the life and works of c.e. ferguson 1 - duke...

CE Ferguson: Life and Works 0

The Life and Works of C.E. Ferguson1

Scott Carter, The University of Tulsa, Tulsa, OK ([email protected]).

Preliminary draft, October 2007.

Please note that this is strictly an unfinished working draft and the entire project is

definitely a work very much in progress. The reader will find whole sections

unfinished with lists of relevant literature only and as such is implored to please

accept the author’s apologies for the unfinished nature of this initial draft. (As such do not quote without permission).

1 Paper prepared for initial presentation at Duke University HOPE Workshop, October 26, 2007 and subsequently at the Southern Economics Association Annual Conference, November 2007. I would like to thank Neil de Marchi and E. Roy Weintraub at the Economics Papers Project at Duke and The University of Tulsa for a Faculty Research grant which made the research possible. All errors and interpretations are my own responsibility.


This essay is intended as an intellectual excursion into the life and works of a relatively minor2 neoclassical writer whose presence was felt during the tumultuous period of the 1960’s and into the early 1970’s, Charles Elmo (C.E.) Ferguson (“Charlie” to those who knew him).3 C.E. Ferguson lived a short but productive life, having died at age 43 in January 1972 with over 50 articles published in over 17 different journals both US and European4, three separate texts that ran into several editions (two well after his death), and two books. It is significant that both the years in which he worked and the year in which he died have been explicitly identified in the opening sentence, for Ferguson’s professional life (even past his death) was intimately connected with the turmoil and controversy that raged in economic theory in that period, especially over the Cambridge controversies in capital theory. Ferguson is famously – or infamously depending on the perspective – known for his comment in the Preface his 1969 opus The Neoclassical

Theory of Production and Distribution (hereafter referred to as NTPD and/or Ferguson 1969a) that belief in neoclassical (aggregate) production and distribution theory is a “matter of faith” to be sorted out (he says “answered”) by the econometricians. Neoclassical economists of the day perhaps could not help but flinch at the ridicule heaped on Ferguson by the so-called Cambridge critics5 for that remark, some of whom had a field day with the religious metaphor (see Robinson 1970, 1971, Nell in Ferguson and Nell 1973, Pasinetti 1977; Ferguson himself subsequently called it “that ill-begotten clause”, Ferguson 1971, pg. 250). Indeed the present writer has always found it very curious that neither the American Economic Review nor more surprisingly the Southern

Economic Journal ever made a review of Ferguson’s 1969 book. Was there perhaps a distancing of sorts among neoclassical economists with such strong statements? This is a question with which we consider below, but by raising it now it is hoped the reader gets a feel for the some of the impetus for this study.

2 The term “minor” is not in any way meant as a slight. Certainly he played a significant role in the capital controversies of his day; indeed Birner (2004) places a great deal of emphasis on a particular article he wrote (Ferguson and Allen 1970) in terms of how it shaped the subsequent development of the debate. However in terms of major theoretical developments on the neoclassical front at that time, Ferguson defers to Samuelson and Solow (Harcourt refers to Ferguson as Solow’s “most enthusiastic proponent” (Harcourt 1976, pg. 51). Ferguson himself admits as much in various places, especially the Preface to his 1969 book. 3 Ferguson was born in the South (Nashville, Arkansas, 1928) and but for a brief stint at Michigan State University (1967-68) remained in this region up until his death. He was educated at Hendrix College (Arkansas, BA 1949) and the University of North Carolina (MA, 1951; Ph.D. 1957). He held positions both at Duke University (1957-67) and Texas A & M (1968-1972). He was President of the Southern Economics Association (SEA) when he died and his never delivered Presidential Address is posthumunously published in Ferguson (1972a). In Appendix A we have reproduced (with permission) the In Memoriam written by the editors of the SEJ and readers are referred there for fuller account of Ferguson’s life. In the pages that follow we will focus primarily on the work Ferguson engaged in and developed. 4 Ferguson indicates that he read and wrote German (Ferguson 1959, p. 271, note 21) and certainly was very familiar with much of the German literature in economics such as that by Erich Schneider, Ragnar Frisch, etc. He published articles in Järhbücher fürNationalökonomie und Statistik, Kyklos, and Meteroeconomica. We believe that he may have had a connection with Eraldo Fossati who founded Metroeconomica in the late 1950s’ (Fossati published a book from Duke University Press???). 5 The term “Cambridge Controversies” is attributed to Harcourt 1969. However the term “Cambridge Criticism” and “Cambridge Critic” to refer to the Cambridge, UK contingent can be attributed to Ferguson (Ferguson 1969a, pg. xv).


Ferguson plays the role of defender of the faith of neoclassical orthodoxy in a particular chapter in the history of economic thought. In many studies and accounts on the history of the Cambridge controversies he is often referenced as one of the early and most forceful voices against a rising anti-neoclassical sentiment from the Cambridge across the ocean. Such a defensive posture Ferguson first made explicit in an article written in 19686 and this theme runs through all subsequent work he would write on capital theory from this point to his death 4 years later, especially as we have noted his 1969 book.7 At the heart of this defense was an argument that empirical testability of the model and its Friedmanesque predictive power would be its proving ground. Indeed it is this call for empirical justification on the part of the Cambridge critics in their rejection of neoclassical principles that Ferguson is often cited and for many most remembered for.8 This exercise is not as fanciful as may seem at first sight. Indeed questions of “faith” are still being raised in the theoretical battles still being waged over ground that has certainly been trodden before. Witness the recent literature concerning the efficacy of the aggregate production function in Felipe and Fisher (2003). They show definitely (again) the problems of aggregation and the impossibility of testing empirically an aggregate production function, this time for a new audience of applied economists. The question (again) they raise is how it is the discipline can continue to utilize a vacuous concept without foundation: “the result has been that aggregate production functions have made an untroubled reappearance in mainstream macroeconomics since the 1980’s.” The authors make clear the gravity of this problem a few sentences later: “The younger generation of economists remain ignorant of these problems [with the aggregate production function], with the consequence that bad habits and bad science breeds bad economics and bad policy advice” (Felipe and Fisher 2003, p. 211).9 Temple (2006) takes a similar (though not exact) position when he addresses how empirical growth research might avoid the aggregate production function, although he does admit that aggregate production functions “can be useful even when their assumptions are unrealistic and cannot be formally justified” (Temple 2006, pg. 301). Heathfield and

6 Ferguson 1968a, Neoclassical theory of technical progress and relative factor shares, Southern Economic

Journal: “I will show in a forthcoming paper [this is published as Ferguson and Allen (1970) – SC] that if the labor intensity condition is satisfied, and if the composition of demand is responsive to relative commodity price, the heterogeneous capital model yield the same factor-price frontier as the ‘neoclassical fairytale’. In this case the Samuelson-Solow defense of the simplified model is a defense indeed. If nothing else, this indicates a direction that empirical research could take” (Ferguson 1968a, pg. 502). 7 Ferguson did not stay strictly confined to capital theory in the years leading up to his death. His work on input demand functions and the role of “inferior factors” in long run marginal costs functions, mostly collaborations with Charles Maurice and Thomas Saving, needs also to be mentioned in this context. Full development of each aspect of Ferguson’s professional interests and contributions will be developed below. 8 See Mirowski (1989, pg. 343), Michl (1986, pg. 532), Blaug (1992, pg. 181), Felipe and Fisher (2003, pg. 213), to cite just a few. However certain writings subsequent to NTPD do address theoretical defenses for the neoclassical model as well. In Ferguson and Allen (1971) reswitching is cast in terms of the implications around the switchpoint for both factor as well as product prices where “the likelihood that the neoclassical relation…holds is much greater than it would otherwise seem” (pg. 109). In Ferguson (1972b) refuge for neoclassical theory is taken in the arbitrage principle inherent in the social rate of return on investment concept Solow got from Fisher. 9 This statement certainly gives an ominous ring to the remark by Joan Robinson in the 1953 article that started it all that “sloppy habits of thought are handed on from one generation to the next” (Robinson 1953, pg. 81).


Wibe (1987) take the other side of the debate: “Whatever merits or flaws the neoclassical production model may have it is indisputably the dominant model and economists require to have some understanding of it” (Heathfield and Wibe, 1987, pg. xi). Birner (2004) identifies this continuing conflict as a major impetus for his history of science study in the Cambridge controversies.10 Faith it seems dies hard. The preponderance of techniques and modes of analysis that have dubious theoretical content for the purpose in which they are directed may require as much. Certain of these themes will be touched on in the following pages as we trace Ferguson’s professional life. No restatement of the capital controversies will be attempted nor will the details of the recent debate be discussed in the detail with which they require. Our task here is relatively simple: we are simply interested in the intellectual development of this neoclassical figure whose name remains associated with the faith of its tenets. What we hope to give the reader is a better account of who he was and what other contributions he made. We find in Ferguson’s work as a complete body three main strands: (i) analytical dialogue with and development of theoretical arguments and propositions, (ii) empirical tests of many of these propositions, and (iii) their pedagogical exposition. In terms of the theory developed, two main sub-fields emerge: (a) applied welfare economics and the theory of the firm (including theories of oligopoly) and (b) those of functional income distribution and distributive shares, capital, and growth, including empirical tests of CES production and cost functions. In both of these subfields Ferguson engaged in both theoretical and empirical analysis. The remainder of this essay is organized as follows. The next two sections develop each of the above two subfields. Section II develops Ferguson’s early work on market structure, market classification, economic policy and the applied welfare economics. The main time span here runs from the early work in 1958 through the completion of his 1964 book in 1962 (the Preface of that book is dated November 1962). Also included here are certain novel arguments put forth in his first principles text, co-authored with Juanita Kreps (Ferguson and Kreps, 1962), which give a particularly clear first statement of the basic theme of that book. Section III moves to the analysis of distributive income shares, the theory of growth, the theory of capital and related debates, and several empirical tests of CES and Cobb-Douglas functions. This period begins immediately after the completion of his book in 1962 and takes us through the rest of his professional life. This last decade of Ferguson’s life included both theoretical advances and empirical tests of the received theory and throughout it all are lively rhetorical and analytical exchanges with both sides of the literature as well as actual exchanges and debates with some of the most important contributors to that literature. The fourth and final section concludes

10 In this work the Cambridge controversies are a methodological case study in the development of scientific discourse and scientific knowledge. In this study Birner considers 15 articles which appeared on both sides of the Cambridge debates. It is significant that one of those 15 includes an article by Ferguson, co-authored with Robert F. Allen (Ferguson and Allen 1971), and that Birner places a great deal of emphasis on the impact this article had in the overall debate. We discuss Birner in some detail below


II

Applied welfare economics and the theory of the firm Ferguson’s first publication, “Alternative standards of taxable excess profits”, appeared in 1952 in the Southern Economic Journal. Based on his 1951 Master’s Thesis, the subject matter was quite the current event in that the US Congress had in December of 1950 passed the Excess Profits Tax Act of 1950, one of three spending bills passed by the Congress in order to meet the revenue needs of the Korean War . Throughout the law’s history there was a tremendous amount of controversy regarding the proper standard by which an “excess profit” should be measured and it is this question that Ferguson addresses in his work. The issue here is one of determining what profits were “excess” and hence subject to the tax, and what profits were “normal” and hence exempt (the legislation termed this “excess profits credits”).

Two themes stand out in this early work by Ferguson. The first concerns is more technical and concerns the construction of alternative standards for excess profits taxation to that of invested-capital and average earnings, and in this he introduces four distinct new ones. The second theme takes on an explicitly “ethical” stance in favor of excess profits taxation. In terms of the latter, Ferguson remarks that an excess profits tax “is a fiscal instrument for preventing and penalizing windfall gains and wartime profiteering…[whose]…basic purpose…is not the provision of revenue, but the satisfaction of an ethical principle: that no one should be allowed to reap excess profits as the result of a national emergency” (Ferguson 1952, pg. 211). Clearly here we find in the early Ferguson an interest in distributive justice, a theme that will remain with him even as he grows more (indeed staunchly) conservative later in life.11

Ferguson (1957b) enters into the discussion on the efficacy of profit maximization in terms of how the firm actually engages in pricing decisions as opposed to what it is theorized under the perfectly competitive norm. This is related to the so-called “marginalist controversy” which began in the early 1940’s and continued until the end of the 1960’s. The basic premise of this critique had to do with the lack of an institutional foundation and empirical verifiability of economic decision-making within firms according to principles of standard profit-maximization associated with the equality of short run marginal cost with marginal revenue. Accordingly this buttressed theoretical developments on many fronts: the theory of imperfect and monopolistic competition, the theory of oligopoly and the role of price stickiness in the development of the kinked demand model, and the emergence of the post-Keynesian and the managerial-behavioral theories of the firm. Screpanti and Zamagni (2005) note that through developments in the late 1960’s the results of the “controversy” led to two lines of research: that dealing

11 Ferguson was influenced early by the socialistically-inclined theories of welfare economics such as those of Enrico Barone, Abba Lerner, and Harold Hotelling. Hotelling’s (1938) notion of the marginal principle (administered even by a socialistically-inclined government) as one that can provide more rational allocation than the “chaotic” market forces (the excess capacity debate) especially should be mentioned (See Ferguson 1956, 1957b).


with the nature of the firm as an organization and that dealing with non-price policies of firms such as innovation, advertising, etc.12 At the time of Ferguson’s article in 1957, one major area of development in the critique of the marginal pricing principle were those of so-called “full-cost” or “average-cost” pricing. The idea of full-cost pricing began in the immediate pre-war period of the late 1930’s with a series of exchanges in the pages of the Oxford Economics Papers and for this reason these developments have been dubbed the Oxford studies in the price mechanism after the publication of a compilation of important papers presented in a 1951 volume of the same name (Wilson, T and Andrews, P.W.S. (Eds.) (1951). Oxford studies

in the price mechanism. Oxford Clarendon Press). The seminal article is Hall and Hitch (1939) who in the 1930’s sampled a total of 58 firms (the “Oxford Economic Group”) the results of which for the authors “cast doubt on the general applicability of the conventional analysis of price and output policy in terms of marginal cost and marginal revenue, and suggests a model of entrepreneurial behaviour which current economic doctrine tends to ignore” (Hall and Hitch 1938, pg. 12). In place of the marginal pricing principle, Hall and Hitch erected (or, as they would argue, discerned by way of empirical observation) a pricing principle based on average (full) costs. Full-costs included average direct costs (assumed to be constant over a relevant rang of output), average overhead costs, and a margin for profits. This of course led in the direction of mar-up pricing and on that score the full-cost principle had great influence on the various measures of the “degree of monopoly” such as Bain’s measure of supernormal profits (Bain 1941). In this early paper Ferguson notes that the institutional factors that justify full over marginal cost as a pricing principle were on the one hand inter-commodity substitution (and in general the role of product differentiation) and on the other the threat of potential competition and hence efforts to limit new entrants into the industry. In this particular paper Ferguson holds the former as negligible and presents two static models of the latter.13 The models are duopolist/oligoplist with the reaction functions measured in terms of coefficients of conjectural variations14, a concept Ferguson attributed to Ragnar Frisch (1951) as introducing into economic literature (pg. 273). The two models are (1) a model where the duopolist regards the level of competitive reaction as a function of its own level of profit, hence profit in this instance is the sole “parameter of action” for the duopolist and (2) a model where the duopolist’s parameter of action is not profit but

12 These lines of analysis were conducted by both the post-Keynesians as well as the managerial-behavioral theorists. In terms of the former see the seminal piece by Bain (1957) as well as Bain (1943) and (1949) and especially Eichner (1976). In terms of the latter see the work by Baumol (1959) and Marris (1964) and Williamson (1964). Herbert Simon’s work (1957) on the firm as an “adaptive organism” engaging in “saticficing bevavior” consistent with bounded rationality of any agent discussed many of the non-price policies of firms We will speak more of this below. 13 We do find Ferguson interested in market classification, especially in early collaborations with Pfouts. See Pfouts and Ferguson (1960b, 1961). We discuss this below. 14 The literature on conjectural variation and duopoly has certainly grown in the years since 1957 and was especially fruitful in the late 1970’s and early 1980’s. See Kamian and Schwartz (1983), Bamness (1979), Bresnahan (1981), Boyer and Moreaux (1983), and Perry (1982). (see the Boyer and Mareaux 1983 for the refereced cites).


rather price. In both instances Ferguson constructs the structures of the model to incorporate the full-cost pricing rule of firms in efforts to stave off entry into the industry. In the profit-deterrent model Ferguson states that “perfect competition must prevail in order to insure average-cost pricing in equilibrium” (Ferguson 1957b, pg. 280). In the price-deterrent model a similar conclusion is reached15. Ferguson concludes with his belief that his static models “are sufficient to show the improbability of average-cost pricing, when that policy is attributed to the desire to thwart potential competition” (Ferguson, 1957b, pg. 283). {Develop literature review of articles:

Theory of Oligopoly:

Ferguson (1959) “Some remarks on dynamic price theory” Jährbücher für

Nationalökonomie Pfouts, R. W. and Ferguson, C.E. (1959). Market classification systems in theory and policy, Southern Economic Journal, Vol. 26, No. 2; pp. 111-118. Ferguson, C.E. (1962b). Cournot points and the conflict curve, Ferguson, C.E. (1962b). Cournot points and the conflict curve, Review of Economic Studies, Vol. 29, No. 2; pp. 151-153.

Early empirical studies

Ferguson, C.E. (1960d). The relationship of business size to stability: An empirical approach, Journal of Industrial Economics, Vol. 9, No. 1; pp. 43-62. Ferguson, C.E. (1958b). A statistical study of urbanization, Social Forces, Vol. 37, No. 1; pp. 19-26 Some theoretical and pedagogical endeavors Ferguson, C.E. (1958a). An essay on cardinal utility, Southern Economic Journal, Vol. 25, No. 1; pp. 11-23

15 Actually Ferguson develops two forms of the price-deterrent model: one when price is the sole parameter of action and the other when other parameters of action along with price introduced. In the single parameter case “we found that average-cost pricing prevails of the elasticity of average cost equals the reciprocal of the total elasticity of demand in a region of decreasing costs” whereas when other parameters are introduced “average-cost pricing never occurs expect under conditions of perfect competition” (Ferguson 1957b, pg. 284).


Ferguson, C.E. (1958c). An analogy between Marshall and Keynes, Meteroeconomica, Vol. 10, No. 1: pp. 3-6. Ferguson, C.E. (1960a). A note on elasticity, Southern Economic Journal, Vol. 26, No. 3; 239-240 Ferguson, C.E. (1960c). Substitution effect in value theory: A pedagogical note, Southern

Journal of Economics, Vol. 26, No. 4; pp. 310-314. Ferguson, C.E. (1962c). Transformation curve in production theory: A pedagogical note. Southern Economic Journal, Vol. 29, No. 2; pp. 96-102 }


A Macroeconomic Theory of Workable Competition16

Ferguson’s first book (1964a) was an attempt to connect a particularly novel macroeconomic approach to both welfare economics as well as market structure, the latter specifically around J.M Clark’s notion of “workable competition”, to then-emerging research critical of Pareto optimality dubbed the “theory of the second best”, the inaugural paper of which is Lipsey and Lancaster (1956).17 We develop this idea in detail below, but this aspect of Ferguson’s work had a lasting impact on theories of industrial organization (see especially Gavin Reid’s 1987 Theories of Industrial

Organization). In the Preface Ferguson writes that:

“In a tolerant academic community, everyone is permitted an occasional excursus outside his principal field of interest. This is mine” (Ferguson, 1964, pg. vii).

That he would attempt such an excursus speaks we argue to the unsettled state of the theories of market structure and welfare economics at that time, a point we will develop below. In terms of structure, the work is broken down into two parts: Part I develops the theoretical arguments that in Part II are subject to empirical testing. Its basic premise is to unify certain elements in economic theory with economic policy, or perhaps better said it attempts to operationalize certain theoretical conceptions related to aggregate social welfare, actual market structure, and economic policy. The ideas put forth in this book are quite novel18, especially as regards the aggregate conception of social welfare and the rejection of the microeconomic foundations of both the theory of social welfare and social choice as well as market classification and structure. The three themes of this book, all treated separately, are the following:

1. The “theory of the second best” provides a powerful critique of Pareto optimality. It basically states that if in a general equilibrium context one of the conditions is not met (i.e. one market does not clear), then it does not follow that the second best scenario be the resulting sub-optimal Pareto

16 This section was first drafter prior to the writer’s knowledge that this was Ferguson’s 1957 dissertation. Indeed while at Duke we intend to spend an afternoon at the UNC Chapel Hill library reading through his dissertation, etc. The next version of this section will reflect this research. 17 Although Peter Bohm (1987; “second best” in New Palgrave Dictionary) notes that the idea itself was not necessarily novel and one can find elements of it in various forms in earlier literature (Bohm, 1987, pp. 280-281). The same holds true for Clark’s notion of workable competition. One especially interesting example of this latter concerns Dennis Robertson’s 1950 comment on the reprint of his 1924 article in the AEA’s 1952 collection Readings in Price Theory. The 1924 article itself speaks to the “empty economic boxes” controversy begun by Clapham’s (1922) critique of returns to scale, mostly along the lines of a lack of empirical applicability and relevance. The debate included Pigou and represents the pre-Sraffa (1926) rumblings against Marshallian partial equilibrium analysis. In the 1950 note Robertson remarks that:

“The reader is begged to remember that this 26-year-old article belongs to the pre-Sraffa, pre-Chamberlin age. In gratefully giving my consent to its reprint, I must not be thought to be offering any defense either to its style or of its contents…Nevertheless, however unconvincingly formulated, I think that my instincts to cry against the excesses of ‘marginal cost pricing’ and to appeal for a more ‘workable’ concept of competition, were sound, and even look rather surprisingly up-to-date!” (Robertson, 1950, pg. 143).

18 One reviewer speaks of a Ferguson “revolution” (Haveman, 1965, pg. 388).


situation. This provided economists interested in economic policy to abandon the so-called “piecemeal approach” advocated by many free-traders and those of liberal thought.19

2. Much of the problem of linking economic policy to economic theory is that the latter is flawed at least in terms of the empirical viability of the concept of perfect competition. Thus Ferguson adopts the idea of “workable competition” and seeks to redefine workable competition in a manner more consistent with its application, one that is more macroeconomic in character.20

3. Welfare economics also had developed amongst such great controversy that by 1960 its very relevance and existence was in question.21 This was for Ferguson a result of the microeconomic character of welfare economics, both “old” and “new”. Accordingly a new concept of social welfare and the social welfare function (SWF) needs to be developed that focuses on macroeconomic categories of analysis, again with economic policy explicitly in mind. Here Ferguson relies very heavily on his interpretation of Jan Tinbergen (1956) on economic policy and economic theory.

It is very important to contextualize the theoretical milieu and state of the debate in 1962 when considering the developments Ferguson attempts to make in his book. We conjecture that he entered into this “excursus” because of the uncertain nature of the above aspects in neoclassical economic theory and this we argue relates to his emphasis logical consistency, practicality, and unification of diverse elements and traditions. As one illustration of this consider the third theme above. Nowhere are we arguing that this macroeconomic SWF is “more correct” than the microeconomic SWF. Indeed Ferguson’s macro approach was never adopted in the literature. However, in terms of history of thought, that he developed a novel approach to this problem is interesting in and of itself, and further that given the state of theoretical welfare economics at the time, such a novel approach supports our view of Ferguson.

19 We will return to this below, but the relevant point in terms of economic policy derived from the theory of the second best considered the possibility that if in a sub-optimal Pareto situation where an “imperfection” exists in one market or area of the economy, the policy makers may advocate inducing an “imperfection” in another market or area of the economy to counter-balance the initial discrepancy (thus moving further away from Pareto optimality). 20 This too will be returned to below but here it should perhaps be underscored that one major difference between “imperfect competition” and “workable competition” can be discerned from the semantics. An “imperfect” market still has behind it the notion of “perfection”, hence policy should be geared to the removing the “imperfection”, usually be the advocation of “free” markets. A “workable” market does not have the negative connotation and accordingly has no idealized concept of what constitutes “perfect” and this allows the theoretician qua policy maker to entertain and develop more nuanced notions of market structure, etc. The basic critique of perfect/imperfect competition advanced here has an interesting Classical/Marxian expression as well seen in the works of Eatwell (1983, “Competition”), Semmler (1988?, Competition and Differential Profits Rates), Shaikh (1982 “Notes of Dobb”), and Botwinick (1988? ). 21 One researcher speaks of “nihilism” in much of the work on theoretical welfare economics following the publication of Arrow’s “Impossibility Theorem” in 1951. Mishan’s (1960) survey of the literature from 1939 to 1959 especially makes this point.


As indicated above, a forceful statement of the basic premise of the 1964 book is found: Chapter 35 of Ferguson’s first text; that co-authored with Juanita Kreps (Ferguson and Kreps, 1962).22 There the role of economic policy is brought to the forefront in an attempt to “resurrect economics as a policy science” (pg. 730). A critique of the microeconomic approach to both workable competition and social welfare is explicitly advanced. Two quotes illustrate this quite nicely

“With its microeconomic orientation, the existing concepts of workable competition rely upon the same approach to welfare as the conventional theory of welfare economics. At the same time, they sacrifice the simplicity and generality of the purely competitive norm. It does not seem unfair to conclude that workable competition presents one with an ill-defined sort of ideal as a norm for welfare judgments. And even then, it is not a fault of the ideals, for ideal – just as Gertrude Stein’s roses – are ideals. Rather it is the fault of this microeconomic

approach to social welfare” (Ferguson and Kreps, 1962, pg. 729; emphasis added).

“The problem arises from the fact that the older approach to welfare economics had been pushed to the point where an economist could only contemplate rather philosophical existence theorems. Tinbergen proposed to cut his way through this morass by taking an entirely different approach to welfare economics…The fundamental stumbling block of the older approach was associated with its microeconomic orientation. If one begins with individual preferences for commodities and income distribution, he can go no further because of the basic conflict of individual interest, especially over the distribution of income. Tinbergen proposed to shuck this approach in favor of a macroeconomic one. Rather than beginning with the individual, he started with the economy as a whole. And instead of analyzing individual preferences he concentrates attention

on the dominant goals (targets or objectives) of the economy” (Ferguson and Kreps, 1962, pg. 731; emphasis added).

These comments represent a very forceful statement of the main thesis in Ferguson’s 1964 book. Indeed the tone is somewhat lower in the latter. Let us now consider some of the theoretical issues involved.

Social welfare functions and the state of welfare economics circa 1960 Let us begin with the novel development of an alternative approach to social welfare that is macroeconomic in character. In order to properly contextualize Ferguson’s contribution, we must remember that at the time of his writing this book (late 1950’s through 1962) theoretical welfare economics had been through 20 years of serious contention and controversy, beginning in 1939 with the establishment of “newer” welfare

22 One interesting question is the role of Kreps in developing this basic premise. Indeed her archives are of those that we wish to consult upon our arrival at the Duke University Economics Papers Project (EPP).


economics over the “older”, and culminating in 1951 with Arrow’s Impossibility (or Possibility) Theorem.23 Conceptually, the branch of economics called “welfare economics” has a very long history, dating as far back as Adam Smith and the Physiocrats (see Feldman, 1987, pg. 889; Ferguson, 1964a, pg. 3; Samuelson, 1947, pg. 203). The basic idea in its early inception was the notion that unfettered free trade resulted in an overall improvement of the conditions of life and well-being in the nation (Adam Smith’s “invisible hand”). In the hands of early marginalists such as Walras (), Edgeworth (?), Marshall (?), and Pigou (1920), welfare economics became primarily concerned with the theoretical problems of utility; specifically they asked the question of how total welfare or utility of society can be maximized, the answer to which they inextricably linked to perfectly competitive markets: social welfare is maximized only when perfect competition characterize all markets in a Walrasian general equilibrium context, and public policy should be geared towards the elimination of “imperfections” in markets such that welfare maximization can result. In this “older” welfare economics, community or social welfare was held to be the some function of the individual utilities of each of its members, and here an implicit social welfare function (SWF) was posited as a summation of the individuals’ cardinal utilities, which necessitated the possibility of interpersonal comparisons of satisfaction. The older welfare economics considered two main problems involved in utility maximization: the proper allocation of resources and the proper distribution of income. Both of these elements to the cardinalist related to maximum social utility. But a particular problem with the cardinalist framework concerned the issue of income distribution. Analogous to the “final degree of utility”, it was possible to show that with admitted interpersonal comparisons social welfare would be maximized only after some program of income redistribution was instituted because only with such redistribution would the marginal utility of income be equal for all members of the community (the latter being a necessary condition for social welfare maximization implicit in the “old” theory). The problem of income distribution did not sit well with the next generation of marginalist economists. Taking the framework first derived by Pareto, the “new” welfare

23 We shall not even attempt a survey of the vast literature surrounding developments in welfare economics and social choice theory. Our purpose here is the quite limited one of indicating the state of the debate and controversy in the specific time period Ferguson drafted his book, namely the early 1960’s. Important for our purposes is not the development in welfare economics especially subsequent to this period, the literature of which is also vast. Rather we are concerned with the fact that at this time (1960) the state of the theory was in major flux and surrounded by much uncertainty. It is precisely due to this uncertainty that we argue Ferguson attempted his own reconciliation of the contentious issues involved. For more modern treatments of welfare economics and references to the most important literature the reader is referred to the collection of important contributions in Sen (1982), the entries of “social choice”, “welfare economics” “Arrow’s theorem”, “social welfare function” and “compensation principle” in the New

Palgrave Dictionary of Economics (Sen; Feldman; Arrow; Suzumura; and Chipman, 1987, respectively), Arrow’s tribute essay to Paul Samuelson (Arrow, 1983, “Contributions to Welfare Economimcs: in E. Cary Brown and Robert Solow (Eds.) Paul Samueson and Modern Economic Theory McGraw Hill: New York) and the text by Boadway and Bruce (1984). Dobb’s 1969 book on welfare economics and socialism should also be mentioned in this context, however it is somewhat dated. Also see Mishan (1960) for a meticulous survey of the literature from 1939 to 1959.


economics constructed an ordinal approach to utility with which they defined maximization of welfare as a situation where no further increase in utility of any individual is possible without making any other member of the community worse off ; this they called “Pareto Optimality”. Maurice Dobb notes, “the watershed between ‘old’ and ‘new’ [welfare economics] turned on the so-called ‘denial of the possibility of interpersonal comparisons’” (Dobb, 1973, pg. 240). The “newer” welfare economics was initiated by Robbins in his 1932 book Essay on the

Nature and Significance of Economics Science. This epistemological critique redefined of the scope of economics away from the cardinal structure to one of pure ordinality. Screpanti and Zamagni (2005) note that:

“If, as [Robbins] argued…,’the unity of subject of Economic Science’ must be found in ‘the forms assumed by human behaviour in disposing of scarce means’, then the utility concept most suited to the study of economic welfare must be that of ‘individual preferences’. Since utility, by its very nature, cannot be observed, let alone measured, Robbins argued that it deprives of scientific foundation every assertion about the effects of redistributive measures on collective welfare” (Screpanti and Zamagni, 2005, pg. 291; emphasis added).

In rejecting interpersonal comparisons, Bergson (1938), Hicks (1939), and Samuelson (1947) formally derived the conditions behind the ordinalist conception of utility and the conditions of Pareto Optimality. A modern expression of this difference is quite illustrative. From Varian (2006) we find the following expression of each type of function:

Classical Utilitarian or Benthamite SWF: ( )1

1

, ,n

n i

i

W u u u=

=∑…

Bergson-Samuelson SWF: ( ) ( )( )11 , ,nnx xW W u u= …

The first equation states that social welfare is some additive function of individual utilities, requiring a cardinal measure. The latter equation states that individual i’s utility is a function only of the amount she actually consumes (xi, where xi = the commodities for individual i in aggregate commodity allocation x). The assumption of well-behaved utility functions and perfect competition assures for the Bergson-Samuelson SWF Pareto optimality, welfare maximization, and zero consumption externalities.24 In his 1959 exhaustive survey of extant developments in welfare economics, Mishan argued that it “suffers from an unevenness in its developments, a lack of homogeneity in its treatment, and…a distressing disconnection between its parts” (Mishan, 1959, pg.

24 See Varian, 2006, Chapter 33, sections 33.2-33.4. Also it is important to note that each of the above two SWF’s involve microeconomic determinants; whereas we have seen that the novel contribution Ferguson made to this debate is the conception of a SWF that is macroeconomic in character and hence he rejects both the “old” and the “new” social welfare functions as written above.


197). The debate that continued over interpersonal comparisons and the controversy over the Kaldor-Hicks-Scitovsky compensation principle which attempted to solidify the basis for the “ordinalist” foundations,25 the lingering problem of income distribution and social welfare, and especially the publication in 1951 of Kenneth Arrow’s book on social choice and the resulting “Impossibility (Possibility) Theorem”26 all contributed to the sorry state of affairs of theoretical welfare economics by 1960. Mishan reports that:

“Arrow’s sweeping essay on social choice added to the skepticism which gathered force in the 1950’s, so that when Graaf’s thesis appeared in 1957, its elegant

nihilism did little more than reflect the prevailing mood” (Mishan, 1960, pg. 218; emphasis added). And “Arrow concludes that, in general, a rule for passing from individual orderings to a social ordering consistent with his ‘reasonable’ conditions cannot be found. Consistency would require an imposed or dictated social-welfare function…Arrow’s thesis caused some stir in academic circles. Several papers were published, productive more of symbols than of substance, urging modifications of Arrow’s conditions in the attempt to keep the social-welfare function from expiring” (Mishan, 1960, pg. 237; emphasis added).27

25 The “compensation principle” was first applied by Kaldor (1939), and later Hicks (1939). Scitovsky (1941) extends is further. The basic gist of this principle argued that the “potential welfare” is what needs to be maximized and that this “potential” can be attained if those who would be worse-off by an allocation and/or distribution could possibly be “compensated” by those who are better off to keep the “losers” at their same level of utility. Social welfare is maximized in such a state whether or not the actual compensation is paid. We read again from Screpanti and Zamagni:

“”[A] reason for the success of the ordinalist programme was directly related to welfare economics and the ‘discovery’ in the 1930’s of the virtues of the Pareto optimality criterion, the most valuable being that there is no need for any interpersonal comparisons of utility; and this seemed to allow certain economic recommendations even when comparisons are impossible. The main recommendation was that ‘the best policy is no policy’. The Pareto criterion seemed to have translated into a scientific proposition the central tenet of liberal thought. It is truw, as was immediately realized, that there may be many social optima, perhaps an infinite number, and therefore that ‘scientific’ criteria are also needed to make a choice between them. But this did not

cause much concern: the ‘compensation tests’ proposed by Hicks, Kaldor, Scitovsky, and

Samuelson, the real theoretical novelty of the 1940’s on this front, seemed to fill the gap” (Screpanti and Zamagni, 2005, pg. 293).

All of this had the effect of downplaying the distributional ethic in social welfare. Although not relevant for our purposes it should be mentioned that certain theories of social justice and the relation to welfare economics have dealt with and continue to deal with the distribution question. Tingergen (1957) is very insistent on this point; the more recent work of Sen (Rawls, etc.) and others also speaks to this. See note #? above. 26 Arrow’s theorem basically proved that a social welfare function that consists of ordinal rankings of different social outcomes according to conditions consistent with the New Welfare Economics cannot exist. 27 Mishan cites in a footnote to this passage the works of Hildreth (1953), Wheldon (1952), Kemp and Asimakopulos (1952), and Inada (1955). It should perhaps be noted that both Wheldon and Kemp and Asimakopulos propose a “constitution function” that is based in cardinal utility. Ferguson in his 1958 “An Essay on Cardinal Utility” adopts a very interesting (novel?) probalistic approach to the question of


Thus was the state of theoretical welfare economics when Ferguson wrote his excursus. He reviews much of the relevant literature on welfare economics extant in the first chapter and works through the various arguments, contributions, and debates in the theory. From this he concludes that the microeconomic approach to social welfare involving perfect competition and ordered Pareto optimal allocations of commodities based on some aggregation of individual ordinal utility functions is fundamentally flawed. In this he takes Arrow’s impossibility theorem as a point of departure, and unlike Sameulson28, accepts the conclusion that social welfare functions so constructed cannot exist. We read from Ferguson (1964):

“Using symbols of symbolic logic, [Arrow] examined a social welfare function based upon the individualistic ethic of Western society and upon certain consistency axioms. He found that there could not exist a welfare function satisfying these conditions…Consequently Arrow’s original result still holds: a social welfare function of the conventional form, which satisfies the individualistic properties he requires, cannot exist” (Ferguson, 1964, pp. 10-11).

In the place of the individualistic social welfare function Ferguson develops one that is macroeconomic in arguments that, citing Jan Tinbergen, he calls “targets”. Ferguson defines maximization of this welfare as occurring when the macroeconomic arguments chosen are closely adhered to: “Welfare maximization and target attainment are simply two different approaches to the same problem” (pg. 71) and “…target attainment is tantamount to social welfare maximization” (pg. 74). The basis of this macroeconomic

cardinal utility in terms of multidimensional utility analysis extended from von Neuman and Morgenstern’s theory of cardinal utility analysis. This latter idea speaks to an ordered hierarchy of wants expressed as a vector in the preference index function. In 1965 (“The Theory of Multidimensional utility analysis…” – this is 1965a) Ferguson synthesized much of the literature of what was also called “lexicographic ordering” and there denied cardinality as necessary condition for such ordering:

“[I]t is…interesting to observe that the theory of multidimensional utility analysis, originally developed in the context of and for use in problems associated with cardinal utility analysis, can be adapted for use in an ordinal setting” (Ferguson, 1965a)

28 In the Forward to de Graaf’s monograph on theoretical welfare economics (dated May 1967), Samuelson writes the following:

“I wish to make it clear that it is not true, as many used to believe, that Professor Kenneth Arrow of Stanford has proved ‘the impossibility of a social welfare function’. What Arrow has proved…is the impossibility of what I prefer to call ‘a political constitution function’, which would be able to resolve any interpersonal differences brought to it while at the same time satisfying certain reasonable and desirable axioms. This Arrow result is a basic theorem of what might be call ‘mathematical politics’ and throws new light on age-old conundrums of democracy. But it does not detract, I believe, from the Bergson formulations nor from the lasting value of the present work” (Samuelson’s Forward in de Graaf, 1967, pg. vii-viii).

The Bergson-Samuelson social welfare function is today quite standard and will be developed below. The “age-old conundrum” Samuelson refers to is known as the Condorcet (?) Principle and involves…


social welfare function Ferguson derives from developments Tinbergen made in the early to mid 1950’s on the relationship between economic theory and economic policy.29

Ferguson on Tinbergen and economic policy Tinbergen links economic policy to welfare variables which themselves are functions of instrumental variables. These welfare variables are seen as target variables and the role of economic policy is to manipulate the instrumental variables in such a way as to satisfy the proposed targets. Ferguson explicitly links the attainment of the targets with maximization of social welfare and attributes this to Tinbergen:

“While maximizing a social welfare function is undoubtedly the ultimate purpose of government policy, Tinbergen feels that this can often be accomplished in a practical way by prescribing fixed values for some of the variables in the function and treating them as targets” (Ferguson, 1964, pg. 18).

Tinbergen himself proposes that the economic policy (hence targets) adopted be that of the policy maker herself, something that is tantamount to a “dictator”. Ferguson himself accepts this conclusion (“the welfare function implied by the target-attainment approach is most logically interpreted as a dictated social welfare function”, pg. 72) but in a qualified sense. For Ferguson the “dictated” social welfare function results from decisions made – and formally voted upon – by the legislative branch of government in a modern industrial democracy.30 Ferguson develops the construction of such a social welfare function in a section where the question of interpersonal comparisons are considered, and for Ferguson adopted.

29 Three works from this period stand out: On the Theory of Economic Policy (1952), Centralization and

Decentralization in Economic Policy (1954), and Economic Policy: Principles and Design (1956). It is from the 1956 publication that Ferguson draws on. In a review of Tinbergen (1956), Kemp remarks that:

“[This] latest book on economic policy summarizes, extends, and largely replaces his two earlier volumes on the same subject. His concern is not with the ethical foundations of the subject, that is with the fairness of economic policy, but with the problem of formulating consistent and efficient economic policies” (Kemp, 1959, pg. 347).

This formulation of consistent economic policies in Tinbergen applies to Ferguson as well. Tinbergen’s book is very thorough and novel and includes 20 different economic models of various levels of abstraction. For example, Model 08 is called “CLOSED, STATIC, MICRO MODEL FOR INCOME DISTRIBUTION”. This is the model that Tinbergen uses in a subsequent article on income distribution and welfare economics (Tinbergen 1957 “Welfare Economics and Income Distribution”, AER). Thus the particular economic question Tinbergen was interested in 1957 – namely the welfare implications of income distribution (which we noted as a major area of contention) – necessitated the use of the particular economic model (# 08) of which the question was best suited. It would not have made much sense for him to use Model 03 “CLOSED, STATIC, MACRO MONEY, PRODUCT AND FACTOR FLOW” for this question, but that does not mean that Model 03 is not relevant – indeed it is but for a different set of questions at a different level of abstraction. This one-size-does-NOT-fit-all approach is very refreshing indeed, especially with respect to the nexus between economic theory and economic policy. 30 Ferguson approaches voting in a modern industrial democracy strictly within the American context – namely majority rule; proportional representative democracies such as those in Europe, etc., are not considered. This idea is developed further below, but this is another example of the American approach to the problem, especially when it is seen in tandem with the other uniquely American concept of workable competition.


The general approach to the macroeconomic SWF adopted by Ferguson is well illustrated in the following adaptation of the argument in Tinbergen.31 Suppose that the economic system contains a collection of target welfare variables (Ti) which are expressed as functions of instrumental variables (Ii).

a. Instrumental variables (Ii) defined as the input variables of a particular target

[ ] th

1, , ; i instrumental variablen iI I I I= =�

…

b. Target variables:

( )1, , target variable

transformation function of instrumental variables into economic policy target

j = 1, ,m

th

j nT I I jφ

φ

= =

=

…

…

c. Policy Maker’s Social Welfare Function:

( )( ) ( ) ( )( )1 1 1

1 1

1 1, , ,

, , , ; , ,

, , , ; , ,n n n

j m i n

j m i nI I II I I

W W T T T I I I

W W I I Iφ φ φ

=

= … … …

… … … …

… … … …

d. Constrained optimization problem:

( ) ( ) ( )( )

( )

1 1 11 1

1

, , ,

Maximize:

, , , ; , ,

Subject to:

, ,

n n nj m i n

i n

I I II I IW W I I I

I I I I

φ φ φ=

=

… … …… … … …

… …

Ferguson adopts this general approach to social welfare. His basic social welfare function, to be developed below, consists of the attainment of four macroeconomic targets; (i) high and stable employment (E), (ii) stability of the price level (P), (iii) economic growth (Y), and (iv) the absence of coercive market power (MP).In terms of the framework above, Ferguson’s SWF can be written as the following:

a. Instrumental variables:

th

th

th

= structure of i firm

= structure of m union

= industrial concentration of j industry

i

m

j

f

u

c

31 This section is adapted from Kemp’s review of Tinbergen (Kemp, 1959, pg. 349). In truth Kemp’s was a review of four different books that dealt with economic policy: ….


b. Target variables:

( )

( )

( )

( )

Stable employment

, ,

Stable price level

, ,

Stable economic growth

, ,

Market structure (degree of monoply)

, ,

E i m j

P i m j

Y i m j

i m j

E

E f u c

P

P f u c

Y

Y f u c

f u cµ

φ

φ

φ

µ

µ φ

=

=

=

=

=

=

=

=

c. Ferguson (Macroeconomic) Social Welfare Function:

( ), , ,W W E P Y µ=

d. Constrained optimization problem:

( )

( )

Maximize:

, , ,

Subject to:

, ,i m j

W W E P Y

f u c

µ=

This is the general approach that Ferguson takes regarding the social welfare function. Below we will consider the three different models of this general framework that he presents.32 At this stage let us now consider the second theme of workable competition Ferguson develops in his analysis. Market Structure and Workable Competition

Ferguson’s novel definition of workable competition is integrally linked to the macroeconomic optimization problem of the Ferguson SWF above.33 He writes that

32 In the third chapter he provides three different interpretations of the social welfare function. He discusses the proxy interpretation, the dictatorial interpretation, and the multidimensional interpretation. The latter is formally developed in the appendix to the chapter and utilizes the analytical framework of multidimensional utility analysis (see note #20) adopted for the particular macroeconomic policy targets and instruments. Also we will present another attempt by Ferguson to develop this macroeconomic approach to the SWF; see Ferguson, 1961a, “Measuring changes in community welfare”, Metroeconomica 13(1), pp. 1-11 33 Generally speaking, linking theories of market structure to theories of social welfare is standard fare: e.g. the Bergson-Samuelson SWF is linked to perfect competition, etc.


“The economy – not just a particular firm, industry, or union – is workably

competitive when the action of its economic agents does not impede target attainment” (Ferguson, 1964a, pg. 206).

Workable competition provides a theoretical and empirical framework from which to identify the particular structure of a market. Before developing Ferguson’s macroeconomic approach let us consider the concept’s origin and development. Early Rumblings The theory of workable competition was developed by the American Institutionalist John Maurice Clark in his seminal 1940 article34 and represents a pragmatic approach to the problem of empirical inapplicability of the theory of perfect competition. In terms of the theory of competition, this clash between the logical needs of the theory and actual observed reality was nothing new in1940. In the 1920’s two famous critiques of Marshallian short run theory of returns to scale are found. In 1922 a debate was initiated by J.H. Clapham and debated by Pigou and D. H. Robertson over the empirical viability of the theory of returns to scale in Marshall.35 A much more devastating critique of the Marshallian partial equilibrium theory of returns to scale is provided by Sraffa, originally in Italian (1925) and a later a revised version published in English in 1926. Sraffa’s was an attack on the logical inconsistencies within the Marshallian theoretical tradition of variable returns. If such returns were in fact variable, argues Sraffa, there would also be a variation in the remunerative price of each factor of production. But such a factor-price variation would have an effect on other industries that also used that factor input – a clear violation of the partial equilibrium framework. It was along these lines that Sraffa showed Marshall’s inconsistency of assuming economies/diseconomies as external to the firm but internal to the sector. Sraffa’s article showed the logical contradiction inherent in short-run Marshallian theory, of which there were two major ways out: (i) completely abandon the marginalist approach and rehabilitate Classical theory, or (ii) work within the confines of neoclassical theory. Sraffa himself chose the first way out and spent the remainder of his professional life devoted to aspects of the rehabilitation of the Classical theory of value and

34 John Maurice Clark, (1940). “Towards a Concept of Workable Competition” American Economic

Review. 35 The taxonomy of increasing, constant, and decreasing costs industries were posited by Clapham to be “economic boxes” that individual industries should be placed into. However, argues Clapham, actual industries cannot be neatly placed into one or another box, and that this is a strong indication of the vacuous nature of the theory

“I think that a good deal of harm has been done through omission to make it quite clear that the Laws of Returns have never been attached to specific industries; that the boxes are, in fact, empty; that we do not, for instance, at this moment know under what conditions the returns coal or boots are being produced…Unless we have a good prospect in the near future of filling the boxes reasonably full, there is, I hold, grave danger to an essentially practical science as Economics in the elaboration of hypothetical conclusions about, say, human welfare and taxes in relation to industries which cannot be specified” (Clapham, 1922, in AEA 1952, pg. 127).


distribution. In terms of the second way out of working within the confines of neoclassical theory, two distinct directions would be undertaken: (a) the development of the theory of imperfect competition and/or monopolistic competition originally by Joan Robinson and Edward Chamberlin; and (b) the abandonment of partial equilibrium and the adoption of a general equilibrium framework. The theory of workable competition is a particular outgrowth of the imperfectly competitive partial equilibrium framework. Ferguson reports the history of these developments as an “epistemological revolution” (Ferguson, 1964a, pg. 23). Below we produce in terms of a table Ferguson’s five stages in such epistemological revolutions in relation to developments in the theory of imperfect competition.

Table: Five stages of epistemological revolutions in general and its application to the

rejection of perfect competition as a norm for public policy36

Stage of revolution Literature a. The preparatory period during which the

ideological foundations of revolution are laid b. The revolutionary overthrow of the existing

system

c. The struggle for power among different factions

or ideological groups

d. The period of excess, characterized by perhaps

unduly strict enforcement of the new dogma

e. The period of Thermidor, during which the

excesses of the previous period are relaxed

a. “Empty Economics Boxes” controversy and Sraffa (1926) article

b. The disappearance of the uniform acceptance of

perfect competition as a norm (Robinson, 1933; Chamberlin, 1933)

c. Emergence of the myriad of definitions of

“workable” competition that emerged after Clark (1940); (see Camberlin, Ed., 1954)

d. Rapid rise to popularity of “workable

competition” and search for new models of microeconomic behavior suitable to the new belief

e. Stigler (1949) and Freidman (1951) who hold

that the American economy is vigorously competitive; Ferguson placed himself here because he argues that monopoly is “self-limiting”

Development of microeconomic theory of workable competition:

J.M. Clark (1940) Edwards, Corwin. (1949). Maintaining Competition: Requisites of a

Governmental Policy.

36 Adapted from Ferguson, 1964a, pg. 23.


Markham, Jesse (1950). “An alternative approach to the concept of workable competition of workable competition” American Economic Review, 40(3), pp. 349-361. Chamberlin, E.H. (Ed). (1954). Monopoly, Competition, and Their Regulation. Clark, J. M. (1955). “Competition: Static models and dynamic aspects” American

Economic Review 45(2), pp. 450-462. Sosnick, Stephen (1958). “A critique of concepts of workable competition”, Quarterly Journal of Economics, 72(3), pp. 380-423. Sosnick, Stephen (1968). “Toward a concrete concept of effective competition”, American Journal of Agricultural Economics, 50(4), pg. 827-853. Reid, Gavin. (1987). Theories of Industrial Organization. Chapter 7 (here develop contestable market theory)

Development of macroeconomic concept of workable competition In this section we relate Ferguson’s unique definition and extension. Development of the theory of the second best

Lipsey, R.G. and Lancster, Kelvin. (1956-1957). “The general theory of second best”, Review of Economic Studies. 24(1), pp. 11-32. Davis, Otto, and Whinston, Andrew, (1965). “Welfare economics and the theory of second best” Review of Economic Studies, 32(1), pp. 1-14. See Sydney Weintraub (1968) “Theoretical Economics”. Annals of the Academy

of Political and Social Sciences , 380. “second best” New Palgrave entry

Revisit the details of Ferguson 1964a Relevance to his past articles:

Theory: Cardinal utility; multidimensional analysis; alternative macro SWF in 1961a


Empirics: market classification; business and union size; inflation

Develop the three different SWF’s in 1964a as well as the one in 1961a Conclude this section on Ferguson It seems odd that he would write that this was “outside of his field” in 1962; certainly he spent a great deal of time researching precisely this field (e.g. dissertation, etc.).


III

Production and Distribution Theory In the early 1960’s Ferguson began to move beyond the theory of applied welfare economics and theories of the firm and began his studies in neoclassical production and distribution theory. It may perhaps be that the vision of distributive justice explicit in the welfare economics of Hotelling, Lerner, and Barone wherein the marginal conditions are conceived as having the capacity to maximize community welfare influenced Ferguson’s move into this field of theory. Whatever his rationale, by the beginning of the 1960’s enquiries into the theories of relative income shares and the marginal theory of production and distribution comprise the bulk of his published material. It is fitting at this stage to mention the major controversy in the theory of (macroeconomic or functional) income distribution37 that was being carried on at this time and one which Ferguson entered, namely the question of constant relative income shares. Macroeconomic distribution as a conceptual category has long been a major area of contention between rival theories.38 Perhaps the most well known debate along these lines had to do with the alleged "constancy" of distributive shares both within and across countries. As early as 1927 Bowley and Stamps threw into the fray the empirical "evidence" of a (strict) constancy in the wage share. For this reason the notion of a constant wage share has often been referred to as "Bowley's Law". In truth theirs was a comparative static analysis of British national income in two years separated by wide upheaval and socio-economic turmoil, 1911 and 1924. What they found remarkable was that after all those years of upheaval the share of wages in national income remained almost constant (43% in 1911 compared to 44% in 1924; Bowley and Stamps, 1927, pg. 50). Subsequent studies published in the 1930's "showed this stability as maintained through the ensuing years, not in the UK only but also in the USA" (Phelps Brown, 1968, pg. 2). From this starting point until the early 1970's a vast literature rose that heavily and often hotly debated this question, a debate to which Ferguson made several contributions

37 Ferguson’s emphasis remained exclusively on functional or macroeconomic distribution with very little mention of size or personal distribution of earnings. Indeed the only remarks he made on that subject appear in his posthumunously published review (published as Ferguson and Nell 1973) of two at the time recently released books on income distribution, Bronfenbrenner (1971) and Pen (1971). He laments that “both authors devote more space than I think desirable to…the personal, as against functional, distribution of income” (pg. 440). In Nell’s separate review of the same two books, he remarks that “both authors…unlike Ferguson, attach considerable importance to personal distribution” (pg. 445). s 38 From a history of thought perspective it is of interest that the development of macroeconomic functional distribution theory has historically taken place within the context of rival approaches to the subject. Kaldor (1956) was one of the first to explicitly locate macroeconomic distribution within a framework of rival (or as he says "alternative") approaches. Two early reviews of rival approaches to macroeconomic distribution theory are Reder (1959) and Paul Davidson's dissertation (Davidson, 1959). Other major works that adopt the "resume" style are Scitovsky (1964), Ferguson (1969a), Brown (1968), Pen (1971), Bronfenbrenner (1968, 1971), Atkinson (1983), Kurz and Salvadori (1995, chapter 15) and Sattinger (2001). Each of these authors develops the macroeconomic distribution problem from the perspective of alternative theories, although some often clearly favor one approach over the others.


(Ferguson 1967, Ferguson and Moroney 1969). Within neoclassical theory there was often vast disagreement within the neoclassical camp on the stability question with Solow (1958), W.E.G. Salter (1960), and Melvin Reder (1959) accepting stability and Simon Kuznets (1959) and Irving Kravis (1959) vehemently rejecting it. Ferguson and Pfouts (1962) represents an attempt to reconcile this difference from the perspective of neoclassical theory. This work represents and important formalization of the neoclassical production and distribution model in a Cobb-Douglas framework. Employing the methodology of model analysis, Ferguson and Pfouts (1962a) construct a logical model that is designed to be compatible with any desired relation in distributive shares, with constancy as only one possible case.39 The rift in neoclassical theory between those that accepted constancy and those that did not was for Ferguson and Pfouts far less wide than many at the time thought. Constancy of relative shares was in the end an empirical issue which requires empirical models that allowed for constancy to be ascertained rather than assumed. On this score Ferguson and Pfouts are very sympathetic to the critique of the Cobb-Douglas advanced by Phelps-Brown (1957) only a few years earlier. Ultimately this sentiment prevailed within neoclassical theory. Thus the key point of contention between the neoclassicals and the neo-Keynesians behind the constancy debate was not whether the wage share exhibited relative inertia - each side admitted this to be empirically what the evidence often showed. The contentious point, especially between the neoclassicals and the neo-Keynesians, regarded the importance of this "fact" vis-à-vis the development of macroeconomic theory. The neo-Keynesians argued that the evidence of a constant wage share required a special theory of distribution.40 Solow (1958) provides one of the earliest effective critiques of this neo-Keynesian contention. There he argues that this "powerful macroeconomic fact" was in many ways an "optical illusion" - that macroeconomic constancy of the wage share is a direct result of "unruly microeconomic markets". The basic thrust of Solow's critique was simply that relative inertia of the wage share may in fact be evidenced empirically but that no "special" theory need be constructed that had "constancy" as one of its logical conclusions. This critique initially advanced by Solow became the mainstay perspective for subsequent neoclassical assaults on neo-Keynesian distribution theory.41

39 Although published in 1962, certainly this article was written prior to the publication of the famous constant elasticity of substitution or CES model of Arrow, Solow, Minhas, and Cherney (ASMC) (1961). In later work Ferguson takes up the CES case. Ferguson later (1969a) refers to model developed as an “alternative form of the Cobb-Douglas function that [does] not involve unitary elasticity of substitution” (Ferguson 1969a, pg. 101, note 2). 40 This is especially evident in Kaldor (1956): "In fact no hypothesis as regards the forces determining distributive shares could be intellectually satisfying unless it succeeded in accounting for the relative stability of these shares in the advanced capitalist economies over the last 100 years or so, despite the phenomenal changes in the techniques of production, in accumulation of capital relative to labour and in real income per head" (Kaldor, 1956 in Targetti and Thirwall, 1989, pg. 202). 41 The concept of the elasticity of substitution played a fundamental role in these debates. Kaldor in a paper presented at the 1961 Corfu Conference on Capital Theory (proceedings published in Lutz and Hague, 1968) argues that for neoclassical theory a constant wage share is only possible if the elasticity of substitution is equal to unity. Given the empirical evidence that the elasticity of substitution was not unity coupled with the evidence that the wage share was constant, the neoclassical account of the latter (argues


Some theoretical models In tracing out this movement away from applied welfare economics to theories of production and distribution, Ferguson starts in an article written in 1960 on the relationship of theories of acceleration to those of growth (Ferguson 1960b)42. The accelerator principle was originally formulated relating the lag-time in intermediate inputs and the resulting effects this has on final demand of produced finished output. In the hands of Samuelson, Hansen and others it developed as a key component in macroeconomic models of investment behavior and aggregate demand (Samuelson 1938???). Ferguson’s purpose here is to develop a variable but linear accelerator which may be introduced explicitly into the Solow growth model introduced only four years earlier in 1956.43 Ferguson (1962a) analytically continues a similar line of argument this time in a dynamic input-output model with fixed mark-up pricing. His purpose is to explore the implications this can have on inflation, fluctuations, and growth: “when the system is made dynamic and mark-up pricing is introduced, it must be recognized that demand is itself a variable, depending upon prices and perhaps upon income” (1962a, pg. 251). In the model Ferguson employs the idea that production is a function of the expected sales in the next period. This notion of anticipated reaction Ferguson had developed in his article on dynamic price theory (1959a) and in this regard (1962a) can be seen as a sort of melding of his ideas on dynamic pricing to Solow’s (1959) competitive valuation model for dynamic input output systems. In 1962 Ferguson writes a very interesting “pedagogical note” on the transformation curve and in the last section addresses the legitimacy of the Cobb-Douglas function, again over the alleged constancy thesis. His take in this article is very critical, something that is somewhat surprising given the extent to which he develops the analytics and dynamics of that function in future work (especially 1968c and 1969a). One lament is that the linear homogenous nature of the function reduces the powerful Clark-Wicksteed product exhaustion theorem to the accounting identity attributed to Euler. Another is that the Cobb-Douglas was originally written as a microeconomic production function, but when applied as a macroeconomic one the microeconomic “productive inputs” are translated into the macroeconomic “factors of production”. Ferguson notes “as Samuelson has indicated, it is probably desirable completely to avoid this expression because ‘factors’ tend to get identified with social classes” (pg. 101). Ferguson continues with the building of theoretical growth models, although nowhere else do such critical remarks regarding the Cobb-Douglas function appear. In Ferguson 1965c he develops a general framework for incorporation of the elasticity of substitution and the savings ratio in what at the time were recent neoclassical models characterized by a variable growth path (as opposed to the constant growth path in Solow’s original 1956

Kaldor) is logically flawed. Using the basic premise advanced by Solow, Bronfenbrenner (1960) demonstrates that a constant wage share is possible for changes in the elasticity of substitution within a “plausible range”. Thus (argues Bronfenbrenner corroborating Solow) there is no need for a “special” theory of income distribution. Ferguson (1968a pg. 495, 1969a, pg. 239) makes a great deal out of this; see too Davidson (1959) for an early account of the nature of these debates and issues. 42 Ferguson cites as references the work on acceleration by J.M Clark (1917) and Jan Tinbergen (1938), 43 We take this as evidence that Ferguson was one of original advocators of Solow’s neoclassical model.


article). His model shows that :the neoclassical elasticity of substitution and the rate of growth of the savings ratio appear to be the two most important endogenous variables conditioning the variable natural rate of economic growth” (pg. 471). And in Ferguson 1968c we find a relatively simple re-statement of the analytics of neoclassical growth theory. Empirical tests of CES functions Ferguson’s endeavors in neoclassical production and distribution theory prior to 1963 were all conducted analytically in a pre-constant elasticity of substitution (CES) production function world, hence his focus on “tweaking” the Cobb-Douglas form to account for a variety of different situations. The original article that develops the CES model was the joint effort of Arrow, Chernery, Minhas, and Solow, and (ACMS) published in 1961. As indicated in the introductory paragraph, the CES model remains today one of the most tested and utilized empirical aggregate production and cost functions to date. And in 1963 Ferguson publishes one of the first extensions of that model.44 This article marks the beginning of a total of 7 different articles that empirically tested the CES function in one version or another.45 In the 1963 article Ferguson employs the same function as ACMS, this time with cross-sectional data at the four-digit industry level (the original ACMS estimated cross-sectional data at the three digit level). In both Ferguson and ACMS the basic CES function takes the following well-known form:

( )1

1

11

1

1

V K Lρ ρ ργ δ δ

ρσ

σρ

−− − = + −

= −

=+

Where V, K, L are value added per man year, capital, and man-years or labor time and γ, δ, ρ are the efficiency, distribution, and substitution parameters respectively and σ is the elasticity of substitution. The logarithmic transformation of this function is:

( )1

log log log 1V K Lρ ργ δ δρ

− − = − + − .

Under the assumption that technical progress does not vary systematically with the wage rate (Kennedy and Thirwall 1972, pg. 24), the elasticity of substitution can be estimated by the following logarithmic regression equation:

44 Note comments by Bell (1965??). 45 The articles are Ferguson 1963, 1964b, 1965a, 1965b, 1967a, Ferguson and Moroney 1969, 1970.


log log log

1

1

Va b W u

L

b σρ

= + +

= =+

.

The CES function is more general than the Cobb-Douglas since it reduces to a Cobb-Douglas as the substitution parameter (ρ) approaches zero and the elasticity of substitution (σ) approaches one. Commenting on this initial study in a subsequent work, Ferguson “obtained elasticity coefficients for 129 cases representing 61 four-digit industries in 11 two-digit groups covering the census years 1947, 1954, and 1958…twenty-two percent of the significant [estimates of the elasticity of substitution] indicated elastic industries and 19 percent inelastic ones” (Ferguson 1964b). Moroney (1966) notes that both ACMS (1961) and Ferguson (1963) “found elasticities on either side of unity with about equal frequency” and that ”the general conclusion form these studies is that industry elasticities of substitution are generally not greater than one” (Moroney 1966, pg. 479; emphasis in original), although Ferguson admits that his results are not as good as in ACMS (Ferguson 1963, pg. 306; see also Bell’s comment). {Note

that it is in this article that Ferguson calls it a “personal choice” whether the CES function is a

production or distribution function}

In a subsequent empirical investigation of the CES model, Ferguson (1965a) tests for Hicks and Harrod neutrality on two CES equations, one for constant returns and the other unconstrained, for the US manufacturing sector in 1929-3 and 1948-63. In both cases Ferguson “finds…that technical progress accounts for more than 90% of the increase in output per man, with elasticitiy of substitution generally below unity.” (Kennedy and Thirwall 1972, pg. 26; emphasis in original). In Ferguson (1965b) time series data is used to estimate elastiticities and accordingly a time trend is included in the statistical equation appear:

( ) 1 2

1

2

log log log

1

1

1

Where = constant rate of nuetral technical progress

V a b t b W u

b

b

ρλ

ρ

σρ

λ

= + + +

=+

= =+

Kennedy and Thirwall (1972) note that “Ferguson finds a wide diversity in the elasticity of substitution between industries and in general finds a tendency for biases in technical progress to be labour-saving/capital-using”(pg. 26). Finally consider the last two articles testing the CES production function, namely his collaboration with Moroney (Ferguson and Moroney 1969, 1970). In these papers the authors are concerned with testing the cause of shifts in functional income shares for 22 two-digit US manufacturing industries (as we shall see the neoclassical theory of functional income distribution especially as


regards technical change is another of Ferguson’s major theoretical interests in this period). In commenting on the original 1969 paper, Martin Bronfenbrenner notes that “Ferguson and Moroney ascribe to capital deepening the greater part of the observed increase in the relative labor share” (Bronfenbrenner 1971, pg. 407). The empirical tests of the CES function constitutes only one area of research for Ferguson in neoclassical production and distribution theories. Three other areas of Ferguson’s work during this era are (1) the general theory of input demand functions with special emphasis on the case of inferior factors; (2) the neoclassical theory of functional distribution and relative income shares (note this has significant cross-over with his work on the tests of the CES function); and (3) the defense of neoclassical capital theory in the Cambridge controversies. We consider each of these areas below. The general theory of input demand functions and “inferior factors”

The above discussion concerning empirical tests of the Cobb-Douglas and CES functions was strictly macroeconomic in character. The questions Ferguson in concerned with in this section relate to the microeconomic theory of production and distribution. Note too that this is a partial equilibrium construct. In Ferguson (1969a) we find the following conclusion for Chapter 9 on inferior factors: “The empirical importance of factor inferiority would be difficult, if not impossible, to assess. On a theoretical level, however, the concept of factor inferiority is important in the theories of production and of derived input demand functions. The concept permits one to explain the theoretical possibility of ‘peculiar’ commodity behavior in response to an input change. Similarly. It leads to a reconciliation of ‘graphical observation’ in the case of constrained output maximization with the mathematically established theorem that input demand function are negatively sloped. It would seem that no further arguments are needed to justify an intense analysis of the implications of factor inferiority” (pg. 200). The relevant articles here are: Ferguson 1966 (this is the initial article of a series of articles on inferior factors; Ferguson 1967 (in French Revue); note that we do not have this one; see 1968a for reference. Note also that this is the exchange that Ferguson had with Puu (1967). Puu (1970) reviews Ferguson (1969a). See above. Ferguson and Saving (1969) Ferguson and Maurice (1971, 1972, 1973). Note in Ferguson and Maurice (1970) we find a backtracking on input demand functions as expressed in Chapter 8, section 8.4.2; see also note of Harcourt’s review of NTPD)


Ferguson and Blair (1971) Ferguson 1969a (Chapters 8 and especially 9) Some secondary literature relevant to inferior factors: Mosak (1938) (Inferior factors) Bear (1965) (Inferior factors) Portes (1968) (Inferior factors) Basset and Borcherding (1968) (Inferior factors) Leibhasky (1969) (Inferior factors) Basset and Borcherding (1970) (Inferior factors) Syrquin (1970) v Puu (1967) (1971) (Inferior factors) Bilas and Massey (1972) (Inferior factors) Bear (1972) (Inferior factors) Silberberg (1974) (Inferior factors) Gould (1981) (Inferior factors) Epstein and Spiegel (2000) (Inferior factors) {Need to come back to this section; develop idea that this corresponds to the

microeconomic character of production and distribution in a Marshallian short run

partial equilibrium framework and that this is a complement to macroeconomic

production and distribution functions}

Relative income shares, the neoclassical theory of functional distribution

We already noted that in Ferguson and Moroney (1969, 1970) the authors use an aggregate CES production/distribution function to test for sources of changes in labor’s share in US manufacturing. Neoclassical macroeconomic functional income distribution certainly is an area in which Ferguson is still well-known. This interest in neoclassical distribution theory begins as we have seen in the collaborative effort with Pfouts (1962a). That paper however was limited to constructing a pre-CES model that could account for changes in distributive shares (test Bowley’s Law) strictly within the neoclassical theory. In Ferguson (1964c) we find Ferguson developing neoclassical macroeconomic theory in tandem with a presentation of the neo-Keynesian theory, specifically Kaldor’s model, a method of presentation which we have noted above is quite standard in disquisitions on functional income distribution (see note #??? above). However the aim of this early work is not to judge one theory better than the other, but rather to offer an “integrated model” that combines elements of each. This development would eventually take another incarnation in an exchange Ferguson had with Kurt Rothschild over a very similar model that Ferguson presents in NTPD (section 15.3.1, pp. 314-322), leading to what Rothschild calls “Ferguson’s model” (Rothschild 1971, pg. 13). As we shall see this plays a fundamental role in Ferguson’s final contributions and thoughts on the reswitching controversy considered below.


This integrated two-sector model contains the neoclassical property of given and fully employed quantities of capital and labor (hence too a given capital-labor ratio) with the neo-Keynesian property of given and constant savings propensities of profit earners (sp) and wage earners (sw) such that 0 ≤ sw < sp ≤ 1. The key “integration” that Ferguson adopts in this early 1964 essay is that of the role of relative commodity demand in a two sector economy in the determination of relative factor shares. We will return to this when developing the arguments both in how Ferguson subsequently develops this model in his book (1969a) and the subsequent dialogue with Rothschild (1972b) as well as his article with Allen on reswitching (1970). Ferguson (1967a) combines both a theoretical exposition as well as an empirical test in relations involving distributive shares and returns to scale. Here he introduces the function coefficient,46 defined as the change in output divided by the change in a factor input, and derives its property as indicating the degree of homogeneity in the production function which Ferguson calls its “state”. This concept is then extended to the macroeconomic case of homogenous capital and labor and data from 14 two-digit industries reported in the 1958 Census of Manufactures is subject to empirical testing via an unrestricted Cobb-Douglas production function first and a CES distribution function subsequently. In the Cobb-Douglas case the estimate of returns to scale was used as a control variable against a breakdown of industries according to level of relative share defined as high, low, and the average. The results of this showed “the state recording the greater economies of scale or lesser diseconomies of scale also recorded the smaller relative share of labor” (pg. 210). Turning to the CES distribution function Ferguson was able to obtain estimates of the elasticity of substitution according to the same high, low, average subdivision used in the case of returns to scale and the results confirmed earlier studies showing the elasticity of substitution clustered around unity and a series of “regularities and curiosa” are garnered from the results. In 1968a Ferguson develops a strictly theoretical model and for the first time openly engages the Cambridge controversies. The model itself is basically a generalized form of production, distribution, and technical progress in the neoclassical surrogate production function parable and perhaps represents a snapshot of the original (discarded) portions of his 1969 book.47 This chapter contains elements of his earlier theoretical work on distribution (1964c) as well as extensions to the relationship of Hicks and Harrod technological progress to distributive shares. He addresses the question of constancy in distributive shares and it is here that he first lays out the argument (attributed to Bronfenbrenner 1960) against the neo-Keynesian claim that said constancy requires a “special” theory of distribution (see note ?? above). Weintraub (1968) comments on this article that “Ferguson expresses satisfaction with neoclassical smooth production functions and the inverse relation of the capital-labor ratio to the rate of interest

46 Ferguson credits origin of this term to Sune Carlson (1939), Erich Schneider (1934) and Ragnar Frisch (1965). Ferguson would continue to write about the economic significance of this concept in both NTPD as well as his solo intermediate text Microeconomic Theory. 47 See the Preface to that work, pg. xv, and also below.


(apparently ignoring the ‘reswitching’ controversy…) and regards marginal productivity theory generally as a ‘useful and satisfactory approximation of reality’” (Weintraub 1968, pg. 159). Two subsequent articles that deal with distributive shares are the collaborations with John Moroney we mentioned in the context of empirical tests of the CES distribution function. As previously noted these articles constitute empirical tests and developments of neoclassical theory exclusively. The Neoclassical Theory of Production and debates in capital theory We now move to what the present writer finds to be the most interesting period in Ferguson’s work, namely the publication of his 1969 opus The Neoclassical Theory of

Production and Distribution and the subsequent debates in capital theory he would engage in up to his death. The book itself spans 384 pages and is broken down into two parts. Part I deals with the microeconomic theory and part II the macroeconomic theory. The debates in capital theory of course relate to the latter. As with his 1964 book on workable competition, several of Ferguson’s previous articles are reproduced (some verbatim) in this volume. Below we show the table of contents for this book.

Table of Contents for The Neoclassical Theory of Production and Distribution

Preface Part I: The Microeconomic Theory of Production 1. Introduction 2. The technical theory of production under conditions of fixed proportions 3. The economic theory of production under conditions of fixed proportions 4. Technical aspects of continuous production functions: General theory 5. Technical aspects of continuous production functions homogenous of degree one 6. Economic theory of production with fixed input prices 7. The theory of cost with fixed input prices 8. The economic theory of cost and production with variable input prices 9. “Inferior factors” and theories of production and input demand 10. Theory of the multi-product firm Part II: Macroeconomic Theories of Distribution and Technological Progress 11. Technological progress and the neoclassical theory of production 12. Technological progress and the neoclassical theory of distribution 13. Vintage models and fixed proportions in neoclassical theory 14. Learning by doing 15. Monopoly and aggregate demand as determinants of relative factor shares 16. Induced bias and the theory of distributive shares


In assessing the significance of this book, Ferguson himself seems to waffle. In the Preface he admits that a major motivation for writing the book revolves around the controversies that were surrounding the latter macroeconomic part of the book, specifically that of reswitching – defined as the lack of a one-to-one correspondence between the capital labor-ratio and the ratio of factor prices - and reverse capital deepening – defined as the specific case when capital-intensive methods are adopted at higher rates of profit (interest), thus violating the inverse relation between the capital-labor ratio and the wage-profit (interest) ratio. As first demonstrated in the famous 1966 “Symposium” in the Quarterly Journal of Economics,48 the presence of reswitching violates the neoclassical proposition that the return on capital is determined by its marginal physical productivity and the presence of reverse capital deepening violates the neoclassical proposition that there exists an inverse demand curve for capital. Such “perverse” behavior has long been known. Indeed Wicksell (1911) is credited with identifying the problems of aggregation of heterogeneous units of capital, from which the terms price Wicksell effects (reswitching) and real Wicksell effects (reverse capital deepening) were coined.49 Consider the following simple graphical comparisons of both cases (adapted from Birner 2002):

48 This “symposium” was a watershed event in the Cambridge controversies because it was there that Samuelson was “embarrassed…into admitting that he had made mathematical errors” regarding the non-substitution theorem (in his attempt to generalize neoclassical results surrounding his surrogate production function article of 1962) he had raised earlier and which his student Levarhi (1965) had erroneously “proven”. Mirowski correctly comments that “it was noted with glee by Marxist economists that the critical error of Samuelson and Levarhi was to assume uniform capital/labor ratios in all industries, the very same assumption derided by neoclassicals in their condemnation of Marx’s solution of his transformation problem” (Mirowski 1989, pg. 343; he cites Bhaduri 1969 as evidence of this sentiment). 49 An interesting thesis advanced by Harcourt and Cohen (2003) is that the Cambridge capital controversies were the last of three such episodes over the marginal productivity theory of distribution to occur in the 20th century. Sparked over controversy relating to Marx’s theory of exploitation, the first capital constroversy was between J.B. Clark, Thorstein Veblen, Irving Fisher, and Eugene Böhm-Bawerk at the dawn of the 20th century. The debate never resolved, it reared is head again in the early 1930’s with debates between von Hayek, Frank Knight, and Nicholas Kaldor. Mirowski (1989, pp. 340353) also takes the similar tone.


Figure: Expected neoclassical results vs. “perverse behavior”

Panel (a): Neoclassical results

The upper graphs in each panel refer to the techniques of production: panel (a) shows three techniques for the homogenous capital case and panel (b) shows two techniques that include the heterogeneous capital case and the associated switch from alpha technique to beta technique and the subsequent reswitch (early in the literature this was called “double-switch”; see Harcourt 1969, 1972) from beta back to alpha. The bottom graphs in each panel relate the expenditure of capital input (pK) to the rate of profit or interest (r). In panel (a) the expected neoclassical case of an inverse relationship between the rate of profit and the quantity of capital is shown. Panel (b) shows the perverse effects of increases in the quantity of capital associated with increases in the rate of profit inherent in reverse capital deepening. It is to these questions that Ferguson spends the majority of his short Preface discussing, and it is here we find the famous/infamous “faith” comment properly contextualized:

“In the initial draft [chapter 12 on aggregate distribution] formally ended with the multi-sector model of technological progress and relative factor shares. Since the exposition of neoclassical aggregate theory…depended entirely upon the assumption of J.B. Clark real homogenous capital, I added an appendix on Samuelson’s ‘Parable and realism in capital theory’ in order to show that the results of neoclassical analysis could be obtained from fixed-proportions,

r

w

r

pK

w

pK

r

r

α

β

γ

α

α

β

Panel (b): Price and Real Wicksell effects


heterogeneous capital models.50 Shortly after this was completed the ‘Symposium on capital theory’ appeared in the Quarterly Journal of Economics; and it then became quite apparent that the Cambridge Criticisms, as I call it, must be accorded more careful consideration. As it now stands, the last half of chapter 12 is given over to an exposition of the Cambridge Criticism of neoclassical theory. Its validity is unquestionable, but its importance is an empirical or an econometric matter that depends upon the amount of substitutability there is in the system. Until the econometricians have the answer for us, placing reliance upon neoclassical economic theory is a matter of faith. I personally have the faith; but at present the best I can do to convince others is to invoke the weight of Samuelson’s authority…” (Ferguson 1969a, pg. xv).

But in an interesting distancing from this rather clear and forceful statement of the efficacy of aggregative neoclassical theory, Ferguson in a response to Joan Robinson subsequently takes the stance that the main purpose of his book was more microeconomic than macroeconomic: “My book was intended chiefly to be an exposition and extension of the microeconomic theory of production, cost, and factor demand (i.e. a theory applicable to single firms or single entrepreneurs)” (Ferguson 1971, pg. 250). This is distancing further evident in Ferguson (1973), the very last work of Ferguson alone that made it into print:51 “To me, neoclassical theory is microeconomic, general equilibrium theory that concentrates on commodity and factor pricing and that relates commodity markets to factor markets” (Ferguson 1973, pg. 2). If the microeconomic focus was indeed the main intention, then Tönu Puu (1970), the only reviewer of that book to focus exclusively on the microeconomic portion,52 certainly gives him less than a ringing endorsement. Writing in the Swedish Journal of Economics, Puu speaks of “inconsistencies as to terminology, symbols, and illustrations” (pg. 231) and that he’s “give[en] the impression that the book is a loosely connected patchwork, published at too early a stage before all the pieces really fit together” noting that “all this is unfortunate because Ferguson has demonstrated considerable analytical skill in handling difficult problems in mathematical economics” (pg. 232-3). In comparing Ferguson’s book to other recent work in microeconomic production and distribution theory, specifically Frisch (1965) and Dano (1966), Puu concludes that “it may not be claimed that this study replaces a standard work such as the one by Frisch” (pg. 239).53

50 This we argue may look a lot like the argument he advanced in (1967a). 51 We read from the editor of HOPE that “This essay was completed shortly before Professor Ferguson’s death on 14 January, 1972. His colleagues at Texas A&M University have brought it to publication with only minor stylistic changes” (Ferguson 1873, pg. 1). 52 Puu makes absolutely no mention of the second (macroeconomic) part of the book. In a subsequent exchange with the present writer, Puu maintains that at the time he was not critical of neoclassical theory (he indicates that subsequently he has grown more critical) and that the “unfinished state” of the first (microeconomic) portion became was disappointment to him because he had expected more from Ferguson (cite email….). 53 Puu was especially irritated at the fact that the chapter on “inferior factors”, a subject on which Puu and Ferguson had exchanged and disagreed, is a “practically in extensor reprint [of] two earlier papers…without even correcting errors pointed out in studies by other economists” (Puu 1970, pg. 232). One of the referenced “other economists” was of course him (Puu 1967, Ferguson 1967b). But to be fair Puu does give credit to Ferguson and believes that this “’unfinished project’ might have constituted very


In fact it can be safely concluded that the macroeconomic is the more widely known portion of that book and it is in here that Ferguson coins the term “Cambridge Criticism.” It is important to note that the arguments advanced in this volume would not be Ferguson’s last word on the problem, nor the last justifications he advanced, regarding the problem of capital for neoclassical theory. Indeed it would be a theme that engaged him for the remaining four years of his life.54 In his book Ferguson adhered to empirically-minded justifications:

“The crucial point to emphasize is that the validity of neoclassical theory is an empirical, not a theoretical, question. At the time of this writing, there have been some, but limited advances toward the construction of statistical models by means of which the empirical validity of neoclassical theory may be assessed” (Ferguson 1969a, pg. 258); and, “The question that confronts us in not whether the Cambridge Criticism is theoretically valid. It is. Rather, the question is an empirical or an econom etric one: is there sufficient substitutability within the system to establish the neoclassical results?” (Ferguson 1969a, pg. 266).

This defense of neoclassical theory corresponds to what Mirowski, citing both Ferguson and Blaug, calls the “disoriented and disorganized” stage of neoclassical responses to capital theory:

The response of the neoclassicals to their November 1966 debacle (i.e. the 1966 QJE “Symposium”) was also very instructive. At first, disoriented and disorganized, some retorted that critics had a point, but that the putative prevalence of perverse behavior of capital was really an empirical issue (Ferguson 1969, Blaug 1974)” (Mirowski 1989, pg. 343).

This “sufficient substitutability” line of defense is actually distinct from (yet related to) that of the “empirical validity” (e.g. the substitutability s what is to be derived empirically) and both were current at the time of Ferguson’s book. Murray Brown (1969) advanced the substitutability argument with the contention that given “sufficient” substitutability, (inverse) uniqueness of capital intensity to factor prices (the matter was called “capital intensity uniqueness”) could be plausibly established. This line of argumentation is consistent with the idea, also current at that time, that the perversity of behavior was a “special case” analogous to Giffen’s paradox in demand theory.55 We read from Ferguson (citing Solow in the different context of so-called “vintage models”): “heterogeneous capital and fixed proportions do not necessarily invalidate simple

valuable contribution if it had been further ‘processed’ in order to make it more coherent, to correct the errors and to give it better historical background. Perhaps this might be done in a second edition” (Puu 1970, pg. 239). Interestingly in Harcourt’s review (see below) mention is also made for a possible second edition. 54 The subsequent discussion in capital theory Ferguson engages in subsequent to 1969 appear in Ferguson and Allen (1970), Ferguson (1971), Ferguson and Hooks (1971), and Ferguson (1972c). 55 See Stiglitz (1974) and Hcks (1965). See too Garegnani (1990) and Kurz and Salvadori (1995; pg. 454).


neoclassical theory. Yet these heterogeneous capital, fixed proportions models to not validate simple neoclassical theory either; they merely show that it is not invalid in certain situations” (Ferguson 1969a, pg. 257-8). Thus in an interesting sleight –of-hand, what is in fact the more general case, namely the existence of heterogeneous capital goods, is deemed to be a special case; and what is in fact the special case of homogenous capital is deemed to be the general situation.56 This is explicit in Ferguson conclusion to this important chapter 12:

“[T]here is no doubt that the Cambridge Criticism is valid. Indeed. It is broader than it was first thought to be in that reswitching is not a necessary condition to invalidate the simple ‘J.B. Clark neoclassical fairy tale’.57 If we live in a fixed proportion world, which may or may not be true, and if capital goods are heterogeneous, which is unquestionably true, there may not exist an invariant relation between factor proportions and the factor-price ratio. At least, one cannot validly assume a priori that such an invariant relation exists. Simple neoclassical theory, with which this book largely deals, would have it so. And if so, simple neoclassical theory is validated. However, the Cambridge Criticism definitely shows that there may be structures of production in which the Clark parables may not hold. It is of no matter that the Robinson-type models of capital and growth are invalidated as well. The crux of the matter is that economists may be unable to make any statements concerning the relation of production to competitive input and output markets.

56 Staying strictly within the confines of a circulating capital model (Sraffa’s single product industries) the technology matrix of a two-sector integrated economic system can be expressed as the following:

11 21

12 22

where input i for industry j

(Note = Sraffian interindustry coefficient = transpose of Leontief coefficient)

ij

ij

a qtr a tonA a

a qtr a ton

a

= = = = = =

��

.

The case of a single one-commodity world effectively renders all input values in the above matrix as having zero quantities except the element in the first row and column (a11). Hence the assumption of a one commodity world is the special case of the heterogeneous capital model with all inter-industry inputs except the referenced first element set at zero values. 57 This statement is related to an earlier demonstration that the neoclassical parable is actually destroyed even without reswitching:

“The Cambridge Criticism initially involved only the reswitching case. Actually the criticism is more profound than the original critics thought…[I]t is not necessary to have reswitching of techniques in order to destroy the parables of simple neoclassical theory. Except for Samulson’s special case [e.g. the surrogate production function], it is generally not possible a priori to relate the behavior of the aggregate capital-labor ratio to the wage-rate of interest ratio. This, then, is the ultimate Cambridge Criticism: there may exist structures of production for which the neoclassical relation between the sphere of production and the market does not hold…[t]he full force of the Cambridge Criticism is as follows: it is illegitimate to make an a priori specification of the relation between the aggregate capital-labor ratio and the factor-price ratio: but more important still, it is even illegitimate to make such an a priori specification for any sector of the economy” (Ferguson 1969a, pg. 258; emphasis in text).


I believe they can; but that is a statement of faith, as is the flyleaf quotation from Samuelson.58 The issue is really not that amorphous, however. As Brown (1967)59 has recently shown, it all depends upon the amount of substitutability there is in the system. The existence of a ‘sufficient’ amount of substitutability establishes capital intensity uniqueness, in the sense that if alpha technique is capital intensive to beta in, say, the consumption sector, beta is labor intensive relative to alpha in the capital-goods sector. That is all that is required to establish the neoclassical parables. The significant and unique achievement of Brown is to have shown that capital intensity uniqueness is an econometric question susceptible of resolution in a probability sense. In final summary, the Cambridge Criticism points up a definite potential weakness of simple neoclassical theory. Whether it is an important weakness is a question that cannot be answered a priori; but there are developments…which indicate that a factual answer may be forthcoming, even if not within the immediate future” (Ferguson 1969a, pp. 269-70).

We now turn to the reviews of Ferguson’s book. Our research thus far has turned up four separate reviews. The first we already encountered with Puu (1970). Recall there that Puu focuses exclusively on the microeconomic portion and give it less than a ringing endorsement. Of the remaining three, the review by S.A. Ozga (1971) in Economica is very brief. Consistent with the above claim that the novel features of this book lay in the macroeconomic and not the microeconomic part, Ozga writes of the latter that “a graduate student is not likely to gain from this any new insights into the conditions which determine production and distribution” (pg. 438). On the macroeconomic part, Ozga writes that “the discussion is in the nature of a survey of contributions which have been made in this filed, and is meant to help the student to understand their significance and limitations” (pp. 438-9). The “limitations” of course is a veiled reference to the Cambridge controversies, however it is not clear in this review which side of the debate is more guilty of such “limitations”. Ozga concludes that “though limited in scope, the book covers the field quite well and deserves attention”(pg. 439). The remaining two reviews unlike Ozga (1971) are much more extensive and unlike Puu (1970) focus mostly on the macroeconomic part of the book. And in one of the most

58 The following extended quotation by Samuelson in his “Rejoinder” to the (from his perspective) infamous 1966 “Symposium” appears not only on the flyleaf of Ferguson’s book but also in (1968a), (recall that latter article is conjectured to be an early version of the “initial chapter” on the capital controversies that Ferguson mentions in his Preface):

“Until the laws of thermodynamics are repealed, I shall continue to relate outputs to inputs – i.e. believe in production functions. Until factors cease to have their rewards determined by bidding in quasi-competitive markets, I shall adhere to the (generalized) neoclassical approximations in which relative factor supplies are important in explaining their market remunerations…a many-sectored neoclassical model with heterogeneous capital goods and somewhat limited factor substitution can fail to have some of the simple properties of the idealized J.B. Clark neoclassical models. Recognizing these complications does not justify nihilism or refuge in theories that neglect short-term microeconomic pricing” (Samuelson 1966, pg. ????; quoted in Ferguson 1969a, pg. iv and Ferguson 1968a, pg. 500).

59 This is an earlier version of the capital intensity uniqueness article published as Brown (1969).


interesting aspects of Ferguson’s book, these remaining two reviews were written by two of the most vocal of the Cambridge Critics, namely Geoff Harcourt (1970) in the Journal

of Economic Literature and Joan Robinson (1970) in the Economic Journal. Harcourt’s review is critical especially of the second macroeconomic part but he certainly writes with a tremendous degree of respect for Ferguson expository and analytical prowess: “Professor Ferguson is blessed with considerable expository powers and in a book of this scope he gives them full reign’ (p. 809).60 Harcourt begins the review by calling attention to the definite article “The” in the book’s title:

“The ‘The’ in the title may be pretentious, nevertheless the book itself is modest and worthwhile, admirably fulfilling the author’s intention of giving a systematic exposition and analysis of ‘the’ theory” (pg. 809).

The implication of course is that Ferguson’s work, by use of that definite article, would represent the last word on neoclassical production and distribution theory, which, clearly, it did not. Although we have no direct evidence, it is our contention that this critique of Ferguson was very well-placed and one that began Ferguson on somewhat of a backtrack. Indeed in four articles published after his book, Ferguson qualifies his position as representing only his understanding/exposition of neoclassical theory:

“To avoid possible confusion, let me state what I (possibly alone) believe neoclassical theory to be” (Ferguson 1971, pg. 251; emphasis added). “In this essay the views expressed are mine alone and should not necessarily be imputed to any other neoclassical theorist” (Ferguson 1972c, pg. pg. 164, note 9). “The description of neoclassical theory that follows is my view only and should not necessarily be ascribed to any other neoclassical theorist” (Ferguson and Nell 1973, pg. 438). “Before proceeding further it will be useful to pause for my definition of terms. ‘My’ is italicized because these views should not be necessarily attributed to anyone else” (Ferguson 1973, pg. 2).

Clearly something was awry in Ferguson’s world subsequent to the publication of his book. It is our conjecture, to be established we hope after direct archival research, that other neoclassical theorists were less than enamored with the implications of Ferguson’s contention that his tome represents the neoclassical theory, and hence the definitive (and

60 In various private conversations with the present writer, Harcourt has always spoken respectfully of Ferguson and his overall work. Above all Harcourt spoke that he and others within his circle felt terrible about the manner in which Ferguson met his ultimate demise. This is in stark contrast to Joan Robinson who was not as respectful, as we shall see. Indeed Harcourt also relayed to the present writer that he and Robinson, although committed ostensibly to the same end, nonetheless went about it in quite different ways. One thinks immediately of the good cop-bad cop scenario. Indeed Ferguson refers to Harcourt as a “gentle critic” (Ferguson and Hooks 1971, pg. 354).


perhaps for Ferguson, the last) statement.61 But perhaps more damning for Ferguson to his neoclassical comrades is Harcourt’s sentiment (which will be echoed by Joan Robinson, albeit much more forcefully, in her review) that “[Ferguson’s] vision is virtually unclouded by doubts and, as it is also allied with intelligence, it is enormously helpful to those who want a clear and simple version of the main tenets of the neoclassical faith” (pg. 809). Harcourt’s main critique with Ferguson’s neoclassical defense incorporated the subsequently-published articles by Pasinetti (1969) and Garegnani (1970):

“It is also an unfortunate book, for thought the author was able to take some rearguard action in the final draft against the ‘Cambridge criticisms’ as set out in the 1966-67 Quarterly Journal of Economics symposium on double-switching and capital reversing, he was unable to do anything in the book about the altogether more damning criticisms contained in two later papers, one by L.L. Pasinetti (1969), the other by P. Garegnani (1970). (He has had second thoughts on these, however)” (Harcourt 1970, pg. 809).

The “second thoughts” mentioned by Harcourt refers to the article by Ferguson and Allen (1970). The basic criticism of Pasinetti and Garegnani is that reliance on neoclassical theories on what Pasinetti had termed the “unobtrusive postulate”. We read inHarcourt:

“As Garegnani and Pasinetti show, [well-behaved neoclassical] results depend crucially on the ‘unobtrusive postulate’62 which removes capital-reversing from heterogeneous capital models and which, when allied with malleability and infinite substitution possibilities, assures the validity of neoclassical parables” (p. 810).

As developed below, all subsequent papers Ferguson would write on capital theory would reference Pasinetti’s “unobtrusive postulate”, often simply by asserting that such a postulate is not adopted. It is useful to quote at length Harcourt’s conclusion:

“Professor Ferguson’s survey shows that technical progress has now been thoroughly analyzed and integrated into neoclassical theory…Nevertheless he has stuck stubbornly to the importance of relative factor proportions and to the view that production and distribution theory are but particular aspects of an all-embracing neoclassical theory of value based on the maximizing behaviour of individual economic actors and the principle of substitution so that classes, institutions, and history are all but irrelevant…It is true that Professor Ferguson

61 This idea fits in well with Mirowski’s claim that in this stage of the Cambridge controversies the neoclassicals were “disoriented and disorganized”. 62 We read in Pasinetti:

“[T]he belief has become widespread that, in general, an economic system in which commodities are produced by labour and capital goods behaves like the particular case f an infinite-techniques one-commodity world. The origin of this belief can be traced back to an unobtrusive proposition which, for some time now, has been adopted as a postulate, i.e. as a proposition so evident as not to need any discussion or justification” (Pasinetti 1969, pg. 520).


covers himself by saying that his treatment will be discursive and incomplete. Nevertheless it is earnestly to be hoped that, in the second edition, which the book both promises and deserves, he will make an already good book more balanced by returning to these themes and covering his nakedness with something more substantial than a fig leaf” (pg. 811).

The review by Joan Robinson, although certainly written in the spirit of Harcourt’s critique, is far less courteous.63 This review would begin a dialogue, discussed below, between Ferguson and Robinson which appeared in the pages of the Canadian Journal of

Economics in 1970 and 1971. {To be continued….} Review by Robinson and Harcourt – two heterodox economists

Solow’s “amazement” that ARE and SEJ did not review it

Ferguson’s debate with Robinson

Ferguson and Allen (note here the role of Birner 2002)

Ferguson and Hooks (1972)

Ferguson (1972c)

Ferguson’s two-sector “variant” model and the dialogue with Rothschild.

Summing up section of Capital Theory:

1. State the fact that Ferguson died at the “disoriented and disorganized

phase”

2. Briefly state how neoclassical theory recovered (Mirowski 1989; Kurz

and Salvadori 1995).

Conclusion

Faith-based economics??

63 Robert Solow, in private correspondence to the present writer, writes that “I would not take Joan Robinson’s remarks [on Ferguson] very seriously. She was much given to minor slurs, intended to put social inferiors (mainly American) in their natural place” (Solow correspondence to Carter, 27 March 2007).


Why study Ferguson? What legacy did he leave?

The 1960’s certainly was a tumultuous time in economic theory. Any effort to understand Ferguson must be properly contextualized within the broader epistemological struggles occurring at the time. Cite here Bronfenbrenner (1967) and idea of trends, cycles and fads; note that Ferguson was more-or-less confined to the “cycle” stage

The defense of neoclassical theory of capital We now move to the last chapter in Ferguson’s life and one that he is most known for – namely the defense of neoclassical capital theory. The first time we find Ferguson using the word “defense” is in Ferguson 1968a: “I will show in a forthcoming paper [this is published as Ferguson and Allen (1970) – SC] that if the labor intensity condition is satisfied, and if the composition of demand is responsive to relative commodity price, the heterogeneous capital model yield the same factor-price frontier as the ‘neoclassical fairytale’. In this case the Samuelson-Solow defense of the simplified model is a defense indeed. If nothing else, this indicates a direction that empirical research could take” (Ferguson 1968a, pg. 502). Weintraub (1968) notes that Ferguson (1968a) does not deal with reswitching very thoroughly Note also Birner’s claim that Ferguson relied on Samualson’s surrogate production function for the first draft of his book (Birner pg. ???) Major writings: Ferguson (1969a) (Here present a synopsis of his book… To be continued…. Pasinetti (1969) in his article critical of Fisher’s notion (revived by Solow and in Fereguson 1972c hailed as the defense of the neoclassical doctrine, makes the following remarks that s critical of the so-called “empirical verifiability” of simple neoclassical parables: “The belief has become widespread that, in general, an economic system in which commodities are produced by labour and capital goods behaves like the particular case of an infinite-techniques one-commodity world” (Pasinetti 1969, pg. 520).


It is here that Pasinetti advances the argument that neoclassical theory in essence relies on an “unobtrusive postulate”, that is a “postulate so evident that it does not need to be explained” (Pasinetti 1969, pg. 520). Ferguson would mention the idea of an “unobtrusive postulate” in every subsequent excursion on capital theory he would engage in subsequent to his book, mostly in the form of denying (by assertion) that neoclassical theory in fact relies on such an epistemological construction (Ferguson 1972c, Ferguson and Hooks 1971, Ferguson and Nell 1973, others??). Ferguson and Hooks (1971)64 provide a very interesting conclusion under the subtitle of “Implications for neoclassical theory”. There they speak of a series of “concessions” that neoclassical theory made as a result of the Cambridge criticism: the first was “to admit heterogeneous capital goods in the model” and the second was “to allow for the existence of fixed-proportions technology” (Ferguson and Hooks 1971, pg. 367), although in NTPD Ferguson seems to conflate the two: “If there is no scope for factor substitution except by switching from one fixed-proportion process to another, which implies the existence of heterogeneous capital goods, the simple neoclassical parables may not hold” (Ferguson 1969a, pp. 254-5). Regarding the first “concession”, Ferguson and Hooks remark that “as a result, it was found that the conditions necessary for valid aggregation of heterogeneous capital limited the generality of neoclassical theory” (pg. 367; emphasis added). Regarding the second “concession, the authors assert that “capital must now be measured in value terms, and this raises the problems of defining a quantity of capital and describing its behavior with respect to factor-price changes. Concomitantly, the concept of capital-intensity uniqueness must be critically examined” (Ferguson and Hooks 1971, pg. 368). What is very interesting in this brief concluding section is that the authors do not mount a defense of neoclassical theory in the face of the existence of price and real Wicksell effects. Rather theirs’ is an exposition of the “special cases” that violate the inverse relationship between the capital-labor ratio and the wage-profit (or wage-rental)65 ratio. This is stated succinctly in the absolute in Ferguson (1973), the very last work of Ferguson alone that made it into print:66 “Except for some special cases, the results [of neoclassical theory] show what any economist would expect: the capital-labor ratio varies inversely with the wage-rental ratio; and the permanent consumption stream of a society varies inversely with the rate of interest” (Ferguson 1973, pg. 2). Ferguson footnotes his article with Hooks in referring readers to what those “special cases” look like. What becomes very interesting in all of this is that for Ferguson, the “special cases” are actually the more general cases that include heterogeneous capital goods; that in fact the

64 Judging by the references, Hooks received his dissertation at Texas A&M in 1970 presumably under the direction of Ferguson. His dissertation is entitled The Wicksell Effect and it Implication for Modern

Capital Theory. In the present article the dissertation is referenced in a discussion that concerning Wicksell’s purported explicit assumption of a “production function” that exhibits diminishing returns. See Ferguson and Hooks (1970), pg. 357, note 15. 65 In Ferguson (????) this ratio of factor returns is dubbed the “wage-quasi-rent ratio”. 66 We read from the editor of HOPE that “This essay was completed shortly before Professor Ferguson’s death on 14 January, 1972. His colleagues at Texas A&M University have brought it to publication with only minor stylistic changes” (Ferguson 1873, pg. 1).


assumption of homogenous (“malleable”) capital is actually the “special case” of what in fact is the more “general” case of heterogeneous inputs.


Appendix A Reprint (with permission) of Southern Economic Journal “In Memoriam” to Ferguson, Volume 39, Number 2, October 1972.

In Memoriam Charles Elmo Ferguson

1928-1972

Charles Elmo Ferguson, President of the Southern Economics Association, died on January 14, 1972. The Southern Economic Association and the Southern Economic

Journal record his death with deep regret: a great career has been halted in mid-term. Dr. Ferguson was born i Nashville, Arkansas on September 7, 1928. He earned a Bachelor of Arts degree from Hendrix College in 1949. His graduate work was done at the University of North Carolina, where he obtained a Masters of Arts degree in 1951, and, after military service, a Doctor of Philosophy degree in 1957. In the same year Dr. Ferguson entered academic work as a member of the Department of Economics of Duke University. He left Duke University in 1967 to join the faculty of Michigan State University. In 1968 he became a member of the faculty of Texas A & M University where he remained until his death. A researcher of prodigious energy and outstanding ability, Dr. Ferguson published a large number of research papers in leading economics journals. Although he worked in many areas, his chief interests lay in the theory of production and distribution and in the theory of capital and growth. His work was noted for the rigor of it stheoretical reasoning and for its conscientious empirical verification. In addition to research papers, he published Principles of Economics, (co-author), (1962, revised edition 1965); A Macroeconomic

Theory of Workable Competition (1964); Microeconomic Theory (1966, revided edition 1969, third edition 1972); Economic Analysis, (co-author), (1970); and The Neoclassical

Theory of Production and Distribution, (1969). This last work, a monument of scholarship, is already becoming a standard reference. As a teacher, Dr. Ferguson commanded not only the respect and admiration of his students, but also their affection and loyalty. In turn he took pride in their achievements as they advanced their careers. He was a devoted educator in the best meaning of the word. Aside from his teaching and research work, Dr. Ferguson served on the committee on advanced tests of the Graduate Records Examination and as a member if the Inter-University Committee for Economic Research on the South. He was, for a time, a consultant to the Office of Ordinance Research. He was a Ford Foundation Faculty Research Fellow (1961-2), a National Science Foundation Research Fellow (1964-5) and a Social Science Research Council Fellow (1966). He was a member of the American Economics Association, the American Statistical Association (Fellow), the Econometrics Society, the Royal Economics Society and the Southern Economics Association. He


served on the Editorial Board of the Southern Economic Journal and the American

Economic Review. At the time of his death he was discharging his duties as President of the Southern Economics Association and had completed his presidential address which begins on the next page.67 He was a man to whom friendship was important and he had many loyal friends who miss him sadly. But he will also be remembered by those who never met him but who know him through his published work.

67 This is Ferguson (1972c).


Appendix B

Ferguson’s role as a textbook author Ferguson is credited with the publication of three separate economics texts of varying editions. Indeed one of the themes developed in this essay is that Ferguson must be understood as someone keenly interested in the pedagogical issues surrounding the development of the strengthening neoclassical paradigm. It is evident that Ferguson deemed it vitally important to establish as clearly as possible the analytical foundations of neoclassical theory. This certainly characterizes a major attribute of his book The

Neoclassical Theory of Production and Distribution (1969a; hereafter referred to as NTPD)68 and is especially evident his intermediate microeconomics text, Microeconomic

Theory (1966, 1969, 1972; hereafter referred to as MT). In this section we will briefly develop the importance of Ferguson as a well-circulated textbook author. One theme however has to be stressed from the outset. For Ferguson, economic theory was in a serious state of flux and the development of the neoclassical paradigm that was emerging in the 1950’s and 1960’s required accompanying texts for support. In at least two of the three textbooks this emerges as an obvious motivational force. And it is in this capacity that we have an opportunity to reflect on how Ferguson envisioned neoclassical theory. Ferguson’s first textbook is the collaborative effort with his Duke colleague Juanita Kreps, 69 what their colleague William Yohe recalled as “the Ferguson and Kreps principles text enterprise” (Yohe, ????, pg. 5). It was a first year two-semester principles originally published in 1962 and later revised in 1965. The structure of this text (revised edition) contains 863 pages and 11 separate “parts” with a total of 40 chapters. The authors in the Preface of the first edition refer to a “trio of objectives” that are stressed in their text: the theory of the firm, the twin objectives of full employment and low price-

68 The present section concerns Ferguson’s textbooks proper; we will return to his 1969 opus in the next section. 69 Ferguson also collaborated with Kreps on a subject that she very much made significant contributions to, namely studies of the economic impacts of the elderly and aging. As part of funded studies for the Duke University Center for the Study of the Aging, Ferguson and Kreps, together with their fellow colleague James M. (Mack) Folsom wrote a detailed three part study of trends in labor and the impact of the aged. The study entitled “Employment of Older Workers” (Kreps, Ferguson, and Folsom 1963) was published in a volume edited by Kreps Employment, Income, and Retirement Problems of the Aged ( Kreps 1963; see also page 661-662 of “News and Notes”, Industrial and Labor Relations Review, July 1961, Volume 14, No.4 where Kreps briefly describes this study as one of four funded by the Center for the Study of Aging). Juanita Kreps has a long history at Duke. She originally received her Ph.D. there in 1948 and in 1955 returned to Duke as a part-time instructor, a position that turned to fulltime in 1958 (Yohe ????, pg. 2). She eventually became Dean of the Woman’s College and oversaw its merger with the men’s programs in 1972. She also served in Carter Administration as Secretary of Commerce, becoming in 1977 the first woman to hold that position. We intend to look through her archival material while at the Economics Papers Project.


high output policies for firms, and theories of inflation and growth. Certainly the themes developed in MTWC can be discerned here.70 In a review that came out the December 1962 issue of the American Economic Review, Simon Whitney is generally favorable although he does find some of the material too advanced for a first year principles course. Picking up on its triad theme, he writes that Ferguson and Kreps “offer a fuller treatment of price stability and growth to supplement the now customary emphasis on full employment” (Whitney, 1962 pg. 1125). He identifies the first five of the eleven part structure as primarily macroeconomic in content and the remaining 6 as primarily microeconomic in content. Table 1 below shows the Table of Contents from the second 1965 edition. Included in the last column are Whitney’s characterizations of the content of each part.

Table 1: Table of Contents from Ferguson and Kreps (1965) Part Title of Part Sub-Title of Part Whitney’s Characterization (pg. 1125)

I (Chs. 1-4)

Preview Objectives, Principles, and Policy Goals, economic laws, resources, and the operation of the market economy

II

(Chs. 5-9) The Economy Demand, Supply, and National Output Supply, demand, and national income

III (Chs. 10-13)

The Economy Determination of National Output Most of employment theory

IV

(Chs. 14-18) Objectives and Controls

Government Finance and the Monetary System

Money and public finance

V (Chs. 19-20)

Macroeconomics A review of theory and controls A “synthesis of the classical and Keynes system” (using Hicks) plus comments on economic policy

VI

(Chs. 21-26) The Economy Production and Pricing of the National Output The firm, competition, and pricing

VII

(Chs. 27-29) Objectives and Controls

Business, Labor, and Agriculture Control of business, labor, and agriculture

VIII (Chs. 30-32)

The Economy Distribution of the National Output Income distribution

IX

(Chs. 33-35) Microeconomics A Review of Theory and Controls Chiefly cost-price inflation, welfare economics, and

workable competition

X (Chs. 36-38)

The Economy National Interest and International Trade International trade emphasizing the recent United States payments deficits

XI

(Chs. 39-40) The Economy National Interest and International Problems Comparative economic systems and development

The textbook is written with a very seriousness of purpose. The volume ends with a short page and a half Epilogue that begins with excerpts from President Kennedy’s and Johnson’s declaration of the war of poverty. Students are told at the very end that the basic principles expounded upon in the text provides the framework from which economic problems are to be analyzed and that they should take this task serious because

70 In Back Matter from the Review of Economics and Statistics (1962, Volume 44, No. 4 and 1964, Volume 46, No. 4) this trio of objectives is touted as its very selling point and, presumably from the perspective of the authors, its distinction from other texts of the day. The 1964 announcement of the forthcoming second edition in January 1965 reads as follows:

“The Second Edition of this widely acclaimed text continues to offer a richly illustrated and sound presentation of basic economic tools and principles as well as a penetrating consideration of important economic issues of the day. Thoroughly up-to-date, it is organized around the three issues that currently dominate national objectives: (1) a relatively stable price level, (2) full employment, (3) continued growth of per capita output. Full treatment is given to macroeconomic and microeconomic analysis, and both are brought to bear on policy”


“the free world rests with the decisions you [e.g. the student] will help to make” (Ferguson and Kreps, 1965, pg. 847). The second and better-known textbook is Ferguson’s Microeconomic Theory. This intermediate textbook book underwent three revisions in Ferguson’s lifetime and two more after his death with the collaboration of J. P. Gould.71 The three editions published in Ferguson’s lifetime are 1966, 1969, and 1972. The Preface to the third edition written by Ferguson is dated January 1972, the month he died, and the title page attributes the authorship to the Late Professor of Economics, Texas A&M – clearly Ferguson had died while the book was still in process. The major substantive changes happened from the first to the second edition; relatively little more than stylistic changes and updated references distinguish the second from the third and the fact that the Preface to the second is much like the third attests to this.72 The fourth edition came out in 1975 under the authorship of Ferguson and Gould (1975). A fifth edition appeared in 1980 as Gould and Ferguson (1980). It wasn’t until the sixth edition came out as Gould and Lazear in 1989 that Ferguson’s name was finally dropped, although we do read in their Preface that “of course, the deepest debt is to the late Professor Ferguson who is, more than anyone, responsible for what we believe is a valuable text” (Gould and Lazear 1989, pg. viii). Because we are concerned with how Ferguson viewed the development and teaching of neoclassical microeconomic theory we will limit our comments to the first three editions with references in the main from the third. Ferguson’s text is broken in to 5 separate parts of microeconomic theory in a total of 16 chapters. Table 2 below reproduces the Table of Contents for the third edition.

Table 2: Table of Contents from Ferguson (1972)

Part Title of Part Chapters

Introduction Scope and Methodology of Economics

I Theory of Consumer Behavior and Demand 1: Theory of Utility and Preference: Historical Approach

2: Modern Theory of Consumer Behavior

3: Topics in Consumer Demand

4: Characteristics of Market Demand

Advanced Readings Part I

II Theory of Production and Cost 5: Production with One Variable Input

6: Production and Optimal Input Proportions: Two variable Inputs

7: Theory of Cost

Advanced Readings Part II

III Theory of the Firm and Market Organization 8: Theory of Price in Perfectly Competitive Markets

9: Theory of Price Under Pure Monopoly

10: Theory of Price under Monopolistic Competition

11. Theories of Price in Oligopolistic Markets

12. Linear Programming: An Approach to Decision Making in Government and Business

71 72 This may very well have been the last thing Ferguson worked on. In a conversation with Thomas Saving it was indicated to me that Ferguson was pretty much incapacitated during the last days of his illness. The fact that he died the 14th of January, 1972 yields a pretty small window indeed for him to draft a new Preface. This represents the last word of Ferguson alone in terms of microeconomic theory (i.e. without the postmortem “aid” of Gould).


Advanced Readings Part III

IV Theory of Distribution 13. Marginal Productivity Theory of Distribution in Perfectly Competitive Markets

14. Theory of Employment in Imperfectly Competitive Markets

Advanced Readings Part IV

V Theory of General Equilibrium and Economic Welfare

15. Theory of General Economic Equilibrium

16. Theory of Welfare Economics

Advanced Readings Part V

Author X refers to Ferguson’s style as “low-brow”. Ferguson’s presentation of microeconomic theory takes the form of five different stages, each represented by a different part in his text. He begins with the theory of value. His cardinalist sympathies emerge in the historical survey of utility theory that comprises chapter 1, a survey which the reviewer Trout Rader (1967) deemed as one of the texts most positive attributes (see below). Ferguson then introduces the theory of production and cost. Next come the theories of output price and market structure followed by the theories of input pricing and income distribution. Since the heretofore has been strictly within a partial equilibrium approach, he concludes with an introduction to general equilibrium and welfare economics, something that the same reviewer felt was far too out of touch with more modern developments (see below). Throughout this story Ferguson weaves are many seminal references (although as indicated Rader thought some lists not up-to-date) including his own contributions (in the 1972 edition he cites 12 of his solely written articles and 3 with collaborators as well as his 1969 book NTPD and 1964 book MTWC). In June 1967 Trout Rader wrote a review of the first edition in the AER. The review was three pages long and contained 19 references. Of the text’s positive attributes according to the reviewer are (1) Ferguson’s exposition of Sweezy’s theory of oligopoly as “vacuous” (Rader 1967, pg. 605 citing Ferguson 1966a pp. 277-78), (2) the “good discussion of the dependence of factor demands on the own factor price and own product price” (3) the fact that “there is a substantial section on cartels and price leadership, (4) that there is “no sign of capitulation to non-neoclassical theories of the firm, such as ‘saticficing’”73, and (5) the historical survey of utility theory already mentioned. (Rader 1967, pg. 605). But these positive attributes were not enough for Rader, who then proceeded to list 12 detailed “flaws”, many of which are shared by other textbooks, “but this makes them no less annoying” (Id):

1. Rader finds a contradiction in Ferguson’s development of the long-run u-shaped cost curve (compare pp. 213-14 to pg. 217).

2. Question about dynamic vs. static equilibrium (quotes Samuelson) 3. Operation of new plant and equipment on long run theory of cost (Vintage

model?) 4. Ferguson’s welfare economics is limited to the Bergson approach

73 Recall that such non-neoclassical alternatives to the theory of the firm were precisely advanced by Ferguson in his 1964 MTWC.


5. His treatment of GE theory suffers from a lack of reference to modern developments as already mentioned

6. In treatment of production Ferguson states the firm will never choose to produce in region I (falling MC) but does not explicitly speak of perfect competition (counter example of monopoly); Also reader is told u-shaped cost curve is compatible with perfect competition (note here that Ferguson begins to back away from his earlier takes; this is also seen in the lack of non-neoclassical theories of the firm

7. Failure to note that elasticity is a weighted average 8. Ignores Nash and Zeuthen’s approach to bargaining games 9. Ferguson on the indeterminancy of bilateral monopoly 10. Sweeping statement that the income effect is always positive 11. The uncritical presentation of monopolistic competition 12. Relation of social vs. private costs

Rader concludes that “I would recommend the text for classroom use if and only if the teacher supplements the text to make these reservations” (Rader 1967, pg. 607). This certainly is not a ringing endorsement in an uncertain textbook market. However Ferguson’s text did stand the test of time, reaching as we have seen many years past his death. The last text that Ferguson wrote was the collaborative effort with Charles Maurice, his colleague at Texas A&M. This was a first year principles text that stood as an introductory complement to his intermediate text. The first edition appeared in 1970, the only one in Ferguson’s lifetime. Subsequent editions are the second and third (1974 and 1978) published still under the names Ferguson and Maurice; a fourth edition in 1982 with the help of Owen Phillips (Maurice, Phillips, and Ferguson 1982); and the fifth and final edition where Ferguson’s name is dropped (Maurice and Phillips 1986). This text was worlds apart from his earlier effort at a first year text with Kreps. The content is strictly applied and simple examples abound. C.D. Hadbury reviewed this book in the August 1971 issue of Economica. He gave it a generally favorable review but expressed issue with the first and last chapters. {Note that Saving in his obituary of Maurice in 1999 SEJ holds that Ferguson and Maurice was an intermediate text. Yet it is certainly not as thorough as Ferguson’s Microeconomic Theory….} {Mention collaborations with Maurice RE: inferior factors.} {Write conclusion and finish this section}


Appendix C: Model Analysis Throughout Ferguson’s work he utilizes a methodology he calls “model analysis” and in various places explicitly brings attention to this fact. Digression on Model Analysis: “Model analysis” is Ferguson’s choice of methodology. In his intermediate text he devotes and entire section of the introductory chapter on the method of model analysis in theorizing about economic phenomena:

“Since this text is exclusively concerned with economic models and their use in analyzing real world economic problems, it is especially important to give attention to the use of model analysis in general before undertaking a study of specific economic models” (Ferguson 1972a, pg. 5).

Ferguson then proceeds to show a diagram based on one that appears in Coombs, Raiffa, and Thrall (1954) [Coombs, C.H. , Raiffa, H. and Thrall, R.M. (1954) Some views on mathematical models and measurement theory” Chapter 2 in Trall, R.M., Coombs, C.H. and Davis, R.L. (Eds.). (1954) Decision Processes.. John Wiley and Sons: New York.

Figure : Model Analysis Schematic

Experimental Design

Real World

Logical Model

Observations

Real World Conclusions

Logical Conclusions

Experimentation

Experimental Abstraction

Theoretical Abstraction

Statistical Interpretation

Theoretical Interpretation

Logical Argument


Appendix D: A short history of the excess profits tax In December of 1950 the US Congress passed the Excess Profits Tax Act of 1950, one of three spending bills passed by the Congress in order to meet the revenue needs of the Korean War (the others were the Revenue Act of 1950 and the Revenue Act of 1951)74. Excess profits taxation in general imposes a temporary tax on industries and firms during times of national crises such as war. In the history of the United States legislation was passed into law that activated a temporary excess profits tax on only three occasions: in 1917 to help pay for World War I75; in 1940 for (anticipated) for WWII funding76 (note this one was more proactive); and the 1950 Act reference above for the Korean War.77 Throughout the law’s history there was a tremendous amount of controversy regarding the proper standard by which an “excess profit” should be measured and it is this question that Ferguson addresses in his work. The issue here is one of determining what profits were “excess” and hence subject to the tax, and what profits were “normal” and hence exempt (the legislation termed this “excess profits credits”). The two standards

74 “In response to the revenue needs with the Korean War, two tax bills were enacted: the Excess Profits Tax Act of 1950 and the Revenue Act of 1951. The former was a corporate tax increase, while the latter raised individual tax rates. The Excess Profits Tax Act was set to expire June 30, 1953. Legislation, however, extended this expiration date until December 31, 1953, which coincided with the expiration date for the individual rate increases in the Revenue Act of 1951” (Keven D.Hoover (2001). Causality in

Macroeconomics. Cambridge University Press; pg. 230). Hoover does not mention the Revenue Act of 1950 here, although the former Secretary of the Treasury for the Truman Administration does include that legislation in his account (see note 5 below). See Riddick (1951) (Riddick, Floyd M. (1951). The Eighty-First Congress: First and Second Sessions, Western Political Quarterly, Vol. 4, NO. 1; pp. 48-66.) for an account of the floor debates over this and other pieces of legislation of the (lame duck) 81st Congress. See Adams (1918) for an early and critical account of the nature of excess profits legislation (Adams, T.S. (1917). Principles of excess profits taxation, Annals of the American Academy of Political and Social

Science, Vol. 75, Financing the War; pp. 147-158). 75 George E. Lent, then a consultant to the Tax Analysis Staff of US Treasury but better known as Senior Analysis for the IMF (retired 1977), notes that “before the bill was enacted, in February, 1919, the war had ended; hence the…tax was restricted to the year 1918….[t]he excess profits tax survived until the end of 1921” (pg. 482-483; Lent, George. (1951). Excess-profits taxation in the United States, Journal of Political

Economy, Vol. 59, No. 6; pp. 481- 497). 76 Lent notes that the tax was passed as the Second Revenue Act of 1940: “The outbreak of war in December, 1941, did not alter the basic approach to the taxation of excess profits, and the 1940 structure remained in effect…with the end of the war, the excess-profits tax was quickly repealed (October, 1945) so as to remove its possible deterrents to peacetime production” (Lent, 1951, pg. 484). 77 As indicated this was the last time an excess-profits bill has been enacted into legislation. The Vietnam War was funded in an entirely different way, namely via deficit spending, as is the current Iraq War. Various voices have however raised of late calling for Congress to enact an excess-profits tax, as much for Iraq War funding as for Hurricane Katrina relief, and as a result several pieces of legislation have been offered in both current and the preceding Congresses. As one example, in 2005 NY Democrat Charles Schumer sponsored legislation called the Recapture Excess Profits and Invest in Relief (REPAIR) Act of 2005 (S. 1809): ”A bill to amend the Internal Revenue Code of 1986 to impose a temporary windfall profit tax on crude oil and to use the proceeds of the tax collected to offset the cost of supplemental spending bills that are targeted to aid victims of Hurricane Katrina and Rita, and for other purposes” (http://www.govtrack.us/congress). An the Institute for Southern Studies based in Durham, N.C. has recently called for an excess profits tax explicitly to fund the Iraq War which has been gaining some support in more progressive circles (e.g. the Green Party).


that were commonly used, what Lent (1951) identifies as “fundamentally opposing”, were the war-profit tax and the high-profits tax. We read in Lent that the former “is designed to recapture the excess over some normal peacetime experience of the individual corporation” and that the latter “is based on the excess over some presumed reasonable standard rate of return on invested capital” (Lent 1951, pg. 481). The excess profits tax that went into effect in 1917 was essentially a high-profits tax and that in 1940 essentially a war-profits tax. The 1950 legislation included mechanisms for both.78 In terms of the standards of each approach, with high-profits tax legislation a tax was levied according to a range of threshold values (floors and ceilings) in the investment-capital ratio, specifically the ratio of income earned as a percentage capital invested. This standard is referred to as the invested capital standard. War-profits legislation called for a different standard, one based in an average earnings formula of corporations over the best three of a five year base period. This standard is referred to as the average earnings

method. Ferguson notes that “the excess profits tax now on the statute books…defines excessive profits in terms of either capital investment or average earnings, whichever results in the lighter burden upon the individual firm” (Ferguson, 1952. pg. 211). Ferguson approached the question of excess profits from an interest in “ethical principles” and based on such he presents four alternative standards: an income-payroll standard (ratio of income to payrolls); an income-investment standard (ratio of income to investment with the latter measured differently than that from the invested capital standard); an income-sales standard (ratio of income to gross sales); and finally an income-value added standard (ratio of income to value-added). The income-sales and the income-value added standards are similar; the difference is that value-added is equal to gross sales net purchases from other firms. The latter measure for Ferguson was more appealing because by excluding purchases of intermediate inputs, if an increase in price is precipitated by an increase in material cost the excess profit burden remains unchanged. If however costs decrease without a corresponding decrease in sales price, the latter method results in a decrease in the excess profit burden. Ferguson supported the income-value added standard for measuring excess profits: “One must judge the value added ratio standard a superior method for measuring and identifying the excessive profit…the use of

78 See Lent (1951) for a historical account of the competing factions that backed each standard. Business interests of course opposed any type of excess profits legislation, but were especially reticent with respect to the high-profits standard. Lent notes that “business was apprehensive over any permanent excess-profits tax implied by the invested capital approach” (pg. 485). The anti-tax interest group The Tax Foundation reports in November 1952 “Business has been operating under the [tax] for nearly two years. Actual experience has borne out the validity of the strong arguments made against the tax when it was proposed” (Tax Foundation, 1952, Impact of the Excess Profits Tax of 1952). Many government officials among others however were relieved to have gotten this legislation through Congress and on onto Truman’s desk. In a 1969 interview former Secretary of the Treasury for the Truman Administration John Snyder indicated that the increased revenue measures resultant from the three pieces of legislation “increased tax liabilities to an estimated $14,700,000,000 for the full operation at the calendar 1951 income level” (Truman Library, Oral History Interview with John W. Snyder, conducted by Jerry N. Hess, July 2, 1969; http:www.trumanlibrary.org/oralhist/snyder43.htm; pg. 3). Truman himself upon signing the legislation on January 3, 1951 declared that “The Congress and its committees have acted with commendable speed in completing this complex piece of legislation and thereby have provided evidence for all to see that we are determined to finance the defense program without jeopardy to the stability of our economic system or to the soundness of the Government’s finances” (http://www.presidency.ucsb.edu/ws/index.php?pid=13776).


the income-value added standard should result in greater equity, less arbitrariness, and a more satisfactory realization of the of the ethical principles underlying excess profits taxation” (Ferguson 1952, pg. 221; emphasis added).

References

Ferguson’s works: Solo Articles Ferguson, C.E. (1951). Alternative standards of taxable excess profits, M.A. Thesis. University of North Carolina Chapel Hill. Ferguson, C.E. (1952). Alternative standards of taxable excess profits, Southern Economic Journal, Vol. 19, No. 2 (October); pp. 211-221. Ferguson, C.E.. (1956). A social concept of excess capacity, Metroeconomica, Volume 8, Issue 1; pp. 84-93. Ferguson, C.E. (1957a). Welfare Analysis of Workable Competition. Ph.D. Dissertation, University of North Carolina Chapel Hill. (Major advisor Ralph Pfouts??) Ferguson, C.E. (1957b). Static models of average-cost pricing, Southern Economic Journal, Volume 23, No. 3; pp. 272-284. Ferguson, C.E. (1958a). An essay on cardinal utility, Southern Economic Journal, Vol. 25, No. 1; pp. 11-23

Ferguson, C.E. (1958b). A statistical study of urbanization, Social Forces, Vol. 37, No. 1; pp. 19-26 Ferguson, C.E. (1958c). An analogy between Marshall and Keynes, Meteroeconomica, Vol. 10, No. 1: pp. 3-6. Ferguson, C.E. (1959). Some remarks on dynamic price theory, Jahrbücher für Nationaökonomie, Vol. 171, No. 4; pp. 262-274. Ferguson, C.E. (1960a). A note on elasticity, Southern Economic Journal, Vol. 26, No. 3; 239-240 Ferguson, C.E. (1960b). On theories of acceleration and growth. Quarterly Journal of Economics, Vol. 74, No. 1; pp. 79-99. Ferguson, C.E. (1960c). Substitution effect in value theory: A pedagogical note, Southern Journal of Economics, Vol. 26, No. 4; pp. 310-314. Ferguson, C.E. (1960d). The relationship of business size to stability: An empirical approach, Journal of Industrial

Economics, Vol. 9, No. 1; pp. 43-62. Ferguson, C.E. (1960e). Learning, expectations, and the cob-web model. Zeitschrift für Nationaökonomie. Band 20, Heft 3-4; pp. 262-274. (do not have this one). Ferguson, C.E. (1962a). Inflation, fluctuations, and growth in a dynamic input-output model, Southern Economic

Journal, Vol. 28, No. 3; 251-264. Ferguson, C.E. (1962b). Cournot points and the conflict curve, Ferguson, C.E. (1962b). Cournot points and the conflict curve, Review of Economic Studies, Vol. 29, No. 2; pp. 151-153.


Ferguson, C.E. (1962c). Transformation curve in production theory: A pedagogical note. Southern Economic Journal, Vol. 29, No. 2; pp. 96-102 Ferguson, C.E. (1963). Cross-section production functions and the elasticity of substitution in American manufacturing industry, Review of Economics and Statistics, Vol. 45, No. 3; pp. 305-313. Ferguson, C.E. (1964a). A Macroeconomic Theory of Workable Competition. Duke University Press: Durham, N.C. Ferguson, C.E. (1964b). The elasticity of substitution and regional estimates of capital and capital ratios in American manufacturing industry, 1954-1958. In Melvin L. Greenhut and W. Tate Whitman, Essays in Southern Economic

Development. University of North Carolina Press: Chapel Hill, N.C. Ferguson, C.E. (1965a). Substitution, Technical Progress, and Returns to Scale, American Economic Review, Vol. 55, No. (1-2); pp. 296-305. Ferguson, C.E. (1965b). Time-series production functions and technological progress in American Manufacturing Industry. Journal of Political Economy, Vol. 73, No. 2; pp. 135-147. Ferguson, C.E. (1964c). Theories of distribution and relative shares, Jahrbücher für Nationaökonomie, Vol. 176 Ferguson, C.E. (1965c). The elasticity of substitution and the saving ratio in the neoclassical theory of growth, Quarterly Journal of Economics, Vol. 79, No. 3; pp. 465-471. Ferguson, C.E. (1965d). The theory of multidimensional utility analysis in relation to multiple-goal business behavior: A synthesis. Southern Economic Journal. Vol. 32, No. 2; pp. 169-175. Ferguson, C.E. (1966a). Microeconomic Theory. Richard D. Irwin: Homewood, IL. Ferguson, C.E. (1966b). Production, prices, and the theory of jointly-derived input demand functions, Economica, Vol. 33, No. 132; pp. 454-461. Ferguson, C.E. (1967a). Substitution, relative shares, and returns to scale: Some statistical regularities and curiosa, Southern Economic Journal, Volume 34, No. 2; pp. 209-222.

• See page 211, note 7 for another Ferguson article (book chapter actually): “Statistical and theoretical problems associated with aggregate production functions, with special reference to the CES class” in Macesich, George Ed). Essays in Economic Development.

Ferguson, C.E. (1967b). Theory of input demand and the role of ‘inferior factors’ in the theory of production. Revue

d’Economique Politique, 72, pp. 413-33. Ferguson, C.E. (1968a). Neoclassical theory of technical progress and relative factor shares, Southern Economic

Journal, Vol. 34, No. 4; 490-504. Ferguson, C.E. (1968b). “Inferior factors” and the theories of production and input demand, Economica, Vol. 35, No. 138; pp. 140-150. Ferguson, C.E. (1968c). The simple analytics of neoclassical growth theory, Quarterly Journal of Economics and

Business, Vol. 8; pp. 69-83. Ferguson, C.E. (1969a). The Neoclassical Theory of Production and Distribution. Cambridge University Press: Cambridge, U.K. Ferguson, C.E. (1969b). Microeconomic Theory, Revised Edition, Richard D. Irwin: Homewood, IL. Ferguson, C.E. (1971). Capital theory up to date: A comment on Mrs. Robinson’s article, Canadian Journal of


Economics, Vol. 4, No. 2; pp. 250-254. Ferguson, C.E. (1972a). Microeconomic Theory, Third Edition. Richard D. Irwin: Homewood, IL. Ferguson, C.E. (1972b). Elaboration of the two-sector variant: An expansion of Professor Rothschild, Kurt., Kyklos, Vol. 25, No. 2; pp. 229-238. Ferguson, C.E. (1972c). The current state of capital theory: A tale of two paradigms, Southern Economic Journal, Vol. 39, No. 2; pp. 160-176. Ferguson, C.E. (1973). The specialization gap: Barton, Ricardo, and Hollander, History of Political Economy, Vol. ??, No. ??; pp. 1-13.

Ferguson’s works: Collaborations Humphrey, D.D., and Ferguson, C.E. (1960). The domestic and world benefits of a customs union, Economia

Internazionale, Vol. 13; pp. 3-22. Ferguson, C.E. and Moore, A.M. (1961). Measuring change in community welfare, Metroeconomica, Vol. 13, No. 1; pp. 1-11. Ferguson, C.E. and Polasek, Metodey, (1962). The elasticity of import demand for raw apparel wool in the United States, Econometrica, Vol. 30, No. 4; pp. 670-699. Pfouts, R. W. and Ferguson, C.E. (1959). Market classification systems in theory and policy, Southern Economic

Journal, Vol. 26, No. 2; pp. 111-118. Pfouts, R.W. and Ferguson, C.E. (1960a). A matric general solution of linear difference equation with constant coefficients, Mathematical Magazine, Vol. 33, No. 3; pp. 119-127. Pfouts, R.W. and Ferguson, C.E. (1960b). Conjectural behavior and the classification of oligopoly situations, Southern

Journal of Economics, Vol. 27, No. 2; pp. 139-141. Pfouts, R.W. and Ferguson, C.E. (1961). Theory, operationalism, and policy: A further note on market classification. Southern Economic Journal, Vol. 28, No. 1; pp. 90-95. Ferguson, C.E. and Pfouts, R.W. (1962a). Aggregate production functions and relative factor shares, International

Economic Review, Vo. 3, No. 3ppp. 328-337. Ferguson, C.E. and Pfouts, R.W. (1962b). Learning and expectations in dynamic duopoly behavior. Behavioral

Science, Vol. 7; pp. 223-237. Ferguson, C.E. and Stober, William J. (1966). Estimate of union membership from reports files under the Labor-Management Reporting ad Disclosure Act, Southern Economic Journal, Vol. 33, No. 2; pp. 166-186. Ferguson, C.E. and Stober, William J. (1968). On estimation of union membership: Reply, Southern Economic Journal, Vol. 33, No. 4; pp. 417-422 Ferguson, C.E. and Moroney, John R. (1969). The sources of change in labor’s relative share” A neoclassical analysis,


Southern Economic Journal, Vol. 35, No. 4; pp. 308-322. Moroney, John and Ferguson, C.E. (1970). Efficient estimation of neoclassical parameters of substitution and biased technological progress, Southern Economic Journal, Vol. 38, No. 2; pp. 125-131. Ferguson, C.E. and Saving, Thomas R. (1969). Long-run scale adjustments of a perfectly competitive firm and industry, American Economic Review, Vol. 59, No. 5; pp. 774-783. Ferguson, C.E. and Allen, Robert F. (1970). Factor prices, commodity prices, and switches of technique, Western

Economic Journal, Vol. 8, No. 2; pp. 95-109. Ferguson, C.E. and Blair, Rodger. (1971). Inferior factor, externalities, and Pareto optimality, Quarterly Journal of

Economics and Business, Vol. 11; pp. 17-25 Ferguson, C.E. and Hooks, Donald L. (1971). Wicksell effects in Wicksell and in modern capital theory, History of

Political Economy, Vol. 3, No. 2; pp. 353-372. Maurice, S. Charles and Ferguson, C.E. (1971). The general theory of factor usage with variable factor supply, Southern Economic Journal, Vol. 38, No. 2; pp. 133-140. Maurice, S. Charles and Ferguson, C.E. (1972). Factor usage by a labour-managed firm in a socialist economy, Economica, Vol. 39, No. 153; pp. 18-31 Maurice, S. Charles and Ferguson, C.E. (1973). Factor demand elasticity under monopoly and monopsony, Economica, Vol. 40, No. 158.

Book Reviews by Ferguson (1955). Review of Approaches to Economic Development by Norman S. Buchanan and Howard S. Ellis, Southern

Economic Journal, Vol. 22, No. 1; 125-126. (1956). Review of Foundations of Productivity Analysis: Guides to Economy Theory and Managerial Control by Bela Gold, Southern Economic Journal, Vol. 23, No. 1; pp. 87-88. (1958). Review of Economic Models: An Exposition by E.F. Beach, Southern Economic Journal, Vol. 25, No. 2; pp. 230-231. (1959). Review of Decreasing Costs as a Problem of Welfare Economics by C. J. Oort, Southern Economic Journal, Vol. 26, No. 1; pp. 69-70. (1962). Review of Microanalysis of Socioeconomic Systems: A Simulation Study by Guy Orcutt, Martin Greenberger, John Korbel, and Alice Rivlin, Southern Economic Journal, Vol. 28, No. 4; pp. 404-405. (1964). Review of The Theory of General Economic Equilibrium by Robert E. Kuenne, Southern Economic Journal, Vol. 30, No. 3’ pp. 286-288.

(1964) Review of Capital Stock Growth: A Micro-Econometric Approach. Vol. XXI, Contribution to Economic

Analysis by Edwin Kuh, Southern Economic Journal, Vol. 31, No. 2; pg. 166. (1966). Review of Modern Capital Theory by Donald Dewey, American Economic Review, Vol. 56, No. 3; pp. 553-554.


(1967). Review of On the Theory and Measurement of Technological Change by Murray Brown, Journal of Political

Economy, Vol. 75, No. 1; pp. 108-109. (1967). Review of On Political Economy and Econometrics: Essays in Honour of Oskar Lange , American Economic

Review, Vol. 57, No. 1; pp. 225-226. (1971). Review of Roads to Freedom: Essays in Hour of Fredrich A von Hayek, edited by Erich Streissler, Gottfried Harberler, Friedrich A. Lutz, and Fritz Machlup, Journal of Economic Literature, Vol. 9, No. 1; pp. 80-82 (1971). Review of Growth Theory: An Exposition by Robert M. Solow, Journal of Finance, Vol. 26, No. 4; pg. 1016 Ferguson, C.E. and Nell, Edward J. (1972). Two books on income distribution: A review article, Journal of Economic

Literature, Vol. 10, No. 2; pp. 437-453.

Reviews of Ferguson (1964a) A Macroeconomic Theory of Workable Competition

Williamson, Oliver. (1965). Journal of Business, Vol. 38, No. 1; pp. 118-119. Lerner, Arthur. (1966). Econometrica, Vol. 34, No. 4; pp. 890-891 Brechling, Frank. (1965). Journal of the Royal Statistical Society. Series A (General). Vol. 128, No. 1; pp. 156-157. Crutchfield, James A. (1965), American Economic Review, Vol. 55, No. 3; pp. 617-620. Williamson, John, (1965). Economica, Vol. 32, No. 126; pp. 233-235. Haveman, Robert (1965). Southern Economic Journal, Vol. 31, No. 4

Reviews of Ferguson (1969a) The Neoclassical Theory of Production and Distribution

Robinson, Joan. (1970). Economic Journal, Vol. 80, No. 318; pp. 336-339. Harcourt, G.C. (1970). Journal of Economic Literature, Vol. 8, No. 3; pp. 809-811. Puu, Tönu. (1970). Swedish Journal of Economics, Vol. 72, No. 3; pp. 230-240 Ozga, S. A. (1971). Economica, Vol. 38, No. 152; pp. 438-439.


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