3. Economics in London: The London School of Economics (LSE)

For the history of LSE, see Dahrendorf (1995). See also Hayek (1946).

Harold Laski (1893–1950) in the field of political science and Bronislaw Malinowski (1884–1942) in that of anthropology were the most eminent figures.

The two other main economists in the LSE of the 1920s were Hugh Dalton (1887–1961) and Theodore Gregory (1890–1970). Hugh Dalton was educated at Eton and then at Cambridge, where he became a socialist and joined the Fabian Society. He took a doctorate at the London School of Economics, where he was, after the war, lecturer from 1920 to 1935. Dalton published important work on public finance, the distribution of income and wealth and the economics of socialism, along Pigouvian lines: his reputation is mainly connected with the publication of The Principles of Public Finance in 1923. In 1935, he resigned in order to devote himself to politics. Theodore Gregory studied at the LSE where he taught from 1913 to 1937, first as assistant and lecturer between 1913 and 1919, then as reader and professor in International Trade between 1920 and 1937. He published essentially in the field of monetary economics, with a historical and institutional approach, his main publications being Gold, Unemployment and Capitalism (1933) and The Gold Standard and Its Future (1932, 1935).

The lectures were well received by the London audience.Hayek had also accepted an invitation from Cambridge to address the Marshall Society. There the impression created was rather different. Richard Kahn describes the evening as follows: “[t]he members of the audience—to a man—were completely bewildered. Usually a Marshall Society talk is followed by a barrage of discussions and questions. On this occasion there was complete silence. I felt I had to break the ice. So I got up and asked: ‘Is it your view that if I went out tomorrow and bought a new overcoat, that would increase unemployment?’ ‘Yes’, said Hayek. ‘But’, pointing to his triangles on the board, ‘it would take a very long mathematical argument to explain why’” (Kahn 1984, p. 182).

Although Hayek much later told interviewers that Robbins brought him to the LSE to serve as an intellectual opponent to Keynes, Howson (2011) reveals that the facts were different. Robbins’ first choice for the vacant Tooke Chair was Jacob Viner, but the American economist received a counteroffer persuading him to stay at the University of Chicago. It was Beveridge who then came up with the idea of offering Hayek a visiting professorship.

The seminar was the continuation of a seminar for research students initially introduced by Allyn Young between 1926 and 1929.

Joan Robinson remembers: “A delegation led by Abba Lerner (then a graduate student at LSE) came to Cambridge to suggest that the young generation on each side should get together and settle the debate amongst themselves. The Review of Economic Studies was founded as a forum for discussion (it later evolved into something quite different) and a weekend meeting was arranged at an inn half-way between London and Cambridge. … Abba came to spend a term in Cambridge” (J. Robinson 1978, p. xv).

For the biography of Robbins see, in addition to Robbins’s autobiography (Robbins 1971), O’Brien (1988), and Howson (2011).

Kaldor remembers in his reminiscences of those years that: “Robbins’ economics (much influenced by his contacts with Viennese economists, mainly von Mises) was the general equilibrium theory of Walras and the Austrians, rather than of Marshall, and his lectures followed the method of presentation of Wicksell and of Knight’s Risk, Uncertainty and Profit … Robbins as a young economist absorbed this theory—the keystone of which is the marginal productivity theory of distribution in its generalised form, as expounded by Wicksell and Wicksteed—with the fervency of a convert and propounded it with the zeal of a missionary (Kaldor 1986, pp. 14–15).

Robbins would later express a strong critical evaluation of this book’s political implications. In his autobiography, he writes: “Confronted with the freezing deflation of those days, the idea that the prime essential was the writing down of mistaken investments … was completely inappropriate … I shall always regard this aspect of my dispute with Keynes as the greatest mistake of my professional career, and the book, The Great Depression, which I … wrote partly in justification of this attitude, as something which I would willingly see forgotten” (Robbins 1971, p. 154).

It is considered a novel contribution to methodological individualism (see Oliveira and Suprinyak 2018 and the literature there cited).

A second edition, with “alterations and improvements”, was published in 1935. On this edition, see Hutchison (2009).

For a biography of Hayek, see Caldwell (2004). See also Boettke (2018).

On the Hayek-Mises relationship, see Caldwell (2004), particularly pp. 143–149.

Hutchison (2009, p. 307) writes: “It announced a profound transformation of his philosophical and methodological views, but the special interest of this methodological transformation is that it forced on Hayek a fundamental recasting of his arguments on the relative merits of market and centrally planned economies.”

“The difficulties that Hayek saw in the idea of equilibrium with perfect foresight were not … Morgenstern’s paradoxes on the quasi-divine knowledge that firms and consumers should enjoy” (Ingrao 2013, p. 501). Note that Hayek did not equate correct foresight with perfect foresight as Morgenstern did, correct foresight not implying limitless knowledge.

For the biography of Hicks, see Hicks (1979), chapter one of Hamouda (1993) and Creedy (2011, 2012).

These concepts had been introduced by Slutsky’s (1915) paper in Italian (see Vol. I, Chap. 2.3), at that time not known to the two English economists. Hicks and Allen—together with Schultz at Chicago—then recognized that their paper was essentially Slutsky’s theory. As Schultz (1935) wrote, the solution of the problem of the reaction of consumers to a change in income and prices “was first given by Pareto in 1892, but was simplified, extended, and put in more elegant form by Professor Eugen Slutsky, the Russian statistician and economist, in a remarkable paper in 1915” (Schultz 1935, pp. 439–440). Allen (1936) published a summary of Slutsky’s paper in the Review of Economic Studies.

Hicks's concept of temporary equilibrium was inspired by Hayek, but later it was credited by Hicks himself (1965) to Erik Lindahl (see Chap. 5.​2).

The idea of “pure futures economy” inspired the axiomatic model of intertemporal general equilibrium then developed by Arrow and Debreu.

Samuelson maintained that the most important advance made by Value and Capital, from the analytical standpoint, was “the enunciation of the principle that a group of commodities has the property of a single commodity if their prices all change in the same proportion” (Samuelson 1948, p. 130). It was, according to Samuelson, “the cornerstone of his exposition” (Samuelson 1998, p. 1381). On the other hand, Samuelson was also critical of Value and Capital. In particular, he showed that the Hicksian stability conditions are not, in general, necessary nor sufficient to satisfy the stability of equilibrium in a dynamic system (Samuelson 1941). For his part, Hicks later wrote that Samuelson, Arrow et al. recognized that Value and Capital was the starting point of their work on GEE, which they accomplished “with far more skill in mathematics” than himself. On the other hand, Hicks regarded those “great” results as extraneous to his way of thinking, which did not espouse either econometrics or theory for its own sake (Hicks 1979, pp. 201–202). Roy Allen, who was at that time in constant intellectual dialog with both Hicks and Samuelson, wrote (Allen 1949) that the two authors “have now come together on essentials” so that “future development…will flow from an agreed combination of the two expositions” (ibid., p. 112). This judgment became a common opinion: Arrow (1974, pp. 255–260) speaks of a “Hicks-Samuelson Model of General Equilibrium” whose “primary interest… was rather in the laws of working of the general equilibrium system…than in the questions of existence and the like”. Allen was also able to show the differences, not trivial, between Hicks and Samuelson: whereas Hicks, he wrote, wanted to present “a full development of one particular line of approach”, Samuelson wanted “to unify diverse fields of economic theory by showing up the common, underlying mathematical basis” (ibid.). Actually, this means a different conception of the use of mathematics in economics.

On the formal shortcomings of Hicks’s GEE, see Collard (1993, pp. 334–335).

When he wrote his review, Morgenstern was “under von Neumann’s spell” (Leonard 2010). Morgenstern (1976) recounts von Neumann’s irreverent opinion of the productions of mathematical economics at the end of the 1930s, and the following quotation refers particularly to Hicks (see Ingrao and Israel 1990, p. 197 and note 60, p. 410): “You know, Oskar, if those books are unearthed sometime a few hundred years hence, people will not believe they were written in our time. Rather they will think that they are about contemporary with Newton, so primitive is their mathematics. Economics is simply still a million miles away from the state in which an advanced science is, such as physics”. Substantially, the same judgment was passed on Samuelson: Leonard (2010, p. 244) writes that von Neumann felt a private disdain for the “primitivity” of the Samuelsonian mathematical economics of Foundations.

On the history of IS-LL and IS-LM, see Young (2010).

Hicks also introduces another version of the classical theory, the so-called Treasury view, which assumes that saving is inelastic to the rate of interest.

Lerner overcomes the difficulty of comparing the wellbeing of different individuals by introducing two assumptions: (1) the similarity in kind of the satisfactions experienced by different people and (2) the principle of diminishing marginal utility of income. On the basis of these assumptions, he argues that equalization of income will maximize the probable sum of satisfactions in the community.