Capitalism-and-Its-Critics-A-History-From-the

Sweezy kept up his economic commentaries, and in the 1960s he acknowledged the political impact of two decades of Keynesianism. Attitudes toward taxation and government spending among the “American ruling class, at any rate its leading echelon of managers of giant corporations,” had “undergone a fundamental change,” Sweezy and his coauthor, Paul Baran, wrote in their 1966 book, Monopoly Capital, which became a key text for a generation of leftists. The old hostility to big government hadn’t disappeared, they went on, but “the modern Big Businessman, though he sometimes speaks the traditional language, no longer takes it so seriously as his ancestors. To him, government spending means more effective demand, and he senses that he can shift most of the associated taxes forward onto consumers or backwards onto workers.”52

Whereas in the 1940s, at the dawn of Keynesianism, Sweezy had queried its political foundations, and the ability of the state to stick with it, he and Baran now emphasized the role that government spending, particularly military spending, played in mopping up the huge financial surpluses that corporate giants like General Motors, General Electric, and IBM were generating. These surpluses raised the danger of saving outstripping investment and pushing the economy into a slump, the two authors argued. “On what could the government spend enough to keep the system from sinking into the mire of stagnation? On arms, more arms, and even more arms.”53 They cited figures indicating that between 1929 and 1957, US defense spending had risen from 0.7 percent of GNP to 10.3 percent.54

Sweezy and Baran were unabashed Marxists; they dedicated Monopoly Capital to Che Guevara. In the economics profession, they were fringe figures. But there were also some prominent Keynesian economists who bemoaned the rise of the Cold War and the emergence of what might be termed Pentagon Keynesianism. One of them had known Keynes and Kalecki personally and discussed their theories extensively with them. She was a major theorist in her own right, and a rare woman in the upper echelons of a male-dominated profession. In fact, she was one of the most notable economists of the twentieth century.

“Economics once more became political economy”

Joan Robinson and the “Bastard Keynesians”

Joan Violet Robinson was what the English call a “blue blood.” Her father was a senior officer in the British Army who had served in India and South Africa. Her maternal great-great-grandfather was Spencer Perceval, who served as a Tory prime minister from 1809 to 1812 and is the only holder of that office to have been assassinated. (The killer was a disgruntled merchant.) Interestingly, there was also a nonconformist scholar in her lineage. Her paternal great-grandfather, Frederick Denison Maurice, was an eminent Christian Socialist theologian who lost his post at King’s College, Cambridge, after saying he didn’t believe in eternal damnation. Robinson was born Joan Violet Maurice on October 31, 1903, in Camberley, Surrey, an affluent town thirty miles southwest of London that has long been associated with the nearby Royal Military Academy Sandhurst, where her father taught. She attended the private St. Paul’s Girls’ School, in West London, which was founded in 1904. There she developed a passion for poetry, particularly the works of Shelley and Byron, but her main subject was history. In 1921 she won a scholarship to Girton College, Cambridge, the first women’s Oxbridge college, where she switched to economics. “I did not have much idea of what it was about,” she recalled much later in life. “I had some vague hope that it would help me to understand poverty and how it could be cured. And I hoped that it would offer more scope for rational argument than history (my school subject) as it was taught in those days. I was somewhat disappointed on both counts.”1

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As an undergraduate, Robinson ingested Alfred Marshall’s Principles of Economics and attended lectures by Marshall’s chosen successor, Arthur Cecil Pigou. Like many students before and after her, she found Marshallian economics—which represented consumers and businesses as rational automatons who maximize their “utility” and profits in a world of “perfect competition”—abstract and bizarre. In a presentation to the student Marshall Society, she and a friend read aloud a spoof essay entitled “Beauty and the Beast” that related the story of a rich merchant who inadvertently traded his favorite daughter to a beast, only for the beast to transform into a handsome prince. “With this happy union of producer’s and consumer’s surplus, they then lived happily ever after,” the essay concluded, “constantly keeping in mind their higher ideals and maximizing their satisfaction by equalizing the marginal utility of each object of expenditure.”2

The Cambridge economics course was divided into two parts, a first year of introductory study followed by two years of more intensive material. To her disappointment, Joan didn’t obtain top marks in either set of examinations, and she was awarded an upper second-class degree. Shortly after graduating, she married Austin Robinson, an economics graduate of Christ’s College, and departed for India, where he had been invited to tutor the Maharajah of Gwalior, a city in the center of the subcontinent. The newlyweds spent four years there and returned in 1929 to Cambridge, where Austin had obtained a fellowship at Sidney Sussex College. Joan, who took her husband’s surname, wasn’t offered a formal position. Determined to pursue her ambition to become a professional economist, she tutored some undergraduates on a semi-casual basis and pursued her own research, which focused on the issue of monopoly.

By the 1930s, big corporations like Ford and General Motors in the United States, and Krupp and Siemens in Germany, dominated many industries, controlling the entire production process—from research and design to manufacturing to marketing and distribution. But these industrial giants played only a bit role in orthodox economics textbooks, which still analyzed markets with many competitors, each of them too small for their actions to affect prices or wages. An exception was recognized in the case of firms that were the sole supplier in a given market, such as power utilities. Marshall, in his Principles, had devoted a chapter to these monopolies. But economics sorely lacked a theory that applied to industries dominated by a handful of large businesses. This was the void that Robinson and other ambitious young economists were setting out to fill.

In 1926 Piero Sraffa, a twenty-eight-year-old Italian economist, published a paper in The Economic Journal that pointed out some of the flaws of orthodox price theory, including the fact that unit costs tended to fall, rather than rise, as the scale of production increased.3 (The textbooks featured rising cost curves.) In 1927 Sraffa moved to Cambridge at the invitation of Keynes. (As a Jew and a close friend of the imprisoned socialist leader Antonio Gramsci, he was facing great danger in Mussolini’s Italy.) Sraffa’s work greatly influenced Robinson and her tight-knit circle of economist friends, which included her husband and Richard Kahn, a recent graduate of King’s College. But the primary influence on Robinson, at this stage, was Professor Pigou, whose 1920 book, The Economics of Welfare, contained an extensive discussion of monopoly. It also analyzed the “exploitation” of labor, which it defined as a situation in which firms forced their workers to “accept in payment for their services less than the value which the marginal net product of their services has to these employers.”4 But Pigou treated this situation as an exceptional case rather than the norm.

Throughout his analysis, Pigou employed the standard Marshallian framework: supply and demand curves, cost curves, “marginal utility,” and so on. Like Marshall, he regarded these concepts as scientific tools that could be applied for “the bettering of human life” and the elimination of poverty.5 Robinson would eventually reject the Marshallian framework on the grounds that it served to cloak rather than reveal the real dynamics of capitalism. At this juncture, however, she embraced orthodox techniques for her research on monopoly power, which she turned into a book, The Economics of Imperfect Competition, which came out in 1933. Much as Marx had used a Ricardian framework to undermine Ricardo’s defense of laissez-faire, Robinson used Marshall’s tools to undermine assertions that the market system produces an efficient allocation of resources and a just distribution of income.

In the standard textbook model of perfect competition, firms can produce and sell as many goods as they want at the market price, and also

hire as many workers as they want at the prevailing wage. Robinson took it as her starting point that this was unrealistic and that many businesses were big enough for their actions to affect prices and wages. “The whole theory of value should be treated in terms of monopoly analysis,” she wrote.6 In a market where firms have monopoly power, they can set prices above costs without losing all their market share. If they want to sell more goods, they must lower their prices; in order to hire more workers, they must offer higher wages. These statements may seem obvious to non-economists, but Robinson demonstrated how they upended the standard efficiency arguments for a competitive capitalist economy.

The reason that perfectly competitive markets allocate resources efficiently, in a certain sense, is that they force consumers and firms to equalize marginal benefits and marginal costs. In pricing their goods, firms set the price equal to the incremental cost of producing another item. And since the additional revenue they get from selling this extra item is the market price, the incremental benefit to the firm is the same as the incremental cost. That’s efficient. But in a modern industrial economy, most markets don’t work like this. If Ford cuts the price of F-150 trucks to sell more of them, it will receive a lower price for all the F-150s it sells, not just the additional sales. Its incremental revenue from a new sale will therefore be less than the purchase price and less than its incremental cost. It may even end up making a loss. Once Ford’s managers realize this, they will restrict the firm’s output, operate its plants at sub-capacity, and raise prices. Compared to the perfectly competitive outcome, output is lower and prices are higher. That’s inefficient.

Robinson presented this argument using some clever new diagrams. With Richard Kahn’s help, she also included some algebraic derivations, but it was her graphical analysis that grabbed the attention of the economics profession. The key innovation was the presence of a downward-sloping “marginal revenue curve” that was situated below the market demand curve. The slope and position of this curve determined precisely where the market would settle.7

Unknown to Robinson, a young Harvard economist, Edward Chamberlin, had come up with a very similar analysis a few years earlier in his doctoral thesis, which was also published in 1933, under the title The Theory of Monopolistic Competition. Despite the formal similarity of the two treatments, their authors regarded them very differently. Chamberlin viewed his analysis as a modification to the competitive model, which didn’t undermine its overall legitimacy. Later in life, he would join the Mont Pelerin Society, an international association of free market economists that Friedrich Hayek set up after World War II. Robinson took a different view of the theory of imperfect competition. She believed she had successfully repudiated the ruling orthodoxy, particularly in a part of her treatise where she applied analysis to the labor market and challenged the long-standing claim that workers’ wages reflected their productivity.

It was John Bates Clark, Veblen’s teacher, who had formalized this argument at the turn of the twentieth century. In a perfectly competitive labor market, Clark showed, workers’ wages would settle at a level equal to the value of their “marginal products.” If hiring another worker enabled a firm to produce two more items a day, each of which sold for ten dollars, the worker would get paid twenty dollars a day. But the competitive logic assumes that the firm is too small for its hiring and output decisions to affect wages and prices. Robinson analyzed the situation in which firms are big enough for their hiring decisions to influence wages—a situation she called “monopsony.” Using another clever diagram, she showed how, in this environment, the key marginal condition for efficiency no longer held.8 Firms would pay workers less than the value of their marginal products, hire fewer of them than a competitive firm, and reap higher profits. Robinson referred to this behavior as “monopsonistic exploitation of labor” and devoted an entire chapter to it.9 She also showed how the problem could be partly remedied by imposing a minimum wage, which, by eliminating firms’ monopoly power in the labor market, could lead to higher wages and higher levels of employment.

Robinson’s treatise highlighted other features of a monopolistic economy. Because firms would be making higher profits than they would in a competitive setting, the level of wealth inequality would be higher, it pointed out.10 To be sure, this conclusion wouldn’t have come as news to Henry George, Thorstein Veblen, or Rosa Luxemburg. On both sides of the Atlantic, socialists and left-liberals had long tied the rise of monopolies, trusts, and other big capitalist concerns to intensified exploitation of workers and greater inequality. Robinson’s achievement was to demonstrate this linkage using techniques that the economics profession couldn’t brush aside. Even in “Pigou’s own terms,” she subsequently noted, “it is not true that wages are equal to the value of the marginal product of labour.”11 She also acknowledged, however, that large firms may be more efficient than small firms because they can exploit economies of scale and use the latest production techniques. “In order to form a judgment on the present-day movement toward monopoly we must decide whether it is worth while to put power into the hands of large concerns for the sake of the increase in productivity which they promise to bring about,” she wrote. “This is a problem which no amount of abstract analysis can help us to solve.”12

Shortly after The Economics of Imperfect Competition was published, Cambridge University offered Robinson a permanent academic post. If she had decided to sit on her laurels, the book would have assured her a prominent position in the history of economic theory. Sitting back wasn’t her way. In 1934–35, as Keynes was putting together successive drafts of The General Theory, she and Kahn acted as his readers and sounding boards. “With these two [Keynes] could feel complete confidence that they understood what he was driving at,” Roy Harrod, the author of the first fulllength biography of Keynes, noted.13 A year after The General Theory was published, Robinson wrote a primer for interested parties who might be bewildered by Keynes’s esoteric presentation. She also wrote a second book, Essays in the Theory of Employment, which addressed various tricky issues arising from Keynes’s magnum opus, including whether a sustained period of full employment would lead to rising inflation.

Bringing unemployment down to a very low level, and keeping it there, would increase the bargaining power of workers and the willingness of employers to pay them more, Robinson pointed out. “When labour is scarce,” she wrote, “not only are Trade Unions very powerful, but employers themselves throw their weight into the scale of rising wages.”14 As wages rise, she went on, businesses try to pass on some of their additional costs to consumers by raising prices, which in turn prompts labor unions to submit higher wage demands. Although Robinson didn’t use the term wage-price spiral, which wouldn’t come into vogue until the 1970s, she clearly had such an outcome in mind. Noting how inflation can erode purchasing power, she warned: “The point of full employment, so far from being an equilibrium resting place, appears to be a precipice over which, once it has reached the edge, the value of money must plunge into a bottomless abyss.”15

If prices did start to rise, Robinson went on, much would depend on how policymakers reacted. If they raised interest rates promptly, they could reduce aggregate demand, lower the demand for labor, and choke off the inflation threat. Rentiers and others on fixed incomes would benefit from such a policy, but it would also lead to an increase in joblessness. “We are here presented with a conflict of interests which a priori reasoning can do nothing to resolve,” Robinson wrote.16 One conceivable solution would be for the authorities to prevail on labor unions to moderate their wage demands, she added, but achieving such an outcome would be challenging, because “Trade Union policy is only very loosely coordinated, and since the duty of each Union is to regard only the interests of its members, gains and losses are very unevenly distributed between industries.”17 In the depressed era of the 1930s, when deflation was a bigger threat than inflation, the significance of this analysis wasn’t immediately obvious.

Unlike some Keynesians, Robinson never regarded demand management policies as a solution to all the contradictions of a capitalist economy. But she did believe that Keynes had liberated the economics profession from the dogma of laissez-faire. “By making it impossible to believe any longer in an automatic reconciliation of conflicting interests into a harmonious whole, the General Theory brought out into the open the problem of choice and judgement that the neo-classicals had managed to smother,” she wrote later in her life. “The ideology to end ideologies broke down. Economics once more became Political Economy.”18 In taking this approach, Robinson was increasingly influenced by Marxist ideas, which hitherto she had largely ignored. In December 1940, she wrote to Richard Kahn: “My next project is to make a dictionary to Marx so that he can be read by economists. ‘Value = man hours. Surplus value = product-real wages etc.’”19 In another letter to Kahn, she commented: “There is a lot of excellent stuff in Marx, e.g., that the quantity of money is determined by prices, not vice versa. But none of the Marxists seem to understand him.”20

Robinson’s interest in Marx prompted her to write a short book, An Essay on Marxian Economics, that was published in 1942 and managed to annoy Marxists and orthodox economists alike. One of the leftist faithful’s grouses was that Robinson dismissed the labor theory of value, which Marx had used extensively, saying it “fails to provide a theory of prices”21—a point that some of Marx’s critics in the late nineteenth century had made. Robinson also criticized Marx’s theory that the profit rate tended to fall, describing it as “confused and redundant.”22 But despite tossing these elements of Capital onto the scrap heap, she said that modern economists “have much to learn”23 from its author, including a clear-eyed recognition of the relationship between economics and capitalism:

The orthodox economists, on the whole, identified themselves with the system and assumed the role of its apologists, while Marx set himself to understand the working of capitalism in order to hasten its overthrow. Marx was conscious of his purposes. The economists were in general unconscious. They wrote as they did because it seemed to them the only possible way to write, and they believed themselves to be endowed with scientific impartiality.24

Robinson also praised Marx for foreshadowing, in his analysis of the centralization of capital, the modern theory of monopolies, and for rejecting Say’s Law and pointing to the possibility of deficient demand and involuntary unemployment. After outlining the two-sector model of the economy that Marx developed in volume II of Capital, Robinson wrote: “Marx does not develop a full theory of the trade cycle, or of the long-run movement of capitalism, but he points the direction in which a theory can be found. He rejected the crude under-consumption theory current in his day, but his own analysis clearly leads to the view that maldistribution of consuming power is the root of the trouble.”25 Robinson also hailed the breadth of Marx’s ambition, comparing his eagerness to confront the big issues of capitalist development with the small-bore research projects that many academics engaged in. “The orthodox economists have been much preoccupied with elegant elaborations of minor problems, which distract the attention of their pupils from the uncongenial realities of the modern world, and the development of abstract argument has run far ahead of any possibility of empirical verification,” she wrote. “Marx’s intellectual tools are far cruder, but his sense of reality is far stronger, and his argument towers above their intricate constructions in rough and gloomy grandeur.”26