Saturday, July 6, 2013

Lee’s Post Keynesian Price Theory: Chapter 1

Frederic S. Lee’s Post Keynesian Price Theory (Cambridge, 1998) is – as the name suggests! – a standard account of the theory of prices in Post Keynesian economics.

I present a brief summary below of Chapter 1.

Chapter 1 deals with the work of Gardiner C. Means, an American Institutional economist and researcher. In the 1920s, while he was involved in a textile manufacturing business, Means noticed that the prices of cotton and wool yarns and the way he set his own prices did not match the price theory of economic textbooks (Lee 1998: 19). He also became interested in the causes of depressions.

In 1924, Means began research as a graduate student at Harvard, but found it difficult to take seriously the neoclassical theory he learned as compared with his actual experience as a businessman (Lee 1998: 20). After his MA, Means collaborated with Adolf Berle on research and co-authored The Modern Corporation and Private Property (1932).

Means came to note how the modern corporation can affect prices without being a monopoly (Lee 1998: 26), and how its prices were administered, like other parts of its internal administration, and set before transactions and held constant sometimes for years on end (Lee 1998: 27–28).

Means also noted how industrial prices in the Great Depression were not as flexible as agricultural prices, since the industrial sector was where administered prices were most predominant (Lee 1998: 28). He also formulated a pre-Keynesian explanation of the Great Depression, emphasising the way in which firms cut production and employment, rather than prices, in particular in response to initial demand shocks (Lee 1998: 34–36, 37). Thus Means grasped that the adjustment process as theorised in neoclassical economics was unrealistic for an economy like the United States and other advanced industrial economies.

Lee, Frederic S. 1998. Post Keynesian Price Theory. Cambridge University Press, Cambridge and New York.

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