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Part I
Radical ideas of Karl Marx and Thorstein Veblen
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1 The Marxian and Veblenesque elements in how I do economics
G. C. Harcourt
I
I count it a great privilege to contribute a chapter to the volume for John Henry. I have known him since he was a doctoral student at McGill in the 1970s. John was supervised by my old and dear friend, the late Athanasios (Tom) Asimakopulos. (Tom and I were PhD students at King’s, Cambridge in the 1950s.) I read John’s dissertation on J. B. Clark and the origins of neoclassical economics and was bowled over by his scholarship, critical ability, analytical strength, enthusiasm, and radical humanity.
By the time John was awarded his PhD, to be a true radical was starting to become a liability as far as getting a permanent academic post was concerned. Thank goodness, John found a niche at the California State University at Sacramento and then at the University of Missouri at Kansas City. He became a much admired teacher and colleague as well as an outstanding scholar. Reading his CV, in which is set out his remarkable contributions, takes one’s breath away. He surely must be one of the greatest all-round scholars in modern economics, with important things to say on so many crucial issues within boundaries so generously drawn by our classical pioneers (my favorite saying of Maurice Dobb, see Dobb 1973, 261).
John knows far more about Karl Marx, Thorstein Veblen, and religious and theological matters than I ever will1 and I have greatly benefitted from drawing on his wise knowledge. In this chapter I document the impact of the contributions of Marx and Veblen, two of John’s and my favorite economists, on how I have done economics over my lifetime as an academic economist, teaching principally at Adelaide and Cambridge.
II
I start with a confession. My absorption and understanding of Marx and Veblen are mostly the outcomes of the process of osmosis. When I was an undergraduate at Melbourne University, in 1952, my third year, I took History of Economic Thought as one of my two Honors options (the other was Mathematical Economics). The lecturer (who shall remain nameless) was one of Joseph Schumpeter’s last graduate students at Harvard. He was a lazy sod who never prepared for lectures/classes. Instead, he outsourced (as we say now) each of the greats of our trade to members of the class to prepare and then give the background lectures on them.2
As well as preparing our allocated lectures, we had to read all the greats in the original texts, an excellent, indeed, essential requirement, of course. John McCarty, alas now dead, introduced us to Marx and did an excellent job. I must confess, though, that Marx’s Capital was the only one of the great books, those by Smith, Ricardo, Malthus, Marshall, Keynes, that completely defeated me.3 In desperation, when preparing for the final exam, I read Paul Sweezy’s The Theory of Capitalist Development ([1942] 1969), still an excellent introduction to the great man’s ideas. But it was not until I supervised three wonderful PhD students who were scholars of Marx—Prue Kerr, Allen Oakley, and Claudio Sardoni—that I started to grasp what Marx was on about.4
I doubt if I read much of Veblen as an undergraduate, though living in Melbourne from the 1930s to the 1950s certainly imprinted on me the vulgarity of conspicuous consumption and the hostilities between well-demarcated classes in what was then a snobby, stuffy, sectarian environment. I came to his ideas tangentially, first, through the writings of John Kenneth Galbraith, especially American Capitalism: The Concept of Countervailing Power (1952), The Affluent Society (1958) and The New Industrial State (1967); and, second, through Nicky Kaldor’s development of the concept of cumulative causation. Kaldor initially obtained his understanding of the concept from Allyn Young, his teacher and mentor at the London School of Economics in the 1920s. The concept had been thoroughly developed by Veblen, independently, by Gunnar Myrdal, and, of course, by Adam Smith, on whom Young drew, albeit he presented his arguments in terms of Marshallian concepts and analysis (see Young 1928). As I discuss below, it was to become an integral part of my teaching and research.
III
I start with Marx. From early on I think I realized, but only vaguely, that Marx classified the march of history by the ways in which the surplus was created, extracted, distributed and used in the specific mode of production that dominated each historical period. Such a view implied that each mode carried within it, its own unique source of contradiction so that one mode would inevitably be succeeded by another, and that, at any moment of time, there would be fossils left over from preceding modes and the beginnings of the embryo of the mode that was to follow.5
Such a viewpoint further implies that one task of a theorist was to abstract dominant relationships from actual surface historical observations in order to construct ideal abstract models of dominant modes of production. Such models would produce inferences that could be observed in the hurly-burly of the actual historical happenings just because they were, in their pure form, the dominant processes at work.6 Allied with this vision was the proposition that all modes contain within them different classes characterized by the nature of the dominance of one class over another. This gave rise to different forms of the exploitation of one class by another. This process was obvious in Feudalism where history and institutions combined to allow the Lords of the Manor to make the serfs not only produce a surplus on the Lords’ lands but also to pass much of it to the Lords for their use.
In the pure competitive capitalist mode of production, such exploitation was neither obvious nor indeed even present in the surface phenomena of its sphere of distribution and exchange. In the competitive mode, all members of the class of property-less wage-earners would nevertheless be paid the same wage for every hour that they worked. (For simplicity we assume homogenous labor.) Any capitalist who organized production and accumulation and who tried not to do this would find that wage-earners could and would be able to move to others who did. How then could there be exploitation and how was a surplus created?
The answer is the essence of the labor theory of value. Because the capitalists as a class had a monopoly of the means of production, as a class they could make wage-earners as a class work longer in the sphere of production than was needed with existing techniques and capital stocks to produce the wage goods the wage-earners received (and earned). The extra hours worked was surplus labor, the source of surplus value and the surplus commodities emanating in the sphere of production, and the source of profits observed in the sphere of distribution and exchange. Their size so created was reflected in the uniform rate of profits and in the profit component of the prices of production which, it was argued, underlay observed market prices. One-to-one correspondence of direct and indirect labor embodiment in each commodity was not implied, only that deviations of prices of production from underlying labor values could be predicted—the (in)famous transformation problem.
This basic vision still illuminates our understanding of the capitalist world today. To it we must add the realization problem, sensed by Marx and his despised predecessor, Thomas Robert Malthus, and independently solved in the modern age by Maynard Keynes (but in an inappropriate Marshallian setting) and Michal Kalecki within an appropriate Marxian structure. This requires a distinction between the potential surplus created in the sphere of production by the current state of the class war and the inherited technical structure created by past accumulation, on the one hand, and the actual surplus realized as an outcome of establishing the point of effective demand combined with the distribution of the product between profits and wages in the sphere of distribution and exchange, on the other. The clearest exposition of these interrelated processes is in the writings of Donald Harris (1975, 1978). Harris drew on Marx, Kalecki, Keynes, and Joan Robinson in arriving at his synthesis, to which he added his own original take on the processes involved.
The other major extensions are, first, to include the role of the multi-national oligopolies that have come to dominate production, trade, accumulation and government policy in our modern world (here Galbraith through Veblen joins Marx7); second, the rise to dominance of national and international finance capital over industrial and commercial capital, both in activity and in influencing government policy, nationally and internationally. Marx had warned us long ago that such events could lead to instability and often to crises.
There, as well as on Marx and these other influences, I draw on Kurt Rothschild’s 1947 classic, “Price Theory and Oligopoly.” It was the single most influential article I read as an undergraduate and it has been integrated into the structure of my thought ever since.
Indeed, my first ever major research project resulted from the requirement that in our fourth undergraduate year as Honors students at Melbourne, we write a 30,000 word honors thesis. Mine was on the implications of having Rothschild’s oligopolists, who were as interested in receiving secure as in receiving maximum profits, as the dominant market structure, for systemic behavior within the framework of Keynes’s General Theory. In particular, I analyzed the effects of “financial prudence”—writing off through depreciation allowances the book values of fixed assets long before the need to spend on their replacement occurred (see Keynes [1936] 1973, 98–106)—as evidenced in the reserve policies of a sample of Australian public companies over the years of the Great Depression.
My immediate examiners were not that impressed by my efforts but Ronald Henderson, my PhD supervisor at Cambridge, and John Hatch and Ray Petridis in Volume I of the volumes in my honor edited by Philip Arestis, Gabriel Palma, and Malcolm Sawyer (1997) were more positive. Hatch and Petridis wrote that the thesis
is of interest for its own sake but also because it contains themes which are echoed in much of his later writing…. The conclusions to the thesis were both modest and agnostic in contrast … to the exuberant, assertive, almost brash style of earlier parts … but he established a pattern of seeking practical policy implications for much of his subsequent work.
(1997, 3)
We know that Kalecki and Keynes independently discovered the principal propositions of The General Theory and that Kalecki’s are set within the more appropriate structure of Marx rather than Marshall as Keynes’s are. While Kalecki concentrated mostly on aggregate analysis in the sphere of distribution and exchange, he took as a necessary given, happenings in the sphere of production in which the class war rages and the surplus is created. This understanding underlies his classic 1943 paper “Political Aspects of Full Employment,” the analysis and findings of which are as relevant to the happenings of the modern world as they were for the 1930s and 1940s.
Just as Marx and Marxists helped form Kalecki’s original structure, so too did Marx and Kalecki help transform Joan Robinson’s from her Marshallian and Keynesian beginnings to her mature understanding of the processes of distribution, accumulation and growth in capitalism as set out in The Accumulation of Capital (1956), Essays in the Theory of Economic Growth (1962), Economic Heresies (1971) and many articles from the 1950s to the early 1980s. Increasingly I also absorbed these influences in my own work through Joan’s writings, in which The Accumulation of Capital held pride of place.8 As I mentioned above, in recent years I have written papers on what would Marx and Keynes (and Kalecki) have made of the last 30 years and more, papers which both criticize mainstream analysis and set out alternative interpretations based on the above Trinity’s insights and contributions.
IV
Turning now to Veblen: there are at least two major influences: the concept of cumulative causation (combined with the view that economics is or should be an evolutionary science) and his role in the Cambridge–Cambridge controversies in capital theory, most recently brought to light by Joan Robinson when she read or reread his critique of J. B. Clark’s version of marginal productivity theory.9 She pointed out that had people remembered his devastating review article (Veblen 1908; Kerr with Harcourt 2002), there would have been no need to have the controversies in the first place.
Much is made of the doctrine that the two facts of “capital” and “capital goods” are conceptually distinct, though substantially identical…. “Capital is the permanent fund of productive goods, the identity of whose component elements is forever changing. Capital goods are the shifting component parts of this permanent aggregate” (p. 29). Mr Clark admits that capital is colloquially spoken and thought of in terms of value, but he insists that … the working concept of capital is … that of “a fund of productive goods” considered as an “abiding entity.” … This conception of capital … breaks down in Mr Clark’s own use of it when he comes … to speak of the mobility of capital, that is to say, so soon as he makes use of it…. The continuum in which the “abiding entity” of capital resides is a continuity of ownership, not a physical fact.
(Veblen 1908, 162–163; Kerr with Harcourt 2002, 287–288)
As in Marshall so it was all in Veblen.
I have Joan Robinson’s copy of her textbook with John Eatwell (1973). In it, she annotated this passage as follows: “In modern times they [mainstream economists] have resorted to be desperate expedient of assuming machines are ‘malleable’” (46). With her usual deep perception she has in one sentence highlighted the central thrust of the critique, that what is at stake is so much more the meaning as opposed to its corollary, the measurement of capital. This leads to concentration on alternative takes (within the mainstream and its critics) on the characteristics of the economic society being analyzed—its “rules of the game,” institutions and, most importantly, the sources and strength of power at work in the society.
As to cumulative causation it is here that osmosis from Veblen is much to the front. The particular form it took in my thinking owes most to Kaldor’s version but also to Joan Robinson’s and, indirectly, to Dick Goodwin’s and (late) Kalecki’s theories of cyclical growth (see Goodwin 1967; Goodwin and Punzo 1987; Kalecki 1968; Harcourt 2006b). I also mentioned above Marx’s insight concerning the consequences of the dominance of finance capital over the other two forms, especially in the modern world. This may be allied with what the profession takes to be Kaldor’s most important theoretical paper, “Speculation and Economic Stability” (1939). In it he analyses price formation and activity in markets in which stocks dominate flows and expectations, often speculative, dominate the usual fundamentals (of neoclassical theory) in the determination of prices.
In my teaching in the 1980s I began t...
