The Golden Age
In the first decades after War World II the reputation enjoyed by the most famous Cambridge economists attracted students from all over the world to their courses. 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, and “Price and production in an expanding economy” with Goodwin and Pasinetti (Cambridge University Reporter, 1962). The number of students sitting part II of the Economics Tripos nearly trebled in less than 20 years, from 72 students in 1952 to 212 in 1968, with a growing non-British percentage. However, not many changes were made to the composition of the faculty, nor to its size. For a long time there were only two professors in economics, Kahn and Austin Robinson, who had been appointed a few years after the end of the war. Robertson, who had returned to Cambridge after the war as professor of political economy, retired in 1957. When A. Robinson retired in 1965, his place was taken by his wife J. Robinson, joined, one year later, by Kaldor. They left the small group of readers to which they had belonged since the early 1950s, and to which Dobb and David Champernowne had been admitted in 1959 and Goodwin only in 1966. Until the end of the 1960s, then, it was the generation who had personally been 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 Frank Horace Hahn, Christopher Bliss or Amartya Sen, took different routes. The size of the Faculty of Economics and Politics was matched by that of the Department of Applied Economics, established in 1939 to manage the research projects funded by external institutions, and put under the direction first of Stone, and later of Brian Reddaway.In the post-war period Cambridge economics developed along two routes which converged for a few years subsequent to publication of Sraffa’s Production of Commodities by Means of Commodities (1960), as the capital controversy raged throughout the 1960s and 1970s, only to diverge again in its aftermath.
The first route has been labelled (Harcourt 2006) the Post-Keynesian theory of growth and distribution: it originated as a joint effort, first by J. Robinson, Kahn and Kaldor, and later by Goodwin and Pasinetti. The aim was to go beyond the static approach of the General Theory and model the working of an economic system which moves through time. One of the protagonists of these efforts, Kaldor, was not a born and bred Cambridge economist, but a Hungarian emigre who soon became identified with the Cambridge School. Although he was already in Cambridge when the London School of Economics was evacuated there in wartime, he joined the economics faculty only in 1949, when he also became a fellow of King’s College. He was a prolific writer both in his academic output and in his contributions to the political debates on economic issues, advising governments and the general public alike.
Kaldor’s main contributions in the field of pure economic theory are his economic growth models and his theory of income distribution, which followed up the thread of a Keynesian idea, namely, that profit earners have a higher propensity to save than wage earners (Kaldor 1956). So he became “the joint architect with Joan Robinson and Richard Kahn of the Post Keynesian School of Economics which extended Keynesian modes of thinking to the long run” (Thirlwall 2003: 221).
Joan Robinson, in her Accumulation of Capital (1956), pursued a different method, seeking to determine what the consequences are for an economy when it moves off its golden path, that is, 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, an American Marxist who arrived in Cambridge in 1951, contributed to this literature in 1967 with a model of growth cycle, exhibiting the dynamic interaction between the distribution of income and the accumulation of capital, which formalized Marx’s general law of accumulation:
Labour market conditions drive profit rates, profit rates drive the rate of accumulation, and the rate of accumulation feeds back to affect labour market conditions. When placed in a multiplier-accelerator framework, this generates cyclical growth, with a full-employment profit rate squeeze sending the economy into a phase of slower growth with rising unemployment that lasts until the profit rate has recovered. (Palley 2003: 185; see also Desai and Ormerod 1998)
Pasinetti arrived from Italy to Cambridge in 1956 as a student, having both Kaldor and Goodwin as mentors; he later became a member of the faculty and a recognized leader of post-Keynesian economics. In his 1962 article he presented the famous theorem associated with his name that “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” (Panico 2003: 171).
The second route developed in Cambridge after the war - the alternative to the Marshallian determination of prices (both of goods and factors) - surfaced with the publication of Sraffa’s introduction to Ricardo’s Principles (Sraffa 1951) and was fully laid down in his 1960 book, where reappraisal of classical political economy led the way towards the construction of a theory in which the principle of equating marginal costs and benefits found no room. The monumental editorial work on Ricardo’s Works and Correspondence, for which he was universally praised, led Sraffa to challenge the interpretation of Ricardo which had prevailed in the British tradition.
Sraffa showed that in Ricardo the “laws which regulate the distribution” of the surplus between profits and rent constituted the main problem in political economy.
To this end, the labour theory of value, despite its limitations, of which Ricardo was well aware, and which he sought to overcome with his search for an invariant measure of value, played the essential role of determining the rate of profit as a ratio between surplus and wages. The same role had been played in his “early theory of profits” by corn, which appeared both as input and output in the agricultural sector (known as Ricardo’s corn-ratio theory of profits).Sraffa’s interpretation was translated into a geometrical model by Kaldor (1956) in a famous article which pointed out the differences between alternative theories of distribution (Ricardian, Marxian, neoclassical and Keynesian), and, by Pasinetti (1960), into a mathematical model. The introduction to the Principles was the first step toward a revival of that surplus approach, “submerged and forgotten”, which Sraffa promoted in his 1960 book.
Production of Commodities by Means of Commodities (Sraffa 1960) had a great impact on Cambridge economics and seemed to satisfy two different needs. On the one hand, it presented an alternative theory of prices and distribution. 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 assumption that in a capitalist society the rate of profit must be equal in all sectors. The distribution of the surplus was not made dependent exclusively on the technical conditions of production and the relative scarcity of productive factors, since one of the distributive variables was determined outside the system of prices and could be influenced by other economic, or even political and social, causes. Moreover, it was a theory that underscored the antithetical interests of labourers and capitalists by drawing an inverse relationship between rate of profit and wage. On the other hand, Sraffa brought compelling elements to the critique of the concept of capital outside the short period that Joan Robinson had begun in her 1954 article, where she drew attention to the “profound methodological error” (Robinson 1954 [1964]: 120) connected with the concept of quantity of capital outside the short period.
She pointed up the 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. The implication is that “different factor ratios cannot be used to analyse changes in the factor ratio taking place through time”, because over time the value of the quantity of capital may change as a consequence of a change in distribution, and we will not be comparing the same quantities. She concluded that “it is impossible to discuss changes (as opposed to differences) in neo-classical terms” (Robinson 1954 [1964]: 129).The substitution of labour for capital when the rate of profit rises relatively to the wage lost any meaning after Sraffa showed that the same technique could be adopted as the most profitable at different rates of wages (the so-called “reswitching”). Therefore Sraffa’s critique had implications not only for the theory of distribution based on the aggregate production function, but also for the contention that market forces always bring the system to the full employment equilibrium via changes in the wage rate. It was the same battle the Keynesians were fighting.