Abba Ptachya Lerner (1903-1982)
Abba P. Lerner was born into a Jewish family in Romania on 28 October 1903. In 1912 the family emigrated to London. Growing up in London’s East End, he became familiar with the conditions of the working class when he himself worked as a machinist and a cap maker at the age of 16.
An early association with the different socialist movements prevalent in the 1920s in Great Britain brought him into contact with economics. In 1929 he enrolled to study economics at the London School of Economics (LSE). He quickly earned several scholarships for his outstanding essays, many of which were published while he was still an undergraduate. With one of these scholarships, he financed a six-month stay at Cambridge University (1934-35), where he made contact with “the Circus”, a group of young economists associated with John Maynard Keynes. Together with other graduate students from the LSE - among them P. Sweezy and U. Webb (later Hicks) - in 1933 he founded the Review of Economic Studies (RES), one of today’s leading economics journals. His appointment as assistant lecturer at the LSE in 1936 was the first of many teaching positions he held, all the others in the United States, where he emigrated in 1937 endowed with a Rockefeller grant. He taught inter alia at Columbia University, the New School for Social Research, Johns Hopkins University, and the University of California at Berkeley. He died on 27 October 1982 in Tallahassee, Florida, one day before his seventy-ninth birthday.Lerner made numerous contributions to economics. One even bears his name: the so- called Marshall-Lerner condition explains the influence of the currency exchange rate on the balance of payments. As one of the founders of the RES he also contributed to the inaugural volume with the article “The concept of monopoly and the measurement of monopoly power” (1934a). The paper’s main contribution is its clear account of requirements for efficiency in the allocation of scarce resources, well known to economists as the Pareto condition.
Deviations from allocative efficiency can be measured by the “Lerner Index” (or Lerner’s degree of monopoly), that is, p 2 mc, where p is the price and mc the marginal cost of a commodity.Lerner’s second contribution to the RES, “Economic theory and socialist economy” (1934b), was the first of several influential papers he published on the theoretical foundations of “market socialism” between 1934 and 1938. Together with Oskar Lange, who was his classmate at the LSE, he shared the view that markets will help to improve the allocation in socialist economies (socialist market economies). According to the first welfare theorem, if perfect competition prevails, prices are equal to marginal costs, which implies a Pareto optimal allocation. Whereas in capitalism deviations from perfect competition are regular, in socialism the planning can conform to the “price equals marginal cost” rule. The allocative efficiency of socialism compared to capitalism seems to be vindicated. The second aspect of Lerner’s contribution to “market socialism” concerns the distribution of incomes. While in capitalism the means of production and other resources are privately owned, in socialism they are owned by the public. Consequently, in socialism the income of the citizens consists of wages plus the “social dividend”. According to which rule should the “social dividend” be distributed so that it does not interfere with the optimal allocation of labour? Lerner persuaded Oscar Lange that a lump sum would not disturb the allocation on the labour market.
In Lerner’s early years, his research focus was in the field of welfare economics. His thoughts on welfare economics, international trade and the functioning of markets are contained in his magnum opus The Economics of Control (1944), which was his PhD thesis submitted to the LSE in 1934. In addition to the aforementioned topics, Lerner elucidates in his book Keynes’s General Theory, especially the liquidity preference theory.
He also helped to clarify the loanable funds versus liquidity preference debate between Keynes and Bertil Ohlin and he developed his own ideas about the principles of “functional finance”, which start from the premise that government expenditure should be designed to obtain full employment output and price stability regardless of whether it increases public debt. He argued against the idea of the “burden of the debt” and against crowding out effects commonly used against deficit spending.His contributions to Keynesian themes, particularly remedies against unemployment and inflation, were published in 1951 in Economics of Employment. In this book Lerner advocated a policy to achieve full employment referring to his concept of functional finance. He argues that monetary economies are inherently demand constrained. The general shortage of aggregate demand should be compensated by government spending. The government should increase spending up to a level where aggregate demand equals potential output. Government spending should be financed by non-interest bearing government bonds, which are sold to private banks or to the central bank. This is almost equivalent to pump priming by printing money. Similarities to the policy of the Federal Reserve System (FED) in 2010 after the financial crisis are perhaps more than mere chance. Why did Lerner not consider that the expectations of future inflation would be self-fulfilling? Because he thought wages did not rise until full employment was reached. Interestingly, Lerner recommends what he called a “low level of full employment”, where labour unions’ bargaining power is not too strong, so that wages will not increase faster than labour productivity. Such a “low level of full employment” equilibrium has similar properties as the “natural rate of unemployment” in recent macroeconomics, where the remaining unemployment is essentially only the result of frictions. However, if the economy moves into a situation of “high full employment” a wage-price spiral may build up and lead to inflation.
Lerner was a staunch supporter of Keynesianism and yet capable of explaining the stagflation phenomenon, which occurred much later. It seems that his ideas were not acknowledged by the then leading neoclassical synthesis Keynesians. One may speculate why Lerner remained an outsider in the US economics academia with little influence on the development of mainstream economics. Tibor Scitovsky mentioned Lerner’s pedagogical device to use paradoxes in his papers and lectures. This was irritating for
the not-so-young, in whom the profession’s conventional wisdom was often too deeply ingrained to be examined afresh. They were merely alienated by Lerner’s paradoxes and deceptively simple ideas and quite frequently looked upon him as a crank. That was all the easier, because he dressed the part, with his open neck, bare toes and (later in life) his prophet’s beard. In short, Lerner was a great teacher but a bad salesman. (Scitovsky 1984: 1548)
VθLKER CASPARI
See also:
Competition (III); John Maynard Keynes (I); Oskar Ryszard Lange (I); Welfare economics (III).
References and further reading
Keynes, J.M. (1936), The General Theory of Employment, Interest and Money, London: Macmillan.
Landes, D.S. (1994), ‘Abba Ptachya Lerner (1903 1982)', Biographical Memoirs, 64, Washington: National Academy of Sciences, pp. 208-31.
Lerner, A.P. (1934a), ‘The concept of monopoly and the measurement of monopoly power,’ Review of Economic Studies, 1 (3), 157-75.
Lerner, A.P. (1934b), ‘Economic theory and socialist economy’, Review of Economic Studies, 2 (1), 51-61.
Lerner, A.P. (1936), ‘A note on socialist economics’, Review of Economic Studies, 4 (1), 72-6.
Lerner, A.P. (1937), ‘Statics and dynamics in socialist economics,’ Economic Journal, 47 (186), 253-70.
Lerner, A.P. (1938), ‘Theory and practice in socialist economics’, Review of Economic Studies, 6 (1), 71-5.
Lerner, A.P. (1943), ‘Functional finance and the federal debt’, Social Research, 10 (1), 38-51.
Lerner, A.P. (1944), The Economics of Control, New York: Macmillan,
Lerner, A.P. (1951), Economics of Employment, New York: McGraw-Hill.
Scitovsky, T. (1984), ‘Lerner’s contribution to economics’, Journal of Economic Literature, 22 (4), 1547-71.