Proposed Syllabus for the Lecture Capitalism and the World Economy over the Three Decades ― Light and Shadow of Globalization ― Toshiaki Hirai

        

    Proposed Syllabus for the Lecture

Capitalism and the World Economy over the Three Decades 
　　　    ― Light and Shadow of Globalization ―

                                               Toshiaki Hirai
                                               Sep. 7, 2015 version 

No.                     Title

1 Outline of the Lecture

2 How should we grasp Capitalism?

3 How should we grasp Globalization?

4 Financial Liberalization and Instability

5 Lehman Shock and the US economy

6 The Euro Crisis

7 Self-Trapped Japanese Economy　

8 Present Situation of the Japanese Economy

9 Whither Economics?

10 Whither Social Philosophy?　 

11 Shift in Geopolitics

              ***

12 Who is Keynes?

13 On the General Theory

14 Social Philosophy in Interwar Cambridge – Keynes, Pigou, Hawtrey, Robertson

15 Social Philosophy of Schumpeter and Hayek

16 Keynes on International Buffer Stock 

17 Keynes on International Monetary System

18 End of the Lecture

Working Paper, KSJ

.At the request of the Working Paper Committee, KSJ,is my paper

was submitted, to be followed by working papers. It is open and downloadable from 


http://ksj-working-papers.blog.so-net.ne.jp/

Best regards

Keynes and his Battles, Gilles Dostaler, Edward Elgar, Cheltenham (UK) and Northampton (USA), 2007, vi; 374pp

Keynes and his Battles, Gilles Dostaler,

Edward Elgar, Cheltenham (UK) and Northampton (USA), 2007, vi; 374pp

Toshiaki Hirai

I. Introduction

So far we have no economist who surpassed Keynes in terms of profound influences in various fields. The phenomenon in economics and social philosophy known as the “Keynesian Revolution” is the most important among his influences. And yet it occupies no more than a part of his achievements.

  As a youth he contributed to the development of philosophy and logic under the influences of G.E. Moore and Russell. He was an intellectual leader of the Liberal Party. He was a central figure of the Bloomsbury Group. He was a splendid and inexhaustible debater, among which impeachment against the Versailles Treaty is well known. He worked as an enthusiastic patron of the artistic activities. He was engaged in managing insurance companies. He was responsible for the financial management of King’s College. He worked as designer of the world order after the Second World War. Surprisingly enough, many of these activities were simultaneously made. His interest was extended indefinitely and his brain incredibly fast worked with vigorous blood flowing through vessel.

  The book brilliantly analyzes and describes Keynes as a human being by shedding light on these multiple activities, and tries to explain Keynes’s life in terms of persistence and continuity rather than inconsistency and discontinuity. The reviewer will discuss only a few below from many topics which were very interestin (the main chapters runs as follows: Ch.2 Ethics; Ch.3 Knowledge; Ch.4 Politics; Ch.5 War and Peace; Ch.6 Money; Ch.7 Labour; Ch.8 Gold; Ch.9 Art).

  

II. The Apostles and the Bloomsbury Group

The apostles and the Bloomsbury Group made profound influence on Keynes’s way of thinking and living on several points.

 Firstly, he and his friends such as Lytton Strachey, Leonard Woolf, was greatly enchanted by Moore’s Ethics. This can be discerned in two aspects. One concerns Keynes’s ethics. The other concerns Keynes’s work on probability. It started by criticizing Ch.5, “Ethics in relation to conduct” of Moore’s Principia Ethica, was submitted as fellow dissertation of King’s College, and was finally published in 1921 as A Treatise on Probability. The author puts emphasis on uncertainty as unmeasurable. (he is right, and yet the reviewer thinks that Keynes defines probability as a degree of rational belief between the propositions, which should be objective, and tries to prove induction in terms of pure logic).

 Secondly, Keynes was greatly involved in the Bloomsbury Group. The group was a creator of new culture in, among others, literature and painting. It shared Moore’s “religion” and were anti-utilitarians and were critical of women’s discrimination. It was a group in which apostles’ s mind was integrated with artistic value judgment of the Post-Impressionism and new literature movement. The members were, in essence, individualistic liberalists in the sense that they highly rated human relation and beauty, while neglecting the social conventions. This seems to have contributed to the (miraculous) maintenance of friendship among them throughout their lives notwithstanding the occurrence of complicated human and love relations. In the book are these complicated relations vividly described.

III. Political Stance

Since his youth Keynes showed great interest in politics, as is shown by his stance, for example, of the Boer War.

  When the (First World) war occurred, Keynes was asked to join the Treasury. He accepted the offer, in spite of the fact that at that time he was making great efforts for the publication of the Probability with help of Russell and Broad. He broke off this work, which resulted in postponing the publication until eight years later.

  This war was to change the world considerably. It was no exception to Keynes – the tension with the rest of the Bloomsbury group, his ability and confidence as high official in leading the UK in international finance, the tough fight with the USA in negotiation, the deep disappointment with the development of the Paris Peace Conference, his proposal for reconstructing Europe such as the “Grand Scheme”.

  In the 1920s Keynes was greatly involved in the Liberal Party through the management of the Nation and Athenaeum, the Liberal Summer School and so forth. He advocated the New Liberalism – the mid-way house between the Liberalism and Socialism. However, his political activities made a convoluted tour, reflecting the then political situation of the UK. He belonged to the Asquith camp, but later came to approach the Lloyd-George one. After the fatal defeat of the Liberal Party, Keynes moved toward the Labour Party. It should be noted that his socio-philosophical and economic influences manifested themselves among the young politicians such as Dalton and Gaitskell of the Labour Party, although he finally became a Liberal Party member of the House of Lords.

In the book these activities and the complicated political changes of Keynes are brilliantly portrayed.

IV. Economics

In the reviewer’s view The General Theory sees the market economy as possessing two contrasting aspects: (i) stability, certainty and simplicity; (ii) instability, uncertainty and complexity. His fundamental perception of the market economy can be summarized: “The market society is stable in the sense that it can remain in ‘underemployment equilibrium’, but if it goes beyond certain constraints, it becomes unstable”.

  In the book reviewed aspect (i) is stressed, while aspect (ii) is rather overlooked. The author argues that aspect (i) can be traced back to the Probability. If The General Theory had lacked in aspect (i), it would not have won such a success. Moreover, Keynes showed aspect (ii) whenever he advocated economic policy.

  The reviewer wish that this book would have dealt with Keynes’s colleauges such as Robertson and Hawtrey as economist as well as social philosopher, for Robertson and Hawtrey were not classified by Keynes as “classical economists”.

  Again, the book is very readable, and a great contribution to understanding Keynes as a human being endowed with such incredible talents.

(2) 平井俊顕

(3) 〒273-0853 船橋市金杉8-12-30-418

(4) hirai-t@mva.biglobe.ne.jp

Money and Markets: A Doctrinal Approach, Oxon and New York: Routledge, 2007, pp. 252.

　　　　　　　　　　　　　　　Alberto Giacomin and

 　　　　　　　　　　　Maria Cristina Marcuzzo (eds.),

Money and Markets: A Doctrinal Approach,

Oxon and New York: Routledge, 2007, pp. 252.

Toshiaki Hirai

 (Sophia University, Tokyo)

This book brings together a selection from the papers read at the 2004 ESHET conference.

  “What is money and what is market? How should we understand the relation between the two?” – these are fundamental questions for us. In the Seng period (China), the Edo period (Japan), to take but two examples, markets developed fully where goods were exchanged for money.

  The history of economics as social science, however, goes back no more than 230 years. Classical economics ruled the roost in the first half of the 19^th century, followed by neoclassical economics from the third quarter of the century right up to the present day.

  As an alias of neoclassical economics, “catallactics”, shows, this school focuses research on markets where economic agents buy and sell goods. Essentially, it boils down to Walras’s general equilibrium theory (GE), which was to occupy a central place in neoclassical economics. It is a system in which money does not work, so the quantity theory of money was adopted as monetary theory in order to adapt it to the real world. This system has dominated the economics field over many years. Moreover, the so-called New Classical Macroeconomics (NCM), similar to the above system in some respects, has prevailed over the last thirty years in the macroeconomics field.

1. Presentation of Alternative Theories

　　　　

What attracts the reviewer most are six papers in support of theories which come to grips with the economic system from alternative points of view, criticizing GE and/or NCM paradigm.

  In Chapter 2 Goodhart criticizes NCM, arguing that because it tries to construct economic models based on assumptions disregarding reality, it is empirically absurd, lacking in relevance to the real world. He favors the line which Shubik takes, combining theory with the empirical realism. In Chapter 3 Davis stresses ‘socially embedded individuals as a network conception’ envisaged by the complexity theory, differing from the picture of individuals envisaged by GE and game theory.

    In Chapter 4 Israel appeals for the reinstatement of ‘genuine’ game theory. He argues that the axiomatic methodology adopted by GE does not explain actual economic phenomenon and, what is more, that economics had been and is moving in the wrong direction due to (i) Debreu’s elaboration of GE; (ii) the tendency for game theory to be incorporated into GE through ‘Nash equilibrium’; (iii) the argument that cooperative games can be reduced to non-cooperative ones. Israel insists that it is the ‘genuine’ game theory based on cooperative games which von Neumann and Morgenstern aimed at that should be pursued.

In Chapter 5 Heinsohn and Steiger advocate property economics, criticizing the view on the relation between money and markets taken by the classical and neoclassical schools that “First markets emerged. Then money came into being to reduce transaction cost”. They argue that the right of possession is the source from which money and markets derived, stressing the right of possession - a legal right based on which its possessor is endowed with non-physical rights - in all types of economic activities including the right to issue money and the right to procure it (borrowing).

  In Chapter 6, “Money and markets as twin concepts?”, Cartelier answers “in the case of Arrow-Debreu and Neo-Walrasian models the answer should be ‘no’, while in the case of ‘monetary approach’ represented by Shapley-Shubik ‘yes’”.

In GE transaction can be made only in equilibrium and there is no place for money. In the 1970s, moreover, it was demonstrated that the Arrow-Debreu model might not attain equilibrium and global stability – the Sonnenshine-Mantel-Debreu theory. Attention then turned to modeling GE under disequilibrium – the Neo-Walrasian model which reveals the dichotomy between price determination and transaction realization.

In both models Cartelier sees divergence from the actual markets and favors the ‘monetary approach’ of Shapley and Schubik, without this shortcoming.

In Chapter 10 Spahn emphasizes money as a social bookkeeping device, which indicates the following properties in the market economy: (i) the principle of efficiently guided incentives; (ii) the need for money as a medium of payment due to lack of information and mutual trust; (iii) a social mechanism or convention that ensures the overall acceptance of money. Although the view was to come into discredit due to the prevalence of GE, Spahn argues that it merits attention.

To sum up, the above chapters share the perception that the methods of analysis in orthodox economics suffer from fatal shortcomings in analyzing the actual economy. 

2．Various Aspects of Economists

Next we will turn to the chapters focusing on certain economists.

2.1 Certain Theoretical Thought

In Chapter 9 a reappraisal of Jean Bodin, a 16^th-century French thinker, is conducted from the point of view of his theory of money. Blanc argues that Bodin should not be regarded as the founder of the quantity theory of money and that his originality lies in aiming at constructing an ideal system - a part of his theoretical system of sovereignty - which would exclude all forms of false money.

  Chapter 12 offers a reappraisal of Adam Smith’s theory of money. So far Smith’s has been regarded as a convertible paper money theory. Giacomin emphasizes that it should be evaluated, rather, as an inconvertible paper money theory. Smith derived this inspiration from the monetary system in Pennsylvania, America.

  Then come two chapters focusing on Keynes’s ideas.

In Chapter 7 Rossi first states that the international monetary system should be reformed along the lines of the International clearing union plan (the Keynes plan). He then argues that the Keynes plan pays attention only to the ‘money purveyor’ in negligence of the ‘credit purveyor’, and the creation of a genuine monetary system requires two divisions (Rossi stresses Schumacher’s remarks on the Keynes plan).

In Chapter 8, “Price and prejudice”, Simonazzi and Vianello, referring to the deflation which afflicted the Japanese economy, focus on how the ‘prejudice’ that downward flexibility in money wages (and prices) can bring about full employment has survived Keynes’s criticism. On the basis of the ‘dynamic’ argument in chapter 19 of the General Theory, they criticize the ‘static arguments’ (‘prejudice’) developed later, stating that the static arguments neither address the present economic situation nor put forward economic policies to be implemented.

　In Chapter 13 attention turns to Lavington, an economist active in interwar Cambridge. Dangel-Hagnauer and Raybaut emphasize that Lavington’s fundamental view on the market economy is that money exists there right from the beginning and economic agents have a limited capacity to see through the future. Lavington sees entrepreneurs as the most important economic agents. They conduct their business activities in the opacity of a situation in which the future is evolving from the present. He sees that this ‘incalculability’ entails ‘risk and uncertainty’. Well-known is his distinction between risk (decrease in efficiency of production) and uncertainty (irregularity of incomes).

  Lavington, moreover, argues that the market economy, as compared with state socialism, brings about effective production, while, since many entrepreneurs conduct their business activities independently, adjustment in the markets is open to uncertainty; consequently, the market economy can not prevent individual incomes from fluctuating. 

Chapter 14 offers some considerations on Marco Fanno, an Italian economist of the first half of the 20^th century.

The theory of cumulative process developed by Wicksell had a great influence on theoretical economics in the interwar period. It seems to be worth stressing, as Spiller and Pomini argue, that Fanno put forward his own theory of business fluctuations as early as 1912, succeeding Wicksell’s theory critically.

After WW2 Fanno turned his focus on economic growth, which he analyzed applying the ‘progressive economy’ concept and distinguishing three kinds of growth lines, adopting an approach similar to Harrod’s and the Keynesian analysis of economic fluctuations by means of an accelerator factor and multipliers but developing his own analysis by bringing in changes in income distribution.

2.2　Way of Life

In Chapter 11, as the subtitle announces, attention turns to John Law as art collector, monetary theorist and corporate financier.

Law, who was sentenced to death in relation to a duel, fled from London to the Continent, where he came to show an interest in the banking system in Italy and the Netherlands. He rapidly worked out and sent to several governments his financial proposal, which argues that money is not to be regarded as possessing intrinsic value, and that, should it run short, the government can vitalize the economy by printing more paper money. The Law System, as it came to be known, was adopted by France but came to a sorry end with the Mississippi bubble, and Law fled to Venice.

Murphy argues that given his financial innovations in money and the capital market he might well be called the father of corporate finance.

  During his stay in Venice Law collected many works of art. Murphy describes Law as showing keen appreciation, with some interesting episodes.

In Chapter 15 the focus falls on Ezra Pound, a Fascist and anti-Semite who came close to being executed by the US. He came to take an interest in money under the influence of Silvio Gesell. As regards the banking system, however, he waxed increasingly critical as time went by. Pound insisted that interest should be kept at zero, and the state should achieve full employment by printing money.

＊＊＊

The book collects papers which show a wide range of views on “Money and Markets”. The reader has the opportunity, among other things, to encounter various new and stimulating theories which he or she can explore further by following up the references.

Keynes’s General Theory: Seventy-Five Years Later, Toshiaki Hirai

                Keynes’s General Theory:

 Seventy-Five Years Later, ed. by Thomas Cate Edward Elgar, 2012, x+348 pp.

                                                     

                                       Toshiaki Hirai

Seventy-Five years have passed since the publication of General Theory (1936. Hereafter GT). Over this period, its evaluation has dramatically had ups and downs, and every time GT marked the 10^th, 20^th … anniversary, there appeared books evaluating it from various points of view. The book reviewed belongs to the 75th one.

In advance, two points might be worth mentioning. One is that almost all the papers regard GT as containing essentials for understanding the present economy or constructing macroeconomics, so the book is “Pro-Keynesian”. The other is that the book presents diverse points of view of GT.

The book is composed of 15 chapters. The reviewer would examine it, identifying four types according to common features.

Type 1: Chapters Focused on GT

Focus on Institutions ― In Chapter 1, Asensio maintains that GT provides rich concepts of institution and equilibrium. Institutions and conventional behaviors provides an economic system with structural stabilizers such as law, regulation, monetary contract, which contribute to its convergence toward equilibrium at any time, while excluding intrinsic indeterminateness. This anchoring works through attraction of market interest rate toward conventionally expected interest rate, the resistance of money wages to fall and so forth. Asensio asserts the chapter belongs to Post-Keynesianism (GT, Ch.18-3 mentions four stabilizers for underemployment equilibrium) .

Maverick Stance ― Two papers develops his own interpretation, keeping his distance from both New Keynesians and Post-Keynesians.

In Chapter 2, Hayes states that Keynes’s innovative achievements have been almost neglected in both theory and policy. Neo-Classical Synthesis and New Keynesianism as its modern version wrongly accepted Keynes’s theory as “economics of rigidity”, while Post-Keynesians failed to grasp Keynes’s achievements by refusing Marshallian framework and deviating from the mainstream. Keynes’s theory of effective demand is a theory of employment as restatement of Marshallian equilibrium theory which takes both time and money into consideration. He also stresses the significance of liquidity for GT. (The reviewer is doubtful of how unique interpretation is in comparison with Neo-Classical Synthesis in interpreting GT.)

  In Chapter 12, firstly Hamouda puts forward his own interpretation, criticizing rather types of Post Keynesians. Firstly, he insists that TM should not be neglected, for TM and GT should be regarded as one. He maintains that the negligence of TM in economics has made economists lead to misunderstanding GT. (The reviewer thinks that TM is important in understanding how Keynes changed his theory from TM to GT. In Hamouda’s case, the Keynesian Revolution occurred in TM rather than GT. Incidentally this chapter only deals with TM in the book.) Secondly, his analysis of GT is basically based on the aggregate demand and supply theory in GT’s Chapter 3, putting emphasis on marginal efficiency of capital as well (The reviewer understands that the manuscript written at the end of 1932 is a turning point from TM to GT. See Hirai [2008] Ch.7).

Focus on Uncertainty ― In Chapter 3 (the only chapter focused on uncertainty), Muchlinski argues that Keynes’s philosophical stance is shared with Russell, and Wittgenstein as everyday language philosopher rather than logical atomism one. Based on this, he maintains that GT develops “vagueness” and “state of confidence” under uncertainty in sharp contrast with orthodox economic theory which is based on certainty and rigid deduction. Two questions emerge. One concerns the fact that GT’s main theoretical achievement is a theory of effective demand which shows how employment is determined. This aspect is ignored here. The other concerns the view that A Treatise on Probability runs through GT in full scale. Didn’t Keynes change his philosophical view, accepting Ramsey’s criticism?

Focus on Nested Structure ― In Chapter 8, Ramrattan=Szenberg argues that GT incorporates Classical views in a “nested” way, thus seeing complementarity between GT and the Classical. The authors recognize that Keynes’s idea evolved in a nested way, incorporating marginal analysis as well as macro analysis. They also admire Clower=Leijonhufvud’s non-Walrasian approach as precursor constructing a nested vision of Keynes. (The reviewer wonders if they mean, by the word “nested”, that GT is compatible with both Classicals and Non-Walrasians.)

Type 2: Chapters on Essential Rather Than GT.

Reinforced by Sraffa’s Idea and Kaldor’s Theory ― In Chapter 10, Camara-Neto=Vernengo maintain that in arguing long-run under-employment equilibrium Keynes’s theory needs to be reinforced on two points. One is Sraffa’s criticism of the limitation of neoclassical capital theory. The other is to rectify Keynes’s principle of effective demand spoiled by neoclassical marginalism through adoption of a “supermultiplier” model cum Kaldor’s “Verdoon Law”.

Monetary Stance – One is Chapter 13, in which Rochon stands by Horizontalist. In this regard, he evaluate not so much GT, which assumes the exogeneity of money supply as Keynes’s Economic Journal papers (1937 and 1939). Even there, the author argues, Keynes did not deal with a problem of endogeneity between banks and a central bank, although the direction in which Keynes moved is the same as Horizontalists did later.  

  Another is Chapter 15, in which Wray explains two alternative approaches to money – market efficiency enhancement, and state creation ― and claims that his stance (neo-Chartalist), which regards money as public monopoly, should update Keynes’s argument.

　　　　

Type 3: Chapters on Development of Postwar Macroeconomics

Positive Evaluation ― In Chapter 7, Lazzetti=Ohanian stress the influences initiated by GT. Its framework was provided to economists and policymakers, who collected the time-series data of macro economy and developed econometrics. On these points, the impact of GT was no less important than that of　Kydland=Prescott. They state that the FRB’s forecasting models are similar to Keynesian models in the 1960s, including Philips curve and management of aggregate demand. Keynesian vision provides the framework for policy implementation in the context of a central bank’s behavior attaining low unemployment rate and stability of the price level. Thus a central bank is unlikely to fall into pessimism. They are sure that GT will continue to find strong support among policy makers (The reviewer thinks that without this kind of development the “Keynesian Revolution” would not have taken place. This should be evaluated in a direct fashion.)

Negative Evaluation (The Case for New Classicals) ― In Chapter 4, describing the development of macroeconomics through the present day, DeVroey concludes that macroeconomics from now on should be developed along the direction which New Classicals initiated, declining the return to Keynes - the only chapter against Keynesianism. What attracts the reviewer, firstly, is that he categorizes IS-LM approach, New Keynesian Models mark II as “Marshallian Approach”, while New Keynesian models of the coordination failures type and New Classical models as Walrasian Approach. To the reviewer IS-LM approach and extended version incorporating many equations belong to Walrasian Approach (see Patinkin), while New Classical models are not Walrasian, for they assume a representative agent. Secondly, the reviewer sees no future for macroeconomics along New Classicals, which use utility maximization of a representative agent over an infinite period, rational expectations and calibration method. These assumptions are of no use in analyzing the real world which has experienced unstable financial globalization over the two decades.

Long-run Post Keynesian Stance ― In Chapter 6, Docherty states that Monetarism turned out to be unsuccessful, and soon Keynesian victory has been brought about by New Keynesians and Post Keynesians. That said, he points out two differences between the two: (i) Difference in causality structure; (ii) the long-run features in Post Keynesians are similar to the short-run ones in New Keynesians. He emphasizes that economics should move along Post Keynesian approach which analyzes macroeconomic policy on short run and long run issues. (The reviewer wonders why New Classical macroeconomics, which had won the victory after Monetarism over these two decades is not referred to at all.)

Response to GT from Soviet and Western Marxism ― In Chapter11, Dostaler discusses the relation between Keynes and Marx – destruction of the foundation of Ricardian economics on which Marxian economics is built, the relation in “Monetary Theory of Production”, the familiarity in love of money - , followed by Keynes’s view on Soviet, the impact of GT on Western Marxism as well as that in the Soviet bloc.

What attracts the reviewer most here – the only chapter discussed in the context of political regime change, are as follows: Big up-and-down swing in evaluation of GT/Keynes in the Soviet bloc as well as among Western Marxists. The reviewer thinks that this theme should be examined more extensively including Japan.

Comparison between Keynes and Friedman ― In Chapter 9, Backhouse = Bateman compares Keynes and Friedman, treating the two on equal terms, and mentions similarities and differences in various aspects, so one might have an impression of neutral stance.

  What is striking is that they maintain the methodological similarities, and argue that Keynes just “moved away” from, not renounce, the quantity theory of money.

　　　　　　　　　　　　Type 4:  Others

New Theories in the Previous Period - In Chapter5, Dimand points out the fact that many theories known as currently invented are, in fact, the ones which were developed before ― people including scholars simply do not notice it (e.g. Minsky’s theory can be found in Fisher’s theory of debt deflation). The author, among others, pays attention to Allais’ achievements, only one of which was credited for the Nobel Prize.

  One problem here is how we should explain and evaluate the revolutionary movement in economics in connection with this unnoticed achievements.

Emphasis on Interest and Profit - In Chapter14, profit seeking activities by firms, Smithin maintains, are essential for understanding capitalism. But this is neglected in Neoclassical theory, so it cannot be an adequate theory of capitalism. He also

emphasizes the difference between profit and interest and rejects the “equalization of the rate of profit”. The reviewer would like to know how this is related to GT.

The book, again, reveals diversity and multiple understanding of GT as well as Keynesian economics in general. This tendency might mirror the present situation in which the “Pro-Keynes” Camp is situated. The reviewer believes that as far as GT’s interpretation is concerned, it should be rather pursued based on primary material as well as on Keynes’s publications in its entirety (cf. Hirai [2008] Chs.4-12). Another task for each Pro-Keynesian is to put GT and Keynes in the context of the present world economy after the Lehman Shock (cf. Bateman, Hirai and Marcuzzo [2010]).

References

Bateman, B., Hirai, T. and Marcuzzo, M.C. eds., The Return to Keynes, The Belknap Press of Harvard University Press, 2010.

Hirai, T., Keynes’s Theoretical Development – From the Tract to the General Theory, Routledge, 2008.

                                                                                          

Seeking the Cure for the Malaise of the Market Economy ―Social Philosophy in Interwar Cambridge ― Toshiaki Hira

How cute!

Read at the ESHET in Prague, 2008

Seeking the Cure for the Malaise of the Market Economy

           ―Social Philosophy in Interwar Cambridge ―

                   

Toshiaki Hirai*

1.    Introduction

  The inter-war Cambridge, needless to say, marked a gigantic advance in the history of economics. Suffice it to mention Pigou’s welfare economics, Keynes’s macroeconomic theory, Robertson’s theory of industrial fluctuations,　Hawtrey’s trade cycle theory, J. Robinson’s theory of imperfect competition which came from the Cost Controversy initiated by Sraffa and so forth. Although each of them have been so far extensively studied, studies which aimed at examining the Cambridge School as a whole seem to be unexpectedly few in number.

  Although such a study in the field of economic theory should be important to be pursued, we will leave it to other opportunities. In the present paper we will rather examine the social philosophies — the images of the market economy with value judgments — entertained by the inter-war Cambridge School by taking the cases of Keynes, Pigou, Robertson and Hawtrey.¹ How did these world-leading economists evaluate the market society? How did they think it needed to be reformed or transformed? And just how much did they really have in common and difference? These are the tasks which this paper should address.

  The significance of this task might in the first place be seen in the fact that their social philosophies, except for Keynes’s, have long been forgotten. Thus, bearing the situation of present-day neo-classical economics in mind, it is all too easy to run away with the idea that except for Keynes the Cambridge economists applauded the laissez-faire market society. This is, however, far from the truth. 

Secondly, by clarifying the social philosophies of the Cambridge economists we can get a useful clue to understanding ‘the relation between social philosophy and economic theory’. On the whole, we can say that in the inter-war Cambridge economic theories underwent multifarious developments through critical discussions, while their social philosophies showed, in contrast, a considerable degree of similarity. 

  This paper runs as follows. In section 2 we deal with the age of Marshall as a prelude. From sections 3 to 6, Keynes, Pigou, Robertson and Hawtrey are respectively examined in view of of social philosophy. In section 7 we will characterize the age of Keynes. Section 8 is the conclusion.

The present paper deals with ‘market’ and ‘governance’, concentrating our attention to the social philosophies of the leading economists in inter-war Cambridge (Knowledge is rather argued by Marshall. It was Hawtrey² and Keynes, however, who was interested in knowledge in terms of philosophy).

2．The Age of　Marshall – a Prelude

In this period, Marshallian economics and the New Liberalism dominated the scene in the UK. It should be noted here that Marshall’s economic liberalism was not an influential force, but the New Liberalism had some influence on Marshall’s social philosophy.

  The predominant social philosophy in this period was represented by Social Imperialism (Chamberlain), Free Trade Imperialism (Asquith), New Liberalism (Hobson) and Fabianism (the Webbes and Shaw). What all these exponents had in common was their advocacy of the need for positive involvement of the state in tackling the poverty problem (social reform), and they were critical of laissez-faire. For lack of appropriate term, let us dare to call these trends of thought ‘Collectivism’. Laissez-faire had by now become practically a lame duck.

  During this period the mainstream of English economics was constituted by the neo-classical school led by Marshall. It was Marshall who put forward the theory of exchange as a theory of stable equilibrium of normal supply and demand (the ‘static theory of equilibrium’) which, assuming the constancy of both the marginal utility of money and the general purchasing power of money, and confining the object of analysis to one commodity, provides an effective way of working out inter-temporal problems, though it leaves out the analysis of spatial interrelations among goods. The fundamental idea running through all the various parts of the central problem of distribution and exchange, Marshall says, is the ‘general theory of the equilibrium of supply and demand’.

In spite of the fact that his mind dwelt so much on Socialism or Collectivism, Marshall’s social philosophy was based on classical liberalism. Groenewegen (1995, p.610) sums up Marshall’s position ‘in terms of a virtual persistent adherence to the tenets of classical liberalism as they existed during his formative years. From these he never departed’.

He stressed the importance of the role which entrepreneurs or firm organizations play for economic development, the importance of competition, which free trade should promote, and the importance of the external economies generated by small or medium firms and their concentration in certain districts. He also emphasized, using the surplus analysis, the maximization of social surplus brought about by competition.

  That Marshall apprehended the unfavourable situation in which the UK found itself in competition with Germany and the USA is a well-known fact. Nevertheless, he advocated free trade on the grounds of the advantages of competition, emphasised the advantages of small and medium firms concentrated within a district, and established the ‘Economic Tripos’ – ‘gentlemanly’ education – in order to reform its education system.

  Marshall, as an economic theorist, literally succeeded in bringing British economics under his control. His stance in social philosophy, however, was one of economic liberalism and conservatism in terms of the current trend. In this sense, the Age of Marshall is the one in which Marshallian economics ruled the roost in the field of economics, as did the New Liberalism in the field of social philosophy.

3. Keynes³ ― ‘New Liberalism’

Keynes brought about the so-called ‘Keynesian Revolution’ in economic theory and policy through the General Theory. However, this is not the only influence. The social philosophy ― ‘New Liberalism’ ― which ruled post-war Europe owes an important share to Keynes than any economist in Cambridge. In this section we will examine it.

3.1　The Nature of the Market Society ― Pseudo-morality and Economic Efficiency

  Keynes’s view of the market society is based on the perception that it depends, in essence, upon ‘an intense appeal to the money-making and money-loving instincts of individuals’ as the main motive force of the economic machine (Keynes, 1926, p. 293). The market society thus characterized, Keynes argued, is subject to a serious dilemma. On the one hand, it is very unpleasant in terms of morality, the money-loving instincts being so elevated to such heights. On the other hand, it is superior to any other type of society in terms of economic efficiency, precisely because it is fuelled by the same instincts.Despite its serious flaws from the point of view of morality, the market society cannot but find general approval for the foreseeable future from the point of view of economic efficiency

This is Keynes’s fundamental view of the market society.

However, recognizing the market society’s superiority in terms of economic efficiency does not mean blanket approval of the laissez-faire principle. Keynes believed that if left to itself, the market economy would be subject to inherent instability. In order to make it work efficiently, policy measures aimed at effective management of the market economy should be pursued, the laissez-faire principle being relinquished.

  Keynes poses a serious question ― the moral problem in our age is how we should come to grips with the relation between morality and money. In judging the market society morally unpleasant, Keynes meant that pseudo-morality rules the roost there — ‘the love of money, ... the habitual appeal to the money motive in nine tenths of the activities of life, ... the universal striving after individual economic security as the prime object of endeavour, ... the social approbation of money as the measure of constructive success, and ... the social appeal to the hoarding instinct as the foundation of the necessary provision for the family and the future’ become the dominant social ethic (Keynes, 1925a, pp.268-269). These traits ─ the most unappealing aspects of human nature ─ are enshrined as the highest virtue.Nevertheless, we have no choice but to live under this pseudo-morality for some time yet to come, as we know of no means to attain economic efficiency aside from exploiting it (Keynes, 1930, p. 331).

   Keynes’s distaste for the pseudo-morality of the market society is reflected  in his remarks on Leninism — its ethics can be, in essence, regarded as a challenge to the individuals’ and society’s ‘love of money’ (see Keynes, 1925a, pp. 259-260). He maintained that if it is to survive the competition with communism, the market society must be several times as efficient as communism (see Keynes, 1925a, pp. 267-268).

　 We can, indeed, go as far saying that behind Keynes’s perception lay Moore’s ethics ─ which was critical of the utilitarianism of J.S. Mill and Sidgwick. Keynes was profoundly influenced by Moore⁴. The story does not end here. Moore’s ethics would also have profound impact on the Bloomsbury Group⁵.

  And yet Keynes considered that the market society could not but be accepted for the time being because of its economic efficiency. On the other hand, the market economy is subject to instability and fluctuations. How can the market economy work efficiently without causing heavy unemployment? It was to be Keynes’s calling as an economist to pursue economic theory and policy to this end.

  One important question remains to be asked — what should relations be between the state and the market? In this respect Keynes was a realist. He argued that the government’s agenda and non-agenda problem should be addressed with the case-by-case approach rather than on the basis of abstract reasoning.

  Below we will consider Keynes’s view of the market society (besides the question of morality) in detail.

3.2 The Mechanism of the Market Economy

How does Keynes perceive the mechanism of the market economy? In a few words: (i) he rejects the view advocated by exponents of laissez-faire philosophy and economics, and (ii) he emphasizes the role which the state and non-market institutions play in stabilizing the market economy.

A. Criticism of Laissez-faire Philosophy and Economics

a. Laissez-faire Philosophy

According to laissez-faire philosophy, argues Keynes, the maximum public good is attainable through each individual’s pursuit of his/her own maximum private good driven by his /her enlightened self-interest. In other words, if the state interferes as little as possible with the market economy, the maximum public good as well as the maximum private good will be achieved.

  Laissez-faire philosophy (which encompasses individualism and the doctrine of social contract) is based upon two propositions: (i) individuals are possessed of enlightened self-interest, and (ii) the maximum public good can be attained through this enlightened self-interest.

 Keynes, however, doubts them. Firstly, there is no built-in mechanism which can harmonize private interests with the social interest.

 Secondly, individuals are not necessarily wiser than the organizations to which they belong. Laissez-faire philosophy, which is based on the supposition that society is composed of rational individuals, ignores the real world as being largely occupied by ignorant and weak individuals.

If the market society is left to individuals’ pursuit of their private good alone, the market society will fail in attaining the maximum public good. Only if some sort of social units were organized would this be attainable. Keynes’s stance was very realistic and in sharp contrast to the philosophy of laissez-faire, which derives its basic propositions from an idealization of society and individuals.

b. Laissez-faire Economics

Laissez-faire economics, he argues, is based on two assumptions: (i) an ideal distribution of the means of production between various ends is brought about through competition among independent individuals; (ii) unlimited opportunities for making money are necessary and effective as an incentive to bring out maximum efforts.

From these derives the proposition that the pursuit of profit by individuals brings about the maximum volume of output. Laissez-faire economics also maintains that economic matters should be left to the supply and demand mechanism in the market (Cf. Keynes, 1925b, p.305)⁶.

  Keynes criticizes laissez-faire economics on two points.

Firstly, it is constructed on three unrealistic assumptions, namely: (a) the process of production and consumption are not organic; (b) there exists sufficient foreknowledge of conditions and requirements; and (c) there exist adequate opportunities for obtaining this foreknowledge.

He argues that these tenets fly in the face of facts evident in the real economy: (d) an efficient production unit is larger than a consumption unit; (e) there exist overhead or joint costs; (f) internal economies promote the concentration of production; (g) the time required for adjustment is long; (h) ignorance prevails over knowledge; (i) monopolies and combinations impair equal bargaining⁷.

  Laissez-faire economists tend to believe, argues Keynes, that (a) and (c) are ‘natural’ and, therefore, ‘ideal’, even when they are apparently not in accordance with the observed facts. This critique corresponds to his critique of laissez-faire philosophy.

  Secondly, laissez-faire economics pays exclusive attention to the final results, overlooking the fact that competition itself entails costs/sacrifices, and that not a small amount of wealth tends to be distributed in the field in which competition is not so strongly felt.

It should be noted that his critical attitude towards laissez-faire economics runs through his entire life. In the 1920s and 1930s Keynes constructed his ‘monetary economics’⁸ in the Treatise and the General Theory, which is at variance with laissez-faire economics (and laissez-faire philosophy). He maintains this stance in his policy proposals of the 1940s.

B. Keynes’s Social Philosophy

a. An Institutional View of History

　 How does Keynes express his own social philosophy? He considers self-interest not all that enlightened, and individuals all too ignorant and weak. From this position he criticizes the Individualism of Locke and Hume: a philosophy of the consequences of behavior based on rational self-love among individuals under the social contract.

 Keynes also criticizes Individualism from a historical point of view: it is not adaptable to modern conditions, although it was adaptable to conditions in the 18th and 19th centuries (see Keynes, 1925b, pp. 300-301).

  This relativistic view of history is to be seen even more clearly in his acceptance of the view taken by Commons⁹, the leading economist of Institutionalism. This acceptance reflects Keynes’s realistic stance, and is indispensable for an understanding of his social philosophy.

  Commons classifies modern history in three periods.

The first is a ‘period of scarcity’ which precedes the Industrial Revolution. It was a period when the freedom of individuals was minimized while government regulations with the accompanying physical enforcement were maximized.

 The second is a ‘period of abundance’ when personal transactions took the place of quotas. It was a period when the freedom of individuals was maximized while government regulations accompanied by physical enforcement were minimized. Through the struggles of the 17th and 18th centuries, it saw the triumph of laissez-faire and liberalism in the 19th century.

The third is the ‘period of stabilization’ in which we are living. It is a period when individual freedom tends to be somewhat reduced partly due to government sanctions, but mainly due to collective actions (by corporations, trade unions, manufacturers, merchants, laborers, bankers and so forth).

  Keynes acknowledges that we are living in a ‘period of stabilization’, and welcomes it. What he terms ‘the New Liberalism’¹⁰ indicates a social philosophy of the third period (see Keynes, 1925b, p. 305).

  Keynes is critical of the idea that an ideal society should consist of economic subjects who amount to no more than individuals in pursuit of their private interests. For example, against Marshall, who praises the situation in which entrepreneurs lead society, he argues that entrepreneurs have now become disgraced idols who cannot lead us to utopia. The same doubt is also given similar expression elsewhere (see Keynes, 1925a, p. 268).

Keynes firmly believes that an ideal unit in the economy should lie somewhere between individuals and the state, and welcomes the emergence of organizations such as ‘semi-autonomous bodies’ and the ‘socialization of large joint-stock institutions’ through history.

  Semi-autonomous bodies are organizations which focus their activities exclusively on the public good (the universities, the Bank of England, the Port of London Authority and the railway companies are mentioned). In the ordinary course of affairs they are permitted to operate freely, but ultimately they must abide by Parliament.

 The socialization of large joint-stock companies is related to a separation of ownership from management, which forces them to respond adequately to the demands of the public rather than aim at maximizing a profit in favor of shareholders (see Keynes, 1926, pp. 289-290).

  As the market society evolves, organizations which pursue the public good will increase, and large joint-stock companies will socialize themselves. These phenomena should appreciably mitigate the pseudo-morality and instability characteristic of the market society.

  It should be noted that Keynes does not think of the necessity of changing these phenomena but of leveraging and promoting them.

 

　 b. The Market Society and the State

  Keynes’s understanding of the evolution of the market society which we saw above, however, does not imply that he considered that the market society’s serious problems would be settled of themselves. He continued, on the contrary, to hold that we have no ground for believing any such thing. He points out the three spheres in which maximum public good cannot be attained in the free market society, and in which the state needs therefore to be involved ― (i) the existence of risk, uncertainty and ignorance¹¹, (ii) the volume of saving and its distribution and (iii) the population problem (see Keynes, 1926, p.292).

c. The Continued View of the Market Society　―　Evidence from the General Theory

  We have so far examined Keynes’s social philosophy through his papers of the mid-1920s. It should be emphasized, however, that he continued to hold to it thereafter, as is shown by the General Theory.  　

  The social philosophy there is, in a nutshell, that the market society, if left unchecked, inherently stays at ‘underemployment equilibrium’.

Two points are relevant here.

Firstly, the market society is subject to fluctuations in terms of employment/output. The fluctuations in the marginal efficiency of capital are mentioned as one of the main factors (the main theme of Chapter 12).

Secondly, the market society can stay at a low level of employment. It will reach neither full-employment nor a minimum level. Rather, it tends to stay in between (lower than full-employment, but much higher than a life-threatening level) (see Keynes, 1936, p. 254) due to the following built-in stabilizers: (i) the multiplier larger than one, but not very large; (ii) moderate changes in the prospective yield of capital or the rate of interest will not induce great changes in the rate of investment; (iii) changes in money wages are modest relative to those in employment; (iv) the nature of capital, such that a movement toward one direction tends to reverse itself (see Keynes, 1936, pp. 250-251).

  Recognizing these points does not necessarily mean taking a wait-and-see approach. Keynes was firmly convinced that these flaws could be remedied with the right policies¹², as is shown by the stress he placed on state management of investment and monetary policy (see Keynes, 1936, p.164). It is worth underlining the fact here that Keynes endeavored to construct theories from which he could draw practical policies throughout his whole life, which contrasts strikingly with the approach taken by Schumpeter and Hayek. 

4. Pigou¹³ ― Socialism or Capitalism?

Pigou’s largest contribution to economic theory is Pigou (1920), which is, in nature, macroeconomics. What he aimed at was to examine how various factors (such as policies, imperfect knowledge, the habit of the people which value the present over the future, uncertainty, and so forth) will influence future national dividend (= national income)¹⁴ and how we could increase national dividend or economic welfare. His recommendation for progressive tax, and his argument of the divergence between social marginal cost and private marginal cost are closely related to this aim.¹⁵

Pigou¹⁶, as the author of The Theory of Unemployment (1933), was targeted for attack as representative of the ‘Classical School’ in the General Theory. Different from Robertson, however, Pigou acknowledged Keynes’s pioneering work and endeavored to reconstruct classical macroeconomics in Employment and Equilibrium (1949).¹⁷

In spite of the fact that Pigou made a great contribution to economics, he has been evaluated exclusively as a champion of anti-Keynesians. This viewpoint seems to have overshadowed Pigou as an original economist.   

With respect to his view on the market society, the situation is quite different. The fact is that this day Pigou’s social philosophy is almost forgotten. We will examine it through Socialism versus Capitalism (1937).¹⁸

4.1. Socialism

Pigou characterizes socialism as a system (i) excluding profit making; (ii) collectively or publicly possessing the means of production and (iii) having central planning.

  He compares it with capitalism on various points — (i) wealth and income distribution; (ii) the allocation of productive resources; (iii) the allocation of productive resources under socialistic central planning; (iv) unemployment, and so forth. Let us take them one by one.

　

4.2. Wealth and Income Distribution

Pigou starts by drawing attention to the following point: in the capitalistic system there is clear-cut inequality in the distribution of wealth and income. This will inevitably cause serious harm because resources are wasted in that they are allocated to the spheres in which priority is relatively low, neglecting the spheres in which priority is relatively high. Thus Pigou places the emphasis on transforming the capitalistic system so that greater equalization of wealth and income distribution may be attained with several measures19: (i) progressive death duties and income tax; (ii) subsidies to the production of goods bought by the poor; (iii) extension of social services to fields favoring the physical and mental improvement of the young, and so forth. Having said so much, he sees some limitations in these measures in the capitalistic system.

Once a socialistic system is set up, argues Pigou, this kind of anxiety will be eliminated, for capital accumulation is then directly carried out by the state by securing the resources necessary for investment at their disposal prior to income distribution to individuals.

4.3. The Allocation of Productive Resources

  What Pigou emphasizes here is an ‘appropriate’ allocation of productive resources among different uses given the existing distribution of money income. This is defined as an ‘ideal allocation’, in which the marginal net products become equal everywhere in a society in which ‘all money incomes and everybody’s tastes and needs [are] exactly alike’ (p.33). He argues that what matters next is a degree of divergence in the actual resource allocation from this ideal one, which comes from divergences between marginal social and private costs, monopoly, and imperfect competition.²⁰

  Pigou maintains that even in the capitalistic system divergences between marginal social and private costs can be rectified by means of proper bounties and duties. With regard to monopoly and imperfect competition, he proposes, respectively, (i) the nationalization of monopolistic firms in order to do away with the harm, and (ii) extension of nationalization to the industries in which resources are wasted on unnecessary competitive advertising.   

4.4. The Allocation of Productive Resources under Socialist Central Planning

  Here　Pigou seems to take up a Lange-type theory of socialism. That is, he argues that by exploiting a Walrasian tâtonnement method the Central Planning Authorities can bring an ‘ideal distribution’ to fruition.²¹  

Pigou’s discussion is composed of two parts. Firstly, given the allocation of resources among different industries, he examines methods in which the Central Planning Authority will distribute consumptions goods to the individuals. Pigou recommends here a compulsory system to guarantee incomes. Secondly, given the distribution of money incomes, he examines methods in which resources are allocated among different industries. His proposal here is to bring the economy close to ‘ideal allocation’, that is, the state of perfect competition.

Pigou then draws up a blueprint²² of the socialist economy. Productive activities are managed and run by the Central Planning Authority²³. This authority determines the ‘accounting’ prices for various means of production and labor by decree, and then endeavors to bring the allocation of productive resources close to the state of perfect competition. According as the demand-supply situation changes, it revises the accounting prices for various means of production and labor. It should be noted that the accounting prices are not what is actually paid.  

Pigou firmly believes that the situation of perfect competition is attainable under the Socialist System. In this respect he might implicitly belong to the Lange=Taylor camp. 

　

4.5. Unemployment

Pigou declares socialism the winner in conquering unemployment. His arguments run as follows.   

  Unemployment is a problem which arises in a dynamic economy. Two movements should be distinguished. One is a ‘relative movement’ which is related to frictional unemployment. The other is an ‘absolute movement’, which results from economic fluctuations. What matters is unemployment in relation to the latter.

  Pigou draws comparison between the capitalistic system with state intervention allowed for and the socialist system.

Firstly, Pigou points out that the socialist system in which decisions are made by the Central Planning Authority gains an advantage over the capitalistic system in which decisions are made by many firms.

Secondly, Pigou asks which system is more effective in implementing public works policy and monetary policy in the direction of curing unemployment. His conclusion is that the socialist system wins out with the former policy through unification of decision-makings, while in the case of the latter the effect will be the same.

Finally, Pigou mentions two cures that only the socialist system has at its disposal to implement: (i) compulsory transference of productive resources among different industries; and (ii) a cut in money wages.

Having thus compared several aspects in the two systems, Pigou concludes that the socialist system can, all things considered, be declared the winner.

5. Robertson²⁴ ― ‘Liberal Interventionism’

Robertson is famous, among other things, for his theory of trade cycle set out in Robertson (1915)²⁵ and Banking Policy and the Price Level (1926). Both of them were the products through long discussion with Keynes, who was given, in turn, a path by Robertson (1926) toward the Treatise.²⁷ Robertson’s book has been valued highly as a representative of the Wicksell Connection, although it was not influenced by Wicksell (1898).

 Having constructed a dynamic theory in which large-scale production is emphasized as key feature of modern industry, Robertson became more and more critical of Keynes as he proceeded from the Treatise to the General Theory. It was Robertson rather than Pigou who opposed the General Theory throughout his life, while defending Marshallian economics such as the theory of value and distribution, and the quantity theory of money as is clear from Lectures on Economic Principles (1957-9).

So far as social philosophy is concerned, however, we see, rather, a certain similarity between the two. To use his own terminology, Robertson’s view of the market society is ‘Liberal Interventionism’ (EO, p.51). Let us examine it through The Control of Industry (1923), which never fails to remind us of The Economics of Industry (1879) by Marshall and Marshall. 

5.1. Large-scale Industry

It is the ‘factory system’ that Robertson regards as an essential of the modern capitalistic economy.

  In the first chapter, he starts by discussing the advantage of the division of labor, and proceeds to focus on the evolution of standardization and specialization²⁶. Robertson shows how these phenomena brought about large-scale industries, and the ascendancy of large-scale firms over medium-small firms. He goes as far as stating that the development of division of labor in mental work led to the economies of large-scale control, accelerating the primacy of large-scale firms.    

  In chapter 2, ‘Large-Scale Industries’, vertical and lateral integrations, and trust are the focal points. The key concept here is ‘the principle of standardization’, a concept in contrast with ‘the principle of differentiation’ so far treated as a key concept. Due to this a very wide range of economic activities are brought under the control of a few firms. And Robertson is neither negative about ─ nor critical of ─ this phenomenon.²⁸

  Robertson submits to our attention the following situation: the firms thus enlarged come under the control of the few, while the majority of people live under their power. He considers the tendency of firms to the large scale and the subsequent monopolization as a sort of natural or reasonable evolution.

However, he is very critical of another condition entailed with capitalism: the majority who work for the big firms bear the risks while they are not entitled to contribute to the control of them. What he dearly hopes for is an improvement in the market society so that risk and control may be fairly and impartially shared.

5.2. Robertson’s View of Capitalism

　The capitalistic system has, according to Robertson, three salient features: (i) an un-coordinate system; (ii) the ‘Golden Rule’ of Capitalism (control is with risk); and (iii) the widening gap between rulers and subjects.

　A.  The Un-coordinated System

　The capitalistic system is, by nature, un-coordinated.²⁹ Although ever larger firms are emerging, says Robertson, they are yet no more than small islands in the ocean.³⁰

 He mentions as advantages of the capitalistic system: (i) democratization of many economic activities; (ii) allowance for individual’s judgment and initiative; (iii) freedom of life; (iv) freedom to use the income at one’s disposal; (iv) regular and affluent sufficiency of consumers’ wants.

In contrast, he sees disadvantages: (i) wants which cannot be expressed in terms of money are not fulfilled; (ii) waste of resources by means of marketing; (iii) regular occurrence of depression.

Robertson’s basic stance is that we are able to improve the capitalistic system on our own initiative without detracting from the advantages. He is sure that there is much room for further diversifications and experiments for the concentration of industrial power into the hands of the few to be mitigated. However, he also adds a word of warning: ‘… it behoves the reformer to beware lest in pursuing this difficult goal [the control of industry] he overlook the achievements and impair prematurely the operation of that delicate mechanism of price and profit, faith and expectation …’ (Robertson, 1923, pp. 87-88).

  Robertson considers that improved control of industry is to be attained through people’s continuous efforts. It was from this point of view that he took an interest in various experiments under way at the time.³¹

 

B. The Golden Rule of Capitalism

　The rule is that those who run a risk have a right to control. Robertson maintains, however, that capitalism as it is now breaks the rule on several counts:

 (i) Separation of ownership from management ― Shareholders take a risk while managers control the firm.

 (ii) Those who take some risk, but have no share in the control of industry ― life insurance companies and speculators.

(iii) The majority who have no share in the control of industry, but run a considerable risk ― the laborers.

Robertson dwells in particular on item (iii)³², stating that laborers run three kinds of risk: (a) the firms for which they work may go bankrupt; (b) the product which they produce may decline due to demand shift or technological progress, and (c) they may be thrown into unemployment.

Robertson insists that no plan to transfer control power should be held successful unless transfer of risk-bearing is included.

C. Widening Gap between the Rulers and the Subjects³³

This involves a social division between those who give orders and those who carry them out. Robertson is here concerned with the alienated feelings which the laboring class experience in the industrial system.³⁴

5.3. Towards a Reform

Robertson proposes that we should aim at eliminating the harm which the concentration of industrial power into the hands of the few causes by devising methods for consumers and laborers to share in power.

Chapter 9 examines collectivism and communism. Collectivism is defined as a system in which the state owns and manages business while prices and markets are kept intact. Communism is defined as a system in which the state manages business but the calculation of profits is disregarded.

Robertson points out the fields of industry where collectivist organization plays a useful role, examining its advantages and disadvantages in great detail.³⁵

As for communism, he examines the possibility of its partial application, pointing out its advantages and disadvantages. Robertson is, however, critical of the extreme communism in which a system of prices and production costs is completely disregarded.

While approving of the market system Robertson aims ─ through various forms of collectivism, the introduction of co-operatives and so forth ─ at reforming private firms, reducing the widening gap between rulers and subjects, and addressing the present situation of risk and control.³⁶

  Robertson’s stance toward Economic Liberalism is very delicate, for he does not seem to believe in it from the bottom of his heart. Properly expressing, his social philosophy should be ‘Sceptical (or Schizophrenic) Liberalism’. The following epitomizes his stance:

   those of us with the liberal virus in our blood but unwilling to be banished to the desert or the wilderness (Robertson, 1947, p.47).

He describes liberalism as ‘virus’ and bare competition as ‘desert or wilderness’, which indicates that he is far from applauding either side. Liberalism is a virus, and yet we cannot weed it out because it already runs through our blood vessel. On the other hand, we do not like a society in which bare competition rules the roost. It is something like desert or wilderness. It is because he was in the state of mind that cannot deny that liberalism is something which is now obsolescent that he calls liberalism ‘virus’³⁷ (no one calls something which a person evaluates highly ‘virus’). There is, at least, Robertson who thinks and feels so. But another Robertson mutters to himself: liberalism must be still maintained as fundamental social philosophy.

  Robertson’s liberalism ― ‘Liberal Interventionism’ (Robertson, 1947, p.51) ― is put in such a psychological conflict.

 5.4. Robertson’s Stance toward the Planned Economy

  Robertson, who supports Liberal Interventionism, is critical of the Planned Economy. On the other hand, Robertson entertains a doubt that the economic phenomenon which took place in the war economy might not be transitory but irreversible trend.

  In the Economic Outlook, Robertson set out the following question:

   … one of the questions to which my paper … is intended to lead up is precisely whether this anti-thesis [the transitional period and the postwar normal period] is one which it is still sensible to draw, or whether the lesions caused or precipitated in our economy by the war are now revealed as being of so deep and lasting a character that this distinction between the transitional and the permanent must be thrown, with relief or regret according to our temperaments, upon the scrap heap (Robertson, 1947, p.47).

  Robertson stands on the side which hopes for the gradual restoration of the market mechanism. He also consents to Robbins (1947) in which he stresses the accelerated restoration of the market mechanism, while emphasizing the role of the government for correcting economic motives’ influences. On the other hand, however, Robertson is not sure of whether this could be argued based on the distinction between the transitional period and the peace period. He thinks that it is not clear at all whether the difference between liberal interventionism and the planned economy is a problem of quality or the one of degree. Evidently Robertson reveals some hesitation and anxiety.

   

Those of us … who are handicapped … by the kind of congenital or educational bias which I have tried to describe have a real personal problem to solve. How far can we honestly manage to attune our thoughts and our teaching [liberal interventionism] to the prevailing wind [the planned economy]? And in so far as we fail to do so, is there nothing for us but to adopt the stance ― an honorable stance, but emotionally fatiguing and apt to be operationally sterile ― of owls in the desert and pelicans in the wilderness, praising past times and prophesying doom? (Robertson, 1947, p.46).

  It is interesting to compare his stance with that of Henderson (1947) in which he ‘identified the essence of planning as consisting in the formulation of precise quantitative programmes extending over a considerable range of time ahead, and set himself to investigate the limits within which, in time of peace, such programmes can be expected to serve as useful instruments of action’ (Robertson, 1947, p.48).

I felt that he [Henderson] had rested his case too little for my taste on the positive merits of a free system, and too much on the weakness of the weapons at his disposal for supplanting it (Robertson, 1947, p.49).

6. Hawtrey³⁸ ― Ethical Criticism of Capitalism

Hawtrey is well-known, among other things, for his monetary theory of the trade cycle. (his criticism, of the Treatise, based on it had some influence on Keynes’s theoretical development from the Treatise to the General Theory). He is also famous for the so-called ‘Treasury View’.³⁹ It is very difficult to see how Hawtrey was influenced by other economists, for although he was a prolific writer, he maintained his style of seldom referring to other economists. This is true even of Marshall. Hawtrey should be called an independent economist who greatly influenced other contemporary economists.

Curiously enough, however, no paper has been produced examining Hawtrey’s social philosophy, which we consider here in the light of Economic Problem (1926.).⁴⁰

6.1. Ethical Stance ― Welfare and Value

Hawtrey defines an ‘economic problem’ as one appealing to human motives in such a way that a cooperative action may be secured for a desirable objective. What is here set as an ‘objective’ is ‘welfare’ in the sense Hawtrey attributes to it (Hawtrey, 1926, p.185). He emphasizes ethical considerations in setting an objective.

　

6.2. False Ends

　 Hawtrey argues that notwithstanding the ethical value should be set up as our ends, economics has overlooked this, and in the market society ‘false ends’ rule the roost⁴¹ — that is, what should, by nature, be the means becomes autotelic.  

He considers that because money making (among other things, profit making) is a fundamental motive for business activities, worship of it becomes an end itself in an individualistic system.

6.3. The Market Society

Hawtrey defines civilization as application of rational management by human will to the economic problem. The market is, according to him, an imperfectly civilized system in which both consumers and producers are liable to lack in taking initiative.

Hawtrey has no encomiums to make of the market society in which the main economic activities are conducted in the form of exchange in the market, for he holds that it does not succeed in attaining ‘ethical value’.

Market prices, which establish themselves through equalization of supply and demand, diverge from ethical values, which should constitute ‘welfare’ in the sense Hawtrey attributes to the term. It is from this viewpoint, be it noted, that Hawtrey criticizes Pigou’s welfare economics based on ‘satisfaction’ ⁴²

  The divergence between ethical values and market values is, Hawtrey argues, attributable to two causes.⁴³

　 The first cause is imperfection of judgment on the part of the consumers. Consumers are lacking in wise spending capacity, while producers and merchants lack sufficient ability to provide them with ‘creative products’. (Hawtrey classifies products in two categories: (i) ‘defensive products’ necessary for the people to enjoy material welfare, and (ii) ‘creative products’, closely related to the culture of human society.)⁴⁴

  The second cause is an excessive inequality of income distribution, which is in turn caused by the profits that economic agents are allowed to make as an incentive. The result is a tendency for an ever larger share of income to go to a small number of entrepreneurs.⁴⁵

  In order to rectify this tendency, Hawtrey suggests two possible methods: (i) taxation on profits; (ii) state intervention in wage determination. He feels, however, that, in the case of (i) because of the effects on savings while in the case of (ii) because of the effects on profits, there might be limitations in an individual system.

  Interestingly enough, Hawtrey considers that cyclical unemployment is curable by means of wise credit control, and does not regard it as the area where human wisdom finds itself despairingly impotent.

6.4. The Market

  Hawtrey sets out to observe various markets from the point of view of exchange activities, and this characterizes his approach. Here we will take the case of the goods market.

The consumers here always appear as passive agents, the merchants as active ones. The merchants endeavor to anticipate, through their daily activities, what consumers will be wanting. With the information thus obtained they order goods from the producers. Thus the initiative in this market is with the merchants.⁴⁶

Hawtrey agrees that the prices of goods are determined through supply and demand. What is worth noting here, however, is Hawtrey’s perception that the prices reached through exchange activities in the market do not attain ethical values because people are lacking in sufficient ability to select goods wisely.

6.5. The State

Hawtrey considers that an essential function of the state lies in the regulation of human behavior through authority. In order to maintain an individual system the endeavor of the state must be to ensure that the rules are respected by the people. For that purpose the state as an ‘organized power’ requires a huge amount of material resources, and consequently exercises the power to levy tax.

Hawtrey goes on to address the question: Assuming an individual system, to what degree could the state, rectifying the flaws in the system, contribute to make genuine ethical values attainable? His answer is profoundly skeptical.⁴⁷

6.6. Collectivism

Hawtrey argues that collectivism, which is synonymous with socialism, is an approach opposed to profit. It excludes profit motives, and seeks an alternative motive in the state. Socialists hope that the extinction of profit will brings about a change in humanity. Hawtrey is sympathetic to socialism⁴⁸, although he does not identify himself as a socialist, for yet he sees serious defects in an individualist system⁴⁹ and considers socialism as a means of exploiting the state in order to bring welfare to fruition.⁵⁰

 　 Hawtrey drew up a blueprint for socialism⁵¹ that saw the markets for consumers’ goods kept intact but the markets between producers and retailers, as well as those between producers, abolished. On the other hand, between laborers and consumers only the state and its agencies would be at work.

7. The Age of Keynes

Now that we have examined social philosophy in inter-war Cambridge, let us go on to see how we might characterize this period as a whole.

7.1. Economics

First we need to look through economic theories put forward by the leading economists in this period, focusing on their original features.

Pigou’s principal contribution was The Economics of Welfare (1920), which belonged, in essence, to macroeconomics. Pigou discussed how several factors (policies, incompleteness of knowledge, the nature of the public and so forth) will influence the national dividend in the future. Above all, he concentrated on ways to increase the national dividend, which meant enhancing welfare. His famous arguments on the recommendation of progressive tax and the divergence between social marginal cost and private marginal cost are related to this problem.

It should be not be forgotten that Pigou, who was severely criticized by Keynes in the General Theory, contributed to the re-construction of neo-classical macroeconomic theory by means of the ‘Pigou Effect’, accepting Keynes’s criticism to some degree in his late years.

Robertson’s originality lies in his theory of economic fluctuations, which was developed in Banking Policy and the Price Level (1926). Although he was independent of Wicksell, this might be regarded, in essence, as following along the Wicksellian tradition rather than Marshallian lore.

Keynes developed his own theory of economic fluctuations in the Treatise, and put forward the theory of underemployment equilibrium in the General Theory.

In contrast with Pigou and Robertson, who endeavoured to defend Marshall’s theory, Keynes was critical of it in both books. (Even so, it is true that his monetary theory and short period analysis were greatly influenced by Marshall’s theory).

Hawtrey is famous for his monetary theory of economic fluctuations, which occupies a unique place in Cambridge economics.

The result of all this activity was that that the leading economists representing inter-war Cambridge made remarkable contributions in the field of macroeconomics. This is, after all, hardly very surprising, for they were in fact completing Marshall’s unfinished work. In this field the four economists endeavoured to construct their own theories, influencing each other and getting into heated controversy.⁵² Above all, Keynes, greatly influenced by Robertson in his collaboration period in the mid-1920s, advanced towards the Treatise. Keynes moved further in the direction of the General Theory, taking the criticism offered by Hawtrey and the ‘Cambridge Circus’.

It should be noted that they added nothing to Marshall’s greatest achievement, i.e., the theory of value. It was, however, added to as a result of Sraffa’s criticism of Marshallian value theory – the so-called Cambridge Cost Controversy. Sraffa raised a problem of incompatibility between decreasing returns and perfect competition. Although, as far as Sraffa himself was concerned, he was to return to the classical world, rejecting the equilibrium theory of supply and demand and adhering to the constant returns to scale, this opened the way to the imperfect competition theory formulated by J. Robinson.

7.2. Social Philosophy

   What is shared by the leading economists in the inter-war Cambridge is the emphasis placed on the malaise to be seen in the market society and the issue of how it could be removed (in sharp contrast with Hume and Hayek, who emphatically sing the praises of the market society).⁵³ With their diagnosis of the imperfection of individuals, they concur in the opinion that a laissez-faire policy can do little for the improvement of the market society, arguing that excessive inequality of income distribution and excessive unemployment are a malaise of that society which must and can be cured by the state.⁵⁴ Based on this type of social philosophy, they endeavoured to construct their own economic theories, which are, therefore, policy-oriented. And we can say that this stance follows Marshall’s stance on economics with a view to the good of society.⁵⁵

  And when we try to characterize the situation as a whole, not only in Cambridge but also in the UK, the conclusion we are driven to is that in this period the New Liberalism as social philosophy together with monetary economics as economic theory (to which the Wicksell Connection and the General Theory belong) ruled the roost, which amounts to stating that this could well be called the ‘Age of Keynes’.⁵⁶

8. Conclusion

  We hope that the meaning of the phrase at the top of this paper, ‘far from the truth’ has now become evident.⁵⁷ While economic theory in the inter-war Cambridge produced heated controversy and a cleavage, we see a considerable degree of similarities in social philosophy. Keynes called his social philosophy ‘New Liberalism’ (while Robertson spoke of ‘Liberal Interventionism’). Rejecting both Liberalism and Socialism, they aimed, broadly speaking, to find a middle path between the two. By and large, the consensus that this approach is the best way to organize society has guided Western Europe after World War II.

 In the U.K., however, recent years have witnessed the rise of an ‘enterprise culture’, which is hostile to the post-war consensus. Those who promote it have risen to the commanding positions in the market society. As a result British society has been greatly transformed.

  How much significance, then, does Keynes’s (and his colleagues) social philosophy retain today?

 It is our belief that however strong the drive towards enterprise culture might be at the moment, an advanced society will shift only modestly to the right in terms of the political spectrum, and that it would be impossible for the market society to approach classical Liberalism. The Society will remain and proceed on a middle path.

Moreover, it is far from clear that Neo-Conservatism ─ the driving force behind enterprise culture ─ is superior to New Liberalism (or the social philosophies dealt with in this paper). Keynes’s view was never ideological, but always practical: decisions should be made on the case-by-case basis. Neo-Conservatism is a social philosophy which seeks to make an impossible dream come true and is, for that reason, ideologically driven. If this is right, then some revised version of New Liberalism (not a return to the dogmatic socialism of the old Labor Party) would be required.

1) Besides them, W. Layton and H. Henderson are worth examining. They were the principal members, together with Keynes and Robertson, of the Liberal Summer School (cf. Freeden (1986, ch.4)) and The Yellow Book (Liberal Party, 1928) (cf. Skidelsky, 1992, pp.263-269). Layton, who had led the Liberal Summer School and supported the Liberal Party throughout his life and had been a ‘no ordinary press baron’, worked as a chief adviser of Programmes and Planning, Ministry of Production in 1942-3.

Although Henderson was to become a harsh critic of Keynes in the 1940s, it does not mean that he turned to laissez-faire. For Henderson’s social philosophy, see Henderson (1947) and Komine (2003). Shove was a pacifist as well as ‘a Fabian and an active member of the Liberal Party’. He was a great admirer of Marshallian economics and a critic of Pigouvian economics. For this, Carabelli (2005).

See Marcuzzo=Rosselli (2005), which brilliantly describes the human relationship among the Cambridge economists in this period based on unearthed correspondence. Also see Collard (1990), Hicks (1979) and Marcuzzo=Sanfilippo (2005).

2) In this respect, ‘Thought and Things’ is important – the only and book manuscript on philosophy in the text of which we find the year ‘1969’. It presents what might be called a theory of Aspect. The main theme is to analyze thought in terms of discernment of aspects, the introspective method being broadly applied. The basic point is that the mind discerns aspects. Aspects exist, in nature, within things in the form of potentiality. Aspects become reality only when the mind discerns them at the level of conscious experience. Aspects, thus obtained, are accumulated, and the mind repeats the action of remembering aspects thus accumulated whenever it makes some judgment. Hawtrey’s philosophy belongs to the general area of Empiricism, and is critical of behaviourism and materialism. He points out the limitations of the tendency of science to try to explain everything in terms of things. ‘Aspects’ was the fundamental concept which he continued to cherish throughout his life from his early days.

3) This section is based on Hirai (2003, ch.5).

4) For this, see Keynes (1949), Shionoya (1992), Hirai (2002) and Asano(2005, ch.1). It should be noted that Hawtrey and Pigou as well as Woolf were also greatly influenced by Moore.

5) L. Strachey and L. Woolf are, among others, important figures.

6) Keynes comments that this idea belongs to 50-100 years ago.

7) It should be emphasized that these features are distinctly recognizable in Marshall=Pigou.

8) See Hirai (2003, pp.81-83; pp.579-583).

9) See Commons (1934, pp.773-788).

10) On Keynes’s ‘New Liberalism’, see Clarke (1988, Chapter 4, ‘The Politics of Keynesian Economics, 1924-1929’) who grasps Keynes as a New Liberalist who succeeds the New Liberalism of the Edwardian period (pp. 13-14, 78-80); Freeden (1986), and Cranston (in Thirlwall ed., 1978) both of whom see Keynes as a ‘Centrist Liberalist’ different from a ‘New (or Left) Liberalist’ in terms of a refusal of a faith in the state as the disinterested agent of the community, the emphasis of the ideological difference between liberalism and a socialist/trade-unionist Labor party, and less reflective, philosophical and synthetic mind (see Freeden, 1986, pp. 128-129, 12-14, and 171-172); and Skidelsky (1992, Chapter 7, ‘Keynes’s Middle Way’) who supports Freeden and Cranston subject to several qualifications. In his paper, ‘Keynes’s How to Pay for the War: A Reinterpretation’, read at the History of Economic Thought Conference (University of Bristol, 1997), Skidelsky maintains that Keynes (1940) advocated his fiscal policy (deferred pay) based on the spirit of ‘the middle way’. See also Fitzgibbons (1988, Chapter 9, ‘The Political Ideals’). Moggridge (1992, Chapter 18, ‘Industry and Politics’) maintains that Keynes’s political thought evolved from the New Liberalism in the 1920s to the ‘Liberal Socialism’ in the 1930s and later. Peacock (in Crabtree and Thirlwall eds., 1993) describes Keynes as an ‘end-state’ liberalist who is in contrast with a ‘contractarian (or ‘procedural’) liberal’. Peacock seems to grasp Keynes within the context of the classical liberalism rather than that of the ‘New Liberalism’. See also Maloney (1985, pp. 159-161) in relation to Freeden’s (1978) evaluation of Hobson as the leader of the new liberal movement.

The New Liberalists of the Edwardian Era such as Hobson and Hobhouse, who saw the root cause of the problem of poverty and unemployment in under-consumption due to unequal distribution of income. See Hobson (1938), Mouri (1990, Ch.2). This is different from the Idealists such as Green and Bosanquet, who ascribe economic inequality to the latifundism as the remnants of feudalism. 

11) In later years Keynes (1937) pointed out two points different from the traditional theory. One is to incorporate the reality that the future is uncertain into theory, and the other to put forward a theory of demand and supply for the output as a whole. We should not think that Pigou and other Cambridge economists neglected this point. See Pigou (1920, Part I, ch. II; Part II, ch.VI), and Lavington (1912).

12) This is Keynes’s persistent stance since Keynes (1923).

13) This section is based on Hirai (2004).

14) On this, see Collard (1996).

15) This book was to be under fire by Robbins on the grounds that individual utilities cannot be compared.

16) Different from Robertson and Hawtrey, Pigou (1931) evaluates the Treatise highly. For example, he remarks: ‘[Keynes] claims for his new equation … that it enables the causal sequence, in many sorts of industrial disturbances, to be followed with a surer eye. This is, I think, a valid claim’ (544).

  17) See also Pigou (1950, 65). Pigou considers the significance of the General Theory to lie in its having put forward a theoretical framework which consistently connects the real factors with the monetary factors. He pays particular attention to, among other passages, pp. 246-247 (Chapter 18), where Keynes summarizes his view that the three fundamental psychological factors (the propensity to consume, liquidity preference, the state of long-term expectation), money-wages, and the volume of money determine the level of national income and employment.

The Pigou effect (the real balance effect) has been used as a powerful tool in favor of neo-classical as opposed to Keynesian macroeconomics.

18) Pigou (1948) is also revealing. Pigou (1953), where Marshall’s social philosophy is examined, is instructive as well.

19)  See Pigou (1937, p.30).    

20)  Needless to say, these were the main themes in Pigou (1920).

21) It should be noted that Pigou mentions neither Lange nor Walras. Some economists detect some flavor of general equilibrium theory in Pigou’s way of thinking. See Hicks in a letter from Ursula to Hicks dated 4 October 1935 (kept in the University of Hyogo) in which Ursula wrote that ‘it is perfectly true what you say about him being a general equilibist at bottom, that is one thing that makes his judgment so good. Myint (1948) distinguished Marshall’s partial surplus analysis from Pigou’s general equilibrium analysis. Laidler (1999, p.165) pointed out the same thing in Pigou (1933).

22) This reminds us of the ‘Blueprint’ in Schumpeter (1943).

23) Pigou (1948) emphasizes the role of the government in the market society because of the existence of the market failures and the propensity of individuals to prefer the present to the future. He classifies government planning into two: the primary planning (the planning of the ends) which aims at an increase of the economic welfare (here the correction of income inequality is emphasized) and the secondary planning (the planning of the means) in which financial policy which is implemented through the price mechanism and the method of directives by the government. Pigou (1948) is a review of Robbins (1947). See the difference between Pigou and Robertson (1947, p.48).

24) This section is based on Hirai (2004).

  25) Roberston (1915) ‘led Robertson to have little respect for Say’s Law and the associated, so-called ‘classical’ disposition to see an automatic movement to full employment in a capitalist economy’ (Presley ed., 1992, 85).  

 26) See Hirai (2003, pp.111-116). The collaboration between the two is traceable to Robertson (1915) in the making. See Presley (1992, pp.82-86).

27) This aspect is dealt with in detail by Marshall (1920). Marshall argues that organization, through a division of labour, aids the development of knowledge.

28) Robertson (1923,p.39).

29) Robertson (1923,p.85).

30) See Robertson (1923, pp.84-85).

31) See Robertson (1923,p.87).

32) See Robertson (1923, p.91).

33) See Robertson (1923,p.95).

34) See Robertson (1923, pp.97-98).

35) See Robertson (1923,p.126).

36) See Robertson (1923, pp.162-163). Robertson (1947) is also enlightening with respect to Robertson’s social philosophy.

37) See the same expression: ‘we sufferers from the bug of liberalism’ (EO, p.48).

38) This section is based on Hirai (2004).

39) Recently Hawtrey came under the focus of Laidler (1993) in relation to the ‘the Chicago tradition’. See also Laidler and Sandilands (2002). Hawtrey attracted the attention of the Circulationists, for which see Torre (1985).

40) Hawtrey went on pursing the same problem in Hawtery (1944) and in an unpublished manuscript, Right Policy (Churchill College, Cambridge University). Here let us take a brief look at the latter. This was Hawtrey’s last work, in the text of which we find ‘1964 at present’, in the field of social (or political) philosophy. It has the following features: (1) ‘the ruler’ – he stresses the importance of the existence of the ruler, authority and power being the recurrent key words here; (2) ‘rationalisation’ – referring to the process by which ‘reason’ makes religion explainable; (3) we see Moore’s influence on Hawtrey; (4) Hawtrey adopts an evolutionary approach to some degree; (5) the question of ‘false ends’ – which is equivalent to ‘intermediate ends’; (6) classification of the final product in utility products and plus products; (7) the proposition that maintaining full employment policy means entrusting the trade union movement with stabilization of the value of money; (8) stress on the importance of the role which dealers and traders play in the market economy; (9) he is not critical of collectivism.

41) See Hawtrey (1926, p.314). Welfare and false ends are also dealt with in Chapter 12 of Hawtrey (1944), and Chapter 2 of Hawtrey (Churchill College).

  42) For Pigou’s response to this, see Pigou (1950, p.17, n.3).

  43) See Hawtrey (1926, p.216).

  44) Subsequently, defensive products were renamed ‘utility products’ (see Hawtrey, 1926, Chapter 13), and creative products ‘plus products’ (see Hawtrey, Churchill College, Chapter 6), Hawtrey continued to adopt the same classification.

  45) See Hawtrey (1926, p.225).

  46) See Hawtrey (1926, p.225).

  47) See Hawtrey (1926, p.132).

  48) He had been so even before WW1. The typescript estimated to have been before 1914 begins by saying that ‘In theory at any rate Socialism is the natural sequel of democracy’. See Hawtrey Papers, 6/5/2.

49) See Hawtey (1926, p.390).

  50) See Hawtrey (1926, p.379). In Hawtrey (1944, p.358), a way towards collectivism and a way towards ‘the third possibility’ (which corresponds to ‘New Liberalism’) are suggested. Although he does not judge which is more excellent, his criticism of ‘competitivism’ (equal to an ‘individual system’ in Hawtrey (1926)) is clearly shown.

  51) See also Hawtrey (1944, pp.354-355).

52) The following shows three economists’ (Robertson, Keynes, Hawtrey) theoretical relation vividly.

In his letter to Robertson (26 October. JMK.13, 315-317), Keynes argued that Robertson’s spontaneous saving is very near to his ‘saving’ in the Treatise (his ‘queer sense’) and he can see ‘no connection whatever’ between … [Robertson’s] revised meaning of hoarding and the Marshallian K and income velocity V’. Robertson replied to Keynes’s two remarks in the negative. Concerning the second remark he stated that ‘I am prepared to assert that on any level of abstraction all forces acting on P can be expressed in terms of M, V, or R (JMK.13, 318). The topic should be the Cambridge quantity theory M=KRP=RP/V. In an unpublished paper, ‘Saving and Hoarding’ (GTE/1/164-170), Robertson argued that his revised hoarding (‘a version of the old pair of trousers whose legs are the Marshallian K and the income-velocity of money V’) and Keynes’s revised one (‘a richly-embroidered version of the same garment’) are one and the same of the Cambridge quantity theory.

It should be noted that throughout their correspondence Keynes did not express his new theory as explained in the present paper. The points for controversy seem to be put on Keynes as the author of the Treatise and Robertson as the author of the Banking Policy and the Price Level.

Hawtrey (1932, 279) maintained his theory of consumers’ income and outlay, arguing that the quantity theory of money is of no use in the state of disequilibrium. Hawtrey’s criticism of the quantity theory of money (see Deutscher, 1990, 36-39) is similar to Keynes’s criticism in the Treatise except that Hawtrey puts forward his theory of consumers’ income and outlay whereas Keynes the Treatise theory.

  We go to the harsh (even destructive) mutual controversy between Hawtrey (1933) and Robertson (1933). They were very critical of each other’s theory. Hawtrey bluntly criticized Robertson’s economics of lacking on several points (the lack in reality, the neglect of stock of commodities, and so on) from a point of his economics of consumers’ income and outlay (See Hawtrey (1926) which was a criticism of Robertson (1926)). Robertson (1933), in turn, criticized Hawtrey’s theory, and emphasized his theory’s advantage of ‘setting in high relief’ analytically interesting points.

  It is very interesting to know that Keynes, who was first influenced by Robertson in the mid-1920s, was to be influenced by Hawtrey after the Treatise, and to move forward thereafter, while Robertson and Hawtrey retained their own theories.

  The following letter to Lydia (30 Oct. 1933) mirrors Keynes’ state of mind:       ‘[Hawtrey was] very sweet to the last but quite mad. One can argue with him a long time on a perfectly sane and interesting basis and then, suddenly, one is in a madhouse. … I have just been having a hopeless debate with Dennis [Robertson]. His mind, though frightfully ingenious, seems to me maliciously perverse. Again it is like arguing with a madman. But when I talk with Alexander [Kahn], it’s all so quite different. (Skidelsky, 1992, p.495)

Besides the above, see Robertson’s and Hawtrey’s criticisms of Keynes’s General Theory, Hawtrey’s (1949) harsh criticism of Pigou (1949), and Shove’s criticism of Pigouvian economics.

  53) Robertson (1947) characterized the social philosophy of the Cambridge School as represented by Marshall and Pigou as follows: (i) it approves of a system of private  property and economic freedom; (ii) it endeavors to try to tinker the malaise of the system through discrete intervention of the state. Robertson also emphasized that this social philosophy entertains two basic beliefs: (i) the limitations of human knowledge, and the fallibility of human foresight; (ii) ‘Progress mainly depends on the extent to which the strongest, and not merely the highest forces of human nature can be utilized for the increase of social good’.

54) The younger economists such as Kahn, and Meade held the same view. For Kahn, ‘Kahn believed that ‘markets are good servants, but bad masters’. That is, if individual and anonymous decisions in unregulated domestic or international markets tend to produce disequilibria …, these can be avoided by the collective actions of individuals through the state and international coordination …, In this way, Kahn, in the Keynesian tradition, was opposed not only to the ‘harmony of unregulated classical liberal capitalism’, but also to the traditional Marxist view that the growing and cumulative contradictions and crises of capitalism would necessarily become unmanageable in the end. (Palma, 1994, 117). For Meade, he used to call himself ‘Liberal-Socialist’. See Howson=Moggridge eds. (1990), and Meade (1948).

Hicks (1979 [1984], p.285, fn.11) recollected that at LSE ‘Hayek, and Vera Lutz, have been the only ones of us [Robbins’ group] who in later years have been fully constant in the old faith [free market faith]. Even Robbins has departed from it, to a considerable extent’.

55) This point was harshly criticized by Stigler (1990) from his point of view of ‘abstract formalism’.

56) This is in sharp contrast with the feature of the ‘Age of Marshall’ to which we referred. For how dominant economic theory and dominant social philosophy has been related in these 100 years, see Hirai (Hirai ed., the last chapter).

57) Keynes was surrounded by important Cambridge figures: L.Woolf who epitomizes the ‘League enthusiasts’, and was a political scientist of the Labor Party; K. Martin was a pacifist and an editor of the New Statesman and Nation; and B. Russell was an ‘absolute’ pacifist. On Woolf, see Yoshikawa (1989). On Martin, see JMK.28, Ch.1, ‘Keynes and Kingsley Martin’. The controversy on the New Statesman and Nation, July-September 1936 are instructive in knowing Keynes who supported the ‘appeasement policy’ of the Baldwin Cabinet from a nationalistic standpoint, and the surrounding political atmosphere. See Hayasaka (1967), Miyazaki (1980) and Yoshikawa (1989, 225-235).

                                                                         

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* Faculty of Economics, Sophia University, Tokyo 102-8554. E-mail: hirai-t@sophia.ac.jp. The present paper originates in Hirai (1994; 2004).　The earlier version (in Japanese) was read at the JSHET, Hokusei Gakuen University, Japan, on 30 May 2004. The present paper was read at the first ESHET-JSHET Meeting, University of Nice, France, in December 2006.