Lavington's Three Economica (1924, 1926b, and 1927) Papers

Although not all of these articles are devoted to monetary topics, two of them in fact addressing aspects of the theory of the firm, they can still be dealt with in this portrait of Lavington as a Cambridge monetary economist. The first of them, Lavington (1924), discussed the interconnection between short and long interest rates in the money market. After stating the general principle that interest rates tend to be higher, the longer the duration of a loan (ibid.: 292-293), Lavington (ibid.: 295-297) indicated that security markets transform long borrowings into short, highly marketable loan instruments. He provided data on three month bill rates and the yield on consuls, suggesting that these rates generally move together, but not invariably so. However, the data on short and long rates showed no normal relationship in which long rate changes are invariably those appropriate to short-term rates (ibid.: 298-299). Examination of the data suggested the following conclusions. Organized markets facilitate relationships between long-term and short-term interest rates, though the financial implications of the (1914-1918) war seem to have destroyed the conformity of movements in these rates revealed by pre-war averages. However, the profitability of business, greatly influenced by movements in the general price level by its influence on the demand for capital, seems to have a stronger impact on rate changes in the market (ibid.: 202-203).

Lavington (1926b) discussed the role of monopoly in preserving business stability, in particular the output strategies visible in monopolistic behaviour as compared with that of competitive firms (ibid.: 136). In general, this monopoly action is seen as less beneficial to the consumer as the alternative, less stable output policy of the competitive firm. However, Lavington (ibid.: 147) suggested in concluding his argument that there may be a substantial benefit to the public from this stable output strategy if it increased continuous employment of appliances and labour. Also, it probably raised supply of the commodity in question, as compared with the outcome under competitive conditions. Lavington’s first excursion in print into an aspect of the theory of the firm did also preserve significant links to his discussion of the evils of unemployment raised in the context of the social consequences of the trade cycle, as discussed in the previous section of this chapter.

Lavington’s third and final article in Economica was devoted to a topic completely within the theory of the firm. More specifically, it broached topics which Marshall had covered in his 1919 Industry and Trade. Under the title, ‘Technical Influences and Vertical Integration’, the paper examined the proposition that the more restricted the variety of processes undertaken by a single firm, the more simple is the management of direction (Lavington 1927: 27). Marshall described this higher specialization as ‘uniform continuous process’, combined with more ‘powerful appliances of production’, constituting the ‘dominant technical economies of modern methods of production’ (ibid.: 28). Individualism in production was sacrificed here for the sake of standardization, with only high-quality goods (in the motor vehicles and in the woollen textiles industries) preserving individuality in production (ibid.: 34). Lavington concluded his discussion as follows (ibid.: 35-36). Form and size of business were influenced by love of power and the desire for monopoly, not just by economic efficiency. However, given the complexity and volume of tasks involved in a single business, such aspects of the specialized production process had consequences for the efficiency and organization of the managerial task. Following Marshall’s position in Industry and Trade, Lavington urged his readers that the dominant technical economies are those attainable from the application of modern continuous process and powerful appliances, but that the pressure to attain this situation required vertical integration and lateral disassociation of processes. The range of appropriate processes is small, but the promise of large output is considerable. This modifies pressure for vertical integration in modern business, as shown in the modern steel industry with its strong requirement for ‘balanced plant’.

The three Economica articles published by Lavington can be seen as a switch in research interests in line with his teaching responsibilities at Cambridge. The second and third were both devoted to topics in the theory of the firm even if the first of these stressed the highly desirable ‘macro-economic’ objective of stability in the employment of both labour and capital. Such ‘macro-economic’ considerations are totally absent from Lavington’s 1927 article, devoted to vertical integration and the benefits of economies of scale from the application of ‘modern continuous process’. Lavington’s death in 1927 meant that this new research endeavour could not be further pursued. Hence, Lavington’s explorations of industrial economics ended with his 1927 article. One can only speculate as to what other findings they may have led.