Cambridge’s Contribution to Economics

An online talk given by John De Val on 11 July 2020

(The views expressed in this talk are my own views, and do not necessarily represent the views of the School of Philosophy, Cambridge – John De Val)

John Maynard Keynes, who we shall meet again later, once famously wrote:

“Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back. I am sure that the power of vested interest is vastly exaggerated compared with the gradual encroachment of ideas.”

Quite a lot of defunct economists studied or taught at Cambridge and their ideas are still having an influence, for better or worse, on the economics taught in universities and the economic policies introduced by governments. I shall cover some of those this afternoon.

I should like to start off with an economist who never went to Cambridge, Adam Smith. I shall start with him for two reasons. The first is that it enables me to make the obligatory jibe at that other great centre of learning, Oxford. A good student, Smith entered the University of Glasgow at the age of fourteen and later accepted a scholarship at Balliol College, Oxford. Like most other students of his day, Smith intended to study theology and enter the clergy. Like many college students of any day, Smith complained about his teachers. He denounced the lecturers; ‘In the University of Oxford, the greater part of the public professors have, for these many years, given up altogether even thepretence of teaching’. He gave up the idea of preparing for the clergy and returned to Scotland and soon became a professor of Moral Philosophy at Glasgow University where he gained a reputation for lucid lectures and concern for his students.

The second reason for starting with Adam Smith is that the Scottish universities were highly active in spreading the ideas of Isaac Newton at the time when Smith was at Glasgow University. Isaac Newton definitely was a ‘Cambridge Man’, in fact he is perhaps the greatest figure in the history of Cambridge and one of the greatest scientists who has ever lived. Smith was a great admirer of Newton and in an essay on the history of astronomy, Smith described Newton’s system as ‘the greatest discovery that ever was made by man’. He confidently expected Newton’s system to become the model of all scientific systems and in ‘The Wealth of Nations’ he successfully applied to social and economic phenomena the idea of the universe as a perfectly ordered mechanism operating according to natural laws.

As a scientist his system, which Adam Smith so much admired, would have been influenced by another Cambridge man – Francis Bacon who was at Cambridge a 100 years before Newton.

Francis Bacon arrived at Trinity College, Cambridge in 1573 at the age of twelve, and went on to become a lawyer, a politician, and one of the most influential philosophers of science of any period. His work in the philosophy of science was more impressive than his work as a politician. Indeed as a politician he was corrupt, rightly accused of accepting bribes, although at that time it was not uncommon. Bacon admitted the charge, but offered the interesting defence that it should not be held against him since, although he took the money, he never let it influence him.

Whatever his political morality, Bacon was a gifted philosopher of science. He was a prolific and stylish writer, especially good at aphorisms such as the famous ‘knowledge is power’. According to Bacon, science has two components which he sometimes referred to as ‘light’ and ‘fruit’. The light that science provides is insight into the inner workings of the world, in particular the workings of its invisible parts. But Bacon emphasised that science is not just about light, it is also about ‘fruit’ i.e. new or improved technology, better control of and improvements to the quality of life. That scientific knowledge should have this power is an obvious thought for us today, but it may not havebeen nearly so natural for people in Bacon’s time.

The emphasis on improving the quality of life was definitely a theme of Adam Smith’s work. The market economy system that he described and explained was one which in his view would provide for a prosperous society in which everyone, landowners, workers and capitalists, would benefit. As he put it;

No society can surely be flourishing and happy, of which by far the greater part of the numbers are poor and miserable.

I do not wish to dwell too much on Adam Smith but of course The Wealth of Nations and the ideas that were contained in it have been very influential ever since, if somewhat selectively so. I would like now to turn to the person Keynes called ‘the first of the Cambridge economists’, Thomas Robert Malthus.

Born in 1766, Malthus showed early signs of high intelligence at an early age and soon received private tutoring. He grew to be tall and handsome, and in 1784 entered Jesus College where, while studying for the clergy, he also read mathematics and philosophy. Like Adam Smith, Malthus was impressed by Newton and read carefully his Philosophias Naturalis Principia Mathematica. Despite his weighty intellectual interests and aspirations for holy orders, Malthus was a popular, witty man. He wore his fair hair in curly ringlets down to his neck, while most others wore pigtails. More shocking, while most students powdered their hair white, Malthus sometimes used pink.

Before graduating in 1788, the Master of Jesus College warned Malthus that a speech defect resulting from a cleft palate would hurt his chances of rising within the Church. This despite Malthus winning prizes for Greek, Latin and English orations at Cambridge. Malthus discarded the advice, took holy orders anyway, and briefly practiced at a church in Sussex, returning to Jesus College as a Fellow in 1793. Although he never again committed himself full-time to the clergy, economists still refer to him as Parson Malthus, perhaps because the image of Puritan pessimism best fits the population theory for which he is best known.

This theory appeared in an essay he wrote in 1798 designed to counter what he regarded as the excessive optimism of his father and his Utilitarian friends. The essay was published anonymously under the very succinct title of “An Essay on the Principle of Population, as It Affects the Future Improvement of Society; With Remarks on the Speculations of Mr. Godwin, M. Condorcet, and Other Writers.” Malthus believed the economic system to be dictated by supreme order, but he could not agree with Adam Smith that all of the consequences of that order were necessarily beneficent; some of the problems appearing in nature, he said, could be downright unpleasant.

In his essay, Malthus describes the population swelling at an explosive pace, while food supplies only creep along. Using data from the USA supplied by Benjamin Franklin, but misinterpreting some of it, Malthus asserted that population tends to double every twenty five years or even faster. Though armed with no reliable data from Franklin on the food supply, Malthus concluded that output could never keep pace with population. Unchecked, population grows at a geometric ratio, Malthus asserted, whereas the food supply increases at merely an arithmetic ratio.

What made Malthus’ essay shocking, but successful in capturing attention, was his analysis of what would happen when mouths exceeded spoonfuls. Long before geometric growth soars off the graphs, two kinds of obstacles block the advance: ‘positive’ checks and ‘preventative checks. By ‘positive’ Malthus clearly did not mean optimistic. He meant checks that raise the death rate. What are the positive forces that can save us from geometric ratios? War, famine and plagues. (pandemics) The black death lurks in every alley to rescue us. Infant mortality liberates us from overpopulation. And famine haunts us always.

Preventative checks, which lower the birth rate, seemed less severe, but also less likely. If only people would bridle their passion and delay marriage, they would be better off, Malthus suggested. After all, having children lowers a family’s standard of living. But Malthus saw little hope here, for he was preaching to the converted. The middle and upper classes who would read his essay would embrace the argument. But what chance did he have of persuading the lower classes, who always appeared more fruitful in multiplying, to forbear from marriage or childbirth, especially when the Poor Law encouraged couples to have children? Malthus portrayed a recurring cycle in which population growth controlled by grim natural checks would keep wages at a bare subsistence level. If wages rose higher, workers would have more children, leading to food shortages and an inescapable decline in the standard of living.

Malthus himself married late, thus practising part of what he preached, and eventually fathered only three children. In his day, Malthus was Great Britain’s foremost political economist. His dark presentiments moved the historian Thomas Carlyle to call economists ‘Respectable Professors of the Dismal Science’, an epithet that is widely quoted with approval.

Malthus’s ideas about the moral inferiority of the poor were adopted in the Poor Law Amendment Act of 1834. All relief outside the prison-like workhouses was abolished for able-bodied people. Relief applicants had to pawn all their possessions and enter the workhouse. Women and children were usually sent to work in the cotton mills away from the temptations of the nuptial bed. The apparent intent of the law was to make quiet starvation more dignified than public assistance. The system remained the basis of British poor law policy until the eve of the First World War. Vindicated by human laws, Malthus was still subject to those of Nature, which subtracted him from the population four months after the passage of the Poor Law Amendment.

Although largely dismissed as misguided today, there are still echoes of the Malthusian argument in present day discussions about the growth of world population and the pressure that it puts on the world’s food resources. Misguided or not, Malthus was an important influence on another Cambridge man, Charles Darwin, the English naturalist. Darwin understood the possibility of producing hardier varieties of plants and animals by selective breeding. He was searching for a theory of evolution that would account for natural selection. He had reached a dead end when, in 1838, he read Malthus’ Essay on Population (for amusement, according to one account, strange as that may seem).

Darwin was struck by the light shed by the struggle for food and the geometric progression of population on the evolution of plants and animals through natural selection. He borrowed those ideas that Malthus had applied to humans and generalised them to cover the animal and plant kingdoms. These Malthusian ideas, now adopted as Darwinian, were also perpetuated in economic thought through what became known as Social Darwinism.

The economic conditions in Britain and the United States during the last half of the 19th century posed two unsettled questions for economics. How could the enormous wealth accumulated by the industrialists under so-called ‘perfect competition’ be explained and how can one account for the poverty of those failing to benefit from the system? The Social Darwinists believed they now had the answer.

According to Darwin’s theory of natural selection, changes favourable to survival in a given species tend to be preserved in nature, and unfavourable changes tend to die out, eventually resulting in the evolution of a new species. An Englishman named Herbert Spencer, the founder of the new discipline of sociology, took Darwin’s ideas (which he misunderstood) and used them to promulgate the view that the reason that the rich get richer and the poor get poorer was just nature’s way of improving the species and the economy at the same time. This was a view very agreeable to the wealthy and their attendants and retainers, as well as the middle class (those who not rich yet, were reassured by the possibility that it was just a matter of time). According to the Social Darwinists, to help the poor, either by private or public aid, interfered with the natural progress of the race. The Darwinian law that the fittest, most adaptable members of the species survive was construed to mean that the existing order of things was ‘best’ since it was arrived at by a natural, selective process.

But I am straying away from Cambridge and so I will turn now to someone who was to have a profound effect on the way that economics would be taught and developed in the 20th century. His name was Alfred Marshall who was Professor of Political Economy at Cambridge from 1884 to 1908. Marshall was born in Bermondsey, London in 1842. His father, a Bank of England clerk has been described as a ‘stern, nasty, tyrant with a jutting jaw and an austere, Evangelical creed to match’. His father wanted Alfred to accept a scholarship to Oxford, where he could study Latin and prepare for the ministry. But Alfred had a touch of the devil in him. While the father thought he was studying religion in his room, the rebellious son was often reading mathematics, which his fatherdidn’t understand and therefore despised. For Alfred, mathematics was a symbol of liberation.

In 1865, Marshall graduated in mathematics. He intended then to study molecular physics, but metaphysics got in the way. In 1866 he trekked to Germany to read Kant in the original. Soon he became an agnostic. So, much to his father’s disappointment, Marshall did not hear God’s voice calling him to the pulpit, but he did hear the cries of the poor urging him to study economics. This is how he himself described the call;

From metaphysics I went to Ethics, and thought that the justification of the existing condition was not easy. A friend, who had read a great deal of what are now called the Moral Sciences, constantly said: “Ah! If you understood Political Economy you would not have said that.” So I read Mill’s ‘Political Economy’ and got much excited about it. I had doubts as to the propriety of inequalities of opportunities, rather than of material comfort. Then, in my vacations I visited the poorest quarters of several cities and walked through one street after another, looking at the faces of the poorest people. Next, I resolved to make as thorough a study I could of Political Economy.

Throughout his life Marshall fought for economics as a separate field apart from history and the ‘moral sciences’. Economists, he asserted, must be guardians of reason and truth, above politically expedient allegiances. This is what he said:

Students of social science must fear popular approval…If there is any set of opinions by the advocacy of which a newspaper can increase its sale, then the student, who wishes to leave the world, in general, and his country, in particular, better than it would be if he had not been born, is bound to dwell on the limitations and defects and errors, if any, in that set of opinions, and never to advocate them unconditionally.

As J.K. Galbraith later observed, the fear of applause is a fear which, over the years, many economists and economic publicists have been singularly able to overcome.

Whereas classical economists such as Adam Smith followed a Newtonian scientific approach searching for the laws of nature, Marshall turned to a more evolutionary approach. Whether consciously or not, he was thus in tune with the scientific trends of the time. As the nineteenth century wore on, biological studies – concentrating on organic, evolving phenomena were now prominent in the scientific world. Economists, including Marshall, took them even further.

Marshall’s approach is often called ‘marginalism’. Marginalism can be described as evolution applied to economics. According to this view, the businessman and the consumer make no great leaps, but step by step they try to improve their situations. Individuals, companies, and governments all adapt to changing prices. The fittest firms survive. Low profits drive out the weakest. Competitive pressures force firms to cut costs. Although the final results do resemble Adam Smith’s Newtonian economics, Marshall provides a framework for closely inspecting individual decisions along the way. Marginalism paved the way for the development of what came to be called microeconomics. And according to microeconomics, actors will be constantly reconsidering their positions and will decide to take new steps if the resulting benefits exceed the associated costs. Only if benefits and costs do not change, can constant Newtonian behaviour be assumed.

Marshall’s great seminal work was his Principles of Economics. The economist Robert Heilbroner states that in it ‘he combined a mind of mathematical precision with a style that was leisurely, discursive, shot through with homely example, and wonderfully lucid’. Even a businessman could understand this kind of economics, for all the hard, logical, mathematical proofs were relegated to the footnotes (with the result that Keynes irreverently said that any economist would do better to read the footnotes and forget the text than vice versa).

Although trained as a mathematician, Marshall feared that economists would calculate themselves into irrelevancy. He never let his economic arguments rest solely on mathematical proofs. In a charming letter, Marshall put forth his system:

  1. Use mathematics as a shorthand language, rather than as an engine of inquiry
  2. Keep to them until you have done.
  3. Translate into English
  4. 4. Then illustrate by examples that are important in real life. 5. Burn the mathematics
  5. If you can’t succeed in 4, burn 3.
    This last I did often.

Would that some of his successors had done likewise!

Probably, Marshall’s most significant contribution to the way that economics developed, – and one which he himself returned to repeatedly– was the insistence on the importance of time as the essential element in the working out of the equilibrium process. For equilibrium, as Marshall pointed out, changed its basic meaning according to whether the adjustment process of the economy took place in a short-run or a long-run period. In the short run, buyers and sellers met to haggle in the market place, but basically the bargaining process revolved about a fixed quantity of goods – the diamonds that the diamond merchants brought along with them in their suitcases. Over the longer run however, the quantity of diamonds was not fixed. New mines could be opened if the demand warranted it; old mines could be abandoned if supply was super-abundant. The short run price and the long run price would be different.

It would be wrong to say that Marshall and his followers were uncritical followers of laissez-faire, that if you leave it alone, the system will work well. They were not. They recognised that the system had deficiencies, that there was poverty, unsatisfactory working conditions, and lapses from full employment, and that there was a role for government intervention. Yet, on the whole, they were great supporters of creating competitive institutions and then letting the price mechanism do its thing.

I will now pass on from Marshall. He retired in the early years of the 20th century, to be succeeded by his protégé, Arthur Pigou who was in his early thirties. Pigou carried on Marshall’s work, though not always in the ways that Marshall liked because Pigou, as one commentator put it, ‘was much more bolshie than Marshall turned out to be.’ He drew on Marshall’s work about how the price mechanism did not always do its thing correctly, and wrote a book which went into several editions, The Economics of Welfare. Some of Pigou’s views are still influential today. He pointed out that, often, the social costs and benefits of production do not match their private counterparts. Because business people are guided by their private gain, we may often get an allocation of resources, a level and composition of production, which do not take proper account of their social costs and benefits, which in current jargon are called ‘externalities’. The best-known example is that of a factory which belches out smoke, yet its owners do not have to pay the costs of people nearby who have to do extra washing – yet they ought to. These ideas are now applied through what has become known as cost-benefit analysis.

But, of course, Marshall’s most distinguished pupil was John Maynard Keynes. He dominated Cambridge economics from the 1930s to his death in 1946 – and beyond.

Keynes was born in 1883 into a Puritanical Victorian home. His father, John Neville Keynes was a well known logician, economist and Cambridge University registrar, while his mother later served as mayor of Cambridge. Although Keynes was said to be fond of his parents, he spent much of his life escaping from their moral and philosophical influences. Keynes liked to have fun and was going to have no truck with the Puritan attitudes embodied in Sir James Stephen, grandfather of his friend, Virginia Woolf, who reputedly once smoked a cigar and found it so pleasurable that he never smoked one again. His parents would presumably have looked despairingly at Keynes later social life, particularly his membership of the Bloomsbury set, once described as a circle who loved in triangles and lived in squares.

After attending Eton, Keynes returned to Cambridge to study not economics but mathematics. Though he performed satisfactorily, he struggled. After passing his mathematics exam, he read his first economics book, Marshall’s Principles of Economics. Keynes began writing papers for Marshall who was very encouraging. Keynes wrote to a friend ‘Marshall is continually pestering me to turn professional economist…Do you think there is anything in it? I doubt it.’ Keynes studies lasted a mere eight weeks, but he learnt quickly. In 1905 he studied hard for the Civil Service Examination and he came second out of 104 candidates. Ironically, economics was the subject in which he got his lowest marks. Typically, Keynes saw this as a reflection of the examiners’ abilities rather than his own, saying ‘Presumably, the examiners knew less about the subject than I did’.

After a two year spell behind a desk in the India Office, Keynes became profoundly bored and returned to Cambridge, attracted by Marshall’s offer of a lectureship. His first book was not on economics but was a treatise on probability which got him a fellowship at King’s College. As an economics teacher, to start with, Keynes leant heavily on the one of the few texts he had actually read, Marshall’s. In the early years his economics did not venture far beyond Marshall and the classical tradition. In the First World War, he went into the Treasury; he was at the Treaty of Versailles as a junior assistant to Lloyd George. He was so horrified at what was being done to the Germans, that he resigned and wrote the book which first made him famous, The Economic Consequences of the Peace. In it he examined how the pre-war European economy worked and how the vicious reparations that were to be imposed on the Germans would not only wreck Germany’s economy but would also disturb the delicate balance of how things were done in Europe.

In writing the book, Keynes was still applying principles he had learnt from Marshall; it was during the 1920’s and especially the 1930’s that he started to rethink drastically about how the world worked. He became more and more dissatisfied with Marshall’s way of looking at the workings of the economy as a whole. In particular he did not share Marshall’s view that one could talk aboutprices and quantities and employment independently of what was happening in the financial sector and in the monetary sector generally. He had a go at solving this in what was meant to be his magnum opus, A Treatise on Money, which was published in 1930. In it, he changed the emphasis from the long period, the central core of Marshall’s economics, to the short period, though he continued to regard the short run as stations on the road to the long term cross. In fact as early as 1923, in a jibe at Marshall, he had written; ‘In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the ocean is flat again.’

A central idea of the work was that if the amount of money being saved exceeds the amount being invested – which can happen if interest rates are too high – then unemployment will rise. This is in part a result of people not wanting to spend too high a proportion of what employers pay out, making it difficult, in aggregate, for employers to make a profit.

At the height of the Great Depression, in 1933, Keynes published The Means to Prosperity, which contained specific policy recommendations for tackling unemployment in a global recession, chiefly counter cyclical public spending.

Keynes’s most famous work however was his General Theory of Employment, Interest and Money which was published in 1936. Although he was the major author, he was assisted by a remarkable group of young economists in their late twenties and early thirties who came together in what was called the Cambridge ‘Circus’. The book is not an easy read; here is the assessment of the American economist Paul Samuelson, author of the best selling economics textbook of all time;

“It is a badly written book, poorly organized… it is arrogant, bad-tempered, polemical… it abounds in mare’s nests and confusions: involuntary unemployment, wage units, the equality of savings and investments, the timing of the multiplier, interactions of marginal efficiency upon the rate of interestand many others… flashes of insight and intuition intersperse tedious algebra. An awkward definition suddenly gives way to unforgettable cadenza. When it is finally mastered, we find its analysis to be obvious and at the same time new. In short, it is a work of genius.”

The work served as a theoretical justification for the interventionist policies Keynes favoured for tackling a recession. The General Theory directly challenged the earlier neo-classical view, which had held that provided it was unfettered by government interference, the market would naturally establish full employment equilibrium. Keynes believed the classical theory was a “special case” that applied only to the particular conditions present in the 19th century, his own theory being the general one. Classical economists had believed in what was known as Say’s Law, which, simply put, states that “supply creates its own demand“, and that in a free market workers would always be willing to lower their wages to a level where employers could profitably offer them jobs. An innovation from Keynes was the concept of stickiness in wages and prices – the recognition that in reality workers often refuse to lower their wage demands even in cases where a classical economist might argue it is rational for them to do so. Due in part to stickiness, it was established that the interaction of “aggregate demand” and “aggregate supply” may lead to stable unemployment equilibria – and in those cases, it is the state, and not the market, that economies must depend on for their salvation.

The General Theory argues that demand, not supply, is the key variable governing the overall level of economic activity. Aggregate demand, which equals total un-hoarded income in a society, is defined by the sum of consumption and investment. In a state of unemployment and unused production capacity, one can only enhance employment and total income by first increasing expenditures for either consumption or investment. Without government intervention to increase expenditure, an economy can remain trapped in a low employment equilibrium– the demonstration of this possibility is usually described as the revolutionary formal achievement of the work. The book advocated activist economic policy by government to stimulate demand in times of high unemployment, for example by spending on public works.

Keynes faced a lot of opposition relating to the increasing role of government that he was advocating. But Keynes maintained that he was trying to save capitalism not bury it. Laissez-faire as a principle was one thing, but if it wasn’t working, something more practical was required. As he put it;

If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coalmines which are then filled up with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again…there need be no more unemployment and, with the help of the repercussions, the real income of the community, and its capital wealth also, would probably be a great deal greater than it actually is. It would, indeed, be more sensible to build houses and the like, but if there were any political and practical difficulties in the way of this, the above would be better than nothing.

The General Theory is often viewed as the foundation of modern macroeconomics. Historians agree that Keynes influenced U.S. President Roosevelt’s New Deal, but disagree as to how much. Yet his ideas were soon to achieve widespread acceptance. From the end of the Great Depression to the mid-1970s, Keynes provided the main inspiration for economic policy makers in Europe, America and much of the rest of the world. While economists and policy makers had become increasingly won over to Keynes’s way of thinking in the mid and late 1930s, it was only after the outbreak of World War II that governments started to borrow money for spending on a scale sufficient to eliminate unemployment. Keynes saw no problem with budget deficits in a period of recession as long as the budget was balanced over the course of the economic cycle.

His General Theory however could not explain the combination of unemployment and inflation which characterised the period of so-called stagflation in the 1970’s and Keynesian economics took a back seat while the views of the so-called Austrian School, particularly those of Friedrich Hayek, held sway. Hayek abhorred government intervention and he and Keynes had crossed swords intellectually many times. But, in spite of this, their personal relations were quite cordial.

Keynes found Hayek rooms in King’s College when

the London School of Economics (where Hayek became a professor of

economics in 1931) moved to Cambridge for the duration of the Second World War, and for a time the pair even shared fire-watching duties on the roof of the college when it was feared that Cambridge might be bombed.

I will finish there although I am conscious that since the 1970s there have been many Economics professors and lecturers at Cambridge. Whether any of them will have such an impact as those I have described, I can only plead that it is too soon to say.