economics. Journals’ rankings are constructed on criteria in part debatable (quality measured by the quantity of citations) and in some cases arbitrary. Incentives needed to stimulate the reappraisal of the existing teaching and career models.

103. Voices “ A number of problems in the profession such as a lack of focus on the inculcation of applied research skills, untoward emphasis on mathematics and axiomatic reasoning instead of analyzing institutions and historical change, inadequate attention to the training with respect to communication and writing skills, an absence of creativity, and excessive emphasis on conformity and homogeneity in professional discourse” (Bernstein 2008) “All macro researchers knew that to get funding you needed to accept the DSGE modelling approach, and draw policy conclusions from that DSGE model in your research” (Colander 2010) “Market correctives work very slowly in dealing with academic markets. Professors have tenure. They have a lot of graduate students in the pipeline who need to get their Ph.Ds. They have techniques that they know are comfortable with. It takes a great deal to drive them out of their accustomed way of doing business” (Posner 2010)

104. Items in the agenda Economics as the realm of possibility to promote social values (Keynes) Fallacy of reasoning at the margin, as a basis for describing choices in production and consumption (Sraffa) Progress and change in economics cannot be brought about without an overhaul of the incentive system behind the training of economists and their career advancement (revise bibliometric indicators). Dismantling the false analogy with the natural sciences may be a step towards attaining a higher – and not a lower – standard of knowledge (connecting economics with history and social sciences).