The 'Profit Margins Inquiry', also known as the 'Cambridge Research Scheme' of the National Institute of Economic and Social Research, originated in 1938 on the initiative of D.G. Champernowne, Richard Kahn, Austin Robinson, Joan Robinson and Piero Sraffa, and with the active support of Keynes, largely as a means of obtaining finance to keep Michal Kalecki in Cambridge after the expiry of his Rockefeller scholarship. Kahn, Joan Robinson and Richard Stone were actively involved in the early stages, but Kalecki and his assistants did the bulk of the work. Papers were written by Kalecki, and G.A. Bauer, P.R. Marrack, E. Rothbarth, B. Tew and Y.N. Hsu, but the project did not meet with the complete approval of the supervisory board in Cambridge (see Lee, 1998, pp. 172-184; Osiatynski, 199t; and the substantial documentation in the Richard Kahn papers at King's College, Cambridge: RKP 5/1),
When Kalecki moved to Oxford in 1940 the project continued. From 1942 until 1946, research was undertaken by Lazlo Rostas, who worked under the supervision of an advisory committee consisting of Kaldor, Robinson, W.B. Reddaway and J.R.N. Stone. In July 1947 Rostas completed his monograph Productivity, Prices and Distribution in Selected British Industries, which was published in the following year and contained detailed information on costs and pricing in eight British industries. Rostas acknowledged the 'very active participation' of the advisory committee: 'In spite of heavy commitments of duties throughout the war years they always found time to come to frequent meetings and to discuss the problems of the work in progress' (Rostas, 1948, p. vi). Although Rostas described his book as 'part of a larger investigation', and expressed the hope that 'further results ... will be published in the near future' (Rostas, 1948, p. v), in fact nothing more came out of the Profit Margins Inquiry. Rostas himself soon left the National Institute to become a civil servant.
By 1941, when the 'Note' was written, Kaldor and Robinson were close friends. They had become neighbours after the activities of the London School of Economics (where Kaldor worked) were transferred to Cambridge for the duration of the war. Together with Kahn and Sraffa they constituted what Kaldor would later describe as the 'war circus', characterised by intense discussions during long country walks. (Kaldor gives an amusing account of one of these walks with Robinson, which ended in their arrest by the military, in the transcript of his 1984 interview with Maria Cristina Marcuzzo in the Kaldor papers at King's College, Cambridge: NKP 3/1318, p. 48 of typescript.) In subsequent years they were to work together on questions of postwar reconstruction (see, for example, Kaldor et al., 1943). Their friendship seems to have been strained, if only temporarily, by the 'Note'. The Kaldor papers (King's College, Cambridge, NKP 3/18) contain an undated letter from Robinson to Kaldor which can only have been written in response to his complaints over her work on the 'Note':
Dear Nicky,
I want to explain why I was so beastly rude about your footnote references to your old articles.
The way I look at it--being in a writing mood I take on the job of drafting a report for the committee. As to whether the committee work was done J50 N50 or J1 N99 is [sic] a question that simply doesn't arise at this stage--it is a subject for some future Ph.D thesis. Therefore your bringing it up is wasting my time first when we have to ration each other to two minutes ultimately to prevent both [words indecipherable].
An explanation is not an apology. I offer here by [sic] a book full of apologies--please help yourself to as much as you fancy.
Yours [word indecipherable] always, Joan.
After 1956 there would be further, increasingly acrimonious, disputes between them over questions of priority and attribution (King, 1998), but this time the wounds soon healed.
The most interesting part of the 'Note' is Section II, which distinguishes four hypotheses concerning distribution:
1. The 'competitive theory, generally known as the marginal productivity theory', where the profit share in output is determined by the elasticity of average prime costs. The rather strange formula here is a modification of that originally presented in The Economics of Imperfect Competition (Robinson, 1933, pp. 314-315). The exposition is not improved by beginning with the special case of a perfectly competitive product market and coming to the more general case of imperfect competition only in the second paragraph.
2. The 'monopoly theory', which relates the profit share in Kaleckian fashion to the degree of product market monopoly and is criticised on the grounds that in oligopoly the elasticity of product demand is indeterminate. Here Robinson is accepting a criticism raised against her by Kaldor (1934) in his review of her book (cf. Robinson, 1969, p. vi).
3. The 'long-period normal costs' theory, which is attributed to Marshall and--intriguingly--to Keynes, and seems to foreshadow the theory of competitive oligopoly later articulated by P.W.S. Andrews (Andrews, 1949; see also Lee & Earl, 1993).
4. A 'customs and traditions' theory that allows for what Andrews & Brunner (1975, p. 29) were to term the 'plasticity' of overhead costs. Here, as in the previous case, the implicit influence of Hall & Hitch (1939) can be discerned.
Kaldor and Robinson come to very pessimistic conclusions: none of these theories, they argue, 'is intellectually quite satisfactory ... while the last is hardly positive enough to be called a "theory" '. But 'their unsatisfactoriness merely reflects the sad state into which the theory [of] value and distribution has fallen'.
The two following sections, on data requirements and the definition of variables, are significant only in revealing the commitment of these two pure theorists to the empirical testing of the theory of price and distribution. The concluding section, on policy implications, builds on the welfare criticisms in Robinson (1933) and in Kaldor (1935), and forms an interesting comparison with the detailed and savage indictment of imperfect competition in Robinson (1954). As Fred Lee has reminded me, it also foreshadows Robinson's influential contributions to the debate on public ownership and the control of monopoly in postwar reconstruction (see, for example, Robinson, 1943, and her contribution to Kaldor et al., 1943).
It is regrettable that Kaldor and Robinson did not extend the 'Note' or revise it for publication. Presumably the pressures of wartime, and the personal strain imposed by this solitary act of intellectual cooperation, deterred them from doing so. As it was, the 'Note' would have been read only by Reddaway, Stone and Rostas, and its influence must have been correspondingly restricted. There is a brief theoretical discussion of 'problems of prices and distribution' in Rostas's book (1948, pp. 1-5), which cites no sources but appears to draw quite heavily on the Kaldor-Robinson memorandum:
A strict adherence to the theoretical assumption that firms behave in such a manner as to maximise their profits with reference to clearly determined and known demand (and cost) functions is, however, unrealistic. Ignorance of their 'demand curves'--the mere postulate of which assumes knowledge of hypothetical situations to which the market mechanism gives few clues--ignorance of rivals' reactions, and the fear of potential competition, may deter firms from pursuing an 'active' price policy, i.e. from exploiting, or attempting to exploit, fully the element of monopoly power inherent in this situation. Even where monopoly rules, or a small group of firms fix prices in collusion, firms may fix their profit margins at a level considerably lower than that which would produce maximum profits in the given situation, either through fear of attracting new competition into their market, or from other motives, such as a desire to avoid public criticism or to acquire a reputation for fair dealing.
Two alternative hypotheses have been put forward as to the typical price policy of individual firms, which do not rest on the maximum profit assumption. The first is that firms endeavour to fix a profit margin which is just sufficient to cover overhead costs and to provide a normal rate of profit on capital, when equipment is worked at optimum capacity. This may be described as the 'fair-price' policy. The second is that profit margins are to be explained as the outcome of historical factors, and not determined by any precise calculation of current costs or of current market conditions. Competition then takes the form of sales pressure of various kinds, rather than price cutting, so that where profit margins happen to be high (in relation to overhead costs at optimum capacity), overhead costs are pushed up both by surplus capacity being attracted into the industry, and by increased selling costs. (Rostas, 1948, pp. 3-4)
These two hypotheses are very similar to the third and fourth cases discussed in the Kaldor-Robinson memorandum.
Rostas's conclusions were modest in the extreme: 'Our investigation cannot hope by itself to answer the broad question of the quantitative importance of the monopolistic elements in price-fixing; still less, to verify or reject the particular hypotheses as to how prices are determined'. The findings of his study were to be regarded as 'at best very tentative' (Rostas, 1948, pp. 4-5). His book was reviewed by Thomas Wilson in the Economic Journal. Wilson complained that Rostas's work was insufficiently theoretical: 'Unfortunately he has not been able to derive as much assistance from the theoretical studies as a busy statistical investigator might reasonably expect, and to some extent, his interpretation of the figures suffers accordingly' (Wilson, 1951, p. 377). This is the only review that I have been able to find; the book cannot be said to have made a major impact on either the theoretical or the empirical literature. The same, alas, can be said of the Kaldor-Robinson memorandum.
I am grateful for the assistance of Claire Schofield, Librarian, National Institute of Economic & Social Research, and for helpful comments from Fred Lee. The memorandum is published by permission of the Provost and Scholars of King's College, Cambridge, and of Professor A.P. Thirlwall. The original is in the Nicholas Kaldor papers, King's College, Cambridge (NKP 3/11).
References
Andrews, P. W. S. (1949) Manufacturing Business (London, Macmillan).
Andrews, P.W.S. & Brunner, E. (1975) Competitive prices, normal costs and industrial stability, in: P.W.S. Andrews & E. Brunner, Studies in Pricing (London, Macmillan).
Hall, R. & Hitch, C.J. (1939) Price theory and business behaviour, Oxford Economic Papers, 2, pp. 12-45.
Kaldor, N. (1934) Mrs. Robinson's 'Economics of Imperfect Competition', Economica, n.s., 1, pp. 335-341.
Kaldor, N. (1935) Market imperfection and excess capacity, Economica, n.s., 2, pp. 33-50.
Kaldor, N. (1956) Alternative theories of distribution, Review of Economic Studies, 23, pp. 83-100.
Kaltext>Rostas, L. (1948) Productivity Prices and Distribution in Selected British Industries, National Institute of Economic and Social Research, Occasional Papers, XI (Cambridge, Cambridge University Press).
dor, N., Robinson, J., Evans, A.A., Schumacher, E.F. & Yates, P.L. (1943) Planning for Abundance (London, National Peace Council).
King, J.E. (1998) 'Your position is thoroughly orthodox and entirely wrong': Nicholas Kaldor and Joan Robinson, 1933-1983, Journal of the History of Economic Thought, 20, pp. 411-432.
Lee, F.S. (1998) Post Keynesian Price Theory (Cambridge, Cambridge University Press).
Lee, F.S. & Earl, P.E. (1993) Introduction: Philip Walter Sawford Andrews, 1914-1971, in: F.S. Lee & P.E. Earl (Eds) The Economics of Competitive Enterprise: selected essays of P.W.S. Andrews (Aldershot, Edward Elgar).
Osiatynski, J. (1991) Editorial notes, in: J. Osiatynski (Ed.) Collected Works of Michal Kalecki, Vol. II [Capitalism: economic dynamics] (Oxford, The Clarendon Press).
Robinson, J. (1933) The Economics of Imperfect Competition (London, Macmillan).
Robinson, J. (1943) The Future of Industry (London, Common Wealth).
Robinson, J. (1954) The impossibility of competition, in: E.H. Chamberlin (Ed.), Monopoly and Competition and Their Regulation (London, Macmillan).
Robinson, J. (1956) The Accumulation of Capital (London, Macmillan).
Robinson, J. (1969) Preface to the second edition, in: The Economics of Imperfect Competition, second edition (London, Macmillan).
