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Twentieth-Century Economics
3. Working out the Megacorp and Oligopoly, 1969–1971

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3. WORKING OUT THE MEGACORP
AND OLIGOPOLY, 1969–19711
1. Eichner to Robinson, February 12, 1969, New York City USA
Dear Professor Robinson,

As someone who has often criticised the out-dated and irrelevant nature of
much of economic theory, you may perhaps be interested in the enclosed
article, outlining what I feel is a more suitable theory of oligopolistic pricing
than has previously been put forward. The article represents a summary of a
larger work I am preparing on the subject, that with the hope of providing a
more useful analytical tool for dealing with the problem of cost-push
inflation.
If you should find the pricing model at all worth discussing, perhaps I could
arrange to see you while you are visiting here at Columbia in March.
Alfred S. Eichner
2. Robinson to Eichner, February 25, 1969, Cambridge UK
Dear Professor Eichner,

Many thanks for sending your paper. In broad lines your point of view
entirely agrees with mine although there are some details which we might
discuss. Looking forward to meeting you.
Joan Robinson
Research in the History of Economic Thought and Methodology, Volume 18C, pages 79–114.
Copyright © 2000 by JAI/Elsevier Inc.
All rights of reproduction in any form reserved.
ISBN: 0-7623-0654-8
79
80 MEGACORP AND OLIGOPOLY
3. Eichner to Robinson, March 1969, New York City USA
Dear Mrs Robinson,

I was very grateful for the chance to talk with you during your visit to
Columbia, first because your words of encouragement are among the very few
that I have received from fellow economists and second because I was greatly
stimulated by some of the things you said. The only reason I have not written
sooner is that in addition to looking at some of the works you suggested, I have
been preoccupied with correcting a serious error in my theoretical model which
Peter Kenen pointed out.2 The error was in the mathematical formulation of the
implicit cost to the firm of raising funds internally through the corporate levy,
but I think I have now made the necessary repairs without significant damage
to the basic structure. Just so you will have a complete copy, I am enclosing the
changes I have made in the article. The American Economic Review having
previously rejected the article for what I felt was a strange reason, I have now
just sent off a copy to the Quarterly Journal of Economics.3
What I found most stimulating in your remarks to me was your emphasis on
the macrodynamic importance of models. This, of course, is the opposite of
where we usually begun in economics – with static micro models. While I have
always been interested in static macro models – even though they are badly
neglected here at Columbia – the macrodynamic models had seemed hardly
worth bothering with. This was because to me, an economic historian, their
influences in explaining the secular factors affecting economic growth was
close to zero. The reliance on the assumption of perfect competition, together
with a marginal productivity theory of income distribution, further repulsed me.
However, now that I have thought a great deal about what you said, I realise
that my own work on oligopoly contains an implicity macrodynamic model.
This is not so readily apparent from the article you saw, but it can be gleaned
from the chapters of the projected book you did not see. Moreover, now that I
have read your Essays in the Theory of Economic Growth, I see that the real
value of macrodynamic models is not in understanding the factors influencing
long run economic growth but rather an understanding why the possible growth
rate is not likely to be achieved. Since it is this latter question which prompted
my own work on oligopoly, I am now very much interested in making explicit
the macrodynamic model implicit in my previous work, especially chapters 3,
5, and 6, copies of which I am also sending along to you. The best way to
proceed, I feel, is to begin with the macrodynamic model found in the Essays,
modifying it in light of my own microeconomic theory.
The first point I would make is that the concept of a ‘natural’ rate needs to
[be] greatly elaborated on. I am now working with Eli Ginzberg here at
Working out the Megacorp And Oligopoly, 1969–1971 81
Columbia on a Theory of Manpower, which is to be the culmination of his

many years’ work on the problems of human resource development.4 As a
recent internal memorandum noted,
The theory of manpower begins . . . definite limits.
·······
The theory of the development process . . human institutions themselves. [The passages
were not included with the correspondence].
With the concept of the natural growth rate thus refined, I would then pass on
to the determinants of your own model of the actual growth process. While I
would in general accept most of the underlying assumption, still in light of my
own oligopolistic model I would make the following changes:
(a) With regard to the investment function, I would insist, as do Eisner, Kuh
and others, on an accelerator model based on past income or, even more
preferable if the model is to be complicated through disaggregation, based
on the past sales of individual industries.5 Chapter 3 explains this choice
from micro perspective and chapter 5 from a macro perspective. (I should
perhaps add at this point that the chapters are a very rough first draft and
contain numerous errors and inconsistencies of which I am already
aware.)
(b) With regard to the savings function or thriftiness conditions, I would insist
that the significant distinction is between the savings of households and of
firms. That is, I think the argument can be lightened even more, with no
serious violence to reality, by assuming that all households, whether their
income is partly derived from property or not, have zero savings. In this
connection I would point out that here in the United States approximately
90% of all investment in the manufacturing sector is financed out of
internally derived funds, and the figure would probably be as high for the
economy as a whole were it not for government regulation of certain
sectors which forces the firms in those sectors to rely on the capital funds
markets. Of course, the situation may be somewhat different in Great
Britain and other countries. But even if households are assumed to have a
positive saving rate, the distinction between labour and property income
can probably be safely ignored for the reasons specified in my chapter 6 –
there are institutional forces that result in the two types of income rising at
the same rate.
As far as the savings rate of firms is concerned, it depends not on the

proportion of income distribution as dividends. As you point out, the
dividend payment tends to be institutionally determined and a constant in
the short run. Rather the saving rate depends on the degree of capacity
utilisation and on the price level selected by firms. That is, the higher
aggregate demand conditions, and thus the higher the level of sales, the
greater will be the internally generated funds, this because of the nature of
the marginal corporate levy as explained in my article and in chapter 5. If
the firm wishes to increase its rate of saving, given its current and
anticipated rates of capacity utilisation, it can do so simply by raising its
price (in conjunction with the other firms in its industry) and thus by
raising its average corporate levy.
(c) With regard to the competition conditions, I would take the oligopolistic
model as the norm. In the U.S. for example, it applies to at least two thirds
of the manufacturing sector and to firms that account for probably 90% of
all investment. But I would agree with you that this structure does not
significantly affect “the animal spirits” that is the desire of firms for growth
for growth’s sake.
(d) With regard to the wage bargain, I believe it depends on the national wage
pattern as explained in my chapter 5.
(e) With regard to the financial conditions, I would attach relatively little
importance to monetary policy, both because of the strong dependence of
firms on internal funds and because of the ‘permanent’ interest rate’s
relative insensitivity to short run fluctuation in short term borrowing rates.
Having made the above changes in the model, I would be forced to alter the
diagram shown on page 48 of the Essays.6 Instead of depicting the rate of profit
on the vertical axis, I would show either aggregate savings or the corporate
levy. The rate of accumulation could still be depicted on the horizontal axis,
though I would find investment a more familiar concept. (I will concede at this
point that I have completely misunderstood the diagram, since I must confess
I could not understand why some of the curves took the shape they did). The
A curve now represents, not the expected rate of profit and not even the
aggregate corporate levy. Instead it represents investment or the rate of
accumulation. It is a linear function because the expansion of aggregate
demand which leads to the rise in the corporate levy induces firms to revise
their expansion plans upward. The slope of the A curve depends on the extent
to which the rise in current sales causes the firms to revise their secular growth
estimates and thus plan immediately to add to their productive capacity. It is a
question of the relative weight of one year’s sales and income experiences
compared to previous years’ sales and income experience.
The I curve then represents aggregate savings or the corporate levy. This is
an increasing function because the increase in aggregate demand resulting from
higher rate of investment causes internal funds to increase even more rapidly as
explained above with regard to the thriftiness conditions.
D, then, still remains the desired rate of growth. When the economy finds
itself above D, the rate of savings is greater than the rate of investment and an
economic contraction is on the offering. Alternatively, when the economy is
between S and D, economic expansion greater than the natural rate is likely. I
might just add that there is every reason to believe that the slope of A is quite
low.7
I think such a macrodynamic model helps to explain why, under present
conditions, the economies of modern nations find themselves in a combination
of bastard golden ages. First the development process has proceeded to the
point where the quality of human skills being produced is greater than the
ability of the economic system, especially its private components, to absorb.
But even aside from the continuing under-utilization of human resources, as
savings are accumulated by firms to finance their decreased rates of growth, the
very existence of these savings in the form of undistributed profits and
therefore normally belonging to the owners of property, leads to insistence by
the trade unions that the nominal wage be increased. When, through the
national wage pattern, the trade unions have their way, the firms respond by
raising their prices, thus reducing the real gains of labour and making possible
the realisation of the desired rates of accumulation. But this ploy of the firms
leads to a rise in the price level, initiating what you have so often pointed out
as the political trade cycle. This is not to take into account such complicating
exogenous factors as wars and international monetary breakdowns.
I feel apologetic for bothering you with such a long letter, but as you can see,
I have been greatly stimulated by my conversations with you and this I wanted
you to know. I think it possible to develop a comprehensive alternative to what
now passes as the conventional wisdom in economics. This alternative would
have as one leg, the emphasis on macrodynamic models; as another leg, the
emphasis on the development and utilisation of human resources; as still
another leg, a realistic theory of the representative firm, that is the large
bureaucratic corporation; and finally, as a fourth leg, a neo-Marxian theory of
income distribution purged of all elements of marginal productivity theory.
Alfred S. Eichner
4. Robinson to Eichner, April 2, 1969, Cambridge UK
Dear Alf,
You have gone off the rails by failing to stick to your own assumptions, but
I think it can easily be put right by the amendments suggested.
I will not read any further until I hear from you.
Joan Robinson
5. Eichner to Robinson, April 1969, New York City USA


Your last several letters, due to vagaries of the mail, arrived in the reverse
order in which they were sent. Your marginal notes of April 2 arrived last of all,
about 10 days ago. But now that I have all the letters in hand, I shall try to reply
to them as intelligently as possible.
(1) You may well be right that my language sometimes implies a stationary
state. I of course mean only to imply a fixed rate of growth, and in revising
the manuscript I shall try to purge it of all language that might seem to
suggest instead a stationary state. Your comments will be most helpful in
this respect.
(2) On the specific point, when do megacorps raise the rate of growth of
investment, I postulate, in chapter VI, an investment demand function
based on the aggregate growth rate. Any increase in the short run growth
rate, G*, will be likely to persuade at least some megacorps that the
probability of a higher industry growth rate in the long run has increased
and thus it is likely that investment expenditures in the oligopolistic
[sector] will increase though at less rapid a rate than either savings (in the
form of retained earnings) or aggregate output itself. In other words, with
the lagged accelerator model of investment which I postulate and which is
consistent with the empirical evidence at least for the American economy
the rate of growth of investment will increase whenever the aggregate
growth is, for some reason increased. This leads to the third point, the one
which underlies most of the changes in chapter VI which you suggested in
your marginal comments.
(3) My macrodynamic model is based on five sectors, the oligopolistic sector
being only one of those five sectors. The aggregate growth rate depends on
investment to be sure, but aggregate investment viewed as the sum of
discretionary expenditures in all five sectors. It is for this reason that while
the rate of growth of investment, I*, need be equal ex post to the rate of
growth of savings, S*, for the economy as a whole, the rate of growth of
investment, I*, for any one sector such as the oligopolistic sector need not
be equal to the rate of growth of savings, S*, in that same sector. They can
diverge, the excess in one sector being counterbalanced by a deficit in some
other sector. This, I think, is explained more clearly further along in the
chapter than perhaps you have yet read. This is the reason, for example,
that I feel it unnecessary to specify that there are no savings in the
household sector. The household sector is dealt with through a separate set
of savings and investment curves, developed later in the chapter. There, in
the first part, I am concerned only with savings and investments in the
oligopolistic sector as a function of the aggregate growth rate, G*.
(4) It seems clear, at least to me, that I do not fully know what I am talking
about when I discussed the post-Keynesians and what their analysis
encompasses. I shall certainly try to correct for this deficiency over the next
years as I do the final revision on my manuscript.
Your comments and criticisms continue to be the only real assistance from
anyone with my work. You cannot realise how much I value and treasure them.
I shall try to repay you by becoming better familiar with your work so I can
impress its importance on others. I have already had great success in this regard
in my undergraduate course, all its members having been assigned to read some
of the chapters from The Accumulation of Capital and all thus now familiar
with the post-Keynesian Robinson-Kaldor type of growth model. Incidentally,
I note that Harcourt, in the most recent Journal of Economic Literatures refers
to it as the neo-Keynesian model.8
I look forward to your further comments and criticisms. In the meantime, I
hope I have cleared up certain confusions.
Alfred S. Eichner
6. Robinson to Eichner, June 19, 1969, Cambridge UK

I am sorry I have been so long in sending you my remarks on your chapters.
I find your whole approach very sympathetic and very much in line with the
kind of things we have been trying to do to bring micro and macro growth
theory together. I enclose a number of notes. If they are not clear please ask for
further explanations.
Joan Robinson
CHAPTER III
I Finance
I think it should be treated in terms of ecology – various forms of live creating

‘niches’ for each other. Thus some corporations have a high pay-out ratio to
keep up a high valuation ratio of shares, so that they can raise money easily by
new issues; others have zero pay-out, to attract supertax payers, etc. You take
as typical the case of self finance, the corporate levy being adjusted to the
requirements of investment. I agree that this is typical.
II Prices
I do not quite understand your argument about the cost of raising prices. A rise
is an event that takes place at a particular date.
I think there are two questions:
(a) what limits the level of the levy – why are not prices already higher than
they are?
N.B. It is very confusing to mix up the question of a response to a general
inflation with the question of the choice of policy about relative prices.
(b) In what circumstances will the price leader raise the levy?
On (a) the various considerations you mention are relevant. I think you
should add that the price leader cannot rely on the loyalty of the others if he
makes margins too high – the temptation to snatch a larger share must not be
too great.
In a given state of overall growth of demand, technical conditions etc, there
is a required amount of investment which will retain market share. If the leader
finds that the levy is yielding more than the required amount he may (1) try to
increase his share. This may lead to an advertising war. I agree that the main
function of advertising is to make entry harder (you will find this in a paper of
Kaldor’s) but it is not always easy to fix a limitation of arms agreement when
it has become excessive (detergents in U.K).9 The advertising war absorbs the
excess funds so that no one actually grows any faster. (2) Buy up other firms
which bring their market share along with their productive capacity, (3)
increase dividends. Of course theoretically (4) lower prices is possible but I
agree is not usual. (5) Increase salaries and amenities for staff and employees.
If he finds that the levy is yielding too little he may (1) raise prices (see
below), (2) go to the market, (3) keep down the rate of growth.
(b) When will the levy be raised?
(1) The leader finds that the levy was set too low to permit the required rate
of investment. Now the choice comes up of remedying this by raising the levy.
But how did this situation arise? If it is because the yield of the levy was
overestimated, it is not a very good idea to raise prices. If however it was
investment that was underestimated ie, growth of the market is faster than was
expected, then a higher price is easy to charge and appears to be justified.
III Payout ratios

I think you have to inquire cui bono. I agree that, to the managers, shareholders
are only a kind of creditor, but still the question of the valuation ratio must have
some influence on the decision about dividend payments. Your treatment of the
cost of borrowing seems to be a bit too simple.
This question is treated by Marris mainly in terms of fear of takeover.10
CHAPTER V
Page 2. I think you do Marshall wrong. He did not really support marginal
productivity theory. If you really look into his system it is that there is a supply
price of capital which governs the rate of profit and the real-wage is then a
residual. I think that the whole confusion in modern teaching arises from
muddling up Marshall’s theory with the Walrasian system of supply and
demand. I therefore disagree with what you say on page 5 about the marginal
productivity system.
I find the whole concept of the firm raising money-wages and then trying to
reduce other costs very artificial. Surely in the kind of world that you are
discussing costs are continually falling through technical progress and the rise
of money-wages is merely preventing profit margins from rising. If the Trade
Unions are too strong and raise money-wages faster than output per head is
rising the corporations simply raise prices corresponding. One of the functions
of the price leader is just to signal a rise of prices when costs go up.
The passage on page 12 seems to me to be off the target for this reason.
On page 37, I should be inclined to say that prices are a multiple of prime
costs so that they rise automatically when prime costs go up. In fact I think that
the chapter should not be called the distribution of income at all. I do not think
that the money-wage bargain has very much effect on the distribution of
income. This view seems to be established both in terms of theory and in terms
of observation.
CHAPTER VI
In general I like this very much and agree with the general line but there are a
number of particular points.
Page 1. This is not the Keynesian theory of Keynes but the bastard version
which is commonly taught.
Page 2. Imperfect competition is implicit in the General Theory, otherwise
there could be no part-time working of plant. Marshall himself introduced
imperfect competition to defend profit margins in a slump. Kalecki cleaned up
this element in the General Theory. There is no difficulty in stepping from

Marshall to Keynes-Kalecki but there is an absolute impossibility of stepping
from Walras.
Page 11. I quite agree but surely this is a simple common-sense point which
does not need such a heavy argument.
Page 16. I should have thought that in the regime of ‘modern capitalism’ the
Government maintains an adequate rate of investment if the firms do not do so.
I should be inclined to make this the key to your whole treatment.
Page 17. I very much agree with your concept of the corporate levy but you
still need a theory of what governs the rate of profit that is obtainable in the
system as a whole.
Page 21. See my note on Finance on Chapter III.
Page 34. In my view taxation of profits does not reduce profits because the
corresponding Government expenditure generates the demand which helps to
keep up prices.
Page 44. Did the U-shaped curve ever exist except in the text-books?
(I am bringing out Imperfect Competition with a new Preface in which I
repudiate the old nonsense.11)
Page 50. If there were perfect competition surely prices would have to move
proportionately to money-wage rates. I think it is an illusion to suppose that
monopoly is necessary to account for the response of prices to costs. Rather the
monopolists sometimes prefer to allow margins to be cut when money-wages
rise whereas competitive firms could not do so.
Page 57. You seem to leave out of account the fact that stockholders get capital
gains as a result of the investment of retained profits. This is a very important
point which I think has been missed in your treatment of dividends as a fixed
charge.
Page 66. What level of profits could be considered optimal from the social
point of view? Is there an optimal amount of unearned income? I think as soon
as you begin to look at things in this way you see that profits which are invested
may be regarded as contributing to the economy whereas consumption out of
unearned income is simply at the expense of real-wages.
7. Eichner to Robinson, August 13, 1969, New York City USA
Dear Professor Robinson

I have been mulling over your last comments (which explains, in part, my
delay in answering), and it seems that we are in general agreement on most
major points. I would certainly agree with many of the points you make. For
example, I think Marris does handle the whole question of the payout ratio
somewhat better than I have so far though he is somewhat vague as to what
determines the price level from which the net profits and payout ratio are
derived. I think you are probably right that I have misconstrued Marshall on
marginal productivity theory. And I think you are probably correct with respect
to Keynes as well. In some cases, I have not made myself sufficiently clear, and
it is helpful to have you indicate this to me. For example, I did not mean to
suggest that the megacorp, if confronted by rising wage costs, would attempt
to lower other expenses. I was simply trying to point out the large range of
indeterminacy when the megacorp and the trade union engage in collective
bargaining.
In all, there seem to be two points in need of further clarification between us.
One is my reference to the cost of raising the industry price. What I mean by
this is that the megacorp, as a result of raising its price, will suffer a certain loss
of future revenue due to the substitution effect, the entry factor and the
possibility of meaningful government intervention. This loss of future revenue
can be compared with the increased future expense which the megacorp would
incur if, alternatively, it were to finance the same amount of investment from
external sources. The result is an implicit interest charge on internally derived
funds. The cost of the price increase is thus not an immediately felt expense but
rather a future foregone opportunity to obtain additional revenue.
The second point has to do with the determinants of profit and the resulting
effect on income distribution. I have tried as much as possible to avoid using
the term ‘profit’ because I am convinced it serves only as a source of confusion
in economics. Instead I speak, on the one hand, of the corporate levy, which
encompasses both retained ‘profits’ and depreciation allowance, and, on the
other hand, of dividends. The latter are rentier payments based on factors that
Marris has, as you have noted, analyzed more satisfactorily than anyone else.
For the most part, this element of profit is an anachronism. Its size merely
reflects the ‘bribe’ necessary to keep the nominal owners of the firm from rising
up in revolt and exercising their right to vote in an insurgent management
group. Under somewhat different legal arrangement not necessarily incompat-
ible with the modified market system, it could be eliminated with little or no
adverse effect on the functioning of the economy.
The corporate levy, however, is another matter. This is the primary basis at
least in the oligopolistic sector for assuring that resources are devoted to capital
accumulation. Its size depends on the market power of the various megacorps
as measured by the elasticity of their respective SI’ curves. While the corporate
levy will determine the relative allocation of resources between present and
future consumption, it will only indirectly affect the relative distribution of
income among households. The latter will depend on the institutional
arrangement, such as the power of trade unions, government transfer payments
and the like. Thus like you I would insist that the distribution of income has
little to do with what has been termed marginal productivity. But I would also
insist that it has little to do with what are conventionally referred to as profits.
Under certain assumptions, our two approaches are not that different. On the
one hand, to the extent that any increase in profits in your system will not lead
to either greater entrepreneurial withdrawals or to larger dividend payments but
will result instead in larger investment outlays, your profits behave as does my
corporate levy. On the other hand, to the extent that a larger realised corporate
levy in my system will induce the megacorp to undertake additional
investment, my corporate levy has the same effect as your profits. (Since I
consider a lagged sales-accelerator model of investment demand to be more
realistic, I of course, would minimise the likely influence of current realised
profits on investment). Still, even if our two approaches could be brought
together in this way, I think there would still be an important difference in
emphasis, somewhat similar to the difference between the Fisher and
Cambridge approaches to the demand for money. Your system seems to imply
that profits are simply something that happens, largely as a result of aggregate
factors over which the individual firm has no control. While I would not deny
that this is an important part of the picture, I would nonetheless insist that
profits or the realised corporate levy, and thus savings in the oligopolistic
sector, are also something that are deliberately planned. Cyclical fluctuations
can be taken into account and secular trends used to determine the corporate
levy necessary if the megacorp is to maximize its growth in the long run. Thus
the realised corporate levy (your profits) is a function both of the level of
aggregate demand and of the deliberate pricing decision by the firm.
As one final matter, I was curious as to your reaction to my comments on

your aggregate growth model. Since I intend to use that model as a foundation
for following your advice and developing a macrodynamic formulation of your
pricing model, I would be interested in knowing whether what I said in my last
letter made any sense to you.
Again, let me express how much I appreciate your interest in my work and
how much I value your comments. Please excuse my not being as prompt a
correspondent in these matters as you have been.
Alfred S. Eichner
8. Robinson to Eichner, September 5, 1969, Cambridge UK

Many thanks for your letter of August 13th which has just come to hand. I
am sending you a paper of mine which is extremely formalistic but I think it
brings out the point of the relationship between the share of gross profit in
value-added and the rate of net profit on capital. Your corporate levy belongs to
what I was here calling the degree of monopoly rather than to the rate of
profit.
I cannot agree more with what you say about dividends but retained profits,
if investment is successful, raises the value of shares, and capital gains are at
the disposal of the rentier. This is an extremely vicious aspect of modern
capitalism – see page 6 of my paper.
My point about your analysis of the cost of raising the price is that this
seems to be an intrusion from static analysis. At what moment would the
megacorp raise its price? Surely it has settled down to a certain price policy
which is yielding a sufficient corporate levy for its present investment plans. If
the situation changes in a way propitious to faster growth this in itself will
provide an opportunity for raising prices without involving the costs that you
mention.
I looked up your remarks about my model in Essays. I think I agree with the
spirit of your remarks but formally there seems to be some confusion between
the share of profit in value-added and the rate of profit on capital.
I am very pleased indeed that you should be working on these lines in the
citadel of neoclassical static theory.
Wishing you the best of luck.
Joan Robinson
9. Robinson to Eichner, October 2, 1969, Cambridge UK

I entirely agree with what you say about profits. On the other question I think
that your system is a bit too simple and that Marris has already carried the
matter somewhat further. We seem to find that the firms which go to the market
are the very large ones like ICI and they keep up a high payout ratio in order
to maintain the value of their shares. Your taking the dividend as a fixed
payment rather limits the scope of your argument.
I am sending you two of my papers. More to follow. Perhaps you could get
hold of my Collected Economic Papers, published by Blackwell, especially

Volumes two and three.12 I have been working on these lines now for twenty
years but I think that I have been treated to a conspiracy of silence in the United
States.
Let me know where you are going next.
Joan Robinson
10. Robinson to Eichner, March 13, 1970, Cambridge UK

It is a long time since I heard from you. Did you have a look at the papers
I sent you? I was hoping that you would feel that this provided the kind of
general background within which you wanted to develop your theory of the
corporate levy.
You told me that you might be leaving Columbia. Please let me know where
you are.
Joan Robinson
11. Eichner to Robinson, Late March 1970, New York City USA
Dear Professor Robinson

Your letter of March 13, and the interest in my work which it indicated,
provided me with a much needed boost in morale. As you well appreciate, that
work has had anything but a friendly reception here at Columbia and indeed in
most other quarters.
Please forgive me for not responding more quickly to your previous letter. In
part, this was because the papers themselves did not reach me until the first of
the year, and in part, because I have been absorbed in trying to revise the first
draft of the oligopoly treatise for publication. I am not satisfied myself with
these explanations, but I hope you will be understanding.
I quite agree that you have been the victim of a conspiracy of silence on this
side of the Atlantic and I shall certainly point this out the next time a colleague
comments on the insularity of British, and especially Cambridge, economists.
My own work would certainly have been facilitated had I been exposed to your
influence at the earlier date. But perhaps the conspiracy is about to end.
Harcourt’s review article in Journal of Economic Literature will clearly help to

make your work better known in this country, I think this is only the beginning.
I am now discovering persons at other American universities who are, to
varying degrees, followers of yours. Even here at Columbia several of the
graduate students are trying on their own, to become conversant with not only
your work but also that of Kalecki, Sraffa, Kaldor and the other ‘Cambridge’
economists. What I hope to do, once the revisions of my treatise are further
advanced, is try to establish closer communications with these various
individuals.
In general, I found the papers which you sent me to be quite helpful. Do they
represent some past work of yours or the draft of some future work? Since so
many of the points you made are the same as the once I would make I was
naturally curious about that. Let me now comment on the papers individually:
The Short Period – I find myself in complete agreement with all that you say.
In my own work I draw a distinction between the pricing period, the planning
period and the long run. The pricing period is the interval during which the
established industry price can be expected to remain unchanged. In the case of
Marshall’s fisherman, it is one day. In the case of a typical oligopolist in this
country, it is likely to be 6 to 12 months. The planning period is the interval
required for a new plant to be built. It is thus the capital gestation interval and
can be assumed to vary from 1 to 5 years. The long run is simply the time
horizon of the firm – what it expects to be the interval for current actions to
have their ultimate impact.
Stationary State – No special comment, except that I find it very useful and
interesting.
Interest and Profits – I find myself in agreement with all of its part, as far as
they go. Now that I am becoming more familiar with your terminology – for
example, I know that what you refer to as the rate of profit, , is what I refer
to as the marginal efficiency of investment, r – I am less put off by semantic
differences. I would add that I still do not have the facility with your theoretical
system that I would like to have, though I hope this will be decreasingly the
case.
While prepared to accept the arguments made in this paper, I would
nonetheless suggest two further extensions or modifications. The first has to do
with savings, the other with investment.
With regard to savings, I think it is important to recognise that the nature of
property relationships has continued to evolve through the years so that it is
now somewhat ambiguous in advanced industrial societies to refer to
‘capitalists’ as savers as though it was actually a group of individual persons
making the relevant decisions. The amount of savings, I would suggest, is
determined not by the ‘capitalist’ whoever they may be in a contemporary

context but rather by the business organisation or, as I refer to the dominant
type of business organisation in the United States, the megacorp. The term sp
as you use it is perhaps best understood as the ratio of the corporate levy to the
non-wage income originating in the firm. I would go even further and suggest
that the individual firm can affect the value of sp, even in real terms, by acting
in conjunction with its fellow oligopolists to raise the industry price.
In this formulation there is, of course, as you suggest, no justification for
rentier income. Nonetheless, the fact that it exists does, as you also point out,
have important implications though not as important as when it is no longer
assumed that new investment is financed out of rentier income. In your
previous letter you indicated your feeling that it was too gross a simplification
to assume the dividend rate was fixed or, as I actually did, assume it was fixed
relative to wages. I would agree, and I would also acknowledge that Marris has
worked out this part of the argument better than I have. Still, such an
assumption is not that unreasonable, especially when the question is how prices
are determined.
With regard to investment, the question is essentially what determines or
r. By far the largest portion of investment, I would argue, is endogenous. That
is, the capital stock is increased by and large in response to outward shifts of
the aggregate demand curve, the higher levels of output requiring additional
capital inputs. More specifically, I would explain the largest portion of
investment in terms of a lagged accelerator model. The rest is probably due to
what you term the ‘animal spirits’ of the capitalist and what Schumpeter
referred to as entrepreneurship – the ability to develop and tap entirely new
markets. Underlying both types of investment is, of course the technological
change which economists still do not understand too well.
When I revise chapter 6 of the treatise, the chapter which I previously
referred to as ‘Micro and Macro’ but which I am now thinking of titling
‘Macrodynamics’, I intend to make precisely these modifications in your

theoretical structure. Unfortunately, I have not been making the progress I
would like in revising the treatise, and it now appears that it will be summer
before I get to that chapter. So far, three chapters have been revised, and I shall
be sending them along to you shortly.
My position at Columbia has now become untenable. The political situation
here is very complicated, so much so that no letter could possible explain it
adequately, but as you yourself noted, Columbia is a citadel of neo-
classicalism. Because of the difficulty I have had publishing my work, as well
as the lack of support from my department, I am not well enough known to
obtain an appointment at one of the major universities in this country, and so

I am now exploring the possibility of taking a position at Sarah Lawrence
College, a small nearby liberal arts undergraduate institution. In this way, I will
be subject to a minimum degree of disruption, and hopefully it will be a
pleasant few years until my work is more widely recognised. At worst, I will
be forced to spend one more year teaching at Columbia.
Again, your interest in my work is a real tonic and very much appreciated.
Alfred S. Eichner
Dear Alfred,
I was very pleased to get your letter and to know that you are working on the
book. Look out for an article of mine in the Canadian economic journal
(McGill) which gives a light-hearted though serious account of Cambridge
(Eng) v Cambridge (Mass).13
I entirely agree with your remarks about the source of profits etc. I think this
will be made clear in other papers in my projected book, which I shall call
Some Old Fashioned Questions in Economic Theory.14 There is only one point
that I think you over looked, that is gross profits are the excess of receipts over
the wage bill – spP = I – swW + H + (G T) + (E M). Saving from profits
finances investment minus saving from wages plus trade surplus. They cannot
get our more profit than they put in. In the simple case of I the only element
in the multiplicand is sw = 0 then P = I/sp, or as Kalecki puts it – the workers
spend what they get and the capitalists get what they spend.
Joan Robinson
13. Eichner to Robinson, Late April 1970, New York City USA
Dear Joan,
I will look for the article in the Canadian Economic Journal. I have finally
found some time to sit down and read The Accumulation of Capital with some
care. I think its one of the few important books published in economics since
The General Theory – and I would be hard proved to name the others. What a
shame it is not more widely read on this side of the Atlantic. The material on
the switching of techniques is, as you say, not worth the diversion; but I
suppose it would be an even greater mistake to leave it out.
On the point you raised in your letter, I am not sure of the extent to which
we are at odds. It seems that there are two questions here; (a) what determines
the amount of investment, I and (b) what is the effect of I, so determined, on
the amount of profit P, or, and I would prefer to term it, business net income.
To answer the first question, I would rely on a lagged sales acceleration model
similar to the one that has been derived empirically by Robert Eisner. Firms I
would argue, attempt to expand the capacity in line with their growth of
industry sales in order to maintain existing market share and the future growth
of industry sales is extrapolated from past trend. While there are elements of
investment demand other than expenditures on new plant and equipment in
existing industries, they are not quantitatively significant at least in terms of
changes from one year to the next. You in turn, if I understand the argument
correctly, see the amount of investment as depending on the amount of profit
being earned, greater profit an inducement to greater investment. This is
consistent with some of the earlier empirical evidence, but not with the most
recent studies indicating that past profits are simply a poor proxy for past
sales.
On the second question, I would argue that realised profits in the sense that
you use the word depend both on the amount of investment being undertaken
in the aggregate and on the profit margin set by business firms. At any given
price level, profits will be a function of the rate of capacity utilisation. As
aggregate demand increases as a result of greater aggregate investment, the rate
of capacity utilisation will rise and so too, at an increasing rate, will the amount
of profit being earned. Over this factor, the amount of aggregate demand, the
individual firm has no control. But if it feels that the amount of profit at normal
levels of output will be insufficient to meet its needs – whether to cover costs
or to finance the desired level of investment – the firm can increase its profit
margin or in my terminology its marginal corporate levy. The effect of this
change in price on current sales levels, that is, capacity utilisation, will be
relatively insignificant, but the effect on corporate savings, that is sp will be

substantial.
Of course, if all firms together raise sp so that, ex ante the level of aggregate
savings exceeds the level of investment, aggregate demand will decline – unless
affect by compensatory action by the government – and the ex post S and I will
be equal. Thus S is determined, as you point out, by I. But S is equal to sp · P,
and the relative values of these two variables may change as long as when
multiplied together, they equal S. Basically, what I am suggesting is that firms
in the oligopolistic sector because of the pricing power they possess, are able
to alter the value of sp and while this cannot alter the overall value of S, it can
affect the level of employment and the rate of capacity utilisation. Moreover if
the government is committed to a policy of full employment, and is [able] to
affect the excess of savings over investment in the private sector with a deficit
of its own, then even the value of S can be affected.
Are we still apart on the issue?
The first three chapters of the tract on oligopolistic pricing have now been
revised and produced, and I am sending them to you by separate mail, I hope
you receive them soon.
Al
14. Robinson to Eichner, May 4, 1970, Cambridge UK
Dear Alfred,
I was very pleased to know that you have seen the point of my Accumulation.
As for the relation between investment and profit I start from Kalecki’s epigram
“the workers spend what they get and the capitalists get what they spend,” ie,
overall gross profit ex post is equal to gross investment plus consumption out
of profits. (Of course this is a simplification but you know of the assumptions
. . . [the rest of the letter is not readable]
Joan
Dear Alfred,
I think this is going to be a most useful book. I am going to offer mine to
Basic Books.15 After I have got a contact, would you like me to introduce you
to them.
I think the draft could still be tightened up. The neoclassicals are notorious
for sloppy methodology and we should be more exact. I think it is necessary to
separate the general talk about how firms behave in reality from a tight model
of stated assumptions. You seem to slip from one side to other without marking
which is which. For the model there are two sets of problems. (1) what is
output? Much of the formulae and diagrams refer to a homogeneous product.
OK. But then point out that megacorps are always multi-product firms selling
in a number of distinct markets. Also, in each market products of different
megacorps are differentiated – you can use my distinction between industries
and markets. All this is too complicated to put into a tight model. The model
can only illustrate an artificially simplified case. Perhaps you can use return per
unit of cost in the more general case. But ‘price’ is a difficult unit because of
the principle of charging what the traffic will bear. (2) The second difficulty is
time. At what moment is the decision to raise price being taken? It seems to me
that your theory is that the firm has a long-term plan of expansion and sets
prices for its present output that still yield the levy that it needs. But if more
levy is easy to get it might raise its sights and plan faster growth. The question
then comes up – why are not prices higher (not only are they not raised today).
To this you can give your three points. Make clear that the growing over time
is in the head of the manager today calculating what to do.
I will fill a second aerogram with particular points.
Joan
Dear Alfred,
Some further thoughts. I do not think that your theory is an alternative to the
Anglo-Italian theory of profits. The total amount of corporate levy that the
megacorps can get is limited by the total excess of expenditure over prime
costs, except in so far as they are still eating up small firms. The total amount
of levy there is to get is equal to gross investment plus excess of spending out
of profits net savings out of wages plus government deficit minus deficit in
trade balance. Your theory shows how the levy is extracted by the individual
firm ie, it is the micro theory that fits into our macro theory not a substitute for
it.
I am here visiting my daughter’s family and have switched off being a
Professor to being a Granny.
Joan Robinson
17. Eichner to Robinson, June/July 1970, New York City USA
Dear Joan,
I greatly appreciated your last set of letters. You continue to be a source of
great encouragement, not to mention a source of great help to me. I have felt
for some time now that I was, indeed, providing a micro foundation to the
macro theories of the Cambridge neo-Keynesians. (Perhaps you might be able
to clarify for me how the group should most properly be delineated. Should
they be known as the Cambridge neo-Keynesians, as I have been wanted to
term them, or as the Anglo-Italian school, as you refer to them in your last
letter? Who besides yourself does the group include? I must confess to having
still only a fragmentary sense of this line of evolution from the original
Keynesian mutation.)
From your letter it was not clear whether you meant to obtain a contract from
Basic Books or make a contact with it. It certainly would be in my interest to
have at least one other publisher solidly interested in my work, even though I
have now come to feel that no publisher will be willing to make a firm
commitment until the draft I am working on has been finished. That is certainly
the situation now with respect to the Princeton University Press.
At present I am finishing up chapter 5, on income distribution. Chapter 4,
extending the model to other single industry oligopolistic situations, is finished
but has not yet been retyped. In part it is because I am trying to conserve funds
and in part because of a few unresolved problems now on the verge of being
overcome. Chapter five, I think, has been considerably improved even though
it remains substantially the same. Your previous criticisms were particularly
apt, and the chapter goes a long way towards meeting them. It contains an
entire new section dealing with the neo-Keynesian or Anglo-Italian theory of
income distribution, which I have just started. The more difficult revision will
be the next chapter which is to be completely rewritten to cast it in a
macrodynamic framework. Here I shall have to come to grips specifically with
the inconsistencies, if any, between our two approaches. I still feel that we rely
upon different investment demand functions and, a more significant distinction,
a different concept of residual income. In your formulation the residual income
accrues to the firm’s owners, and to their ultimate benefit, even if it is
temporarily retained by the firm. In my formulation the residual income
accrues to the firm organisation separate and distinct from the nominal owners.
In any case, once that chapter has been revised, you will be able to see how well
I have come to understand your work. Perhaps by then, which I hope will be
not later than the beginning of October, I will be able to send you all the three
subsequent chapters for comment. I certainly do find your reactions to the first
three chapters most useful.
Let me just comment briefly on the two principal points you raised. I think
you have put your finger upon a major weakness of the chapters as presently
written – the failure to specifically define an industry. I noticed this myself as
a result of a point raised in chapter four. This will certainly be corrected. My
notion of an industry is a group of firms which recognise the interdependence
among themselves as reflected by the membership in the same industry trade
association. Generally, there is a technological base common to all the firms in
the same industry, and when this technological base is used to produce a
product, the firm may be said to have diversified, that is, increased its product
line. On the second point, the time orientation of the theory, I think we are in
fundamental agreement, it being only a matter of my making things clearer.
I hope you had an enjoyable visit with your daughter’s family in Canada.
These pleasures are something that I am coming increasingly to appreciate as
my own two young boys grow older (they are now 5 and 2).
Al
18. Robinson to Eichner, August 3, 1970, Cambridge UK
Dear Alfred,
I will be very pleased to look at your draft. I am going away shortly and will
be back in September.
I think it is quite reasonable for a publisher to want to see the full text before
making an offer.
Of course, I agree that profit accrues in the first place to the firm as such, but
I think that the phenomenon of realisation and consumption out of capital gains
cannot be left out of the story.
Joan
19. Eichner to Robinson, Fall 1970, New York City USA
Dear Joan,
Here are the revised chapters, 1 through 3. I think you will find they have
been substantially improved. In chapter 1 perhaps you will be able to suggest
better citation of your work than those I have used.
I am also sending off copies to the Princeton University Press in the hope it
will agree to publish the full work. If not I will have to seek another
publisher.
Warm regards.
Al

Dear Alf,
I think I have fathomed the relation of your system to mine.

(1) When you say raise price you generally mean maintain price at a level
which yields profits in excess of what would obtain in a stationary state (zero
net investment) with a rate of profit equal to the actual market rate of interest
ruling today. Sometimes, however, it means raise, as when the firm is
contemplating an increase in its investment plans and is choosing how to
finance it. (You don’t seem to ask, how is it possible to make profits. You give
only one half of the two-sided action.) (If there was no investment there would
be no profits.)
I think I made this point when I first wrote to you, so perhaps you have a
blind spot about it; anyway when you are reading me, remember that I think of
investment already going on and profits already being earned.
(2) I think the idea of the market rate of interest in a stationary state is
metaphysical. In my way of looking at things, investment causes profits, and
interest is derived from profits. However, for your story about how the
megacorp catches its share of profits you can take the general level of profits
and of interest as given.
(3) I maintain that in the economy as a whole P = I + (1 sp)P swW
therefore when sw = 0, P = (1/sp)(I) where P is profit per annum, I net
investment, sw + sp savings ratio of wages and profits.
This is true whether firms are competitive or oligopolistic and whether they
finance from retained profits or go to the market.
N.B. Small firms are more dependent on self-finance than large ones.
I am sending an offprint with some marks against relevant passages.
I like your Chapter 4 very much apart from the bit about Marshallian firms.
I will send some notes on this later.
Polypoly Chapter IV p. 40 et seq. Hicks distinguishes somewhere between
stickers and grabbers.16 The grabbers firm has no future but goes in for a quick
profit in a seller’s market and comes out again when supply has overtaken
demand. This is not Marshall’s family firm. The M. firm is growing by re-
investing profits. (It is more dependent, not less, than the megacorp on self
finance). It dies off because of the failure of the third generation to be good
entrepreneurs, not because it does not have a long horizon.
Nor does Marshall think of text-book perfect competition in face of a fall in
demand. “Fear of spoiling the market” keeps price above prime cost.
I think that the kind of competition you describe may occur among primary
producers, but never among manufacturers.
You say normal profit is that which covers costs including interest. This is
why I say you are thinking of a stationary state. So long as there is investment
going on (and consumption out of profit exceeds saving out of wages) there are
profits even in a perfectly competitive world.

The key to Marshall is the long and short period idea. I hope you will see this
in my Old-Fashioned Questions.
The text-book exposition of perfect competition is usually an ill-considered
mixture of Walras and Pigou as interpreted by me in Imperfect Competition. It
is quite useless for your problems as it is really conducted in terms of
comparisons of static positions though it pretends to deal with firm etc.
Meanwhile, may I have your reaction on the general point?
Would you send a complete list of definitions of your symbols? I hope in the
book you will have them all on one page, preferably a pull out.
Joan
21. Eichner to Robinson, April 6, 1971, New York City USA

I was quite touched by your sitting down to rewrite the section on the post-
Keynesian theory of income distribution. (I shall not refer to it again as the
neo-Keynesian theory). While I am not yet at the point of revising that chapter
for final publication, you can be sure that your formulation will be incorporated
into the final draft in one way of another. Though it is somewhat peripheral, the
footnote on Kalecki is much appreciated. I had looked for the source and, of
course, had not found it.
My plans for next year have finally begun to gel. I shall be leaving the
Columbia faculty of economics – that “Citadel of neo-classical thought” – to
take an associate professorship at the State University of New York at Purchase,
a new branch of the university located about 25 miles north of Columbia and
based on the English system of higher education, though more closely linked
to Sussex than Cambridge. I shall, however, remain with the Conservation of
Human Resources Project at Columbia, a research group independent of the

economics department.
In addition, thanks perhaps to your recommendation, I shall be on a
Guggenheim Fellowship. This will largely free me from any teaching duties
this coming academic year, and will enable me to revise the book on oligopoly
for publication. The eighth and final chapter on policy is now almost complete,
but a great deal of polishing and rewriting still remain to be done – as, for
example, the incorporation of your comments on the post-Keynesian theory of
income distribution. The Fellowship provides some money for travel and I was
thinking of a trip to England to see you; but if you will be coming to this county
in November, perhaps that will not be necessary.

If you are going to be at Columbia, I would be willing and most anxious to
extend to you whatever hospitality I could. We live just outside the city, across
the river in New Jersey. It is about 17 miles from Columbia, or half an hour by
car. I would be honoured to have you stay with us for as little or as long as you
might wish. Since I will be relatively free, I could see to it that you got to
wherever you had to. While it might perhaps be more convenient to stay near
Columbia, it is somewhat more pleasant where we live, and at some point you
might welcome a change in scenery. I should add that we have two young,
active boys, and that might be something of a bother to you. In any case, I
would be glad to put myself at your service in any way that I could.
Finally, let me say that I have significantly revised the macroeconomics
course I teach for undergraduates, basing it on macrodynamic model that, like
the one employed in chapter 6 of my book, depends on savings and investment
functions for both the entire economy and each of its separate sectors. I go
directly from a simple Keynesian static model to a Harrod-Domar growth
model to The Accumulation of Capital. While there are still a number of rough
spots that need to be smoothed over, I feel it is a far better way to teach
macroeconomics, both because it is more inclusive and because it is more
realistic. At some point, I hope to write a post-Keynesian text based on the
course.
I await with great interest your new book from Basic Books.
Alfred S. Eichner
Dear Alf,
I am so glad that the Guggenheim came off.
I was a bit suspicious at your accepting my amendments so readily as I

wonder if you have really grasped the relation of your ideas to the Anglo-Italian
theory. I await your reaction to the next lot.
I expect I shall have to stay near Columbia when I am there in November,
but I will certainly manage to see you one way or another.
Joan
23. Eichner to Robinson, April 1971, New York City USA


The more I read of your work, the more I realise how much you have
anticipated my own analysis, and how much time I would have saved had I
come under your influence earlier. Still, we have begun from different starting
points and have developed somewhat different languages along the way, and as
it seems that we are quite capable of misunderstanding one another despite the
agreement on essential points.
I am distressed that you could have gotten the impression, after reading
chapter 3, that when I say ‘raise price’, I mean “maintain price at a level which
yields profits in excess of what would obtain in a stationary state (zero net
investment) with a rate of profit equal to the actual market rate of interest ruling
today.” I mean that not at all. When I say “raise prices,” I mean instead, “raise
price, as the firm is contemplating an increase in its investment plans and is
choosing how to finance it.” Implicit in my system is the assumption of a
positive growth rate for the economy as a whole, at least over the long run. I
agree that a ‘stationary state’ is a metaphysical concept entirely divorced from
reality. The economy is always expanding, though at different rates. And
megacorps, by raising their price levels, can generate a higher rate of savings
to finance their own particular share of the growth. If some part of my chapter
gives a contrary impression, as apparently it must, I would like very much to
know which section it is so I can change it.
I suspect part of the reason for this misunderstanding – and the reason you
ask me to make clear my theory of investment – is the nature of my chapter 3.
It is intended merely to explain how firms decide on a change in the price level,
holding costs constant, and thus on a change in the level of ex ante or planned
savings. The decision, as I point out later in the chapter, presumes a certain
schedule of planned investment over the next five years. It is basically a
decision as to the desired savings rate or, in your terms, so, the savings ratio for
the oligopolistic sector. In other words, chapter 3 is intended simply to lay the
ground work for the savings function employed in chapter 6. I think a reading
of that chapter, which has been completely rewritten and entirely as the result
of your influence, will make this point clear. There it is pointed out that within
the oligopolistic sector, as within the other sectors of the economy, a savings
function can be specified showing the relationship between the rate of growth
of savings and the rate of growth of aggregate output. That savings function
has, as its parameters, the price level, the wage rate and the tax rate, a change
in any one of which will cause the savings function to shift. There, too, an
investment demand function is specified, this function, as a variant of the
lagged sales accelerator model, depending entirely on the rate of growth of
aggregate output. Thus chapter 6, and implicitly chapter 3 as well, supplies an
answer to the question which you raised.

Reverting now to your language, I accept the argument that profits depend on
investment. That is, that P = 1/sp · I. In the revision of my work, I intend to
incorporate your equations into the discussion. Of course, what you refer to as
profits I prefer to think of as dividends and corporate levy, at least in so far as
the oligopolistic sector is concerned. Still, even the corporate levy or more
precisely the realised or ex post corporate levy, and hence ex post savings in the
oligopolistic sector depends on investment. What must not be overlooked,
however, is the distinction between ex ante and ex post savings. The two need
not be the same, at least within the oligopolistic sector. Megacorps fix a price
on the basis of being able to generate a certain amount of investment funds at
the anticipated rate of capacity utilisation, or demand, and that amount of
investment funds is their desired amount of savings. But changes in
government policy, among other exogenous factors, are apt to result in a
different amount of investment funds, and thus a different amount of savings or
profits actually being realised. It is because my chapter 3 deals with the desired
level of corporate levy, or savings, and not the realised level, that it did not
focus more directly on the actual level of investment. I hope that by now you
have had a chance to read chapter 6, and what I have said is apparent to you.
As a minor point, I see you are still disturbed by my use of the phrase
‘Marshallian proprietorship’. I prefer to use it because I think it is the type of
firm which Marshall had in mind when he wrote the Principles and it is still the
type of firm which conventional economic theory still has in mind. I think that
is more a reflection on contemporary economists than Marshall himself, who
after all could only be expected to analyze the type of firm that predominated
in his time. Would you feel more comfortable with the phrase ‘neo-classical
firm’. To me it seems to lack a certain punch.
Your suggestion that I make up a list of all the definitions and symbols I use
is a good one, and I shall make that, as well as some sort of table of contents,
the first order of business when I sit down soon to begin revising the entire
manuscript. Right now I am in the last part of the final chapter and giving that
all my attention.
Thanks very much for the reprint. I found myself in agreement with
everything it said. From my narrow perspective here at Columbia, I though it
was only the narrow minds turned out by the University of Chicago which
believed in the relevance of the neo-classical or neo-classical theory of the firm.
But now I realise that the same blindness characterises even the American
Keynesians on the Eastern seaboard. Perhaps, however, the time is ripe for a
post-Keynesian Revolution in this county. Your invitation to visit this country
is certainly a hopeful sign.
Al

Dear Alf,
I fear you do have a blind spot about TIME owing to neo-classical
miseducation. Ask yourself when did a corp raise its prices and why were they
lower before? You are consciously thinking of a stationary [state] but your use
of language implies what I said. (I mean: at any particular date, the corp is
doing net investment and receiving profits. Raising the rate of investment is a
fairly rare occurrence).
I agree that a faster expanding market yields higher profits, but this is equally
true in Marshallian competition.
I will send some notes on the Marshall in chapter IV and read the rest of
chapter VI when I have had your reaction to my ‘Old Fashioned Question’.
I believe it is the students not the faculty who are responsible for my
invitation to Columbia. To be continued later.
Joan
25. Robinson to Eichner, May 19, 1971, Cambridge UK

Dear Alf,
I suppose it is rather annoying for you that your quite original ideas are very
familiar here. On the other hand, it is a good thing to find yourself of a
movement.
I fear you are in a muddle about time. Even in this letter you cannot refer to
the rate of investment except as the increase in I. However, if you keep the
point in mind when you are revising it will come out alright.
I enclose some notes on the Marshallian bit in Chapter IV. I will look at the
rest of Chapter VI later. I hope meanwhile you are reading my Old Fashioned
Questions (Basic has published it under the title Economics Heresies).
Joan
Dear Alf,
I at last found time to start reading the rest of your Chapter VI, but I find it
terribly confusing.
(1) You start by saying that when income is growing relatively to productive
capacity, saving exceeds investment in the megacorp sector. Why? Might not
the high level of income be due to a high level of investment within that sector?
Then you say that in the rest of the economy, investment tends to exceed
saving. Surely you ought to say that when I is greater than S in the rest of the
economy, S must be correspondingly greater than I in the megacorp sector, and
vice versa.
(2) You seem to boil investment decisions and current investment together.
You should say when income is high in the present period (whether because I
is high within or without the megacorp sector or because thriftiness is low) then
output is high relatively to capacity in the megacorp sector, profits are high and
savings are high. Therefore there are good prospects for investment and finance
is becoming available, so that investment decisions, affecting investment in the
next period, are high.
The general point is that you should be using Kalecki’s version of the
General Theory, not Keynes’.
Joan
27. Eichner to Robinson, July 13, 1971, New York City USA

I think the confusion expressed in your last letter reflects a basic
disagreement between us about the determinants of the investment demand
function. What you suggest, and have always argued in your own work, is that
the level of investment in the current time period depends on the level of profits
in the past time period – in other words, that the rate of growth of savings and
the rate of growth of investment are inter-related, though with a time lag. What
I have posited throughout this work on oligopoly is that the level of investment
in the current time period depends on the level of past sales as a proxy variable
measuring for anticipated growth of industry demand, and that as a result it is
possible to stipulate an investment demand function that is independent of the
rate of growth of savings, either in the current time period or in the past time
period.
I do not think this is an issue that can be determined a priori though one can
provide a logical framework in support of one or the other hypothesis.
However, the empirical evidence, it seems to me, is clear. It overwhelmingly,
at least in the case of the United States, supports a lagged sales accelerator
model such as the one I have employed. That is the reason I feel that even the
Kalecki version of the General Theory, with its lagged profits investment
demand function, is inappropriate, at least for understanding the American
economy.
Let me indicate how this fundamental disagreement between us is reflected
in your comments. I quote from your letter, “You start by saying that when
income is growing relatively to productive capacity, savings exceeds invest-
ment in the megacorp sector. Why? Might not the high level of income be due
to a high level of investment within that sector?” To which I must reply, “No,
because prices have been set so as to yield, within the oligopolistic (or
megacorp) sector, savings just sufficient of finance the level of investment. If
income is growing relatively to productive capacity, so that savings exceeds
investment in the oligopolistic sector, it must be because industry sales are
greater than was originally anticipated, and this can only because the level of
aggregate demand is higher than was originally anticipated. But since
megacorps would, on the basis of sales expectations, have no reason to increase
investment beyond the level for which they have already determined their
savings rates, the increase aggregate demand could only come from outside the
oligopolistic sector. In other words, with investment in the oligopolistic sector
dependent only on present and past sales, and with present sales have only a
partial effect even then, the oligopolistic sector itself cannot be the source of
any exogenous increase in investment, and thus of any increase in aggregate
demand that would lead to high rates of capacity utilisation.” Of course, if
investment is based on past profits, the same argument does not hold.
To quote from your letter again: “You should say when income is high in the
present period (whether because I is high within or without the megacorp sector
or because thriftiness is now) then output is high relatively to capacity in the
megacorp sector, profits are high and savings are high.” Yes I would say so, and
so far we are in agreement. But then you add, “Therefore there are good
prospects for investment and finance is becoming available, so that investment
decisions, affecting investment in the next period are high.” This is where our
views diverge, because I do not believe that investment in the oligopolistic
sector is significantly affected either by money market conditions or by the
availability of internal funds. The megacorp adds what capacity which it needs
to supply growing industry demand, and it will add that capacity whatever the
financial stringency may be. Only in periods of extremely tight money is the
megacorp likely to be forced to defer investment outlays, and then it is of
course, only a deferral.
This much said, let me hasten to add that I think my formulation of the
investment demand function needs to be sharpened. As I indicated earlier, I am
not happy with my treatment of time, and I am on the verge of revising chapter
6 to make investment a function, not only of the aggregate growth rate, G, but
also of time. That is, I would posit a response lag between an increase in the
growth rate and an increase in the rate of growth of investment. But this would
still leave investment independent of profits, and so the basic difference
between us would still remain.
Let me also hasten to add that I think chapter 6 could be written much more
clearly, and I will attempt to do in rewriting it for final publication.
I am sorry you have had so much trouble with it. This may sound somewhat
repetitious, but I must again point out how much help your comments have
been to me. I have now expunged the phrased ‘Marshallian proprietorship’
from my work, to be replaced by the phrase ‘neo-classical proprietorship’. I
also shall add a comment on the distinction you make between the Marshallian
firm and the grabbers that Hicks described. I have ordered a copy of Economic
Heresies, but it has not yet arrived from the publisher.
I hope this letter clarifies matters, even if it dos not resolve the issue, and I
look forward to your response.
Al
28. Robinson to Eichner, July 20, 1971, Cambridge UK

Dear Alf,
I was quite stunned by your letter. Certainly there is a deep misunderstand-
ing. How could you possibly think that I hold that past saving out of profits
determines present investment? Did you think I have joined the pre-Keynesian
camp? It is present investment that determines present profits. P = I + (1 sp)P.
If you look at my notes on Chapter VI again you will see that I am saying:
When investment this month is higher than last month, relatively to
productive capacity, then utilisation of plant, sales and current gross profits are
higher. When present experience influences investment plans, then there will be
a further increase in investment and there will be still more sales, profits, etc.
In short the trade cycle arises from reading the future by the present.
I agree the corp. section is less volatile than the competitive sector. If they
are totally uninfluenced by current experience and stick strictly to a steady
growth path, then when investment outside that sector rises, the corp sector gets
savings in excess of its own investment and lends them through the money
market to the outside sector. Conversely when outside investment falls, the corp
sector must borrow. I do not think this sounds very plausible. I think the corps
always have a good cushion of liquidity, and can vary their investment plans
when they like. It is rather their investment that generates saving outside.
I am really shocked that you could have read my Essays in the Theory of
Economic Growth and think that past profits rather than expected future profits
influences investment plans. Whether you say expected profits or expected
sales does not matter as sales at prices including the ‘levy’ bring profits.
I shall be at Department of Economics, University of Waterloo, Ontario, until
Christmas.
Joan
29. Eichner to Robinson, August 9, 1971, New York City USA

I assume that your being at Waterloo enables you to be close to your
daughter and her family, and I hope this propinquity greatly sweetens the next
half year. It appears that we shall have a chance to see each other, not only in
November here at Columbia but also in December at New Orleans. I see that
you will be delivering a major address at the AEA meetings.17 I shall myself be
giving a paper on inflation,18 as a follow-up to an article which I wrote last
February in The New Leader.19
My last letter seems to have pushed our discussions backward rather than
forward, and this doubly unfortunate as far as I am concerned, for it is of great
important to me whether our positions on the nature of investment demand are
at variance with one another, and if so, how.
First, let me be clear that I am now talking about the demand for investment
ex ante, not the actual amount of investment undertaken ex post. The latter, I
think we are both agreed, determines the amount of profits (or corporate levy)
realise ex post. If there is any disagreement with regard to this latter
relationship, namely, that P = I + (1 sp)P, it has to do primarily with source of
volatility in the case of I, whether the volatility arises in the oligopolistic sector
or without. Of course, the amount of investment undertaken ex post depends, in

part, on the demand for investment ex ante; so the two are not unrelated.
Now, with respect to the demand for investment ex ante, I argue in chapter
6 that it depends on (a) the marginal efficiency of investment, in the case of
such expenditures as cost-reducing equipment, advertising and R & D, and (b)
on the growth rate of industry sales, as extrapolated from past sales trends. The
point, however, is simply a continuation of the arguments made in the pricing
analysis of chapter 3. Since the amount of investment undertaken for other than
capacity expansion purposes is negligible in the aggregate, we can ignore the
effect of the marginal efficiency of investment and concentrate instead only on
the growth rate of industry sales. This, I suggest in chapter 6, means that the
rate of growth of investment, I*, is a function of the rate of growth of aggregate
output, G*. If investment decisions were based on past sales trends irrespective
of sales in the current time period, then I* in the current time period would be
independent of G* in the current time period. Geometrically, this would mean
that, in a two-dimensional diagram with I* measured along the vertical axis and
G* measured along the horizontal axis, the investment function, I, would be a
straight line parallel to the horizontal axis, its height determined by past sales
trends. I think the more reasonable assumption is that current sales will be
taken into account in extrapolating future demand, and that therefore I* will be
a positive function of G*, its slope depending on the relative weight given
current sales vis-a-vis past sales. But then I could be wrong about this. It is,
after all, an empirical question basically.
The more important question, it seems to me, is whether (a) I* increases
relative to G* at an increasing rate, or (b) the demand for investment depends
on the supply of investment funds. The first situation would prevail if rising
sales were to generate the optimism that would lead to an increasing discount
of the risk associated with investment, so that the demand for investment, like
an epidemiological disease, were to feed upon itself. (Here I am discussing
only the oligopolistic sector). This would make it possible for the rate of
growth of investment to exceed the rate of growth of savings, thereby giving
rise to a situation where investment in the oligopolistic sector, rather than being
stabilising as I have argued, is in fact destabilising. The second situation would
arise if large corporations were persuaded to undertake a larger amount of
investment, not because they discounted the risk at a decreasing rate but rather,
simply because they had more funds to invest. In this case the investment
demand function would not be independent of the supply of funds schedule,
and the type of diagrams I have presented would be an imperfect advice for
depicting the actual dynamics at work.
I have rejected both of these two alternatives because it is hard for us to see
why large corporations, whose prospective growth is determined solely by the
growth of the industries to which they belong, would be influenced to any great
degree either by states of optimism or by the availability of funds. Only
prospective growth for the industry as a whole, it seems to me, can provide a
valid basis for capacity expansion on the part of such firms. Is this view of
things at variance with yours? You can see why, on this basis, I argue that the
source of investment volatility lies outside the oligopolistic sector, and most
likely for a largely self-contained economy such as that of the United States in
the governmental sector.
I have now read though Economics Heresies. While it is not as clear as I

would like it to be on such minor points as the nature of investment demand,
still it provides a damned good base points to indicate to an economist what he
should know before he starts undertaking economic research of his own.
Having almost gotten up to this point myself, there are still a number of points
I need to master. I am moved by a very particular consideration. That is, how
does one remove the great amount of error and nonsense found in most
economics books? Economic Heresies, I fear, is not the strong polemic needed
to sweep away the neo-classical and neo-neo-classical economists to the
oblivion they deserve in the curiosity shops of the history of economic dogma.
How one would go about writing such a polemic, I do not begin to know. I only
hope I have greatly underestimated the convincing power of Economic
Heresies. As one already convinced, perhaps, I am not the best judge of this.
P.S: One of the reasons I may have misconstrued your position on investment
is that you referred, approvingly, of Kalecki’s model. That does have an
investment demand function based on past profits.
Al
30. Robinson to Eichner, August 24, 1971, Waterloo Canada
Dear Alf,
I think we better leave further argument until we meet as writing letters
seems to give rise to misunderstandings. I shall look forward to seeing you in
November.
I am afraid I mislaid your new address. Hope this will catch you.
Joan
NOTES
1. Eichner introduced the letters in this chapter with the following comments:
This set of letters represent the correspondence between Joan Robinson and myself
between the time I first wrote to her in 1969, shortly before her first visit to Columbia
[University], and just before he second visit to Columbia in Nov. 1971 (at the invitation of
Anwar Shaikh and other graduate students following the upheavals the previous spring over
the Cambodian invasion). Most of the correspondence is concerned with The Megacorp
and Oligopoly but in my letter to Joan 4/6/71 [L.21] I agreed to use henceforth the term
‘post-Keynesian’ rather than ‘neo-Keynesian’. My distinct recollection, though I do not see
it in the correspondence that survives, is that she objected to neo-Keynesian because it
sounded too much like ‘neoclassical’. I, on my part, had argued that the term ‘Anglo-
Italian’ (which she undoubtedly continued to use, see her letter of 4/16/71 [L.22]) would
never catch on here in the U. S. As far as I know ‘Post-Keynesian’ first appeared in print
in the subtitle of J. A. Kregel’s 1973 book, The Reconstruction of Political Economy (in
distinction to his earlier 1971 book, Rate of Profit, Growth and Distribution: Two Views,
which avoids any term whatsoever). This is significant because Jan worked closely under
Joan’s supervision.
2. Kenen does remember finding an error in Eichner’s model, but does not remember
precisely what it was. Kenen taught at Columbia University from 1964 to 1971. He is
currently the Walker Professor of Economics and International Finance at Princeton
University [Kenen, 1994].
3. The title of the paper was ‘Monopolistic Practices and Inflation’. It was eventually
submitted, after various revisions, to The Economic Journal where it was published in
1973 as ‘A Theory of the Determination of the Mark-up under Oligopoly’ (see L.46c,
46d, and Appendix III – L.9).
4. See chapter 2, pages 48–49; also see Ginzberg (1976).
5. For Eichner’s discussion of the accelerator-based investment function, see Eichner
(1976), (1991); also see Meyer & Kuh (1957); Eisner (1978).
6. The diagram in Essays is as follows:
A curve represents the expected rate of profit on investment as a function of the rate of
accumulation that generates it.
I curve represents the rate of accumulation as a function of the rate of profit that induces
it.
D represents a rate of accumulation which is generating just the expectation of profit

that is required to cause it to be maintained; it is a stable equilibrium position.
S represents a rate of accumulation which is generating just the expectation of profit that
is required to cause it to be maintained; it is a unstable equilibrium position.
7. After some revision, Eichner incorporated the diagram into The Megacorp and
Oligopoly, p. 207.
8. See Harcourt (1969), p. 370.
9. See Kaldor (1950).
10. See Marris (1964).
11. See the new introduction in Robinson (1969).
12. See Robinson (1960) and (1965).
13. See Robinson (1970).

15. The book in question is Economic Heresies: Some Old-Fashioned Questions in
Economic Theory (1971).
16. See Hicks (1954).
18. The paper, ‘Monopolistic Practices and Inflation’, was given at a session
sponsored by the Association for the Study of the Government Economy.
19. The New Leader article represented Eichner’s first use of his revised
microeconomics to examine a current economic issue – wage-price controls. His social
concerns vis-a-vis government economic policy are clearly apparent in the article. See
Appendix I.

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3. Working out the Megacorp and Oligopoly, 1969–1971

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1. Eichner to Robinson, February 12, 1969, New York City USA

Dear Professor Robinson,

2. Robinson to Eichner, February 25, 1969, Cambridge UK

Dear Professor Eichner,

3. Eichner to Robinson, March 1969, New York City USA

Dear Mrs Robinson,

Columbia on a Theory of Manpower, which is to be the culmination of his

The theory of manpower begins . . . definite limits.

As far as the savings rate of firms is concerned, it depends not on the

4. Robinson to Eichner, April 2, 1969, Cambridge UK

5. Eichner to Robinson, April 1969, New York City USA

Dear Professor Robinson,

6. Robinson to Eichner, June 19, 1969, Cambridge UK

I think it should be treated in terms of ecology – various forms of live creating

III Payout ratios

this element in the General Theory. There is no difficulty in stepping from

7. Eichner to Robinson, August 13, 1969, New York City USA

Dear Professor Robinson

As one final matter, I was curious as to your reaction to my comments on

8. Robinson to Eichner, September 5, 1969, Cambridge UK

Dear Professor Eichner,

9. Robinson to Eichner, October 2, 1969, Cambridge UK

Dear Professor Eichner,

hold of my Collected Economic Papers, published by Blackwell, especially

10. Robinson to Eichner, March 13, 1970, Cambridge UK

Dear Professor Eichner,

Dear Professor Robinson

Harcourt’s review article in Journal of Economic Literature will clearly help to

determined not by the ‘capitalist’ whoever they may be in a contemporary

‘Macrodynamics’, I intend to make precisely these modifications in your

obtain an appointment at one of the major universities in this country, and so

12. Robinson to Eichner, April 11, 1970, Cambridge UK

relatively insignificant, but the effect on corporate savings, that is sp will be

14. Robinson to Eichner, May 4, 1970, Cambridge UK

15. Robinson to Eichner, June 9, 1970, Cambridge UK

16. Robinson to Eichner, June 12, 1970, Cambridge UK

17. Eichner to Robinson, June/July 1970, New York City USA

18. Robinson to Eichner, August 3, 1970, Cambridge UK

19. Eichner to Robinson, Fall 1970, New York City USA

20. Robinson to Eichner, April 1, 1971, Cambridge UK

I think I have fathomed the relation of your system to mine.

profits even in a perfectly competitive world.

21. Eichner to Robinson, April 6, 1971, New York City USA

Dear Professor Robinson,

Human Resources Project at Columbia, a research group independent of the

in November, perhaps that will not be necessary.

22. Robinson to Eichner, April 16, 1971, Cambridge UK

I was a bit suspicious at your accepting my amendments so readily as I

23. Eichner to Robinson, April 1971, New York City USA

Dear Professor Robinson,

answer to the question which you raised.

24. Robinson to Eichner, April 24, 1971, Cambridge UK

25. Robinson to Eichner, May 19, 1971, Cambridge UK

26. Robinson to Eichner, June 17, 1971, Cambridge UK

Dear Professor Robinson,

28. Robinson to Eichner, July 20, 1971, Cambridge UK

29. Eichner to Robinson, August 9, 1971, New York City USA

or without. Of course, the amount of investment undertaken ex post depends, in

I have now read though Economics Heresies. While it is not as clear as I

30. Robinson to Eichner, August 24, 1971, Waterloo Canada