PPE Economics at Oxford in the Inter-War Years
As noted above, the teaching of economics in Oxford prior to the establishment of the Final Honours School of PPE in 1920 was more historical and applied in orientation, such as to label it the “Oxford approach” to political economy.
Marshallian supply and demand theory was broadly accepted, but where many Oxford dons and lecturers differed from Marshall was in its usefulness. On the one hand, they argued that the theory was specific to a particular historical period of capitalism; thus, when those conditions changed, the theory's theoretical conclusions would not necessarily or likely be appropriate. On the other hand, they argued that if political economy was to be useful, it must be applied to pressing economic and social problems. Thus, Oxford dons were most interested in applying theory to practical questions of socialism, State interference in the marketplace, fair wages, tariffs, unions and cooperatives, land reform and the poor law system. In this context, students were asked to learn only the rudiments of supply and demand before moving on rapidly to historical and applied topics. Hence, it was a Millian version of supply and demand as modified and interpreted by J. Shield Nicholson's Principles of Political Economy, Henry Rogers Seager's Introduction to Economics and Charles Gide's Principles of Political Economy that dominated Oxford economics at this time; Marshall's Principles, although accepted as authoritative, was only presented to advanced students, if at all (see Young and Lee 1993: 12-18).The establishment of PPE combined with students' interest in economic questions led to an increasing need to provide lectures and tutorials in economics. In turn, this led to a nearly two-decade-long spree of hiring young, Marshallian-educated and Marshallian-inclined economists, such as Roy Harrod, Lionel Robbins, Robert Hall, Eric Hargreaves, Henry Phelps Brown, James Meade, Lindsay Fraser, Redvers Opie, Maurice Allen, Richard Sayers and Thomas Balogh.
Consequently, Marshallian supply and demand theory became more dominant as the core material to be taught, with all applied and historical topics secondary, especially if they were not based on the theory. By 1939, the emphasis on historical process disappeared. In particular, lectures on economic history declined by nearly 50% between 1920-1921 and 1938-1939 (from 11 to 6), whereas lectures on the history of economic thought initially fluctuated between one and seven, stood at six in 1932-1933, but then declined to just one when its status was demoted to an elective paper. In contrast, lectures in economic theory fluctuated at around 14 on average and applied topics rose dramatically from an average of nine in 1920-1923 to 21 in 1936-1939 (see ibid.: 19-22).The increasing emphasis on and interest in economic theory are reflected in the transformation of the economics portion of the PPE examination during this period. That is, while many exam questions during the inter-war period were concerned with “real-world” questions, what became more and more evident were that these questions were dressed up in a theoretical guise, so the students were actually dealing with theory rather than the real world per se. As many of the real world qua theoretical questions dealt with money, credit, unemployment and the Great Depression, they largely drew upon the work of economists other than Marshall. However, there was also a steady stream of micro-oriented questions. In the 1920s, these examined issues such as interest and the productivity of capital, whether the interest rate could actually be explained as the result of a preference for present over future income, and the distinction between long and short periods in an analysis of costs of production. But in the 1930s, the questions were more directed towards utilising marginalist theory. Perhaps the smoking gun transition question came in the 1933 examination when students were faced with a question asking them to delineate the “equilibrium price” and whether it could be distinguished from the older expression of “normal price”.
When, in 1939, an examination question was set asking about the “representative enterprise”, there was a protest about expecting students to know new terminology (see ibid.: 73-80).Marshallian economics was clearly taught at Oxford in the inter-war period: students had tutorials where they ploughed through the Principles, others remember lectures derived from the Principles and working through it in preparation for exams, and some even read the Principles during the long (or summer) holiday (see Lee 1993). In addition, in the 1928-1929 academic year, D.H. Macgregor gave lectures based on the Principles. As the prescribed books required students to undertake a historical survey of the classical economists, many tutors, such as Robert Hall, who accepted Marshall’s continuity thesis (or the non-marginal revolution thesis), directed such surveys so that they would inexorably lead up to Marshall (see Lee 1993: 108). Finally, students were directed to read volumes from the Cambridge Economic Handbook series, including Hubert Henderson’s Supply and Demand and Dennis Robertson’s Money and The Control of Industry, as well as books and articles penned by John Maynard Keynes, A.C. Pigou, Cannan, Gustav Cassel and other non-Oxford economists which, at least in the 1920s, were thought to be compatible with Marshall. The basic point was that many components of Marshall’s Principles, such as utility, marginal utility, supply and demand curves, scarcity, price elasticity of demand, quasi-rents, diminishing returns, increasing returns, economies of scale, real costs, marginal productivity and support for capitalism, were all part of the instruction at Oxford and hence part of Oxford economics.
With the influx of new fellows throughout the inter-war period, Oxford became populated by young economists who were not tied to the old ways of theorising and who were eager to arrive at ‘practical maxims for economic policy' (Sayers quoted in Young and Lee 1993: 186) using marginalist tools.
Much of this work was beyond Marshall's Principles and hence did not concern the theoretical core of his supply and demand analysis of prices. However, Oxford economists did reject Marshall's analysis of prices, his concept of the market supply curve and his representative firm. As early as 1924, Harrod had started formulating his ideas about the problems associated with supply curves, especially with regard to diminishing and increasing returns, a research agenda that eventually led to his publications on imperfect competition (see, in particular, Harrod 1931). However, Harrod was not of the view that he was dismissing Marshall's supply and demand analysis and his portrayal of the business enterprise, but was rather improving on them:The main doctrines of imperfect competition were worked out largely independently by myself and Joan Robinson.. The main motive prompting me was to get nearer to reality. Orthodox theory had its monopoly theory and its theory of competition: the latter assumed an infinite number of producers working for a perfect market. This seemed so highly unrealistic that it seemed worth exploring what would happen if one made some intermediate assumption. No doubt any theory of this sort is only an abstract skeleton, a structure that will have to be revised in many particulars, only a very imperfect model of reality. But I do think it is an immense improvement on the old doctrine (Harrod 1936).
Of course, Harrod's ‘improvements' did constitute a rejection of Marshall's analysis. It is clear that all the economists at Oxford, bar Macgregor, accepted the reformulation of supply and demand in marginalist terms and hence the models of perfect and imperfect competition and the equilibrium firm. For example, in his lectures on “Questions in Advanced Economic Theory” delivered in Trinity term 1935, Hall dealt with the determinacy of prices. Arthur Brown's notes of the lectures indicate that Hall drew liberally from Edward Chamberlin's The Theory of Monopolistic Competition and Robinson's The Economics of Imperfect Competition.
Consequently, marginal cost and revenue, optimality, equilibrium, the individual firm, diagrams and mathematics were central to Hall's lectures; and what was entirely absent was any notion of a representative firm or any other Marshall-like industrial analysis. Later, Hall gave lectures on “Imperfect Competition” (Michaelmas term 1936) and “Competition, Imperfect Competition, and Monopoly” (Michaelmas term 1938), while Allen gave lectures on “Monopoly and Imperfect Competition” (Trinity term 1937). As noted above, Hall's lectures were viewed by Oxford students as being up-to-date and not old-fashioned. Oxford postgraduate students, such as Henry Smith, also fell under the influence of Chamberlin and Robinson and the use of geometry as a tool of analysis (see Smith 1992: 76).The replacement of Marshall's mode of analysis of prices, price determination and the business enterprise with marginalism is best seen in the work of the Oxford Economists' Research Group. The events leading to the formation of the Group, its purpose and its research into pricing have been told at length elsewhere (see Young and Lee 1993: 128-136). What is important to emphasise is the theoretical role that Chamberlin, Robinson, Harrod and marginalism played in framing the Oxford economists' understanding and analysis of businessmen's responses to questions dealing with price determination. That is, the responses of businessmen with regard to prices and price determination could lend themselves to a theoretical interpretation that was distinct from marginalism, as with Philip Andrews' theory of normal-cost pricing. However, with the exception of Macgregor and Henderson, all members of the Group were confirmed marginalists and accepted the imperfect competition/monop- olistic competition approaches to price determination. On the other hand, the feedback that they received from businessmen clearly indicated that the latter thought of prices in terms of some relationship to average total costs and totally ignored the marginalist approach to pricing.
In fact, severe questioning by the Group failed to uncover any evidence that businessmen paid any attention to marginal revenue or costs and that they had only the vaguest ideas about anything remotely resembling price elasticities of demand. However, this did not prevent the framing of the responses and evidence in marginalist terms.In November 1937, Hall read a paper to the group on “Notes on the Behaviour of Entrepreneurs During Trade Depression”, which was an interpretative-theoretical analysis of the responses of businessmen. In particular, Hall argued:
In my opinion, the most usual type of competition among the firms which we have been considering is a modified form of oligopolistic competition, the governing factor being the idea of what one of the entrepreneurs called a reasonable remuneration. Using very rough figures, I should say that in the absence of a cartel, competitors will not follow you if you raise your price above total average cost plus a quantity of the order of 10%, so that over a reasonable period the individual demand curve is highly elastic for prices higher than this, or in Harrod's terminology becomes greater than this in the short period. But they are compelled to follow you if you lower your prices below this, because if they do not do so you will gradually get their trade, the individual demand curve again becoming highly elastic in a reasonable period. Thus each individual firm has a demand curve which is highly elastic (the more competitors the more elastic) above full cost plus normal profit, but with an elasticity similar to the market elasticity below this. (See Chamberlin, Monopolistic Competition, Chapter V, for analysis of this effect.) If this is so, then profit should be maximized by getting the price as high as you can persuade your competitors to put it unless there is an unusual degree of elasticity about the market. But receipts may well be maximized at a much lower price (Hall 1937: 4—5).
In a subsequent version of the paper, “The Business View of the Relation Between Price and Cost”, which was presented at the 1938 meetings of the British Association for the Advancement of Science, Hall makes it even clearer that the marginalist approach framed the analysis of businessmen’s responses:
[O]ur investigations throw some doubt upon the account of business behaviour usually given in textbooks on economics... The facts on which this paper is based may be stated briefly[:] many businessmen appear to base their prices on average or full cost irrespective of the state of the market, and many others think that this should be the normal procedure. According to economic theory, this would be the most profitable course only (a) in perfect competition when this price corresponded to the optimum output (b) in imperfect competition when marginal cost equalled marginal revenue at the point where price equalled average cost. Thus, it appears that the statement of economists about business behaviour is too simple (Hall 1938: 2—3).
This view was retained in the famous published version, “Price Theory and Business Behaviour” (Hall and Hitch 1939). So, from the beginning, Hall and Hitch’s kinked demand curve was a marginalist response and explanation of why businessmen do not use marginal analysis when determining prices, which was the way it was seen at Oxford. What was missing from the discussion was any reference to Marshall and his representative firm. By 1939, then, Marshall’s industrial analysis had no place in the theoretical thinking of Oxford economists (see Lee 1991: 489-497; Young and Lee 1993: 195-197).
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