The Palgrave Companion to LSE Economics

Given Lionel Robbins’s scepticism about the value of regression analysis, early LSE contributions to econometrics came from members of the Statistics Department, such as Arthur Bowley and Roy Allen. Much later, with the arrival of Bill Phillips, Rex Bergstrom, Denis Sargan and the graduate students he trained, the School developed the leading econometrics group in the UK for a time, with a distinctive ‘LSE Tradition in Econometrics’. This involved both econometric theory and methodology. With the retirement of Sargan and David Hendry’s move to Oxford, the econometric emphasis at LSE changed under Peter Robinson, with important applied econometric work being carried out across several of the School’s research institutions.

Examining the intellectual and institutional development of the subject, Lewis argues that the LSE’s founders regarded economic history as a core discipline, a bridge between economics and other social sciences that was critical to the mission to foster applied research and practical education. Methodological pluralism, deploying theory to frame questions about social, economic and political change, and recognition of the interpretive power of analysis based on qualitative and quantitative data remain central. Early practitioners like Power, Tawney and Fisher also saw how studying the past facilitated an evaluation of contemporary problems. An emphasis on the relevant and radical, along with methodological diversity, explanation and argument, supported by a variety of sources, account for the emergence of the subject—and are crucial to its survival.

Accounting has been taught and studied at LSE since 1902, but for the first 30 years, it was a largely technical subject. Early accounting professors, Laurence Dicksee and Frederic de Paula, were practitioners influenced by law rather than economics. In the 1930s, however, a group of economists with accounting training, including Ronald Coase, developed the LSE tradition in cost theory. This tradition was continued into the 1970s by the so-called LSE Triumvirate—William Baxter, Harold Edey and David Solomons—who influenced both a generation of UK accountants and the British government. More recently, the Department of Accounting has become associated with the ideas of Anthony Hopwood and his followers. They argue that economics could not have gained its current prominence without the calculations of accounting.

Many pioneers of economics blended empirical work effortlessly with their theoretical work, though critics alleged that theory became increasingly divorced from empirics after 1945. Yet many LSE academics—from Ronald Coase and Edith Penrose to Geoffrey Owen and John Sutton—consistently rooted their work in the founders’ aims of studying ‘the concrete facts of industrial life’, generating and testing important ideas in industrial economics. A distinctive LSE initiative in 1978 was the foundation of the Business History Unit, a wellspring of later developments in the subject of business history within the UK and internationally. The core staff and the Unit’s students and diaspora at home and abroad contributed to the analysis of entrepreneurship, technical innovation and comparative business development.

Social policy as an explicit intellectual endeavour only began after the Second World War, but themes that are central to it can be found in the work of the LSE Economics Department from its beginning. Taxation and its distributional and incentive consequences is one continuous theme. The appropriate and uncertain boundary line between public and private funding and service delivery, between market competition and public monopoly, is another long-standing interest. While the Department began by generally taking a pro-free market line, the development of theories of market and information failure led to an evolving ‘economics of the welfare state’. Though never central to the Department’s work, individual members specialised in this topic and other areas of social policy, including education, housing, social security and pensions.

Economica was launched in 1921 as an LSE house journal to cover all aspects of work at the School and in its early years, LSE contributions dominated. In 1934, Politica was launched. Economica would now concentrate on economics, economic history, accounting and statistics, while Politica would cover the remaining subject areas. Economica was involved in the 1930s battle between LSE and Cambridge, with lively exchanges between Hayek, Keynes and Sraffa. Among notable articles were Coase’s ‘Nature of the Firm’, an analysis of cigarette money in a prisoner of war camp by Radford, and the Phillips Curve. As economic research at the School became more specialised, fewer LSE economists published in Economica. It has become a generalist journal based at LSE rather than a house journal.

Edwin Cannan was appointed founding Professor of Political Economy at London School of Economics (LSE) in 1907, having taught at the School from 1895. He had earlier made his mark as a historical scholar of economics, most notably in editing an edition of Adam Smith’s Lectures in 1896 and then in 1904 editing a new edition of Smith’s Wealth of Nations that remained the standard work of reference until 1976. His sceptical, not to say combatively liberal, approach to economic analysis was a major factor in the creation of a distinct LSE style during the interwar years, conveyed to generations of students in his lectures on the principles of economics.

Arthur Bowley was a pioneer in the quantitative study of social phenomena; he was an economic statistician of the highest rank and his work in mathematical economics and econometrics was path-breaking. His interest in the social sciences was always practical, and his theoretical work, most notably in statistical sampling, was motivated by the need to answer material questions. Bowley’s development of quantitative and statistical approaches to the social sciences, and his adherence to the highest of standards, ensured the quality of his work. His legacy, through his research, his scholarly textbooks and the many students whom he taught and influenced, is profound. He was a modest man with little to be modest about.

William Beveridge made at least three significant contributions to economics. Regarding his contributions to modern economic analysis, Beveridge set out a coherent diagnosis of industrial fluctuations based on empirical data and the latest theories on trade cycles. Regarding his contributions to professionalisation in economics, Beveridge helped form an international group at LSE and exhibited enthusiasm for (unsuccessful) attempts to create a renewed political economy. Beveridge served as the driving force for creating innovative ideas and was also the representative of a new type of economic thought: ‘management in bureaucracy’. In a sense, he served as a bridge, connecting the three different schools of economics (Oxford idealism, Cambridge practicality and LSE scientism and internationalism), which could in turn be sublimated into universal welfare ideas.

Thompson discusses the political economy of R.H. Tawney, one of the most important British socialist historians and theorists of the twentieth century. This chapter considers Tawney’s time at LSE, his relationship with colleagues, his methodology and work as an economic and social historian, his critique of capitalism, and his contribution as to the thinking and policy of the British Labour Party. While recent commentators have suggested that Tawney’s work has a purely historical significance, Thompson argues for the relevance of key aspects of his political economy to some of our contemporary challenges.

Hugh Dalton combined a brief but very successful academic career, spent entirely at LSE, with a deep commitment to the Labour Party. Cassell Reader in Economics from 1920 to 1935, when he resigned in order to devote himself to politics, Dalton published important work on public finance, the distribution of income and wealth and the economics of socialism. His authoritative textbook, Principles of Public Finance, was still selling well in the early 1950s having first appeared in 1922, and his 1920 article on ‘The Measurement of the Inequality of Incomes’ was rediscovered in the 1970s and has been very widely cited ever since. Dalton was essentially a pre-Keynesian economist, who applied A.C. Pigou’s neoclassical microeconomics to develop a surprisingly radical brand of democratic socialism.

Frank Paish was on the staff of the Economics Department at LSE for over three decades from the early 1930s to the mid-1960s. Although he has faded into obscurity, Paish made important contributions across a number of fields in economics. He is best known for the Paish doctrine, which argued, somewhat controversially when it was put forward in the 1960s, that in order to secure stable prices there must be a certain level of spare capacity (unemployment) in the economy. Although Paish was for a time influential in British government circles, his policy proposals subsequently fell out of favour due to the occurrence of high unemployment and persistent inflation.

Cord looks at the work of Arnold Plant. After an examination of Plant’s life and career, the focus is on the seminal contributions that he made in the 1930s to the economics of copyright on books and patents for inventions, and how his views on these issues reflected his wider dislike of monopoly. Cord then considers Plant’s work on Africa, in particular the South African economy, this interest resulting from the time he spent at Cape Town University in the 1920s. Following on from this, there is an examination of Plant’s deep involvement with the Department of Business Administration at LSE, before a concluding section highlights the significant influence he had on generations of students at the School, including Ronald Coase and Arthur Lewis.

Lionel Robbins was famous outside LSE for his varied public activities, including government service in the Second World War and involvement in the administration of the arts and in higher education in Britain, as well as for his work as an academic economist. He was associated with the School for over sixty years, including as a student, Professor of Economics and Chairman of the Governors. Howson concentrates on Robbins’s career as an LSE economist, discussing his education at the School and his teaching and writing on economics before and after the Second World War. It also considers the influence of his teachers, notably Edwin Cannan, Hugh Dalton and Theodore Gregory, on his own thought and teaching, and the influence of his teaching on LSE students.

In the 1930s, Friedrich Hayek emerged as one of the leading economists of his generation. Alongside Lionel Robbins, Hayek made LSE a major player in the marketplace of ideas due to his role in a variety of technical and policy debates against such figures as John Maynard Keynes, Frank Knight, Oskar Lange and Abba Lerner. Boettke and Piano argue that one of these debates, the so-called socialist calculation debate, played a major role in determining the trajectory of Hayek’s career in the decades to come, pushing him to explore a wide array of themes often perceived as beyond the scope of economics proper.

Young, Schiffman, and Zelekha deal with the LSE-based contributions of Abba Lerner to economics over the half-century 1932–1982. These include his writings on micro- and trade theory, socialist economics and the economics of Keynes in the 1930s; his influential book, The Economics of Control, and the notion of ‘functional finance’, and research on inflation, employment theory and policy in the 1940s and post-war period; his ongoing work on these topics in the 1950s and 1960s; and revision of his views in the 1970s after the failure of Keynesian economics to explain stagflation. All of these writings were characterised by the eclectic approach that Lerner absorbed as an undergraduate, graduate student and junior faculty member at LSE.

Hagemann focuses on John R. Hicks, the first British economist to receive the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel in 1972. Hicks felt a lifelong commitment to London School of Economics (LSE), the institution that made him an economist and where he taught from 1926 to 1935. Hagemann discusses how Hicks’s later works at Cambridge, Manchester and Oxford are linked to his earlier influences at LSE. The emphasis is not only on his work on general equilibrium theory and welfare economics but also on Hicks’s other major works from wage theory to monetary theory, capital and growth theory, and the challenges posed by Hayek and Keynes. Hicks’s deep interest in (economic) history and history of economic thought also influenced his work as a theoretician.

Henry Phelps Brown was Professor of Labour Economics at LSE from 1947 to 1968. This was a time when trade unions in Britain were powerful, exchange rates were fixed, and governments intervened in setting wage and price targets; it was also a time when economists, particularly at the School, embraced economic history. Phelps Brown’s contributions must be assessed in this context. He recognised that labour economists needed to understand the institutional characteristics of the labour market, so he investigated the development of British trade unions and their role in the system of industrial relations. He also constructed various historical series, including money wages and labour productivity. Finally, Phelps Brown provided a precursor of the Phillips curve and a devastating critique of the Cobb-Douglas production function.

Evan Durbin was a democratic socialist, an economist and a politician. In the 1930s, his work was central to the Labour Party’s adoption of economic planning. During and after the Second World War, Durbin championed a socialist planned economy that maximized individual liberty and rejected sectional interests. He was elected as a Labour Member of Parliament in 1945 and served as a junior minister in Clement Attlee’s government. His distinctive formulation of socialism melded economics with ethics and insights drawn from psychology and psychoanalysis, underpinned by a belief in the superiority of English values and institutions. Durbin’s ethical vision and interest in affluence, voter psychology and managerialism informed Labour’s policy debates in the 1950s and ensured the continued relevance of his ideas.

Although Roy Allen was officially a member of the Statistics Department at LSE, he made many important contributions to economic theory in the 1930s, including joint articles with John Hicks. He became a Fellow of the Econometric Society in 1935 and taught courses in econometrics at LSE from 1935 to 1940 and again in 1947 and 1948. His 1938 Mathematical Analysis for Economists remained the standard text well into the 1960s, and he wrote important textbooks in economics. Allen also had an important input into public service through his membership of public commissions and other activities, for which he was rewarded with a CBE, an OBE and a knighthood.

Richard Sayers’s greatest strength was as an economic historian of institutional changes within the British financial system, especially relating to the Bank of England, for which he became the second official historian covering the years 1891–1944, but also writing the histories of Lloyds and Gilletts, and a wider study entitled Financial Policy, 1939–1945. Nevertheless, he is best known for two other contributions. First, his textbook, Modern Banking, remained required reading on this subject for all British undergraduates from 1937 until the early 1970s; second, he played the major role in the domestic monetary analysis of the Radcliffe Report (1959). This latter role was often not well received, and his historical and institutional approach came to be treated as unfashionable and outdated.

The purpose of this chapter is to link Ronald Coase’s methodological approach to what he ‘learned’ when he was at the London School of Economics (LSE) from Edwin Cannan and Arnold Plant. The main lesson Coase taught us and insisted upon was that economics should not be too ‘abstract’ and should not rely on a priori categories. He pleaded for more realism in economics, for a form of ‘political economy’: economists should use theory to generalise what facts tell us rather than trying to interpret facts by using a priori and abstract categories. This conception of economics is closer to the LSE of Cannan and Plant than to the Chicago of Stigler, Friedman, Becker or Posner.

A.W.H. ‘Bill’ Phillips was an innovative and sometimes path-breaking economist, but one whose achievements and influence have been much exaggerated. The famous ‘Phillips curve’ was neither as innovative, insightful, nor influential as it has been portrayed; the ‘Phillips machine’, although innovative, left little mark. His work on the theory of stabilisation policy and econometric theory was of much greater intellectual value. But attempts at finely tuned macroeconomic control with which the former was concerned feel thoroughly out of favour. Phillips’s work on econometrics went largely unnoticed, and his insights were later rediscovered after his death. There are indications too, that his econometric insights persuaded Phillips himself that the stabilisation policy with which so much of his work had been concerned could not be made effective.

Quah and Ng first discuss Ezra Mishan’s contributions to cost–benefit analysis, focusing on the appropriate set of individuals to be included, unconventional spillover effects such as ‘keeping up with the Joneses’, and the value of a statistical life. They then provide some qualifications to Mishan’s arguments questioning globalisation and immigration, concentrating on three commonly ignored benefits of a larger population. An increase in population, including as a result of immigration, need not reduce the per capita income due to the presence of increasing returns. Even if per capita income is reduced, existing citizens still gain economically through higher returns of factors complementary to the immigrating labour. Additionally, a larger population reduces the per capita costs of providing public goods, like defence and research.

James Durbin joined the LSE Statistics Department in 1950 and remained there until he retired in 1988. He was a key figure in the development of econometrics and statistics. An early contribution, which came to be known as the Durbin–Watson test, was the first ‘diagnostic’ to be routinely applied in the analysis of regression models and it exerted a profound influence on the way that econometrics evolved. However, it was only one of a number of fundamental contributions made by Durbin. He was a Fellow of the British Academy and in 2008 he was awarded the Royal Statistical Society’s Guy Medal in Gold for a lifetime’s achievement in statistics.

Matsuyama describes how Michio Morishima, a distinguished Japan-educated mathematical economist, had wide-ranging research interests, including dynamic general equilibrium theory, history of economic thought and ‘symphonic economics’. In order to cover his various works, the focus here is on the transition of Morishima’s economic methodology, which had been triggered by criticism from Ragner Frisch. After that, Morishima’s economic research gradually moved towards a more historical and institutional analysis of economic reality. Consequently, his realistic methodology evolves into his original approach, ‘symphonic economics’, based on historical and sociological perspectives. Matsuyama also describes Morishima’s efforts to establish The Suntory and Toyota International Centre for Economics and Related Disciplines (STICERD) at LSE.

During his period at LSE from the early 1960s to the mid-1980s, John Denis Sargan rose to international prominence and LSE emerged as the world’s leading centre for econometrics. Within this context, we examine the life of Denis Sargan, describe his major research accomplishments, recount the work of his many doctoral students and track this remarkable period that constitutes the Sargan era of econometrics at LSE. The overriding theme of his research was to improve the quality and reliability of empirical modelling through new approaches to specification and methodology, new methods of estimation, inference and evaluation complemented by systematic studies of their small sample and asymptotic properties, and by demonstrating their operational implementation with path-breaking applications in a wide range of empirical studies.

Middleton surveys the life and writings of the LSE economist, Ralph Turvey (1927–2012), who made contributions to macroeconomics and applied welfare economics. In a three-part career comprising the LSE proper (from outstanding undergraduate to Reader, 1944–1960), LSE secondment to various public bodies, national and international (1960–1989), and then ‘retirement’ (1989–2010), Turvey published at least 150 items. He played a major role in embedding marginal cost pricing in Britain’s then nationalised industries, in developing economic analysis of the electricity sector and, with Thatcherite privatisation and beyond, researching the economics of utility regulation. For Turvey, economic theory must serve practical ends, and his career was devoted to expanding the domain of policy problems for which economics offered rational solutions.

Richard Lipsey has had a wide-ranging career as a researcher, a teacher, a textbook author and participant in matters of economic policy. In all of these, technical facility is used to enhance understanding of economic matters and not for its own sake. His approach is not to simply go with the flow, but to think carefully about the nature and practice of economic enquiry. Lipsey combines a practical focus of investigation with a lifelong concern with methodology. His passionate belief in the importance of economic understanding makes him an engaging and stimulating colleague. In his years at LSE and after, Lipsey created and continues to create a special intellectual environment and to be a part of it is both a pleasure and of great benefit.

Richard Layard has, over the past 50 years, been one of the most influential and wide-ranging economists and public figures in Britain. He has throughout his career been based at LSE, which he has opened up to the world through the creation of research centres and direct links with leading international economists and public figures. Layard has been a driving force in many fields of economic research, including education, public finance, macroeconomics, labour economics, post-communist transition, and the new science of happiness or well-being. He has advised governments, notably the ‘New Labour’ administration from 1997 to 2001, and has driven policy reforms in many areas, in particular measures to reduce unemployment and, most recently, policies to improve the care and treatment of depression.

Charles Goodhart has made major contributions to the study of financial markets and macroeconomics, pioneering the integration of those two disciplines and applying his insights to the structure and practice of central banking. Goodhart served at the Bank of England in the 1970s and 1980s and as a policy maker on the Monetary Policy Committee (MPC). Along with Mervyn King, he founded and led the Financial Markets Group (FMG) at LSE, which has helped to ground the study of financial markets in actual practice. He foresaw many of the issues that led to the 2008 global financial crisis (GFC), has made a number of suggestions for preventing a repeat and has commented extensively on the strengths and weaknesses of the regulatory and monetary policy responses to that crisis.

Meghnad Desai has had a distinguished career as an economist, a political scientist and a politician: he is a Renaissance man. He has published numerous books and academic papers on a variety of topics, including Marxian economics, agricultural economics, development economics and macroeconomics. Besides his academic interests, he has been involved in movies and theatre. Meghnad has always been concerned with social issues. He was born in India and did his undergraduate education in Bombay, his doctorate at Pennsylvania, and began his academic career in the Agricultural Department at the University of California, Berkeley, before moving to LSE. After retiring from LSE, in 2015 he collaborated with some of his former students to establish an academic institution in India, the Meghnad Desai Academy of Economics (MDAE).

Astill presents Nicholas Barr’s contributions as an academic, his policy work and its influence in the UK and across the world. Barr created an economics of the welfare state, drawing on, among other things, the new economics of information. He established the efficiency role of the welfare state to go far beyond the existing rationale of market failure correction. Barr brings clarity to the controversial economics of higher education finance, presenting the mechanisms at work as transfers of consumption across an individual’s life cycle that mirrors pensions, but recognising the wider systemic failures of choice and access. Finally, with Peter Diamond, Barr explodes myths about pensions and reconstructs the economic analysis space with a pragmatic focus on design issues.

Steve Nickell is a researcher who has covered a lot of ground. At the start of his career, he worked on theoretical issues, quickly moving on to do empirical work. Nickell studied product market-related topics, but the focus of his work has been on labour market issues, ranging from individual unemployment durations to aggregate labour market institutions. In his research, Nickell emphasizes that distortions in the labour market are predominantly related to the system of benefits and the process of wage determination. According to Nickell, to reduce unemployment, governments should stimulate product market competition and link unemployment benefits to active labour market policies in order to move people from welfare to work.

Chris Pissarides has pioneered the concept of equilibrium unemployment arising from search and matching frictions. In his theory, unemployment is neither Keynesian nor classical, but results from a lack of information about job opportunities and imperfect knowledge of the location and skills of job seekers. This approach has major importance for the analysis of labor markets as well as aggregate policies. In particular, it emphasizes active labor market policies, the adverse effect of passive compensation, the importance of interest rates and aggregate demand, of adequate wage compensation, and the role of firm’s profits. In 2010, Chris received the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel together with Peter Diamond and Dale Mortensen for their work on markets with search frictions.