Economic Papers 1941–88

1. In dealing with uncertainty of price it is usually assumed that the entrepreneur who tries to predict a price has in mind several possible magnitudes of the price in question and various chances are attributed to these magnitudes. A distribution of the chances of various possible prices is drawn up, and the dispersion of this distribution is used to measure uncertainty.² This definition of uncertainty is purely formal, because we are not told what the entrepreneur expects in the concrete.³ Further, there is no explanation of how the entrepreneur comes to hold his particular assumption about the degree of uncertainty of price (or profit, sales, cost, etc.). But the degree of uncertainty is needed as an explanation, chiefly of the various rates of profit in different lines or enterprises; conceived as a purely subjective feeling, like a taste, it is no help for statistical investigation.

It is proposed to discuss in this paper the role of the distribution of wealth in a system of capitalist enterprise and profit. At the outset it is necessary to give a brief summary of the principle of increasing risk.² The most important consequence of this principle is that the entrepreneur’s investment (measured by his real capital — equipment and stocks) is not independent of the amount of capital which he can provide from his own resources; a wealthy entrepreneur may therefore in the same circumstances invest much more than a ‘poor’ one. It is pertinent to ask what is meant by entrepreneur and entrepreneur’s capital in this context. A fuller treatment of this question will be given in the last part; for the moment it is sufficient to say that the relevant characteristic of the entrepreneur is the unity of control, so that, for example, a number of firms controlled by the same people constitute one ‘entrepreneur’. The entrepreneurial capital, in the case of a private entrepreneur, is his private capital, in the case of a joint stock company it may be regarded for our present purposes as the sum of ordinary share capital and capital reserves.

1. In a comparison of small and big firms the question also arises whether they differ as far as their capital-output ratio is concerned. Apart from the ‘morphological’ question of the characteristics of firms of different size, there exists also the different but somehow related question how a growing firm will change and, in the present context, how it will use its accumulating capital: to what extent it will use it to produce the same output with more capital and to what extent for just expanding capacity. This second aspect of the problem leads us to consider the capital-output ratio in a much more general context, including the question of its historical change. For the present moment, we are going to deal only with the comparison of firms of different size. We are not oversupplied with data on capacity or capital. I tried to use the US Statistics of Income for corporations which give capital assets and sales (Table 4.1). Sales can in the present context be regarded as a proxy for gross output. There seems to be a strong increase with size in capital-sales ratios in various industries in the highest size classes, and more generally in all industries in the lowest size classes. The crux of these data is the vertical integration of the big concerns. In fact it is only too easy to see that the strong increase in the capital-sales ratio in the highest size classes of corporations occurs in the pulp and paper industry where the large concerns own forests, in the iron and metal industries where they own mines, and in the chemical and allied products industries where they own oil wells, etc. and means of transport like tankers.

The most comprehensive statistical material available with regard to the question of profitability and size has been published by W.L. Crum on the basis of the American Statistics of Income for corporations.¹ These data show that the rate of profit (profit exclusive of interest paid, in proportion to common and preference share capital plus reserves) increases with the size of the corporation (size being measured by value of total assets). The increase is steep in the lowest size classes and flattens out in the high size classes. In Table 5.1 (column A) the profit rates are shown for all corporations and broad groups and as an average of 1931–6. The significant result of Mr Crum’s investigation is, however, that the same relation obtains in all groups and subgroups of corporations, and in all the years for which data are available (that is, 1931–6); the only qualification is that in some years, and in some industries, there is a decline in the profit rate in the highest size classes.

It seems natural to suppose that the demand for skilled labour depends on the level of output, taking due account of its structure. It may be argued, however, that only part of skilled manpower is related to the level of output while an appreciable part is related to the rate of change of output. In fact, a part of the input of skilled manpower plays the same role as investment and is therefore subject to the acceleration principle.

This chapter is concerned with two ideas: first, the analogy between technical progress and biological evolution and, second, the interaction of science and society (of which the economy is only a part).

The concept of transfer of technology, or of diffusion of innovations, implies a distinction between the creation of new know-how and its spread through the economy. The first may be described as the activity on the ‘technological frontier’. This is usually identified with the innovators and could be defined as ‘best practice’ or latest know-how. The meaning of diffusion is self-explanatory. For some economists the distinction is connected with the idea that the technological frontier is created autonomously; the innovations enter the economy from outside whereas the diffusion is subject to economic forces and considerations (Maddision, 1979; Gomulka, 1979).

‘Long run’ and technical progress are subjects which have lain dormant from the Classics to the end of the second World War, if exception is made for Marx and Schumpeter. Since then curiosity about them has been aroused again, impelled from different sides: the interest of the former colonies in development on the one hand, and a renewed optimism in mature industrial countries on the other, combining as it did Keynesian policies and technical progress in an attempt to drown social antagonisms in a flood of prosperity. Each of the two interests has given rise to a separate theory and literature, understandably in view of the large difference in problems. It would be desirable to bring them under the same roof, as it were, but I shall be modest enough to confine myself to the industrial countries.

1. Kalecki has given us three versions of his theory of the trade cycle, dating respectively from 1933 (Kalecki, 1935, 1937), from 1943 (Kalecki, 1954) and from 1968. The difference between these versions almost entirely concerns the investment function (the equation explaining investment or investment decisions).

1. No doubt distribution is a subject which cannot be treated fully within the narrow framework of ‘pure’ economic theory. It depends too much on institutions, politics and history. Yet there is a macroeconomic relation which should not be neglected in any treatment of the subject: the influence of growth on distribution. This appears already in Marx’s ‘law of accumulation’. It is seen in the model of von Neumann where growth rate and profit rate are equal. It is suggested by Kalecki’s profit equation (profits are equal to investment plus capitalists consumption) from which both Joan Robinson’s golden age rule and Kaldor’s distribution paper are derived.

Morishima in a recent work (1984) has stressed that economic theory cannot be the same for every country nor for different periods in one and the same country. This applies also to stagnation theory. My stagnation theory was to explain the secular decline of growth from the nineteenth century to the depression of the 1930s in the US. This country was chosen because it seemed to me an easier subject for study than European countries — more of a closed and private economy than they were and less complicated by feudal past and imperialism. I was, however, inspired by a belief that behind the differences of individual countries a common pattern of development of accumulation in capitalism existed, and that a study of a comparatively simple case might reveal something of it.

The special role of household saving in the modern industrial economy may well be worth considering, if only because of certain features suggested by available data: expressed as a ratio of GDP, these savings seem to show an increasing trend in several countries in the last two decades. Again, observation of the same ratio seems to show that it is rather inflexible in face of cyclical changes, responding little or sometime even perversely to a fall in incomes. In this respect it reacts quite differently from business savings.

In an endeavour to formalise also applied economics the economists of the post-war decades have represented policy as a confrontation of objectives and instruments.¹ Typical objectives were full employment, growth, price stability, equilibrium of the foreign balance. The most frequently discussed instruments were fiscal policy, taxation, monetary policy, exchange rates, incomes policy. There are also forbidden instruments, black magic (import or exchange control.) The number of instruments, we were told, has to equal the number of objectives.

About ten years ago when the great reorientation of economists in relation to economic policy gained momentum it was often said, perhaps as an excuse for their volte-face, first, that ‘conditions were not what they had been before’ and second, that global measures to control demand were not sufficient ‘any more’ (they never were). An apparent justification for these arguments was the structural problem. Of course, this had existed before (Keynes, 1929). But maybe there is something new in the world-wide character of the present structural problems. All over the world the steel industry, the shipyards, the motor car and plastics industries and so on are in difficulties. But what may also be new is that the structural problem appears now not only in its industrial and regional aspects but also in its aspect of organisation (the crisis of the large concerns). We shall deal with these various aspects in turn although they are so closely connected as to be inseparable.

In my lifetime I witnessed two major changes in outlook in economics: first the Keynesian revolution, and then the counter-revolution, the return of the Bourbons.

My purpose is not an appraisal of Sraffa’s work or a probing into his aims or philosophy. I want to deal with a particular aspect. Sraffa’s book is concerned with measurement, concepts, aggregation. Indeed, a good deal of the intellectual difficulties which he has mastered are precisely in this field. He had to find a concept which would make it possible to deal with a multicommodity economy in the same way as if it were the corn economy (one commodity economy) of Ricardo. He found the concept in the standard commodity. It is an aggregate and yet a physical measure like corn, independent of prices and distribution. It may serve to measure consumption and investment, wages and profits alike. It is a macroeconomic concept derived from data for the individual commodities.

What was it that Keynes stood on its head in economics? Perhaps an idea of it can be conveyed in simple words. The analogy between the individual household and society as a whole which many economists as well as laymen use in their reasoning is misleading. Conclusions drawn from this analogy, Keynes showed, are false. Thus for the individual household saving (spending less than one’s income) leads to an accumulation of assets. For society as a whole when people spend less they reduce each other’s income and the wealth of society is reduced. That for the economy as a whole the relations are different, that spending determines income and not the other way round, is not immediately accessible to common sense which bases itself on the day by day experience of the household. The truth of the matter is revealed only by studying the circular relations in a society (spending-income-spending). This shows that there are feedbacks which for the individual household or firm are unimportant because of its small scope but which for a large unit, such as for example the public sector, will be very important. In economics as in other fields the scope of reasoning is enlarged beyond the field of everyday experience and intuition and produces results in flat contradiction with it.

Kalecki once said to me: In order to be useful a theory has to be simple. A good example of this simplicity is the mark-up. The concept corresponds to a practice which is familiar to business men; it has, therefore, a strong intuitive appeal. Theoretically its function is to enable us to distinguish between those changes in profit which result from the firm’s charging a higher price in relation to cost and those which are merely due to a larger turnover with given capacity — a fortuitous outside circumstance. The first follows from an increase in mark-up, not counting any response of demand (this corresponds to the ‘surplus value produced’ in Marxian terms), and the second from a change in the utilisation of a given capacity (this corresponds to ‘realised surplus value’ in Marx).

The following papers will probably not appeal to quite the same readers as the preceding ones. I realise this difference but I regret it and should therefore like to add a few words of explanation.

Using certain data on personal income, V. Pareto (1897) plotted income on the abscissa and the number of people who received more than that on the ordinate of logarithmic paper and found a roughly linear relation. This Pareto distribution or ‘Pareto law’ may be written as where α (the negative slope of the straight line) is called the Pareto coefficient. The density of the distribution is The Pareto coefficient is occasionally used as a measure of inequality: the larger α, the less unequal is the distribution. According to Champernowne α is useful as a measure of inequality for the high income range, whereas for medium and low incomes other measures are preferable (Champernowne, 1953).

Available data show that the pattern of the distribution of wealth conforms to the well-known Pareto law. Why this should be so was explained by Wold and Whittle (1957) who used a comparatively simple stochastic model for the purpose. The following paper builds on this work. By removing certain simplifications it may gain some additional insights.

When D.G. Champernowne showed how you can explain by means of a stochastic process why the pattern of the Pareto distribution is found with such great regularity in various fields, he very naturally chose as an example the distribution of income because that is the classical case. It seems to me that the approach is more easily applied to firms, towns or wealth. The case of income is the hardest, so that the great pioneering paper (Champernowne, 1953), while fully demonstrating a new method, has not entirely disposed of the special problem to which it was directed.

It may be assumed with some plausibility that the participants in a speculative market — for example, a market for bonds or for foreign exchange, more generally, a market where the participants are interested in future appreciation or depreciation — have different expectations with regard to the future price, or the direction in which prices are going to change. Contrary to some opinions, this diversity of expectations is a condition for the attainment and maintenance of equilibrium in these markets; it must be fulfilled in order to assure that an additional offer coming from outside will find buyers or that an additional demand coming from outside will will find sellers. A further condition is that there must be a generally accepted idea of a normal price level to which prices ultimately tend to return. This normal price will be a range of prices rather than one single price. Though the estimate of this range of prices may not be uniform either, it is much more uniform than the earlier mentioned price expectations: it must have some basis in objective facts. Thus in the case of a manufactured good there may be some general information about the range of costs. In the case of an exchange rate there is — or at least there used to be — an idea about purchasing power parity or relative cost, although in our times this has obviously become more and more an obscure and irrelevant quantity.