The Cambridge Circus
Meade arrived in Cambridge in October 1930 to spend a year studying monetary economics under Dennis Robertson’s supervision. Robertson told him that amongst the younger economists he should get to know was Richard
Kahn of King’s College, which Meade promptly did. Kahn had already written his first paper on the employment multiplier, ‘The Relation between Primary and Secondary Employment’, a note circulated to the Committee of Economists of the Labour government’s Economic Advisory Council (Keynes was chair of the committee, Kahn a secretary along with the civil servant Francis Hemming).1 Kahn considered the total increase of employment that could result from expenditure on public works and showed that the amount of additional, ‘secondary’ employment generated could be calculated as a definite multiple of the initial increase, ‘primary employment’, the size of the multiplier depending on the amount of additional income that each newly employed person spends on consumption of home-produced goods. As Kahn put it in his article in the Economic Journal of June 1931 (Kahn 1931) if k is the number of men employed as a result of the increased expenditure generated by one man placed in primary employment, the number who receive secondary employment is k+k2 + k3 + ... = k/(1 - k), which is the ratio of secondary employment to primary employment, that is, the multiplier.
In addition to his work with Robertson, Meade in Cambridge was trying to learn mathematics. As he recalled: ‘I decided as an exercise in the Higher Mathematics to repeat [Kahn’s] exercise summing not what income recipients decided to spend but what they decided to save’; he found that the increments of saving added up to the initial increase in investment (in this case the expenditure on public works), thus answering Kahn’s original question ‘Where does the finance for public works come from?’ (Meade 1993a: 664-665). Kahn christened the result ‘Mr Meade’s Relation’ when he used it in his article, where he wrote it as
cost of investment = saving on dole + increase in excess of imports over exports +
increase in unspent profits — diminution in rate of saving due torise in prices or, in modern terminology, the increase in investment equals the reduction in government expenditure on unemployment benefit plus the increase in the current account deficit plus the increase in saving, since, as Kahn acknowledged in 1932, the last two items are both part of saving (Kahn 1932: 492495; see also Shackle 1951). Kahn’s multiplier and Meade’s relation are two of the essential ingredients of the theoretical system of The General Theory of Employment, Interest and Money.
See Howson and Winch (1977: 49). There is a copy of Kahn’s paper in the Meade Papers.
As soon as A Treatise on Money had been published, Kahn and the other young Cambridge economists plus Meade had begun to discuss it critically, at first informally amongst themselves in Kahn’s rooms in King’s, their discussions continuing in the Lent Term 1931, then as a ‘seminar’ held in Trinity in the Easter Term which a few carefully selected undergraduates were allowed to attend. Austin Robinson remembered Meade ‘as more active than any of us, not only in the Keynesian arguments but also in those around the theory of value’ (Austin Robinson 1977: 33-34). Joan Robinson remembered the ‘main speakers’ in the seminar as ‘Kahn, James Meade...Sraffa...Austin Robinson and myself’ (Joan Robinson 1978: xii). Kahn and the others quickly realised that the equations of the Treatise really applied only when output was constant, Austin Robinson noticing (as he and Joan both remembered) that the analogy of the ‘widow’s cruse’ (Keynes (1930 [1971]): 125) implicitly assumed a fixed output of consumption goods. Kahn reported to Keynes on the deliberations of his friends; Meade reported some of their findings to Robertson, who used them in his criticisms of the Treatise in the Economic Journal in September 1931 (Robertson 1931: 408-409; see also Laidler 1999: 133).
Kahn’s multiplier analysis was a first step in incorporating changes in output in response to changes in demand; his article also introduced a supply curve of consumption goods. David Vines relates what Meade once told him:
I said the following to the other members of the Circus. ‘Haven’t any of you read Marshall’s Principles of Economics? In that book, in the short run, the economy lies on a short-run, upward-sloping, supply curve. But that curve adds an extra equation to the model. This means that—in comparison with the model in the Treatise—we can make both prices and output endogenous at the same time (Meade quoted in Vines 2008: 486; italics in original).
Meade attributed the supply curve of consumption goods to Kahn. He wrote to George Shackle in 1950:
I can remember making only one other contribution in the discussion ... Richard Kahn introduced the idea of the supply curve of consumption goods in general.
I then tried to introduce the idea of a supply curve of capital goods in general. This appeared in the General Theory, where the rise in the price of capital goods as their output increases is one of the things which brings down the marginal efficiency of capital and thus determines the effect of, e.g., a change in the rate of interest on the value of investment. I feel that this is the only contribution which I made and which may not be apparent from the record.
Kahn commented: ‘I do not at all quarrel with what he says except that he is of course unduly modest about the part that he played’ (Meade to Shackle,
10 June 1950 and Kahn to Shackle, 15 June 1950, Meade Papers 4/1, LSE Archives).
Meade’s first book, The Rate of Interest in a Progressive State, written in the year after he returned to Oxford, clearly shows the influence of his year in Cambridge. As Joan Robinson wrote in her review (Joan Robinson 1934: 282), ‘Mr Meade is a follower of Mr Keynes, but he has an original contribution to make ... Breaking away from the vain circle of controversy and misunderstanding, Mr. Meade has struck out on a path of his own’. Meade acknowledged the influence of both Keynes and Robertson and the help of Kahn and Maurice Allen of Balliol College, Oxford, ‘with both of whom I have spent many hours arguing about these problems’ (Meade 1933: vii- viii). He also mentioned Friedrich Hayek’s Prices and Production: Meade was in Cambridge when Hayek gave an address to the Marshall Society on 22 January 1931 a few days before his lectures on Prices and Production at LSE.2 The effect of Hayek was on the questions Meade was asking, not on his answers; he told Keynes on 11 January 1933 that ‘I fear the book is very incomplete and does not get very far, but I have tried to incorporate some of the method of thought of Hayek, without introducing what I consider to be his obscurities’ (Keynes Papers CO/5/82, King’s College, Cambridge).
Meade opened his book with the questions ‘What can be meant by an equilibrium rate of interest? What changes in this equilibrium rate are to be expected in a progressive society? and In what conditions will the market rate of interest move so as to conform with the equilibrium rate?’ By a progressive society he meant one in which output per head is increasing; for simplicity he assumed a closed economy with a centralised banking system, perfect competition, and a constant population. The last assumption was to make it possible to define a ‘neutral money system’: ‘one which simply interprets the decisions of individuals, of companies or of the government without, by its own action or inaction, making the effects of such decisions different from what they would have been in a non-monetary economy’ (Meade 1933: 11); with a constant population such a system would keep final incomes constant—an idea he attributed to Robertson (ibid.: 24, fn. 2). Joan Robinson, with justice, saw this concept of neutral money as ‘monetary mysticism’ but she noted that most of the argument of the book did not depend on it. She particularly commended the chapters on the relations between short-term and long-term interest rates and on the effects of interest rate changes on investment and Meade’s notion of a supply curve of capital goods.
Other friends of Meade’s also disliked his use of a concept of neutral money, including the Hayekian Evan Durbin, with whom Meade was collaborating closely in work on monetary policy for the New Fabian Research Bureau (NFRB) which had been created in March 1931 (Durbin had read PPE at New College, Oxford, 1927-1929, and was now a Lecturer at LSE). He swiftly gave up on it, admitting as much to Joan Robinson in June 1934 (Durbin to Meade, 15 November 1933, Meade Papers 2/3; Meade to Robinson, 3 June 1934, Meade Papers 10/48). Keynes meanwhile commended the book for publication to Macmillan without having read it. But Keynes had read the memorandum on ‘The Market Rate of Interest’ that Meade wrote for the NFRB in the winter of 1931-1932 for Kahn had shown it to him in the spring.3 This memorandum contained the ideas that were developed into the central chapters that Joan Robinson commended; the book was completed by the Michaelmas Term 1932 when Meade lectured on it to undergraduates at Oxford. Both the book and the lectures include sections criticising Hayek’s Prices and Production and Keynes’s Treatise on Money.4
Meade kept in touch with his fellow members of the Cambridge Circus, especially Richard Kahn and Joan Robinson. Kahn came to stay in Oxford in June 1932 and June 1934; Meade and his wife Margaret spent a weekend with the Robinsons in 1934; Richard and Joan visited the Meades in Geneva in 1938. Meade attended the inaugural meeting of the London and Cambridge research students’ seminar at Newport in August 1933, and contributed two of the series of ‘Notes on the Elasticity of Substitution’ (by Paul Sweezy, Abba Lerner, Kahn and John Hicks, and others) in the first two issues of the Review of Economic Studies.5 He may have given a paper to a meeting of Keynes’s Political Economy Club on 22 January 1934. Meade invited Joan to talk to the Economic Theory group of the Political and Economic Society at Oxford in Michaelmas 1933 and he invited Keynes, who came in February 1935.6 Joan read and commented on drafts of Meade’s next book An Introduction
- 3 Durbin to Meade, 2 February 1932, Meade Papers 2/3; Kahn to Meade, 18 April 1932, Meade Papers 2/4. While Durbin’s and Kahn’s lengthy comments on Meade’s memorandum have survived, the memorandum itself has not.
- 4 ‘F. Taylor Ostrander’s Notes from Lectures by James E. Meade, Hertford College, Oxford University, 1932-33, Concluded’. In M. Johnson and WJ. Samuels (ed.) (2009) Research in the History of Economic Thought and Methodology, volume 27-C: 3-34. Warren Samuels mistakenly entitled the lectures ‘Second Term: Linking Monetary Theory with the Pure Theory of Value’. The lecture lists published in the Oxford University Gazette give the correct title and the terms (Michaelmas 1933 and 1934 as well as Michaelmas 1932) in which the lectures were given.
- 5 Kahn to Meade, 14 June 1932, Meade Papers 2/5 and Meade to Joan Robinson, 3 June 1934, Meade Papers 10/48; Keynes (1973a: 338, fn. 2), Kahn (1984: 183), and Meade (1988b: 1-8).
- 6 Kahn to Meade, 15 December 1933, Meade Papers 2/4; Meade to Robinson, 25 June 1933, Meade Papers 10/48; Meade to Keynes, 1 January 1935, Keynes Papers PS/6. Meade explained to Joan Robinson that ‘The Political & Economic Society corresponds to your Marshall Society and the Economic Theory group is perhaps the nearest thing we have to your Keynes Club’. If Meade gave a paper to the Keynes Club, it is unlikely to have been his ‘The Amount of Money and the
to Economic Analysis and Policy, which was published soon after The General Theory (Meade 1936: vi-vii). At the same time, Meade remained close friends with Robertson, meeting and corresponding regularly, especially over trade cycle theory (see, for instance, the exchange in Meade Papers 4/47). The reading list for his lecture course ‘Monetary Theory of Trade Fluctuations’ included Keynes’s Treatise volume 1, Robertson’s Banking Policy and the Price Level, Hayek’s Prices and Production, Marshall’s Principles Book V, Kahn’s article on the multiplier, and one by Roy Harrod entitled ‘Notes on Supply’ (Harrod 1930).
Meade’s published work in the 1930s was thoroughly Keynesian. In his The Rate of Interest he argued that to counter the inevitable discontinuities in investment and expenditure it would be necessary for the state to undertake public investment schemes (Meade 1933: 103-104); he expanded on this in a paper published as an NFRB pamphlet in January 1933, using his ‘relation’ to counter the objection that extra borrowing by the state for public works will take funds that would otherwise be used by private industry (Meade 1988a: 10-11). He also advocated Keynesian employment policies in his work for the Labour Party (see, for instance, his ‘Outline of Economic Policy for a Socialist Government’ in Meade 1988a: 33-78). Since expansionary policy undertaken by one country could lead to balance-of-payments problems for a country with a fixed exchange rate, and exchange rate depreciation could cause difficulties (of domestic inflation or foreign debt repayment) for a country with a floating exchange rate, he consistently argued for international cooperation as well as exchange rate flexibility.
Meade, who lectured on ‘Introduction to Economic Theory’ in the Trinity Terms of 1934, 1935, 1936, and 1937 and ‘Introduction to Theory of Money’ in Michaelmas 1935 and 1936, wrote the first Keynesian textbook in economics, An Introduction to Economic Analysis and Policy, completed in April 1936. He wanted to write a book which would ‘expound the whole corpus of Economic Theory without taking any knowledge of technical terms for granted and with full use of the more recent developments’ and include every piece of theory with an application to current economic problems (Meade 1936: v). In addition to the Keynesian developments in macroeconomics, which he expounded in Part I, he particularly wanted to cover the work of Joan Robinson and others on imperfect competition (Part II); he was also very interested in the distribution of income (Part III) and in population (Part IV); Part V dealt with international problems, including the balance of pay-
Banking System’ which Keynes had read and accepted for the Economic Journal in September 1933
(Keynes to Meade, 21 September 1933, Meade Papers 2/4; Meade 1988a: 26-32).
ments, exchange rates, trade, migration and capital movements, international economic cooperation, and the economic causes of war. Joan Robinson read the full manuscript except for Part V
The book was resolutely non-technical, with no equations or even diagrams. Meade provided a more technical account of Keynesian theory in his ‘A Simplified Model of Mr Keynes’ System’ for the sixth European meeting of the Econometric Society in Oxford on 25—29 September 1936. The first session of the conference was a symposium on ‘Mr Keynes’ System’ to which Roy Harrod and John Hicks also presented papers. Meade’s model was a static short-period equilibrium model of eight equations, which determined the outputs and prices of capital goods and consumption goods and the numbers employed in each industry, total money income and total money profit, given the stock of money, the money wage rate, and the proportion of income saved. As in The Rate of Interest he assumed perfect competition but this time he assumed the elasticity of supply of capital goods was the same as the elasticity of supply of consumption goods (see Phelps Brown 1937: 361-363). Hicks in his paper introduced the IS-LM diagram which became the favourite device for teaching purposes and which Joan Robinson excoriated as ‘bastard Keynesianism’. The conference was very well attended but, as Luigi Pasinetti has commented, ‘Very unwisely, neither Richard Kahn nor Joan Robinson participated...— a too-obvious mistake on their part’ (Pasinetti 2007: 32, fn. 7).
Harrod’s and Hicks’s papers were published in Econometrica, Meade’s in the Review of Economic Studies (Meade 1988a: 79-90). At the conference Ragnar Frisch had challenged Meade’s claim for the stability of the solution of his model; as editor of Econometrica he said he would like to publish it if ‘the definition and the fundamentals of the stability situation could be discussed in more exact terms’ (Frisch to Meade, 8 October 1936, Meade Papers 2/3). Ursula Hicks asked for less drastic changes for the Review of Economic Studies (Hicks to Meade, 18 November 1936, Meade Papers 2/4). Earlier, Meade had sent his paper to Keynes who responded on a postcard on 14 September: ‘It’s excellent. I have no criticisms to suggest’ (Meade Papers 2/4). Meade told Warren Young that Keynes had also told him that he could not publish the paper in the Economic Journal because he had already accepted another simplified account of The General Theory for the journal, which was anyway ‘absolutely full of commentary’ on the book (Keynes quoted in Young 1987: 37). Robertson also commented briefly on the paper when Meade presented it to a meeting of the Economic Club in Geneva in April 1937; when Meade ‘said that The General Theory presented a “short-run stable equilibrium model” ... DHR commented, “That is what is wrong with it”’ (Meade to Elizabeth Durbin, 11 August 1982, Meade Papers 10/21).
Meade wrote a third, short book in the summer of 1937: Consumers’ Credits and Unemployment (Meade 1938a), in which, concerned that in a depression expansionary monetary policy and public works might not suffice to prevent unemployment, he put forward the idea of giving grants or allowances to consumers when aggregate demand threatened to fall off in order to maintain consumption expenditure. Keynes, reviewing it for the Economic Journal in March 1938, was critical: although ‘there is a good idea behind this’, he thought consumers’ subsidies would be less effective in creating employment than an equivalent amount spent on increasing investment (see Keynes 1983: 439-444).
