I’m pleased to see Duncan Foley draw attention to Allyn Young on increasing returns. But can I appeal to him, when stressing that increasing returns arise from the non-convexity of individual firms’ production technologies, to reflect on the significance of Young’s statement in his LSE lectures, 1927-29 (as recorded by Nicholas Kaldor in the Journal of Economic Studies 1990) where he stressed that “large production, not large-scale production, permits increasing returns.”

In his famous EJ December 1928 paper Young put it thus:
     "...the principal economies which manifest themselves in increasing returns are the economies of capitalistic or roundabout methods of production. These economies, again, are largely identical with the economies of the division of labour in its most important modern forms. In fact, these economies lie under our eyes, but we may miss them if we try to make of large-scale production (in the sense of production by large firms or large industries), as contrasted with large production, any more than an incident in the general process by which increasing returns are secured and if accordingly we look too much at the individual firm or even, as I shall suggest presently, at the individual industry."

The point is that Young wanted to get away from Adam Smith’s focus on internal economies of scale in the pin factory and the demand for pins. Instead he stressed that it is the _overall_ size of the market (i.e., growth of GDP) that encourages division of labour via increasingly specialised firms (big and small). The pin factory (or industry) will enjoy hugely greater productivity if the whole economy is advancing rather than just the market for pins. And the advance of the economy is enhanced not by protecting the pin factory from competition so it can increase its size, but rather by _promoting_ competition and mobility.

Young’s Harvard student Lauchlin Currie (1902-93) understood the point. He developed a “macroeconomic concept of increasing returns” (HOPE 1997) that was a classical theory of Youngian endogenous growth that stressed the importance of real reciprocal demand. Here, growth is itself the main source of (self-sustaining) growth. It differs greatly from neo-classical endogenous growth theories that stress firms’ fixed costs and economies of scale – and end up justifying protectionism.

Young's monetary economics is also important. Duncan Foley mentions Perry Mehrling's 1997 book on "The Money Interest", but Mehrling & Sandilands (1999) further bring out the link with growth in "Money and Growth: Selected papers of Allyn Abbott Young".



- Roger Sandilands

________________________________
From: Societies for the History of Economics [[log in to unmask]] on behalf of Duncan Foley [[log in to unmask]]
Sent: Tuesday, January 20, 2015 2:20 PM
To: [log in to unmask]
Subject: Re: [SHOE] The theoretical divisions of heterodox and orthodox economics

A response to the interesting exchange between Ric Holt and Matias Vernengo on the relation between “heterodox” economics and mainstream thinking.

While economics, like other disciplines, has its own sociology and internal politics, it seems to me there are some important differences in theoretical fundamentals between the various branches of heterodox economics, including Austrian, post-Keynesian, structuralist, and Marxist traditions, and the marginalism that dominates the mainstream.

One (surely not the only) division arises from whether production technologies are convex (diminishing returns, which leads to marginal principles of equilibrium) or non-convext (with positive fixed costs and increasing returns, which leads to multiple equilibria based on equalities of average returns). There is strong reason to believe that Adam Smith and his predecessors based their thinking on increasing returns production technologies (which provide a robust explanation of the division of labor).

This division leads to different conceptions of money. Specialized producers with increasing returns technologies are very likely through network externalities to settle on one universally acceptable medium of exchange, giving rise to a characteristically monetary economy in which purchase and sale are distinct. Producers with convex production technologies are less likely to evolve a highly specialized division of labor dependent on intensive monetary exchange, and more likely to limit exchange to less intensive barter. Thus the marginalist traditions either conflate monetary exchange into equivalence to barter (Ricardo’s “money is a veil”, for example) or abstract from money altogether in favor of models that determine relative prices.

Both the Marxist and Keynesian traditions reproduce themselves firmly in the classical category of monetary economies based on increasing returns technologies. I am not familiar enough with the Austrian literature on money to be confident of drawing a similar conclusion in that case, but I think this issue is important in the Austrian literature.

The sociological “mainstream” of U.S. economics embraced both these starting points up to about the 1950s. A very important figure in this discussion was Allyn Young (who is the subject of a penetrating essay by Perry Mehrling in his book “The Money Interest and the Public Interest”). The flavor of increasing-returns and a distinctively monetary form of economic interaction was important for the generation of theorists like James Tobin and Bill Vickery, who found themselves marginalized in the rational expectations “revolution” of the 1980s.

One reason “heterodox” thinking reproduces itself despite its “subaltern” status is the re-discovery by younger thinkers of one or another aspect of this fundamental division.

Duncan Foley

On Jan 19, 2015, at 6:03 PM, Matias Vernengo <[log in to unmask]<mailto:[log in to unmask]>> wrote:

Hi Rick:
Don't think I do raise that question really (whether heterodox remained monolithic; not sure it ever was, indeed), as much as the exam does not seem to show anything about the changing mainstream. Sure heterodox and mainstream schools do change. Garegnani famously showed how the notion of equilibrium changed in the mainstream in the 1970s. As you admit, the exam shows that Harvard was more pluralistic in the 1950s. That doesn't make it heterodox. It's a combination of the mainstream of the time (neoclassical synthesis) with alternative approaches still represented in the faculty. By the way, besides Ken Galbraith, I would add as interesting and difficult to classify scholars both Leontief and Gerschenkron, who were also on the faculty, I believe. By the late 1950s (or early 60s, perhaps), they would hire Hirschman, other difficult to classify economist. Other interesting note is that history was required for PhD candidates. All of that seems to point to a less pluralistic mainstream. Heterodox groups remain, I would suggest, as divided now as then, and yes some of them did change. Not sure what's the relevance of that point though.
Best,
Matías

Matías Vernengo
Associate Professor
Bucknell University
________________________________
From: Societies for the History of Economics [[log in to unmask]<mailto:[log in to unmask]>] on behalf of Ric Holt [[log in to unmask]<mailto:[log in to unmask]>]
Sent: Monday, January 19, 2015 2:08 PM
To: [log in to unmask]<mailto:[log in to unmask]>
Subject: Re: [SHOE] Answering some questions about the Harvard exam

I think Matias raises, probably inadvertently, an interesting question: Has heterodoxy remained (and is) monolithic over time or has it changed? One gets the impression from the post that heterodoxy holds certain universal characteristics that make it easily discernible over time and if they do not have those characteristics, then it is not heterodoxy -- that there is a heterodoxy "standard." -- "modern or any other..."

In regard to Harvard, if one reads the questions carefully they reflect the interest and research of the faculty of that time. Schumpeter and Joe Bain had just left, but people like Ed Mason, Arthur Smithies, Ken Galbraith, Hansen and Harris were there, along with some Austrians I believe. It is hard for me to put them in the neoclassical synthesis crowd. I find them more in the institutionalist camp, which I believe reflected more the mainstream then. But that's just my opinion. Also interesting is that Ken, in a few letters, defended Hansen's work on secular stagnation and functional finance (along with Harris) from "mainstream" economists at that time.

Ric Holt





On Sun, Jan 18, 2015 at 7:14 PM, Matias Vernengo <[log in to unmask]<mailto:[log in to unmask]>> wrote:
Hi Rick:
Not sure the questions prove that the mainstream is changing. Very fast read, but these are my impressions. First, most questions seem to be compatible with the neoclassical synthesis, which was by then the mainstream, and it might be an outdated version of the mainstream now, but is certainly not heterodox by modern or any other standard. Further, some questions seem to discuss old classical (Ricardian) views, and perhaps have some institutionalist influences. I would guess that Harvard was not monolithic in 1953 (not all neoclassical synthesis), and there were other views represented in the department, like Ken Galbraith, which might explain the broader range of the questions. Unless you're suggesting the questions display somehow a coherent representation of the mainstream, and that Harvard provided in this exam a sample of these views. If anything, the exam seems to suggest that a wider range of approaches might have been acceptable at Harvard by the early 1950s, and that the mainstream has become less pluralistic and open to dissent, and institutionalist, Marxists and other eclectic authors have vanished from mainstream departments, including Harvard. And that was a 1960/70s phenomenon.
Best,
Matías

Matías Vernengo
Associate Professor
Bucknell University
________________________________
From: Societies for the History of Economics [[log in to unmask]<mailto:[log in to unmask]>] on behalf of Ric Holt [[log in to unmask]<mailto:[log in to unmask]>]
Sent: Sunday, January 18, 2015 7:15 PM
To: [log in to unmask]<mailto:[log in to unmask]>
Subject: [SHOE] Answering some questions about the Harvard exam

I have received a number of private e-mails about the Harvard economics exam that I sent out last week, dated April 29, 1953. Most people wanted to know if it was an undergraduate or graduate exam. This was the general written examination for undergraduate students. The exam was for three hours, broken down into two areas. At the option of the examiner, an oral examination could be given, "if the mark of the student is in doubt." Requirements for the economics major in the  early 1950s included: 1) the completion of a certain number of courses in economics, government and history; 2) To choose a concentration in a special field of economics and take a number of courses in that area. There were five major "special fields" the student could choose from: a) Economic Theory, b) Economic History, c) Money and Finance, d) Market Organization and Control and e) Labor Economics and Social Reform; 3) To submit a plan of study for general courses, one's special area of concentration and to participate in the tutorial program; 4) pass the general written examination in economics at the end of the senior year. For Honors besides answering more questions on the general exam the student had to hand in a thesis. What's interesting with the questions is that they would be considered to be heterodox today, and probably could only be passed in a heterodox economics department, but at that time they were considered  to be very mainstream questions. This supports my view that the mainstream is constantly changing -- for the better that's up for interpretation.
Ric Holt