The Cost Controversies

In the first three decades of the twentieth century the analysis of the laws of returns developed by Marshall and Pigou enkindled several contro­versies. Conceived most narrowly, they revolved around the functional relationship between costs and output and its implications for economic welfare.1 Regarded more broadly, they entailed important consequences for Cambridge economics. At the time of his retirement, Marshall’s Principles endowed his successors with several alternative profiles for the future of economics. In light of the unrivalled pre-eminence of this book — Joan Robinson called it the ‘bible’ of Cambridge economics in the 1920s (Robinson 1951, vii) — how Cambridge economics devel­oped would depend on how his disciples interpreted it. On this point, the conception of time in Marshall’s thought was critical. Should his followers adopt the framework of comparative statics elaborated in the Principles? Or should they attempt to develop an evolutionary theory, using as inspiration the organic metaphors with which Marshall embel­lished some of his arguments? For a number of reasons, Pigou took the former course, which rested on the concept he saw as the cornerstone of economics: the national dividend. In the ensuing, we consider the cost controversies of these years in so far as they bear upon Pigou’s interventions.