The Great Economists

by Linda Yueh

  Yet Joan Robinson was a pioneer in introducing imperfect competition into economics, a concept that has fundamentally transformed the field. As Robinson once observed: ‘The subject matter of economics is neither more nor less than its own technique.’6 She has given economists the techniques and tools to help analyse the challenge of low pay, among others.

  The life and times of Joan Robinson

  Joan Robinson (née Maurice) was born into an elite family in Surrey in 1903. Her father was a baronet and a major general in the British army in the First World War. Her grandfather was a famous surgeon who taught at Cambridge University, where she studied and built her career.

  She read economics at Girton College, graduating in 1925 without much distinction and with a Second Class degree. The following year she married Austin Robinson. He was to become a significant Cambridge economics professor and editor of the Economic Journal, but nevertheless was to be overshadowed by Joan. They moved to India for two years as he was to become the economics tutor to the young maharajah of the Indian state of Gwalior.

  When her husband returned to Cambridge University, she began attending Piero Sraffa’s lectures on the ‘advanced theory of value’, which was the standard term for what we would now describe as the theory of what determined prices in an economy. Sraffa’s article in the Economic Journal in 1926 had radically abandoned the assumption of competitive markets and focused on monopolies. Before then, the theory of monopoly was used only to analyse firms with dominant market power, such as public utilities or railways. After his article, interest grew in analysing imperfectly competitive markets. His work stimulated research among Cambridge and other economists, including Robinson, who would go on to establish imperfect competition as a new branch of economics.

  It wasn’t an easy time for female economists. In 1881 students at Girton and Newnham, the two Cambridge colleges for women, received permission to sit for honours examinations and have their papers evaluated, which were the same as those set for men. But they would not receive degrees. Cambridge was the only British university where women were still excluded from lectureships and administrative positions. It wasn’t until 1925, the year that Robinson graduated, that women could take up university posts. They remained excluded from college fellowships at men’s colleges, which formed the core of Cambridge teaching and research.

  In addition to the barriers faced by women at Cambridge, Robinson had earned less than a First Class degree. She had to publish research that would serve in place of a successful fellowship dissertation to establish herself as a serious economist. As an upper-middle-class woman, she had domestic help and thus she had research time. In the span of just a year and a half, between March 1931 and October 1932, she completed what would become a trail-blazing book, The Economics of Imperfect Competition.

  In thinking about firms with monopoly power, Robinson recast the theory of what determines prices in less than perfectly competitive markets. In so doing, she was also able to reconcile the two sides of economics. On the one side were those who used diagrams to establish precise theoretical relationships, for example price and quantity. The other side were the empiricists who thought data trumped theory.7 Robinson’s diagrams were based on empirical observations about how markets actually operated, which was less than perfect, and resulted in wages that were lower than a worker’s output warranted.

  Another factor in Robinson’s ascendancy to the core of Cambridge economics was her relationship with the Cambridge economist Richard Kahn. In 1930 they shared ideas. By 1931 they were having an affair. They were discovered by none other than John Maynard Keynes: ‘Early in 1932 Keynes surprised them on the floor in Kahn’s study, “though I expect”, he told [his wife] Lydia, “the conversation was only on The Pure Theory of Monopoly”.’8

  Robinson’s pregnancies in 1934 and 1937, which produced two daughters, did not seem to change their relationship. In 1938 Robinson suffered a psychiatric breakdown and she and her husband began leading separate lives.9 In 1952 she suffered another breakdown, though less severe than the first one.

  Richard Kahn could have been a potential competitor in developing a new theory of imperfect competition. Instead, he became a supporter. Kahn was a protégé of John Maynard Keynes. She joined him, her husband, Sraffa and James Meade in what was known as the ‘circus’. In 1935 Robinson was one of these five economists Keynes entrusted for feedback on The General Theory.10 This placed Joan Robinson at the centre of Cambridge economics. Keynes even wrote the Introduction to her Introduction to the Theory of Employment, which was the first textbook in Keynesian economics.

  In 1934, Robinson had been appointed to a part-time probationary lectureship at Cambridge University. By 1937, she had a full-time probationary lectureship, which led to a permanent lectureship the following year. She was amidst some of the most influential economists of the time. In 1938 Cambridge economics was led by Keynes, Sraffa and Kahn. As well as those, there was J. R. Hicks and A. C. Pigou. John Hicks would later receive both a knighthood and, in 1972, the highest prize in economics. He shared the Nobel Prize with Kenneth J. Arrow for their work on introducing welfare concepts into economics, such as assessing how people’s utility or happiness is affected by economic choices. Arthur Pigou more fully developed the idea of ‘externalities’, the costs or benefits to others that are not taken into account by, for example, a polluter or a person who plants trees. A Pigouvian tax is a tax that is imposed on the polluter to get them to internalize the social cost of their polluting activities.

  Despite her distinguished perch, Joan Robinson faced competition in claiming to lead a new research field. Edward Chamberlin at Harvard University published The Theory of Monopolistic Competition three months before Robinson’s The Economics of Imperfect Competition. But at a roundtable discussion held at the American Economic Association (AEA) meeting in December 1933 on the topic they adopted Robinson’s concept, and not Chamberlin’s, to set the parameters of the new research area. She was helped by Kahn’s visits to American universities, which broadened Robinson’s references in her book as compared with Chamberlin’s. Edward Chamberlin, though, would go on to develop the fruitful field of industrial organization, which researched questions such as oligopolistic interaction that analysed how a few companies can dominate an industry, for example the airline sector. Robinson would later develop her more theoretical approach in the field of labour economics rather than the theory of the firm. Curiously, one of the discussants of the papers presented was Chamberlin himself, and it was chaired by Joseph Schumpeter. Schumpeter would later recommend Robinson for honorary membership of the AEA: ‘I know I shall be considered out of order if in this anti-feminist country, I suggest honoring a woman, but Mrs. Joan Robinson had a well-earned international success with her book The Economics of Imperfect Competition in 1933. By virtue of it she holds a leading position in one of the most popular lines of advance.’11

  Robinson’s next book complemented and extended Keynes’s General Theory. In March 1936, only a month after Keynes’s book appeared, she published an article titled ‘The Long-Period Theory of Employment’. Since Keynes’s assumptions focused on the short run, Robinson extended his work to analyse long-term conditions. In June of the same year, another article, ‘Disguised Unemployment’, appeared, which again extended Keynesian economics. Keynes argued that insufficient demand resulted in unemployed workers. Robinson posited that when workers are laid off, they take less productive jobs in order to survive even if they resort to selling matches on street corners. Although they are technically employed, such employment was really disguised unemployment, which meant the official unemployment rate was not telling the whole story. Robinson’s Essays in the Theory of Employment, published in 1937, further explored the problems around employment that were raised in the General Theory.

  Joan Robinson’s emergence as a world-leading economist was impressively rapid. In 1930 she was the wife of a Cambridge faculty member. By the end of that decade she was an internat
ionally respected economist at the heart of the Keynesian revolution. Yet she was only made a full professor at Cambridge University in 1965, the year her husband retired from his professorship.

  Joan Robinson published her last major work in 1956. The Accumulation of Capital was a study of economic growth models that moved away from the standard Keynesian and neoclassical approaches to gain a deeper understanding as to why some countries prosper. Like her other research, this work is highly readable, especially as she makes her case using diagrams and figures rather than equations and complex mathematical models. Along these lines, her work in the 1960s increasingly moved towards economic development issues, especially in India, but also in China and North Korea.

  That was not the sole new direction of research that she pursued. Robinson also examined the basis of economics, as in her 1962 book, Economic Philosophy, where she wryly observed: ‘All along [economics] has been striving to escape from sentiment and to win for itself the status of a science.’12 She added: ‘lacking the experimental method, economists are not strictly enough compelled to reduce metaphysical concepts to falsifiable terms and cannot compel each other to agree as to what has been falsified. So economics limps along with one foot in untested hypotheses and the other in untestable slogans.’13

  Still, Robinson saw the task of economists as ‘sort[ing] out as best we may this mixture of ideology and science. We shall find no neat answers to the questions that it raises.’14

  Robinson’s imperfect markets

  Joan Robinson’s work on imperfect competition offers no neat answers but can help explain why wages have failed to keep pace with productivity, that is, output per worker, since markets are just not perfect in the real world. It might seem curious to many why it took so long to discover this! In fact, one would be hard pressed to give many examples of a perfectly competitive market. It goes to show how entrenched had become the idea that the market works perfectly efficiently, driven by the ‘invisible hand’. It wasn’t until Keynes challenged the neoclassical view of quickly self-righting markets that the ground was laid for the work of Robinson and others to develop theories of imperfectly competitive markets.

  Under perfect competition, a firm would choose to produce at the point where the volume it sells is warranted by the cost of producing it. Workers would be paid the value of the last unit of output they produced. Employers would not be able to pay less because exploitation (known as ‘economic rents’) would be eroded by competition, i.e., another firm would be able to pay a bit more until the point where the wage equalled what they could sell the last unit for. So, the last or ‘marginal’ unit reveals the value of what a worker has produced, which then sets the wage.

  But Robinson points out that if markets are imperfectly competitive, then firms can earn economic rents because rents aren’t entirely eroded by competition.15 In that situation, firms have market power. This could be the result of accidents of history, in that some were first in the market, others held patents, and still others have influence over the market due to the entrepreneurship of their founders.

  She developed a theory of ‘monopsony’ to refer to the market power that firms can wield in the labour market alongside the more familiar and established term, monopoly power, where firms have market power in the product market and can charge more for a good or service above their costs, earning them monopoly profits. Monopsony power allows employers to pay workers less than the value of their output, and keep more for themselves.

  There has been an active debate over whether monopsony exists. Economists have been sceptical about firms being able to possess power over labour markets. The British National Health Service (NHS) is an example of an organization whose main employer, in this case the government, is pretty much the sole employer, so can set wages and employment conditions. Others include the local labour markets of many towns, which are often dominated by one or two major industries. (Robinson used coal mining as the most extreme example of her day.) Indeed, the classical economists made the somewhat surprising point that, almost by definition, there are always significantly fewer employers than workers. Employers are not usually worried about where their next pay cheque is coming from, unlike employees. Employers typically have a much stronger common interest than workers. The end result is that quasi-collusive cartels or monopsonies are not that uncommon, which is then somewhat balanced by workers unionizing.

  These, though, are considered rarer than firms with monopoly power. Because workers can change industries, monopsonies are not as common as monopolies. Numerous examples of monopolistic industries come to mind. For instance, a few firms dominate the mobile phone market and a few search engines monopolize the internet. We’ve seen some of these firms become the subject of regulatory inquiries for anti-competitive practices due to their market power.

  According to Robinson, if there are imperfections in the labour market that cause it to be less than perfectly competitive, then those imperfections can lead to different wage levels. This is plausible since workers are not homogeneous or perfectly interchangeable. For instance, workers have different willingness or ability to work, which is known as labour supply elasticity. Full-time versus part-time work is a good example of how much labour a worker wants to, or can, supply to the employment market. If a woman has childcare responsibilities, then she may only take on part-time work. It means that employers can offer different wages even to equally productive individuals. Employers ‘exploit’ these labour supply differences and earn ‘rents’ by offering wages that are less than the output produced. (Rents can also be gained in other contexts, such as when monopolists gain what would have gone to consumers.) If there are imperfections in both factor (labour) and product (for example rail) markets, then there are even greater potential ‘rents’.

  Wages also affect employment levels. If some groups have higher ‘reservation wages’, that is, a wage level that tips them into deciding to enter the labour force or not, and accept a job or not, then there will be different employment levels too. That is seen in the different labour force participation rates for men and women, which are usually lower for women, who may not choose to work if their wage barely covers their childcare or other familial costs such as taking care of elderly parents, for instance.

  Robinson’s theory shows that if there is not perfect competition, which is highly likely, then workers will receive lower wages than they should earn based on their productivity, and firms will earn ‘rents’. Such ‘exploitation’ of workers will persist until the market structure changes so that competition leads firms to lose their market power. This market power is what enables firms to pay wages below what the workers produce.

  Robinson’s ideas paved the way for an examination of what determines wages. Her theories show how the problem of low pay goes beyond labour productivity and is related to the structure of markets.

  The problem with pay

  Low pay wasn’t always a problem. After the Second World War in the 1950s and 1960s, wages grew strongly during what is known as the Golden Age of economic growth. Then, the oil crises of the 1970s struck. Wage growth slowed all over the world to some extent. In the United States in particular by the end of the 1970s, median wage growth – the wages of people in the middle of the income distribution – started to stagnate.

  Still, the post-Second World War period saw wage growth of 4 per cent on average per annum even after the 1970s slowdown. But then the Great Recession hit in 2009 and there was a huge fall of economic output, as well as wages, after the financial crisis.

  Some countries, mostly emerging economies, have done better, both before the crisis and afterwards. China in particular has done well. The growth of China since 1979 has led to double-digit annual increases in wages even after the crisis. India has also done relatively well. Many emerging economies are industrializing, so wage growth is less of a problem than in advanced economies.

  By contrast, wages in the UK were affected badly. In Britain there was a more than 10 per ce
nt fall in real wages (wages after adjusting for inflation) in the six years after 2008. Wages started picking up again around 2013, but that fall in real wages is unprecedented. The only other time this was seen was in the 1920s.

  Since 2009 the pace of nominal wage growth in the UK has slowed to around 2 per cent. At 2 per cent, wage growth is about half the level it was 20–30 years before the Great Recession. When inflation is at 2 per cent, that means stagnant real wages since the pay increase is eroded by having to pay higher prices. Britain did experience real wage growth in 2014 for the first time since the crisis, but only due to negligible inflation. That lasted about two years until inflation started to pick up again in 2017, when real wages again declined.

  The economy has recovered and unemployment has fallen back to below the long-term level of around 5 per cent in Britain and the US, but wage growth has lagged behind. It is peculiar because wages would usually improve along with the economy. Over the long run, the fundamental reason that wages grow is because of productivity growth driven by new technologies and ideas. It means that businesses can afford to pay workers higher wages.

  But the International Labour Organization (ILO) finds that since the early 1980s, the productivity growth of workers exceeded that of their average wage growth in several large developed economies, including Germany, Japan and the United States. For France and Britain, productivity and wages grew at a similar pace. The UK suffers additionally from poor productivity growth (that is discussed in Chapter 12). So, productivity growth has outpaced wage growth in a number of advanced economies in recent decades.16 Why has this relationship between what firms can afford to pay workers and what they do pay broken down?