The Cambridge Tradition is Alive and Well

In spite of the loss of centrality in the academic world and the oblivion of the victories in the theoretical battle against neoclassical economics, it is not to be inferred that the Cambridge tradition is dead and buried.

The tradition stemming from Marshall is enjoying a revival thanks to the work of a group of scholars bringing to light a conceptual tool of his analysis which has proved of great utility in interpreting the peculiarity of a contemporary economic phenom­enon. Marshall’s concept of “industrial district”, discussed in book IV of the Principles, describing “the concentration of specialised industries in particular localities”, pointed to a form of organization governed by trust and co-operation, which characterizes clus­ters of firms within well-defined regional boundaries in various parts of the world.

Becattini (1979), who was the first to apply this concept to explain the success stories of several industrial regions in Central Italy (mainly in the textile sector), provided the key idea that in order for an industrial district to rise and grow a congruence must be there between the organization of the production process and the social and cultural characteristics of the people involved in it. It is “the active presence of both a community of people and a population of firms in one naturally and historically bounded area” (Becattini 1990: 38) which provides the necessary ingredients.

This attention to the social and historical embeddedness of the economic process within which firms operate is a far cry from the approach to industrial economics which has become fashionable nowadays (industrial organization and its focus on strategic interaction and incentives). Marshall’s concern with the costs of coordination and the knowledge, skills and experience of the firm is a source of inspiration for those who are dissatisfied with formal production theory focusing on optimization. This is one of the areas in which the Cambridge School heritage has proved to be more fruitful.

Another and equally successful endorsement of the Marshallian apparatus draws on his evolutionary vision of the organic development of firms and society at large. Economic progress is seen as the cumulative result of increasing division of labour, of the development of specialized skills, knowledge and machinery and, at the same time, of the ability to coordinate them. Economic change is represented by concepts such as adaptive behaviour, variation and selection through industrial competition. The object of study is a population of firms, each different from the other and continuously evolv­ing through interaction among themselves and with their social environment. Although this evolutionary approach is not unique to Marshall, having its recognized forefather in Schumpeter, several interesting research trends in cognitive and industrial economics have exploited the richness of this Marshallian tradition.

The idea that mental models matter in explaining economic processes, and the role of personal learning in the problem-solving process, together with the importance attached to the development of mental faculties - all of Marshallian ancestry (Egidi and Rizzello 2004) - are the basis of the cognitive approach to economics, which has grown into a specialized and successful discipline in recent years.

However, nowadays the best-known and most widespread approach in economics associated with the Cambridge School is post-Keynesianism, which emerged in the 1960s as a reaction against the “perversions of Keynes’s original vision” (King 2003: xiv). In recent years the insights of Hyman Minsky into the causes of the financial meltdown have given more visibility and credibility to an approach which had always stressed the role of uncertainty, as well as the importance of money and income distribution in capi­talist economies. The role of effective demand in generating employment, rejection of the idea that public investment crowds out private investment, the monetary nature of the interest rate, mistrust in the flexibility of prices as a way to redress fundamental market imbalances, and the importance of cost in generating inflation and of incomes policy in controlling it and fostering growth are the main ingredients of the post-Keynesian approach.

There is indeed variety within the group of post-Keynesians, in terms of emphasis and research agenda, while the (smaller) Sraffian group appears more cohesive and focused. It is for expository purposes that the division is made here between the two approaches, since many heterodox economists would see no contradiction in endorsing both.

Sraffa’s research programme has been carried forward along three different lines. The first is investigation into the properties of the so-called “core”, that is, the set of equa­tions that determine long-period relative prices and the wage rate or rate of profit, under the assumption that outputs and the alternative techniques that produce them are given. The analytical complexities of the system when joint production is involved and/or the inputs include at least one natural resource have been explored. Another issue that drew the attention of Sraffian scholars is the convergence (or the non-explosive oscillations) of market prices to their long-run positions characterized by the uniformity of the profit rate.

The second line of research lies in the “closure of the system” or determination of the distributive variable which is assumed as given. The classical tradition of assuming constant real wage is rejected and attention is focused on the rate of profit. Two routes have been pursued here. One, following Pasinetti and his Cambridge growth equation, is to consider the rate of profit determined by the rate of growth of the system, which, in turn, depends on the investment decisions of capitalists. The other route, following Sraffa’s suggestion, is to assume the rate of interest to be equal to the rate of profit (allowing for differences in liquidity and risks). In this way the possibility for monetary policy to impact on income distribution - a clear case of non-neutrality of money - is posited.

Note that the two lines of research described above well represent what Pasinetti has labelled the “separation theorem”, that is, the division between “those investigations that concern the foundational bases of economic relations - to be detected at a strictly essential level of basic economic analysis - from those investigations that must be carried out at the level of the actual economic institutions” (Pasinetti 2007: 275). The separation concerns not only the objects, but the level of abstraction and generality that the analysis must and can achieve (Garegnani 2002).

The third line of research lies in a critique of general equilibrium theory in its more recent versions of temporal and intertemporal equilibrium, in order to show that even this version, with disaggregated capital endowments, is based on the notion of capital as a single magnitude and therefore falls under Sraffa’s critique. The debate is still going on (Garegnani 2003; Schefold 2008).

We may conclude by saying that the Cambridge tradition has handed down to us a heritage resting on two pillars.

Maria Cristina Marcuzzo and Annalisa Rosselli

See also:

Business cycles and growth (III); Richard Ferdinand Kahn (I); Nicholas Kaldor (I); John Maynard Keynes (I); Keynesianism (II); Labour and employment (III); Macroeconomics (III); James Edward Meade (I); Money and banking (III); Post-Keynesianism (II); Joan Violet Robinson (I); Piero Sraffa (I); Uncertainty and information (III).