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  • Over 3,000 chapters written by leading experts in the field
  • Includes contributions from 36 Nobel Prize laureates
  • Third edition of award-winning publication contains entries on the most topical issues

Now in its third edition, this award-winning publication contains entries written by the world’s most influential economists, including 36 Nobel Laureates. In addition to classic and foundational articles of enduring importance, the latest edition of The New Palgrave Dictionary of Economics includes entries on topical issues including gender and economics, recent economic crises in the European Union and beyond, health economics and the economics of the Internet.

With over 3,000 individual articles, this is the definitive scholarly reference work for a new generation of economists.

Year:
2018
Edition:
3rd
Publisher:
Palgrave Macmillan
Language:
english
Pages:
14896 / 14899
ISBN 13:
9781349951895
File:
PDF, 213.70 MB
Download (pdf, 213.70 MB)

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The New
Palgrave
Dictionary of
Economics
Third Edition

The New Palgrave Dictionary of
Economics

The New Palgrave
Dictionary of Economics
Third Edition

With 754 Figures and 231 Tables

ISBN 978-1-349-95188-8
ISBN 978-1-349-95189-5 (eBook)
ISBN 978-1-349-95190-1 (print and electronic bundle)
https://doi.org/10.1057/978-1-349-95189-5
Library of Congress Control Number: 2017957595
# The Editor(s) (if applicable) and The Author(s) 2018
This work is subject to copyright. All rights are solely and exclusively licensed by the Publisher,
whether the whole or part of the material is concerned, specifically the rights of translation,
reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any
other physical way, and transmission or information storage and retrieval, electronic adaptation,
computer software, or by similar or dissimilar methodology now known or hereafter developed.
The use of general descriptive names, registered names, trademarks, service marks, etc. in this
publication does not imply, even in the absence of a specific statement, that such names are exempt
from the relevant protective laws and regulations and therefore free for general use.
The publisher, the authors and the editors are safe to assume that the advice and information in this
book are believed to be true and accurate at the date of publication. Neither the publisher nor the
authors or the editors give a warranty, express or implied, with respect to the material contained
herein or for any errors or omissions that may have been made.
The publisher remains neutral with regard to jurisdictional claims in published maps and
institutional affiliations.
Printed on acid-free paper
This Palgrave Macmillan imprint is published by Springer Nature
The registered company is Macmillan Publishers Ltd.
The registered company address is: The Campus, 4 Crinan Street, London, N1 9XW, United
Kingdom

Publishing History

First edition of Dictionary of Political Economy, edited by Robert Harry Inglis
Palgrave, in thr; ee volumes:
Volume I, printed 1894.
Reprinted pages 1–256 with corrections, 1901, 1909.
Reprinted with corrections, 1915, 1919.
Volume II, printed 1896.
Reprinted 1900.
Reprinted with corrections, 1910, 1915.
Volume III, printed 1899.
Reprinted 1901.
Corrected with appendix, 1908.
Reprinted with corrections, 1910, 1913.
Reprinted, 1918.
New edition, retitled Palgrave’s Dictionary of Political Economy, edited by
Henry Higgs, in three volumes:
Volume I, printed 1925.
Reprinted 1926.
Volume II, printed 1923.
Reprinted 1925, 1926.
Volume III, printed February 1926.
Reprinted May 1926.
The New Palgrave: A Dictionary of Economics,
edited by John Eatwell, Murray Milgate and Peter Newman.
Published in four volumes.

v

vi

First published 1987.
Reprinted 1988 (twice).
Reprinted with corrections 1991.
Reprinted 1994, 1996.
First published in paperback 1998.
Reprinted 1999, 2003, 2004.
The New Palgrave Dictionary of Economics, Second edition,
edited by Steven N. Durlauf and Lawrence E. Blume.
First published in 2008 in eight volumes
The New Palgrave Dictionary of Economics, Online Edition
Continuously updated between 2008 and 2016
The New Palgrave Dictionary of Economics, Third edition
First published in 2018

Publishing History

Preface

‘During recent years the course of economic study has extended so widely that
it was obviously impossible to restrict the work to the old and formerly wellrecognized boundaries’. That’s Inglis Palgrave in 1893 describing the first
volume of his Dictionary of Political Economy.
One hundred and twenty four years later, with this third edition of The New
Palgrave Dictionary of Economics, those boundaries have extended further
still. While Palgrave noted that his three volume dictionary – what we would
now call an encyclopedia – obviously needed to cover ‘banking, the foreign
exchanges, and the operations of the mint’, he also noted it needed to cover
‘questions of a philosophical character. . .ethics. . .reasoning. . .and the ways in
which diagrams and mathematical processes may lend assistance to economic
inquiry’. Today, the boundaries of economics include the analysis of laboratory experiments, brain scans and computer simulations, investigations of
cultural diversity, management methods and public health interventions, and
in the realm of theory it includes innovations in games, econometrics and asset
pricing. This third edition of The New Palgrave includes entries that review
innovations in all of these areas and many, many more.
Since the second edition of The New Palgrave was published in 2008, the
Dictionary of Economics has added hundreds of new entries in every area of
economics. Just to note a subset:
Extensive coverage of the global financial crisis, from theoretical, econometric and
historical perspectives. LIBOR, Lehman, Fannie Mae and Freddie Mac all have their
entries, and additional entries, draw multiple theoretical lessons from the crisis. The
new entry by Charles Goodhart (CBE, FBA and author of Goodhart’s Law), ‘The Run
on Northern Rock’, is not to be missed, an analytical take on an early event in the
crisis.
Coverage of the euro crisis and its aftermath, including two entries on the Greek
crisis by former Greek Minister of Economics and Finance Nicos Christodoulakis.
Entries with a focus on China, including Diego Restuccia’s entry on factor
misallocation and Gao Haihong’s entry on the growing internationalization of the
renminbi.
Entries in the areas of health economics, the economics of gender and Internet
economics all play a growing role in this third edition.

One of the great pleasures and honors of serving as an associate editor for
The New Palgrave is that one can recruit the finest minds in economics to write
so many of these entries. In total, this edition contains entries by 36 Nobel
vii

viii

Preface

laureates. And since laureates Elinor Ostrom, Vernon Smith, Angus Deaton
and many others contributed well before their trips to Stockholm, it is safe to
predict that this edition, like earlier ones, includes entries by future Nobel
laureates.
Many hands and many minds have contributed to making possible this new
edition, the first in print since the 2008 edition edited by Steven Durlauf and
Lawrence Blume. Two names deserve particular mention for their valuable
work since 2008: Alison Howson and Rachel Sangster, both of whom oversaw
The New Palgrave as it continued to add entries over the past decade.
On a personal note, I recommend an entry by Francis Ysidro Edgeworth –
he of the Edgeworth Box – carried over from the 1893 edition. In ‘Mathematical Methods in Political Economy’, he begins:
The idea of applying mathematics to human affairs may appear at first sight an
absurdity worthy of Swift’s [magnetically flying island] Laputa.

It only gets better from there. Edgeworth himself descended from a line of
boundary-free thinkers. As John Creedy’s biographical entry in this edition
notes, Edgeworth’s grandfather had been an inventor, a member of the famed
Lunar Society of Birmingham, an informal club which included ‘Watt, Bolton,
Wedgwood, Priestley, Darwin and Galton’. And the family inclination to
expand one’s boundaries shows up in Francis’s aunt Maria’s novel Belinda,
where one foolish character mocks the wise heroine Belinda for wasting her
time reading the book that Adam Smith held was the better of his two: The
Theory of Moral Sentiments.
May future editions of The New Palgrave continue to expand the boundaries of economics and continue to lend wisdom to economic inquiry.
July 2017

Garett Jones
Associate Editor

Preface to the Second Edition of The New
Palgrave Dictionary of Economics

The second edition of The New Palgrave: A Dictionary of Economics shares
R.H. Inglis Palgrave’s original goal, ‘. . . to provide the student with such
assistance as may enable him to understand the position of economic thought
at the present time’. That goal was certainly within reach (and achieved) in
Palgrave’s time and that of his successor, Henry Higgs. Some 60 years later, it
was a much more daunting achievement for John Eatwell, Murray Milgate and
Peter Newman, the editors of The New Palgrave: A Dictionary of Economics.
A mere 21 years later, the task is nearly insuperable. When Eatwell, Milgate
and Newman began commissioning entries for their Dictionary in 1983, the
IBM PC with 16K of ram was 2 years old. Econometrics was still largely the
estimation of linear models on mainframe computers. Sequential equilibrium
had been formally introduced to the profession only the year before, and the
Bayesian revolution, indeed the modern revival of game theory, had just
begun. Economists and psychologists had already been talking for some
time, but the field of behavioral economics was still in gestation. Only a few
farsighted economists saw anything more to sociology than James
Duesenberry’s famous quip that ‘Economics is all about how people make
choices; sociology is all about how they don’t have any choices to make’.
Since the appearance of The New Palgrave: A Dictionary of Economics in
1987, the discipline of economics has grown enormously both in analytical
and technical sophistication and in the scope of the subject. The growth of
economics is reflected in the expansion of the Dictionary. This edition has
grown to eight volumes from the four of its predecessor, although many entries
from the previous edition were either removed or electronically archived.
Furthermore, the Dictionary has shed much of its historical character: from
providing a record of the development of economic thought, it has become
more a snapshot of contemporary economics. Whereas the first edition emphasized economic method, this edition reports equally on what those methods
have found. It places more emphasis on empirical work than have any of its
predecessors, reflecting the significant empirical advances that have occurred
in the microeconomic fields in particular. But a static snapshot could not
pretend to be contemporary for long. Our publishers have recognized not
just the magnitude of the change in the stock of knowledge between the last
edition and the present, but also the increased growth rate of economics’
intellectual capital. They have made the Dictionary dynamic. With this edition,
ix

x

Preface to the Second Edition of The New Palgrave Dictionary of Economics

The New Palgrave Dictionary of Economics moves online, with the expectation of regular updates to keep the Dictionary current in ‘real time’. It is no
longer possible to produce a reference work that aspires to be comprehensive
on the small editorial scale of the lone Palgrave or the Eatwell-MilgateNewman trio. The present edition has benefitted from two editorial boards.
We were pleased to have access to a board of advisory editors, many of whose
members’ work has defined the methodological and subject matter transformation of the last 20 years. A board of area editors took on the responsibility of
constructing large parts of the Dictionary, choosing topics, commissioning
writers and editing the entries. This edition simply could not have been
produced without their expertise and efforts. By any measure of sweat equity,
they own much of this book. This edition of the Dictionary has come to print
only through the efforts of people too numerous to properly acknowledge, but
some names must be celebrated. In particular, we cannot thank enough Ruth
Lefevre in London and Susan Nelson in Madison, who organized every nut
and bolt of this project and kept track of manuscripts on five continents.
Economists do not write as well as our Dictionary entries suggest. Every
author benefitted from superb copy-editing by Michael James and Elizabeth
Stone. Finally, it is the job of the editors to keep the writers in line; it was the
job of Alison Jones to keep the editors in line. We deeply appreciate both the
velvet glove and the iron fist it encloses. The huge effort required to bring this
edition to print is compensated for by the opportunity to have contemporary
economics laid out before us. What joy to have the ability to commission an
explanation by any expert of anything we wanted to know. But even this is
second order to our discovery of the warmth and generosity of the community
in which we work. We are deeply appreciative of the support we have received
from our colleagues: those who wrote for the Dictionary, those who helped us
sort out editorial issues and those who just stepped forward to wish us well.
More than just a subject matter, economics is a community of scholars, of
which we are proud to be a part.
February 2008

Steven Durlauf
Lawrence Blume

Preface to the First Edition of The New
Palgrave: A Dictionary of Economics

In the preface to the first volume of his Dictionary of Political Economy
(1894), R.H. Inglis Palgrave said that its ‘primary object. . . is to provide the
student with such assistance as may enable him to understand the position of
economic thought at the present time’. Although appearing almost a century
later, when economics has changed and grown beyond anything imagined in
his time, still much the same claim can be made for The New Palgrave. In order
to accommodate this growth, much that interested Inglis Palgrave has been
jettisoned. Such topics as the administration of public exchequers, foreign
coinage, land tenure systems, legal and business terms, social institutions, and
many others, are all of interest but are, as Henry Higgs said in his preface to the
second edition of the Dictionary, ‘only remotely connected with economics’.
Their place has been taken by whole disciplines unknown to the original editor
(econometrics, game theory, Keynesian economics, optimization theory, risk
and uncertainty and its application, social choice theory, urban economics), as
well as by vast expansions of subjects which were in their infancy in his time
(business cycle theory, general equilibrium theory, growth theory, industrial
organization, labour economics, welfare economics). There is so little
remaining here of the original Dictionary that it would be disingenuous to
call this its third edition. But just as the editor of The New Grove ‘tried to
ensure that something of the fine humane traditions of the earlier editions of
Grove are to be seen in our pages’, so we would like to believe that The New
Palgrave has retained some of the liberal and scholarly spirit of Palgrave’s
enterprise. At least it is like its predecessor in dealing with economics mainly
in its theoretical and applied aspects rather than in descriptive and institutional
detail. The latter becomes outdated within a very few years, depreciating too
rapidly for a publication meant for a longer shelf life than that. Although it is
not intended to contain a directory of economists, over 700 of the nearly 2000
entries in The New Palgrave are in fact biographical. We have aimed at
reasonably complete coverage of the more important economists who have
written primarily in English, especially in Britain itself, and a substantial
treatment of major economists who have written in other languages. Palgrave,
perhaps hoodwinked by his contributor C.P. Sanger, chose only Walras from
economists living at that time, on the distinctly odd ground that ‘he so closely
carried on the work of his father Prof. Antoine Walras that it was not possible to
mention the latter without also describing the works of his son’. We, however,
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Preface to the First Edition of The New Palgrave: A Dictionary of Economics

have included a substantial number of living economists, arguing that economics has grown so much in this century that not to include many of its most
eminent living practitioners would seriously limit the usefulness and scope of
the work. To reduce obvious problems of evaluation we imposed a cut-off date:
a necessary condition for inclusion is to have reached the age of seventy before
1 January 1986. On many non-biographical subjects, large and small, we have
tried to capture diversity and vivacity of view by having multiple entries, under
similar but different titles. In this way, we hoped to obtain entries that present
the results and methods of research with fairness and accuracy, but not
necessarily from a ‘balanced’ point of view. Such a view in these cases should
be sought externally, as it were, using the system of cross-references to consult
other relevant entries. This means more work for the reader but should yield
correspondingly greater reward. There is obviously a rough and ready correlation between the size of entry and the importance which the editors attach to
the person or subject concerned, but the correlation is very far from perfect.
The actual realization of the project did not always turn out in accord with our
original plans. And fortunately so, for we learned a great deal in the process of
editing and as a consequence made continual revisions of those plans. Such
adjustments have made for a better product, but not for one that displays
perfect consistency. In this regard, there can be no reader who will not wish
that the Dictionary were different in some respects, a lot more here, rather less
there, that tired or tiresome topic omitted, that important omission made good.
While it is unrealistic to expect that all such errors of omission and commission
can be avoided, our hope is that the reader will find that those which remain are
unbiased, in almost every sense of the word. There is, however, one major bias.
We wanted not only to provide a thorough account of contemporary economic
thought but also, like Palgrave himself, to have it set in historical perspective.
So we asked authors to write accordingly, discussing for any particular subject
its past and its prospects for the future, as well as its problems of the moment.
Some topics are naturally more apt for this approach than others, and some
contributors were of course more in sympathy with our aims than others. In the
main, however, they responded very well indeed to our request, in some cases
remarkably so. Palgrave was the sole editor of his Dictionary, a labour of love
for his subject over many years. Several of his authors did more than just write
for him, however, by suggesting entries and contributors and by helping the
work through the press. We have tried to preserve Palgrave’s small editorial
scale, but like him could not have done so without the generous and friendly
help (far more than could be reasonably expected) of very many contributors,
so many indeed that it would be invidious to acknowledge them all by name.
We must, however, recognize the key part played by Margot Levy, the
publishers’ managing editor, whose enthusiasm and attention to detail contributed essentially to the timely completion of the work. It is also only simple
justice to acknowledge, with gratitude, how much we have depended on the
assistance of Ann Lesley in Cambridge and Donna Hall at Johns Hopkins,
always cheerfully given and expertly rendered. Editing this Dictionary has left
us with a very strong sense, quite contrary to the layman’s accepted view, of the
solidarity of economics as a profession. This has been shown in many ways,
not least by the extremely favourable response to our invitations to contribute,

Preface to the First Edition of The New Palgrave: A Dictionary of Economics

xiii

which were extended to economists of widely varying ideological and methodological persuasions. Over eighty per cent of those whom we asked agreed
to write, and almost all of those who declined did so with words of regret and
encouragement. Looking back, the hard work of editing subsides into the
background, overwhelmed by the sheer enjoyment of putting it all together,
by the continued pleasure of managing the flow of usually good and sometimes
superlative copy from nearly a thousand authors. We hope that the reader will
experience most of this enjoyment and less of the work.
January 1987

John Eatwell
Murray Milgate
Peter Newman

Note from the Publisher

Now in its third edition, but with a history stretching back to 1894, The New
Palgrave Dictionary of Economics has been the go-to reference work for
generations of economists.
Since the publication of the second edition 10 years ago, much has happened in the world and in economics, in particular the tumultuous years of the
financial crisis and its aftermath. As Garett Jones’s preface illustrates, the
current edition includes substantial new content covering these events alongside entries reviewing growing areas of research which will be of interest to
readers and researchers across the spectrum of economic enquiry. In addition,
and in keeping with Palgrave tradition, classic entries of perennial importance
are maintained. Whether summarizing the economics behind the headlines or
as an entry point into an established topic, the reader can be assured that the
Dictionary provides reliable, vetted content that is authoritative and
informative.
Over 1,700 authors, including 36 Nobel Laureates, have contributed to this
third edition which includes more than 3,000 chapters and nine million words
making this the most comprehensive economic reference resource available
and one that we are proud to publish.

xv

Introduction to the First Edition of the
Dictionary of Political Economy

The primary object of the Dictionary of Political Economy is to provide the
student with such assistance as may enable him to understand the position of
economic thought at the present time, and to pursue such branches of inquiry
as may be necessary for that end. The table of the contents of the work shows
how large is the range of investigation which the student must follow at the
present time. During recent years, the course of economic study has extended
so widely that it was obviously impossible to restrict the work to the old and
formerly well-recognized boundaries. The development of the historical
school has opened out new and fertile fields, while the wants of those who
follow the mathematical method of study have also to be considered. These
two main lines of treatment are here but mentioned as examples. They are far
from exhausting the countless ramifications of inquiry now rightly thought
necessary for the complete investigation of a study bounded only by the
requirements of human life in every social relation. In making the selection
necessitated by the limits of space, the requirements of different classes of
students have throughout been borne in mind. On the one side purely business
matters, such as banking, the foreign exchanges and the operations of the mint,
come in; on the other, subjects of a philosophical character have been dealt
with, such as questions of ethics and methods of definition, analysis and
reasoning, and the ways in which diagrams and mathematical processes may
lend assistance to economic inquiry have also been discussed. Again those
interested in historical studies require an explanation of words found in early
works, and those derived from classical and medieval times, also of legal
phrases, now archaic, together with the modern correlative terms, for only thus
can it be understood how ancient usage has influenced present habit. Life in the
present day, even in the most modern settlements in the United States, in our
British colonies and in the new countries coming into existence in different
parts of the world, is influenced largely by the past. The stream of existence, if
the simile may be permitted, reaches us deeply coloured by the soil of the fields
through which it has flowed by the varied strata of the cliffs – some of them
undermined by it – that have bounded its long and devious course. Considerations of space have necessarily confined the scope of the work mainly to the
developments of economic study in England, the United States and our
English-speaking colonies – and, in regard to these, an endeavour has been
made to present under all the subjects treated an account of the best and most
recent authorities, whilst the opinions held in other countries have also, as far
xvii

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Introduction to the First Edition of the Dictionary of Political Economy

as the required limits allowed, been considered and mentioned. The biographies introduced have been selected with the same end. They show what has
actually been written in former times, and hence will enable the reader to trace
the progress of economic thought. Much attention has been given to the lessknown writers. It is difficult for the student under ordinary circumstances to
trace out when such authors lived, the surroundings which influenced their
lives and the opinions they held. While the oversights in science are sometimes
as remarkable as the discoveries, these earlier labourers have not unfrequently
been the precursors of other and better-known men, and have sometimes
anticipated opinions that have held sway for long periods after them. The
different economic schools in the principal countries of the world are also
described. Thus, this volume contains notices of the American, Austrian,
Dutch and English schools, and the French, German, Italian and Spanish
schools will follow in due course. A work extending over so wide a range of
subjects is, necessarily, the production of many minds, of writers whose
pursuits, occupations and studies are very diverse and varied. I desire to record
my warm thanks to the contributors to the book, which is, I think, in itself an
almost unique example of economic co-operation. Where all have assisted so
heartily, it is less easy to select individual names; but I wish to be allowed to
express my special thanks to Professor Dunbar, Dr. Keynes, Professor
Marshall, Professor Montague, Professor Nicholson, Signor M. Pantaleoni,
Mr. L.R. Phelps, Mr. L.L. Price, Mr. E. Schuster, Professor H. Sidgwick and
General Walker for valuable assistance in different directions, and particularly
to Dr. Bonar, Professor Edgeworth, Mr. Henry Higgs and Mr. H.R. Tedder,
who have kindly helped in the more arduous labour of the preparation of the
work for the press. This is but an act of justice, that readers may know to whom
they are specially indebted.
R.H. Inglis Palgrave
Belton, near Great Yarmouth
Christmas 1893

Associate Editors – Online Content

Roger Backhouse University of Birmingham, Birmingham, UK
Biography, History of Economic Thought and Methodology
Iain Begg London School of Economics, London, UK
Economics of the European Union
Roger Fouquet London School of Economics, London, UK
Energy and Environmental Economics
Yannis Ioannides Tufts University, Medford, USA
Urban and Rural Economics and Economic Geography
Garett Jones George Mason University, Fairfax, USA
Monetary Economics and Behavioral Economics
Adeel Malik University of Oxford, Oxford, UK
Economics of the Middle East
Robert Picard Reuters Institute, University of Oxford, Oxford, UK and the
Information Society Project at Yale Law School, New Haven, USA
Media and Cultural Economics
Gordon Rausser University of California at Berkeley, Berkeley, USA
Agricultural Economics
Jonathan Temple University of Bristol, Bristol, UK
Development
Catherine Tucker Massachusetts Institute of Technology, Cambridge, USA
Economics of the Internet
Bruce Weinberg Ohio State University, Columbus, USA
Labour Economics
Barbara Wolfe University of Wisconsin, Madison, USA
Health Economics

xix

Associate Editors, Second Edition

Roger Backhouse University of Birmingham, Birmingham, UK
Mark Bils University of Rochester, Rochester, USA
Moshe Buchinsky University of California, Los Angeles, USA
Gregory Clark University of California, Davis, USA
Catherine Eckel University of Texas, Dallas, USA
Marcel Fafchamps Oxford University, Oxford, UK
David Genesove Hebrew University of Jerusalem, Jerusalem, Israel
James Hines University of Michigan, Ann Arbor, USA
Barry Ickes Pennsylvania State University, State College, USA
Yannis M. Ioannides Tufts University, Medford, USA
Eckhard Janeba University of Mannheim, Mannheim, Germany
Shelly Lundberg University of Washington, Seattle, USA
John Nachbar Washington University, StLouis, USA
Lee Ohanian University of California, Los Angeles, USA
Joon Park Texas A&M University, College Station, USA
John Karl Scholz University of Wisconsin, Madison, USA
Christopher Taber University of Wisconsin, Madison, USA
Bruce Weinberg Ohio State University, Columbus, USA

xxi

Founding Editorial Advisory Board, Second
Edition

Kenneth Arrow Emeritus Professor of Economics, Stanford University,
Stanford, USA
Sir Tony Atkinson Professor of Economics, Nuffield College, University of
Oxford, Oxford, UK
Richard Blundell Professor of Economics, University College London,
London, UK
William Brock Vilas Research Professor of Economics, University of Wisconsin, Madison, Madison, USA
Sir Partha Dasgupta Professor of Economics, University of Cambridge,
Cambridge, UK
Peter Diamond Institute Professor, Massachusetts Institute of Technology,
Cambridge, USA
Roger Guesnerie Delta PARIS-Jourdan, Paris, France
James J. Heckman Henry Schultz Distinguished Service Professor of Economics, University of Chicago, Chicago, USA
Elhanan Helpman Galen L Stone Professor of International Trade, Harvard
University, Cambridge, USA
Takatoshi Ito Professor of Economics, University of Tokyo, Tokyo, Japan
Andreu Mas-Colell Societat de la Informació/Universitat Pompeu Fabra,
Barcelona, Spain
Peter Phillips Sterling Professor of Economics and Professor of Statistics,
Yale University, New Haven, USA
Thomas Sargent Senior Fellow, Hoover Institution and WR Berkeley Professor, New York University, New York, USA
Peter Temin Economics Professor, Massachusetts Institute of Technology,
Cambridge, USA
xxiii

A

Abbott, Edith (1876–1957)
P. Kerr

Social reformer, economic historian and a pioneer
in America of the study of the economic position of
women, Edith Abbott was born on 26 September
1876 in Nebraska, and graduated from the University of Nebraska in 1901. She enrolled in a summer
session at the University of Chicago in 1902,
attracting the attention of James Lawrence Laughlin and Thorstein Veblen, and on their recommendation returned to Chicago in 1903 on a fellowship
in political economy, taking her PhD in 1905 with a
dissertation on the wages of unskilled labour in the
USA between 1850 and 1900 (Abbott 1905). It was
during this period at Chicago that she met
Sophonisba Breckinridge who became her mentor
and lifelong friend. In 1906, on a Carnegie Fellowship, she went to the LSE to carry out research on
women in industry. In London she was influenced
by the social reformers of the day, including
Charles Booth and Sydney and Beatrice Webb.
She returned to the USA in 1907 and taught political economy at Wellesley. In 1908 Breckinridge,
now Director of Research at the newly established
Chicago School of Civics and Philanthropy, invited
her to become her assistant.
Abbott’s work there involved her directly in
action for the protection and education of
juveniles and immigrants, for improvements in

housing, and for the reform of correctional institutions. She also worked towards women’s suffrage, the 10-h law to protect women in
employment, and the admission of women into
trades unions. In the 1930s she was to become a
staunch advocate of social insurance measures
and the welfare state. Although sympathetic to
the New Deal, she felt it to be entirely inadequate
when it came to welfare policies.
Her publications ranged over a number of areas
in social and public policy, and with Breckinridge,
she was an influential proponent of the role of the
state as the key element in any extensive programme of social welfare. The journal they jointly
established in 1927, Social Science Review, was
immediately recognized as a highly esteemed professional journal. Her main writings on economics
were collected in her Women in Industry (1910),
where a recurring theme was the distinction
between the progress of ‘professional’ women
(and the women’s movements with which they
were associated) and the relatively unchanged
position of working-class women.
After 1920, although social work came
increasingly to dominate her time, Abbott continued her role as an applied economist. She was a
member of the advisory committee of the ILO on
immigration, and succeeded Breckinridge as
Dean of the School of Social Studies Administration at Chicago. She remained in the post until
1942, and continued editing the Social Science
Review until 1953. She died at the age of 80 at
her family home in Grand Island.

# Macmillan Publishers Ltd 2018
Macmillan Publishers Ltd (ed.), The New Palgrave Dictionary of Economics,
https://doi.org/10.1057/978-1-349-95189-5

2

Abramovitz, Moses (1912–2000)

Selected Works
1905. Wages of unskilled labour in the United
States, 1850–1900. Journal of Political Economy 13: 321–67.
1906. Industrial employment of women in the
United States. Journal of Political Economy
14: 461–501.
1908. Study of early history of child labour in
America. American Journal of Sociology 14:
15–37.
1910. Women in industry: A study in American
economic history. London: Appleton & Co;
last reprinted in 1970.
1915. A forgotten minimum wage bill. Life and
Labour 5: 13–16.

Abramovitz, Moses (1912–2000)
Richard A. Easterlin

Keywords

Abramovitz, M.; Aggregate demand theory;
Business cycles; Economic growth in the very
long run; Inventories; Kuznets cycles

JEL Classifications

B31
Born in Brooklyn, New York, Abramovitz was
educated at Harvard (AB, 1932) and Columbia
(Ph.D., 1939). He held faculty appointments at
Columbia (l940–2, 1946–8) and Stanford University (1948–77) and was a member of the research
staff of the National Bureau of Economic
Research from 1938 to 1969. From 1942 to 1946
he worked as an economist for several organizations within the United States government. He
was elected president of the American Economic
Association in 1979–80.
Abramovitz’s work, which was particularly
influenced by Wesley C. Mitchell and Simon
Kuznets, centres on the study of long-term

economic growth and fluctuations in industrialized
market economies. His first major contribution was
an empirical study of business inventories that
demonstrated the importance of inventory change
in the shorter swings of the business cycle, and
showed how the classification of inventories by
stage of processing aided in the explanation of
their behaviour (Abramovitz 1950). From this,
Abramovitz went on to the study of longer-term
fluctuations, Kuznets cycles of 15 to 20 years duration, and formulated the most widely accepted
interpretation of these cycles. Using Keynesian
aggregate demand theory, Abramovitz developed
a model linking Kuznets cycles to long swings in
building cycles and demographic variables, and to
shorter-term business cycles (Abramovitz 1959a,
1961, 1964, 1968).
Contemporaneously with his work on fluctuations, Abramovitz made important contributions
to long-term economic growth. He was one of the
first to demonstrate that only a small share of longterm output growth in the United States was
explained by factor inputs (Abramovitz 1956).
He documented and analysed the increasing role
of government during long-term economic growth
(Abramovitz 1957, 1981) and directed and coordinated a comparative study of the post-war economic growth of a number of industrialized
market nations (Abramovitz 1979b, 1986). Finally,
he challenged in characteristically perceptive fashion the facile linkage made by many economists
between economic growth and improving human
welfare (Abramovitz 1959b, 1979a, 1982).

Selected Works
1950. Inventories and business cycles.
New York: NBER.
1956. Resource and output trends in the United
States since 1870. American Economic Review,
Papers and Proceedings 46(2): 5–23.
1957. (With V. Eliasberg.) The growth of public
employment in Great Britain. Princeton:
Princeton University Press.
1959a. Long swings in U.S. economic growth.
Statement presented to joint economic committee of the congress. Hearings before joint

Absentee

economic committee of the congress of the
U.S. on Employment, Growth and Price
Levels, Part 2, 11–66, 10 April.
1959b. The welfare interpretation of secular trends
in national income and production. In The allocation of economic resources: Essays in honor
of Bernard F. Haley, ed. M. Abramovitz et al.
Stanford: Stanford University Press.
1961. The nature and significance of Kuznets
cycles. Economic Development and Cultural
Change 9: 225–248.
1964. Evidence of long swings in aggregate construction since the civil war. Occasional paper
no. 90. New York: NBER.
1968. The passing of the Kuznets cycle.
Economica 349–367.
1979a. Economic growth and its discontents. In
Economics and human welfare: Essays in
honor of Tibor Scitovsky, ed. M. Boskin.
New York: Academic Press.
1979b. Rapid growth potential and its realization:
The experience of capitalist economies in the
postwar period. In Economic growth and
resources. Proceedings of the fifth world congress of the international economic association, vol. 1. London/New York: Macmillan.
1981. Welfare quandaries and productivity concerns. Presidential address to the American
economic association. American Economic
Review 71: 1–17.
1982. The retreat from economic advance. In Progress and its discontents, ed. G.A. Almond,
M. Chodorow, and R.H. Pearce. Berkeley:
University of California Press.
1986. Catching up, forging ahead and falling
behind. Journal of Economic History 46:
385–406.

Absentee
F. Y. Edgeworth

An absentee may be variously defined (1) as a
landed proprietor who resides away from his

3

estate, or (2) from his country; or more generally
(3) any unproductive consumer who lives out of
the country from which he derives his income.
Examples of these species are (1) a seigneur
under the ancien régime living in Paris at a distance from his estates; (2) an Irish landlord
resident abroad; (3) an Anglo-Indian ex-official
resident in England and drawing a pension from
India. In writing briefly on the evils of absenteeism it is difficult to use general terms appropriate
to all the definitions; but considerations primarily
relating to some one definition may easily be
adapted to another by the reader.
It is useful to consider separately the effects of
the absentee proprietor’s consumption upon the
wealth of his countrymen; and the moral, as well
as economical effects of other circumstances.
I. The more abstract question turns upon the fact
that the income of an absentee is mostly remitted by means of exports. ‘The tribute, subsidy,
or remittance is always in goods . . . unless the
country possesses mines of the precious metals’
(Mill). So far as the proprietor, if resident at
home, would consume foreign produce, his
absence, not increasing exports, does not affect
local industry. So far as the proprietor’s absence
causes manufactures to be exported, his countrymen are not prejudiced. For they may have
as profitable employment in manufacturing
those exports as, if the proprietor had resided
at home, they would have had in supplying
manufactured commodities or services for his
use. But if the proprietor by his absence causes
raw materials to be exported, while if present
he would have used native manufactures and
services, his absence tends to deprive his countrymen of employment, to diminish their
prosperity, and perhaps their numbers. This
reasoning is based on Senior’s Lectures on the
Rate of Wages (Lecture II), and Political Economy (pp. 155–61). Senior’s position is in a just
mean between two extremes – the popular fallacy and the paradox of McCulloch. On the one
hand it is asserted that between the payment of
a debt to an absentee and a resident there is the
same difference as between the payment and
non-payment of a tribute to a foreign country.

A

4

Absentee

On the other hand it is denied that there is any
difference at all. The grosser form of the vulgar
error, the conception that the income of the
absentee is drawn from the tributary country
in specie, is exemplified in Thomas Prior’s
List of Absentees (1727). McCulloch’s arguments are stated in the essay on ‘Absenteeism’
in his Treatises and Essays on Money, etc., and
in the evidence given by him before some of the
parliamentary commissions which are referred
to below. Asked ‘Do you see any difference
between raw produce and manufactured
goods’, McCulloch replies, ‘I do not think it
makes any difference’ (compare Treatises and
Essays, p. 232). He appeals to observation, and
finds that the tenants of absentee landlords are
‘subjected to less fleecing and extortion than
those of residents’.
J.S. Mill attributes to absenteeism a tendency
to lower the level of prices in the country from
which the absentee draws an income; with the
consequence that the inhabitants of that country
obtain their imports at an increased cost of effort
and sacrifice (Unsettled Questions, Essay i, p. 43).
Mill’s meaning may be made clearer by a study of
the rest of the essay which has been cited, and of
the parallel passage in his Political Economy
(Book v, ch. iv, § 6), where he argues that an
inequality between exports and imports results in
an ‘efflux of money’ from one country to another.
Upon less distinct grounds Quesnay connects
absenteeism with a development of trade and
industry in an unhealthy direction (Oeuvres, ed.
Oncken, p. 189). Among recondite considerations
which may bear on the subject should be mentioned Cantillon’s theory concerning the effect of
the consumption of the rich on the growth of population (Essai, pt. i, ch. xv).
II. Other economical advantages lost by absenteeism are those which spring from the interest
which a resident is apt to take in the things and
persons about him. Thus he may be prompted
to invest capital in local improvements, or to
act as an employer of workmen. ‘It is not the
simple amount of the rental being remitted to
another country’, says Arthur Young, ‘but the

damp on all sorts of improvements’.
D’Argenson in his Considérations sur le
gouvernement ancien et présent de la France
(1765, p. 183), attributes great importance to
the master’s eye.
The good feeling which is apt to grow up
between a resident landlord and his tenantry has
material as well as moral results, which are generally beneficial. The absentee is less likely to take
account of circumstances (e.g., tenant’s improvements), which render rack-renting unjust. He is
less likely to make allowance for calamities which
render punctual payment difficult. ‘Miseries of
which he can see nothing, and probably hear as
little of, can make no impression’ (A. Young). He
is glad to get rid of responsibility by dealing with a
‘middleman’, or intermediate tenant – an additional wheel in the machinery of exaction, calculated to grind relentlessly those placed underneath
it. Without the softening influence of personal
communication between the owner and the cultivator of the soil, the ‘cash nexus’ is liable to be
strained beyond the limit of human patience, and
to burst violently. There can be little doubt but that
absenteeism has been one potent cause of the
misery and disturbances in Ireland. The same
cause has produced like effects in cases widely
different in other respects. The cruellest oppressors of the French peasantry before the Revolution
were the fermiers, who purchased for an annual
sum the right to collect the dues of absentee seigneurs. The violence of the Granger Railway legislation in the western states of America is
attributed to the fact that the shareholders damnified were absentee proprietors (Seligman, Journal
of Political Science, 1888).
There are also the moral advantages due to the
influence and example of a cultivated upper class.
The extent of this benefit will vary according to
the character of the proprietors and the people. In
some cases it may be, as Adam Smith says, that
‘the inhabitants of a large village, after having
made considerable progress in manufactures,
have become idle in consequence of a great
lord having taken up his residence in their
neighbourhood’. The opposite view, presented
by Miss Edgeworth in her Absentee, may be true

Absolute and Exchangeable Value

in other states of civilization. Perhaps the safest
generalization is that made by Senior that ‘in
general the presence of men of large fortune is
morally detrimental, and that of men of moderate
fortune morally beneficial, to their immediate
neighbourhood’.
Reprinted from Palgrave’s Dictionary of Political Economy.

References
Brodrick, G.C. 1881. English land and English landlords.
London.
Carey, H. 1835. Essay on the rate of wages. Philadelphia:
Carey, Lea & Blanchard.
de Lavergne, L. 1860. Economie rurale de la France
depuis 1789. Paris: Guillamin.
Levasseur, E. 1885. A summary of the results of the recent
Italian Commission. Journal des Economistes.
Levasseur, E. 1889. La population Française. Paris.
Montchrétien. 1615. L’économie politique patronale.
Traicté de l’oekonomie politique, ed. Th. FunckBretano. Paris, 1889.
Smith, A. 1776. An inquiry into the nature and causes of
the wealth of nations. London: W. Strahan & T. Cadell.
Taine, H. 1876. L’ancien régime. Paris.
Tocqueville, A. de Clerel. 1856. L’ancien régime et la
révolution, 3rd edn. Paris, 1857.
Wakefield, E. 1812. An account of Ireland, statistical and
political. London.
Young, A. 1780. A tour in Ireland. London: T. Cannell &
J. Dodsley.

Absolute and Exchangeable Value
John Eatwell

Abstract

The notion of absolute (as distinct from
exchangeable or relative) value arises in classical economics from the image of a given
magnitude of output being distributed between
the social classes. Ricardo posited that the
value of the social surplus could be expressed
in terms of labour regardless of how the surplus
was distributed. But since changes in distribution affect exchangeable value, the value of the

5

surplus will typically vary as distribution
varies, even though its physical magnitude
remains unchanged. In 1823 Ricardo concluded that ‘there is no such thing in nature as
a perfect measure of value’.
Keywords

Absolute and exchangeable value; Cairnes,
F. E.; Cairnes, J. E.; Class; Classical economics; Invariable standard of value; Labour theory of value; Marx, K.H.; Rate of profit;
Ricardo, D.; Sraffa, P.; Surplus

JEL Classifications

D0
No one can doubt that it would be a great desideratum in political economy to have such a measure of absolute value in order to enable us to
know, when commodities altered in relative
value, in which the alteration in value had taken
place (David Ricardo 1823, p. 399n).
The idea that changes in the relative or
exchangeable value of a pair of commodities
might usefully be attributed to alterations in the
‘absolute value’ of one or the other of them will
appear rather odd to anyone accustomed to thinking of the basic problem of price theory as being
the determination of sets of relative prices, with
any consideration of ‘absolute’ value being confined to problems in monetary theory and the
determination of the overall price level. Since in
neoclassical theory it is the relative scarcity of
commodities, or of the factor services which are
used to produce them, which is the key to relative
price formation, no conception of ‘absolute’
value, that is, a price associated with the conditions of production of a single commodity, is
either relevant or necessary.
Yet the notion of absolute value arose naturally
within Ricardo’s analysis of value and distribution. The central problem of classical theory is to
relate the physical magnitude of surplus (defined
as the social output minus the replacement of
materials used in its production and the wage
goods paid to the labourers employed) to the
general rate of profit and the rents in terms of

A

6

which the surplus is distributed. The key image is
the distribution of a given magnitude of output
between the classes of the society. ‘After all’, as
Ricardo put it, ‘the great questions of Rent, Wages
and Profits must be explained by the proportions
in which the whole produce is divided between
landlords, capitalists, and labourers, and which
are not essentially connected with the doctrine of
value’ (1820, p. 194). Ricardo was able to sustain
this ‘material’ view of distribution only in the
Essay on Profits, and only there by the implicit
device of a sector in which all inputs and all output
consist of the same commodity, corn, which is
also used to pay wages in the other sectors of the
economy. In the corn sector the division of the
product may be expressed in physical terms, and
the rate of profit expressed as a ratio of physical
magnitudes.
This clear and direct analysis is no longer possible once the strong assumption of a selfreproducing sector is dropped.
The need to express heterogeneous surplus (net
of rent) and heterogeneous capital as homogeneous magnitudes in order to determine the rate
of profit created the need for a theory of value.
Ricardo’s materialist approach led him to the
labour theory of value. The quantity of labour
embodied directly and indirectly in the production
of a commodity is determined by the conditions of
production of that commodity, or as Ricardo put it,
by the difficulty or facility of production, and will
change only when the technique changes. Hence
the aggregates of social surplus and capital
advanced may be expressed as quantities of
labour, these quantities being invariant to changes
in the distribution of social product. So the rate of
profit is determined as the ratio of surplus (on the
land last brought into use) to the means of production, including wages.
Once, however, the impact of changes in distribution on exchangeable value is taken into
account the picture is far less clear. The value of
social output, and of the surplus, measured in any
given standard, will typically now vary as distribution varies, even though the physical magnitude
of social output remains unchanged. The direct
deductive relationship between wages, surplus,
and hence, the rate of profit, is no longer

Absolute and Exchangeable Value

self-evident, or indeed, evident at all. It was
Ricardo’s desire to restore clarity to his analysis
which led to his search for an invariable standard
of value (a standard in terms of which the size of
the aggregate would not vary as distribution was
changed) and for what Sraffa describes as ‘for
Ricardo its necessary complement’, absolute
value (Sraffa 1951, p. xlvi).
The term ‘absolute value’ was used by Ricardo
but once in the first edition of the Principles and
occasionally in letters. It was clarified in the
papers on ‘Absolute Value and Exchangeable
Value’, written in 1823 in the last few years of
his life. These were discovered in a locked box at
the home of F.E. Cairnes, the son of the economist
John Elliot Cairnes, in 1943, and published for the
first time in Sraffa’s edition of Ricardo’s Works
and Correspondence.
There are two versions of the essay. One, a
rough draft, is written on odd pieces of paper,
some of them the covers of letters addressed to
Ricardo. The other is a scarcely corrected draft,
written on uniform sheets of paper. This clean
draft breaks off, unfinished.
The importance of the essay derives from the
reinforcement it provides to that interpretation of
Ricardo’s theory of value and distribution which
suggests that the problem of the determination of
the relative values of commodities stemmed from
Ricardo’s desire to relate his image of the division
of social product as a physical magnitude to the
wages, rents, and rate of profit of a market economy. Ricardo was not interested for its own
sake in the problem of why two commodities
produced by the same quantities of labour are
not of the same exchangeable value. He was,
rather, concerned by the fact that as distribution
of social output changes exchangeable value
changes, disrupting and obscuring an otherwise
clear vision. It was this emphasis on the fact
that changes in distribution lead to changes in
exchangeable value, even though the quantity of
social output and the method by which it is produced are unchanged, which led Ricardo into the
intellectual cul-de-sac of the search for an invariable standard of value.
The absolute value of a commodity is the value
of that commodity measured in terms of an

Absolute Rent

invariable standard. An invariable standard of
value may be found
... if precisely the same length of time and neither
more nor less were necessary to the production of
all commodities. Commodities would then have an
absolute value directly in proportion to the quantity
of labour embodied in them. (Ricardo 1823, p. 382.

Changes in the absolute values of commodities
could then derive only from changes in the
amount of labour embodied in them, and the
value of social output would be invariate to its
distribution.
Yet precisely because all commodities are not
produced under the same circumstances, ‘difficulty or facility of production is not absolutely
the only cause of variation in value, there is one
other, the rise or fall of wages’ since commodities
cannot ‘be produced and brought to market in
precisely the same time’ (1823, p. 368). Hence
Ricardo must conclude, rather sadly, that ‘there is
no such thing in nature as a perfect measure of
value’ (1823, p. 404) – there is no such thing as an
invariable standard of value.
Marx (1883), who could not, of course, have
seen the papers on Absolute and Exchangeable
Value, was critical of Ricardo’s absorption with
the search for an invariable standard. The focus on
changes in relative value obscured the fact that
commodities do not exchange at rates proportional to their labour values (labour embodied).
Yet Marx’s attempt to restore clarity to the analysis of distribution by first determining the rate
of profit as the ratio of quantities of labour, and
then ‘transforming’ labour values into prices of
production, encounters difficulties which derive
from exactly the same source as those which
bedevilled Ricardo – the difference in production
conditions or ‘organic composition of capital’ of
commodities.
The data of classical theory can be used to
determine the rate of profit, as Sraffa (1960)
has shown. But the determination cannot be
‘sequential’ – first specifying a theory of value
and then evaluating the ratio of surplus to capital
advanced by means of that predetermined theory
of value. Rather the rate of profit and the rates at
which commodities exchange must be determined
simultaneously.

7

See Also
▶ Ricardo, David (1772–1823)

Bibliography
Marx, K. 1883. Capital. Vol. 3. London: Lawrence and
Wishart. 1976.
Ricardo, D. 1820. Letter to J.R. McCulloch, 13 June 1820.
In Works and correspondence of David Ricardo. Vol. 8,
ed. P. Sraffa. Cambridge: Cambridge University Press,
1953.
Ricardo, D. 1823. Paper on ‘Absolute and exchangeable
value’ (rough draft, and unfinished clean version). In
Works and correspondence of David Ricardo. Vol. 4,
ed. P. Sraffa. Cambridge: Cambridge University Press,
1951.
Sraffa, P. 1951. Introduction to works and correspondence
of David Ricardo. Vol. 1. Cambridge: Cambridge University Press.
Sraffa, P. 1960. Production of commodities by means of
commodities. Cambridge: Cambridge University Press.

Absolute Rent
Ednaldo Araquem da Silva

Marx’s work on rent was based on his studies of
the statistical reports published after the Russian
Agrarian Reform of 1861. The importance of the
Russian case on Marx’s thinking is highlighted in
Engels’ ‘Preface’ to the third volume of Marx’s
Capital, which draws a parallel between the influence of Russia’s diverse land tenure system on
Marx’s analysis of rent and the role of England
on his analysis of industrial wage-labour.
Although the economic surplus normally takes
the form of profits in the capitalist system, Marx
gave considerable attention to rent. In chapter
XLV of the third volume of Capital (1894), and
in his critical comments on Ricardo’s theory of
rent, published in Theories of Surplus-Value
(1905), Marx introduced the concept of absolute
rent as the rent paid by capitalist tenant farmers to
landowners, regardless of the fertility of the
rented land.

A

8

Absolute Rent

Absolute Rent,
Fig. 1 Marx’s concept of
absolute rent
value
Unit price

AR
P (g)
DR

P (i)

A

B

C

D

Increasing land fertility

Marx (1894, pp. 760, 771; 1905, pp. 244, 392)
defined absolute rent as the difference between
the value of the agricultural product of the least
productive land and the general production
price, P(g). Absolute rent can absorb the entire
[value–P(g)] difference or a proportion of this
difference. In contrast, differential rent is defined
as the difference between the general production
price and the individual production price, P(i).
These concepts are depicted in Fig. 1. By definition, absolute rent is positive even on the worst
cultivated land, A, whereas differential rent is zero
on A, but then becomes positive and increases
with improved land fertility, B, C, and D.
Marx’s concept of absolute rent is based on two
assumptions: (1) the agricultural organic composition of capital is lower than the average of agriculture and industry; and (2) land is cultivated by
capitalist tenant farmers. Assumption (1) implies
that the value of an agricultural commodity will be
above its production price; under assumption (2),
landowners will lease land only to those capitalist
tenants who can pay absolute rent even on the worst
quality and most inconveniently located land.
In contrast to other commodities whose
organic composition of capital is lower than the
average of agriculture and industry, and thus have
their values above their production prices, competition among capitalist producers does not

reduce the values of the agricultural products to
their production prices. The separation of landowners from tenant operators prevents the equalization of profit rates in agriculture with the single
rate prevailing in industry. Landowners are therefore able to seize excess or above average agricultural profits and prevent them from entering the
process by which the average profit rate is formed
(see Marx 1905, p. 37; Murray 1977).
Under Marx’s assumptions, the market price of
an agricultural product will include the absolute
rent above the general production price.
If the worst soil cannot be cultivated – although its
cultivation would yield the price of production – until
it produces something in excess of the price of
production, [absolute] rent, then landed property
is the creative cause of this rise in price (Marx
1894, p. 755).

There has been some confusion as to whether
the upper limit of the market price of an agricultural
product would be set by its individual value on the
worst cultivated land. Marx (1905, p. 332) himself
asked: ‘If landed property gives the power to sell
the product above its [production price], at its
value, why does it not equally well give the
power to sell the product above its value, at an
arbitrary monopoly price?’ Echoing Marx,
Bortkiewicz (1911) and, much later, Emmanuel
(1972) have also questioned why landlords limit

Absorption Approach to the Balance of Payments

absolute rent to the excess of value over the production price on the worst cultivated land. They
suggest that since landowners have the power to
withdraw land from cultivation until the market
price covers both the absolute rent and the production price of the highest-cost producer, they could
also charge a rent in excess of the corresponding
value. In capitalist agriculture, absolute rent has a
negative impact because it prevents agricultural
prices from falling, and because it removes above
average profits, a major source of capitalist technical innovation (see Lenin 1901, pp. 119–29).
Despite some ambiguity in Marx’s formulation
of absolute rent, his argument is persuasive:
Although landed property may drive the price of
agricultural produce above its price of production, it
does not depend on this, but rather on the general
state of the market, to what degree market-price
exceeds the price of production and approaches
the value (Marx, 1894, p. 764, see also p. 762;
Murray 1977; Flichman 1977).

According to Marx (1894, pp. 760, 765; 1905,
pp. 244, 393), the lower composition of agricultural capital compared to that of industry ‘is
a historical difference and can therefore disappear’, and so absolute rent would also tend to
disappear as the productivity of agricultural
labour approaches that of industry. In this case,
the production price of an agricultural product
would approach its value and any rent paid by
the capitalist tenants would constitute a monopoly
rent. The monopoly rent is paid above the value of
the agricultural product, and it would thus be
limited not by value, as in the case of absolute
rent, but by foreign agricultural trade, competition
among landowners, and the consumers budget
(see Marx 1894, pp. 758, 805, 810; 1905, p. 332).
Marx’s theory of absolute rent has been
by-passed by the controversy over the transformation of values into production prices, and has been
little used as a conceptual device to analyse the
effect of landownership on capitalist investment
in agriculture or the effect of landownership on
agricultural prices. Unfortunately, absolute rent
has been neglected by Marxist economists, while
it seems to be a favourite bête noire among sympathetic critics of Marx, such as Bortkiewicz
(1911) and Emmanuel (1972). As a result,

9

absolute rent has an uncertain future as a useful
theoretical device, despite the fact that in many
countries capitalist agriculture still largely conforms to the two basic assumptions made by
Marx more than a hundred years ago.

See Also
▶ Land Rent
▶ Marx, Karl Heinrich (1818–1883)
▶ Rent
▶ Unequal Exchange

Bibliography
Bortkiewicz, L. 1911. La teoria della rendita fondiaria di
Rodbertus e la dottrina di Marx sulla rendita fondiaria
assoluta. In La Teoria Economica di Marx e altri saggi
su Böhm-Bawerk, Walras e Pareto. Turin: Einaudi,
1971.
Emmanuel, A. 1972. Unequal exchange. New York:
Monthly Review Press.
Flichman, G. 1977. La Renta del Suelo y el Desarrollo
Agrario Argentino. Buenos Aires: Siglo Veintiuno
Editores.
Lenin, V.I. 1901. The agrarian question and the ‘critics of
Marx’. In Collected works, Vol. V, ed. V.I. Lenin. Moscow: Progress Publishers, 1973.
Marx, K. 1894. Capital, Vol. III. Moscow: Progress Publishers, 1971.
———. 1905. Theories of surplus value, Part II. Moscow:
Progress Publishers, 1968. Murray, R. 1977. Value and
the theory of rent: I. Capital & Class 1(3): 100–122.

Absorption Approach to the Balance
of Payments
David Vines

JEL Classifications

E0
The absorption approach to the balance of payments states that a country’s balance of trade will
only improve if the country’s output of goods and

A

10

Absorption Approach to the Balance of Payments

services increases by more than its absorption,
where the term ‘absorption’ means expenditure
by domestic residents on goods and services.
This approach was first put forward by Alexander
(1952, 1959).
The novelty of this approach may be appreciated by considering the particular question ‘will a
devaluation improve a country’s balance of
trade?’ The elasticities approach, popular when
Alexander was writing, answers this question by
focusing on the price elasticities of supply and
demand for exports and imports. It holds that the
devaluation will be successful if the price elasticities of demand for exports and imports are large
enough so that the increase in exports sold to
foreigners and the reduction in imports bought
by domestic residents together more than offset
the terms of trade loss caused by the devaluation
(A special case of this result is formalized in the
Marshall–Lerner conditions). The absorption
approach argues, by contrast, that the devaluation
will only be successful if it causes the gap between
domestic output and domestic absorption to
widen. In effect Alexander criticizes the elasticities approach for focusing on the movement along
given supply and demand curves in the particular
markets for exports and imports (a microeconomic approach), instead of looking at the production and spending of the nation as a whole
which shift these curves (a macroeconomic
approach).
Alexander’s criticism of the elasticities
approach is valid. But without further elaboration
the absorption approach is unhelpful in rectifying
the inadequacy. This is because, taken at face
value, the absorption approach merely states an
identity. Let the symbols, Y, C, I, G, X and M stand
for output, consumption, investment, government
expenditure, exports and imports respectively.
Then the Keynesian income-expenditure identity
states that
Y ¼CþIþGþXM

(1)

which may be rewritten
X  M ¼ Y  ðC þ I þ GÞ:

(2)

This identity states precisely that the trade balance
will improve if output, Y, increases by more than
absorption (C + I + G).
What is needed, and what Alexander helped to
provide, is an analysis of exactly how output and
absorption change, in response to a devaluation,
and indeed in response to other developments in
the economy. Such a gap was also being filled at
the time by Keynesian writers (Robinson 1937;
Harrod 1939; Machlup 1943; Meade 1951;
Harberger 1950; Laursen and Metzler 1950; see
also Swan 1956).
All of these authors grafted the Keynesian
multiplier onto the elasticities approach. The
resulting hybrid construct can be used to analyse
the effects of a devaluation as follows. Suppose
that the price elasticity effects do improve the
balance of trade, X–M, by ‘switching’ expenditures towards domestic goods. Then these
‘expenditure-switching’ effects provide a positive
stimulus to the Keynesian multiplier process, and
drive up output Y and absorption C + I + G. Let
x be the expenditure-switching effects on the trade
balance of a devaluation of the currency by one
unit, and let the overall effects of this devaluation
on the trade balance be y. Let the propensity to
consume be c, the tax rate be t and the propensity
to import m, so that the Keynesian multiplier is
k = 1/[1  c(1  t) + m]. The increase in output
resulting from the devaluation is kx and the
increase in absorption is c(1  t)kx. And so
y ¼ k½1  cð1  tÞx:

(3)

If the propensity to consume c is less than unity
and the tax rate t is positive then absorption
increases by less than output, and, as Eq. (3)
shows the trade balance is improved by the devaluation. The above sketch shows how the combination of the elasticities approach and Keynesian
theory is able to provide the needed analysis of
how output and absorption change following
a devaluation. And instead of describing the
outcomes in terms of output and absorption, as
Alexander did, it is possible to give a more
conventional Keynesian description, which
would proceed as follows. Since the multiplier

Absorption Approach to the Balance of Payments

11

k = 1/[1  c(1  t) + m] times the propensity to
import m is less than unity, the increase in imports
induced by the multiplier, mkx, is less than the
positive ‘expenditure-switching effects’, x, and so
the trade balance improves.
We can also show how output and absorption
change after an ‘expenditure-changing’ adjustment
of policy. For example, a one unit increase in government spending will cause output to increase by
k whereas absorption increases by the sum of
the increase in government expenditure and the
induced increase in consumption (1  t)ck; the trade
balance thus worsens by an amount z where
z ¼ k  ½1 þ ð1  tÞck
¼ k  ½1  cð1  tÞ þ m þ cð1  tÞk
¼ mk:

(4)

Again this outcome can be described in the
more conventional Keynesian way: high government expenditure drives up output by the multiplier, k, and sucks in imports of an amount mk.
The combination of the elasticities approach
and Keynesian multiplier theory was used to produce a theory of economic policy for an open
economy, which involved the pursuit of full
employment as well as a satisfactory balance of
trade as policy objectives (Meade 1951; see especially Swan 1956). This theory can be stated
just as well in terms of Alexander’s absorption
approach. For example an improvement in the
balance of trade at full employment requires a
reduction in absorption, without any change in
output. It is obvious from the previous two
paragraphs that this, in turn, requires both
expenditure-switching policies and expenditurechanging policies, since both of these policies
and influence output as well as absorption.
Johnson (1956) put this point masterfully, and
I now express it algebraically. Let the desired
increase in the trade balance be w, let the required
devaluation of the currency be a units and let the
required change in government expenditure be b.
Then from Eqs. (3) and (4)
w ¼ ½1  cð1  tÞkxa  mkb
whereas, since output is not to be affected,

(5)

0 ¼ kxa þ kb

(6)

Solving for b from Eq. (6) and substituting into
Eq. (5), nothing that 1  c (1  t) = 1/k  m, gives
w ¼ ½1=k  mkxa þ mkxa ¼ xa:
Thus the required devaluation is simply a =
w/x and substituting in Eq. (6) the required change
in government expenditure is simply b = w.
This states what is obvious: government absorption must be reduced enough to release resource
from domestic use – the expenditure-changing
component of policy – and the devaluation must
ensure that these resources are actually used to
improve the trade balance, rather than leading to
a fall in domestic output – the expenditureswitching component of policy.
Laursen and Metzler (1950) show that what is
obvious must in fact be qualified. A more careful
analysis would show that the positive expenditure
switching effect of a devaluation on the trade
balance is slightly smaller than the positive
expenditure switching stimulus which devaluation imparts to the Keynesian multiplier process
(whereas we have assumed both of these effects to
be equal, and have denoted them by b). See also
Harberger (1950) and Svensson and Razin (1983).
Modern balance of payments theory has carried criticisms much further than this. It has shown
that the hybrid of the Keynesian multiplier and
elasticities approaches is inadequate in providing
a full analysis of how output and absorption
change. First it does not deal with the inflationary
effects of devaluation. But one way in which
devaluation depresses absorption relative to output is through engendering rises in costs and
prices which depress the real incomes (particularly real wages) of domestic consumers (Diaz
Alexandro 1966). Furthermore, devaluation may
also engender a wage-price spiral so strong as to
preserve the real incomes of domestic consumers,
with the end result that prices rise by the full
extent of the devaluation and there is no relative
price change for the price elasticities effects to
work on (Ball et al. 1977). In that case positive
effects of devaluation on the trade balance can
only emerge as a result of the effects of higher

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prices on absorption (Higher prices lower the real
wealth of consumers and perhaps also increase the
tax burden if tax rates are progressive and not
indexed with inflation). Second, the multiplierplus-elasticities analysis is not appropriate in
analysing the effects of a devaluation not accompanied by any expenditure changing policy if
the economy is at full employment, for in that
case output cannot be expanded through the
multiplier, and the effects of the devaluation
must primarily work through the influence of
inflation on absorption described above. Third,
the multiplier-plus-elasticities analysis does not
deal with monetary conditions. A devaluation,
because it raises prices, may initially also cause
higher interest rates which helps to curtail absorption. But if the improvement in the trade balance
caused by the devaluation is allowed to lead to an
expansion of the domestic money supply, then
gradually interest rates will fall, absorption will
rise, and the effects of the devaluation may turn
out to be temporary. This issue has been analysed
by the Monetary Approach to the Balance of
Payments (Frenkel and Johnson 1976; Kyle
1976; McCallum and Vines 1981). Alexander
made many of these points in his articles whereas
the authors cited at the end of the fourth paragraph
tended to skate over them. For that reason his
work prefigures much subsequent balance of payments theory.
In conclusion, the absorption approach provides a useful perspective from which to view
the trade balance. But it must be supplemented
by a theory both of what determines absorption
and of what determines output. And of course, the
absorption approach only deals with the trade
balance; a full theory of the balance of payments
requires a theory of capital account movements
(and a discussion of how the exchange rate itself is
determined).

Absorptive Capacity

Bibliography
Alexander, S.S. 1952. Effects of devaluation on a trade
balance. International Monetary Fund Staff Papers 2:
263–278.
Alexander, S.S. 1959. A simplified synthesis of elasticities
and absorption approaches. American Economic
Review 49: 22–42.
Ball, J., T. Burns, and J.S.E. Laury. 1977. The role of exchange rate change in balance of payments adjustment –
The United Kingdom case. Economic Journal 87: 1–29.
Caves, R.E., and H.G. Johnson, eds. 1968. Reading in international economics. London: George Allen & Unwin.
Diaz Alexandro, C. 1966. Exchange rate devaluation in a
semi-industrialized country: The experience of Argentina 1955–1961. Boston: MIT Press.
Frenkel, J.A., and H.G. Johnson, eds. 1976. The monetary
approach to the balance of payments. London: George
Allen & Unwin.
Harberger, A.C. 1950. Currency depreciation, income and
the balance of trade. In Caves and Johnson (1968).
Harrod, R.F. 1939. International economics, Cambridge economic handbooks, VIII. 2nd ed. London: Nisbet & Co..
Kyle, J.F. 1976. The balance of payments in a monetary
economy. Princeton: Princeton University Press.
Laursen, S., and L. Metzler. 1950. Flexible exchange rates
and the theory of employment. Review of Economics
and Statistics 32: 281–299.
Machlup, F. 1943. International trade and the national
income multiplier. Philadelphia: Blakiston Co.
McCallum, J., and D. Vines. 1981. Cambridge and
Chicago on the balance of payments. Economic Journal 91: 439–453.
Meade, J.E. 1951. The balance of payments. London:
Oxford University Press.
Robinson, J.V. 1937. The foreign exchanges. In Essays in
the theory of employment, ed. J. Robinson, 2nd ed,
1947. Reprinted in Reading in the theory of international trade, ed. H.S. Ellis and L.A. Metzler, 83–103.
Philadelphia: Blakiston, 1949.
Svensson, L., and A. Razin. 1983. The terms of trade and
the current account: The Harberger-Laursen-Metzler
effect. Journal of Political Economy 91: 97–125.
Swan, T.W. 1956. Longer run problems of the balance of
payments. In The Australian economy, a volume of
readings, ed. H. Arndt and W.M. Corden. Melbourne:
Cheshire Press, 1963. Reprinted in Caves and Johnson
(1968).

Absorptive Capacity
See Also
Richard S. Eckaus
▶ Elasticities Approach to the Balance of
Payments
▶ Monetary Approach to the Balance of
Payments

The idea that the productivity of new investment is
a declining function of the rate of investment – the

Absorptive Capacity

concept labelled ‘absorptive capacity’ – has
attracted attention in development economics
because of its implications as a constraint on growth.
The hypothesis began to emerge most clearly
in the 1950s in the form of a limit on the total
amount of investment which could be carried out
and/or used in any period, as if the marginal
productivity of resources devoted to investment
would, at some level of total investment undertaken, fall to zero. This was the position taken by
Horvath (1958), citing experience in Yugoslavia
and Eastern Europe. An Economic Commission
for Asia and the Far East (ECAFE) report claimed
that ‘capacity sets a limit to the amount of efficient
investment physically possible’, introducing the
distinction between ‘efficient’ and, presumably,
‘inefficient’ investment (ECAFE 1960). In the
early discussions, the concept was used to represent all the constraints on development which
economists could not easily put into the conventional production function, ‘the supply of skilled
labour, administrative capacity, entrepreneurship
and social change’ (Marris 1970).
Rosenstein-Rodan (1961), Adler (1965) and
others described the absorptive capacity concept
as a relationship between the productivity and the
rate of investment, rather than as an absolute
ceiling on investment’s productivity. The source
of the relationship were not discussed in depth nor
investigated empirically and it remained a ‘black
box’ whose inner workings were never fully
explained. Nonetheless, by the mid-1960s the
absorptive capacity idea had become a part
of the standard toolbox of development economics and used readily to explain difficulties experienced in attempts to accelerate economic growth.
Research on growth and planning models led
to both a refinement of the concept and new speculation about its sources. Kendrick and Taylor
(1969), following a suggestion by Dorfman and
Thoreson (1969), modelled the absorptive capacity constraint as a permanent reduction in the
productivity of new investment related to the
rate of investment, as if an increase in investment
were accompanied by the use of progressively
inferior engineering design and materials. Eckaus
(1972) formulated the constraint by making the
productivity of successive tranches of investment

13

in any year decline relative to the original tranche
with, however, the decline only being temporary.
In subsequent periods after the new capital was
completed, its productivity would grow to ‘rated’
levels. He offered the hypothesis that, as investment increases, less and less well qualified engineers and workers and less suitable equipment are
employed in producing the new capital goods and
bringing them into production.
The absorptive capacity concepts came to play
a critical role in the economy-wide policy models
which were formulated as linear programming
problems. If the objective function in such models
is linear, for example, the simple discounted sum
of aggregate consumption over the plan period
and, if all the constraints are linear and do not
control the timing of consumption, the solutions
of the models will exhibit ‘flip-flop’ or ‘bangbang’ behaviour. Aggregate consumption will be
concentrated either at the beginning or at the end
of the planning period. This unrealistic and undesirable result can be controlled by constraints on
the timing of consumption (Eckaus and Parikh
1968). An aggregate utility function with declining marginal utility as a nonlinear objective function and/or absorptive capacity constraints, which
are essentially nonlinear relations between investment and increments in output, are, however, theoretically more satisfactory means of avoiding
‘bang-bang’.
The absorptive capacity concept is related
closely to a generalization which emerged quite
independently of the development literature from
the study of factors constraining the growth of
firms in advanced countries (Penrose 1959). This
was embodied in a theoretical growth model by
Uzawa (1969). The concept is also a close relation, if not the twin, of an idea which appeared
early in the macroeconomic analysis literature
only to be lost and then revived once more. In
chapter 11 of the General Theory, Keynes
describes the marginal efficiency of capital, that
is, the productivity of new investment, as declining with the rate of new investment because,
‘pressure on the facilities for producing that type
of capital will cause its supply price to increase’
(Keynes 1936). Under the title of ‘adjustment
costs’, this characterization began to figure

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prominently in the macroeconomic literature in
the late 1960s (Lucas 1967).
‘Adjustment costs’ is a phrase which is as
appealing as ‘absorptive capacity’. The phenomenon is not explained by giving it a name, however. While the fact that economists continue to
resort to the idea might be counted as evidence
that it reflects a reality, the empirical research on
its sources is still limited.

See Also
▶ Adjustment Costs
▶ Development Economics

References
Adler, J. 1965. Absorptive capacity and its determinants.
Washington, DC: Brookings Institution.
Dorfman, R., and R. Thoreson. 1969. Optimal patterns of
growth and aid with diminishing returns to investment
and consumption, Economic Development Report, vol.
142. Cambridge, MA: Development Research Group,
Harvard University.
Eckaus, R.S. 1972. Absorptive capacity as a constraint due
to maturation processes. In Development and planning:
Essays in honour of Paul Rosenstein-Rodan,ed. J. Bhagwati and R.S. Eckaus. Cambridge, MA:
MIT Press.
Eckaus, R.S., and K.S. Parikh. 1968. Planning for growth.
Cambridge, MA: MIT Press.
Economic Commission for Asia and the Far East
(ECAFE). 1960. Programming techniques for economic development. Bangkok: United Nations.
Horvath, B. 1958. The optimum rate of investment. Economic Journal 68: 747–767.
Kendrick, D.A., and L.J. Taylor. 1969. A dynamic nonlinear planning model for Korea. In Practical
approaches to development planning, ed. I. Adelman.
Baltimore: Johns Hopkins Press.
Keynes, J.M. 1936. The general theory of employment,
interest and money. London: Macmillan.
Lucas, R. 1967. Adjustment costs and the theory of supply.
Journal of Political Economy 75: 321–334.
Marris, R. 1970. Can we measure the need for development
assistance? Economic Journal 80: 650–668.
Penrose, E. 1959. The theory of the growth of the firm.
Oxford: Blackwell.
Rosenstein-Rodan, P.N. 1961. International aid for underdeveloped countries. Review of Economics and Statistics 43(2): 107–138.
Uzawa, H. 1969. Time preference and the Penrose effect in
a two-class model of economic growth. Journal of
Political Economy 77: 628–652.

Abstinence

Abstinence
N. De Marchi

‘Abstinence’ was Nassau Senior’s term for that
conduct for which profit is the reward (1836,
p. 59). He meant it to convey two things: ‘both
the act of abstaining from the unproductive use of
capital, and also the similar conduct of the man
who devotes his labour to the production of
remote rather than immediate results’ (1836,
p. 89). The term he knew was not ideal, but it
was preferable to ‘providence’, which implies
nothing of self-denial; and to ‘frugality’, which
implies care and attention, that is, labour, which
analytically Senior wanted to keep distinct from
the agent of production rewarded by profit. For the
same reason he chose not to speak of profit in
relation to ‘capital’. Capital usually combines the
services of natural agents, labour and abstinence,
but it is desirable in an analysis to keep their
several contributions distinct.
Despite the desirability of precision in analysis, Senior had to admit that in practice ‘it is often
difficult to distinguish profit from wages’, or, for
that matter, rent from profit (1848–9, pp. 149–50).
Nor was he, nor any of the other classical writers
who took over his terminology (e.g. J.S. Mill
1848, p. 34), able to quantify the reward of abstinence. Clearly it is the minimum return for there to
be any accumulation, and, since profit is an uncertain expectation (1836, p. 187), must be at least
equal to the rate of interest on a government bond;
but beyond that exactly how the rate is settled was
not paid much attention. It must not be thought,
however, that profit is just the reward for the initial
refraining from consuming one’s capital. That
would make any net return after the first period
simply rent. The fact that Senior stressed abstinence also in relation to activity with remote
results, suggests that he was fully aware that profit
must be calculated as the present value of a stream
of returns.
The notion of abstinence has been regarded
by Marxian writers as a poor apology for a

Abstract and Concrete Labour

justification of the payment of interest. They have
ridiculed it, using examples comparing the ‘abstinence’ of a Rothschild with the profligacy of a
labourer who spends all his meagre income. Even
John Stuart Mill, in his draft Chapters on Socialism wrote: ‘The very idea of distributive justice, or
proportionality between success and merit, or
between success and exertion, is in the present
state of society so manifestly chimerical as to be
relegated to the regions of romance’ (1879,
p. 714).
These sentiments are misleading in relation to
Senior’s deployment of ‘abstinence’. The idea
derives from his Stoic perspective on supply. Production involves overcoming obstacles such as a
natural preference for leisure and for present
enjoyment; hence prudent behaviour to counter
these impediments requires and merits recompense. Abstinence, for Senior, was on a par with
the other agents of production – labour and natural
agents – and is critical to one of his four fundamental propositions of economic science, the
notion that the powers of labour ‘may be indefinitely increased by using their Products as the
means of further Production’ (1836, pp. 26, 58).
Senior’s point is simply that abstinence is a necessary precondition for capital to emerge.
Marshall, with characteristic appositeness,
insisted on a distinction between abstemiousness
and waiting, and used the latter to replace abstinence (1890, pp. 232–3). He also saw the important point in Senior’s discussion, namely, the need
to encourage the ‘faculty of realizing the future’ or
‘man’s prospectiveness’ (ibid., p. 233). Without
encouragement to this faculty there will be no
supply of capital. Others, such as Böhm-Bawerk
and Fisher, argued against treating abstinence as
a cost (Fisher 1907, pp. 43–5). But this criticism
scarcely touches Senior, and Fisher is basically at
one with Marshall in stressing prospectiveness.
Fisher’s emphasis, however, is on timepreference and the fact that time-preference itself
will depend on the size, distribution over time,
composition and probability of the prospective
income stream facing an individual (ibid.,
pp. 92–4). This is the natural link with recent
models embodying inter-generational transfers
and infinite time-horizons.

15

See Also
▶ Senior, Nassau William (1790–1864)
▶ Waiting

Bibliography
Fisher, I. 1907. The rate of interest. New York: Macmillan.
Marshall, A. 1890. Principles of economics, vol. 2, 9
(variorum)th ed. London: Macmillan for the Royal
Economic Society, 1961.
Mill, J.S. 1848. Principles of political economy. In
Collected works of John Stuart Mill, vol. II, III, ed.
J.M. Robson. Toronto: University of Toronto Press,
1965.
Mill, J.S. 1879. Chapters on socialism. In Collected works,
Vol. V, 1967.
Senior, N.W. 1836. An outline of the science of political
economy, Reprint. New York: Kelley, 1965.
Senior, N.W. 1848–9. Course of lectures delivered in the
University of Oxford. Unpublished; quoted in Industrial efficiency and social economy by Nassau
W. Senior, ed. S. Leon Levy, 2. vols, New York:
Henry Holt & Co., 1928.

Abstract and Concrete Labour
Anwar Shaikh

The reproduction of society requires the production and distribution of the mass of products
which forms the material basis of its existence.
This in turn means that each society must somehow ensure that its available social labour time is
regularly directed, in particular quantities and proportions, towards the specific applications needed
to ensure social reproduction. As Marx points out,
‘every child knows that a nation which ceased to
work . . . even for a few weeks, would perish’
(Marx 1867a).
The above implies that all labour has two distinct aspects. As a part of the general pool of
society’s labour, it is merely one portion of the
human energy available to the community. In this
respect all labour is essentially the same,
representing the expenditure of ‘human labourpower in general’ in its capacity as simply one

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part of the division of general social labour. This is
labour as social labour. But at the same time,
individual labour occurs in the form of a specific
activity aimed at a specific result. Here it is the
particular quality of the labour, its determination
as labour of mining, metalworking, weaving, distribution, etc., which is relevant. This is labour as
concrete labour, related to the concrete result of
its activity.
Although the dialectic between concrete and
social labour is a necessary part of social reproduction, their inter-connection is hard to discern
within societies which produce things-forexchange (commodities), because in this case
individual activities are undertaken without any
apparent consideration for the necessity of a social
division of labour. All useful objects now appear
to be naturally endowed with quantitative worth in
exchange (exchange value), and this apparently
natural property in turn seems to regulate the
actual division of labour.
It is at this point that Marx introduces two
crucial questions. What precisely is a commodity?
And more importantly, why does it become
socially necessary to attach an exchange value
to it? He begins his answer by observing that
as a useful good a commodity is simply a concrete bundle of different socially desirable properties. In this respect it is similar to particular,
qualitatively distinct useful objects in all social
forms of organization. But as an exchangeable
good, its salient property is that it is treated
socially as being qualitatively identical to every
other commodity. This is manifested in the
fact that when commodities are assigned differing quantities of exchange value, expressed in
some common measure, they are thereby being
socially regarded as qualitatively alike, all
reducible to the same homogenous measure of
quantitative worth. A commodity is therefore a
doublet of opposite characteristics: a multiplicity
of concrete useful properties (use value) on the
one hand, and a single magnitude of homogenous quantitative worth (exchange value) on
the other.
The double character of a commodity is strikingly reminiscent of the previously noted duality
of labour as particular concrete labour and as

Abstract and Concrete Labour

general social labour. Indeed, in commodity producing society the various concrete labours ‘only
count as homogeneous labour when under objectified husk’, that is, when they ‘relate to one
another as human labour by relating their products to one another as values’. The concrete
labours are thus counted as social labour only
when they are valorized, and the necessity of
exchange value lies precisely in the fact that it is
through this device that a society containing
apparently independent private producers comes
to grips with the social content of their individual
labours. To answer Marx’s second question,
exchange value is the particular historical mode
of expressing the general necessity of social
labour.
The notion that exchange value is a historically
specific way of accounting for social labour time
does not imply that the terms of exchange of
commodities always reflect the quantities of valorized social labour time that went into their
respective production. Indeed, Marx distinguishes
between the case in which particular useful
objects are produced for direct use and only accidentally or occasionally find their way into the
sphere of exchange, and the case in which goods
are produced in order to be exchanged. In the first
case, when for example otherwise self-sufficient
tribes occasionally barter a few of their products,
the relation between concrete labour and social
labour is effectively determined within each social
group, and exchange merely serves to create a
temporary equivalence between the respective
social labours involved. Because the objects in
question are produced as useful objects and
become commodities only when they enter
exchange, the labours involved are valorized
only in exchange itself. Moreover, since these
activities do not depend fundamentally on
exchange (and hence on the valorization of their
labour), the precise conditions of exchange can in
turn be decided by a variety of factors, ranging
from broad structural influences to merely
conjunctural or even accidental ones.
At the opposite extreme is the case of goods
produced solely for exchange. Now, the particular
labours involved are aimed at producing
exchangeable goods, and the valorization of

Acceleration Principle

these labours is an intrinsic part of their reproduction. As producers of commodities, these labours
create not only bundles of useful properties
(use-values), but also amounts of abstract quantitative worth. In the former aspect, they are of
course concrete labours; but in the latter, they are
value creating activities whose content as social
labour is manifest only in-and-through the
abstract quantitative worth of their products. To
emphasize this particular historical form of the
duality of labour, Marx identifies that labour
which is engaged in the production of commodities as being both concrete (use-value creating)
labour, and abstract (value creating) labour.
Three further points must be briefly mentioned.
First of all, Marx argues that abstract labour time
not only stands behind the production of commodities, but that the magnitudes of these labour
times actually regulate the exchange relations of
these commodities. To this end, he defines the
quantity of abstract labour ‘socially necessary
. . . to produce an article under the normal conditions of production’ as the (inner) value of the
commodity, since it is the ‘intrinsic measure’ of
the exchange value. Secondly, he distinguishes
between the conditions under which the exchange
relations of commodities are dependent on their
(labour) values, and the conditions in which they
are controlled by them. It is only in the latter
instance, in which capitalism has effectively generalized commodity production, that the reproduction of society is regulated by the law of
value. Lastly, he notes that once commodity production is indeed generalized, so that social labour
appears only under objective husk, then the social
relation among producers is actually regulated by
the mysterious value-relation between their products. In this topsy turvy world, a social relation
among persons appears in their eyes to be in fact a
relation among things. This is what Marx calls the
Fetishism of Commodities which is characteristic
of capitalism.

See Also
▶ Adaptive Expectations
▶ Adjustment Costs

17

▶ Labour Power
▶ Marxist Economics
▶ Value and Price

References
Marx, K. 1867a. Capital, vol. I, 1st ed., ch. 1 and Appendix
to ch. 1. In Value: Studies by Karl Marx. Trans. and
Ed. A. Dragstedt. London: New Park Publications,
1976.
Marx, K. 1867b. Capital, vol. I. Introduced by E. Mandel.
London: Penguin, 1976, ch. 1.
Marx, K. 1879. Marginal notes to A. Wagner’s textbook on
political economy. In Value: Studies by Karl Marx.
Trans. and Ed. A. Dragstedt. London: New Park Publications, 1976.

Acceleration Principle
P. N. Junankar

Abstract

The acceleration principle holds that the
demand for capital goods is a derived demand
and that changes in the demand for output lead
to changes in the demand for capital stock and,
hence, lead to investment. The flexible accelerator, which includes both demand and supply
elements, allows for lags in the adjustment of
the actual capital stock towards the optimal
level. The principle neglects technological
change but has been used successfully in
explaining investment behaviour and cyclical
behaviour in a capitalist economy. Almost all
macroeconomic models of the economy
employ some variant of it to explain aggregate
investment.
Keywords

Acceleration principle; Aftalion, A.; Aggregate demand; Aggregate investment; Business
cycles; Capital–output coefficient; Chenery,
H. B.; Clark, J. M.; Depreciation; Derived
demand; Distributed lag accelerator; Eisner,
R.; Expectations; Haberler, G.; Harrod, R. F.;

A

18

Acceleration Principle

Harrod–Domar growth model; Marx, K. H.;
Pigou, A.C.; Technical change

JEL Classifications

E22
The acceleration principle has been proposed as a
theory of investment demand as well as a theory
determining the supply of capital goods. When
combined with the multiplier, it has played a
very important role in models of the business
cycle as well as in growth models of the
Harrod–Domar type. The acceleration principle
has been used to explain investment in capital
equipment, the production of durable consumer
goods and investment in inventories (or stocks).
In general, it has been used to explain aggregate
investment, although it is sometimes used to
explain investment by firms (micro-investment
behaviour). The main idea underlying the acceleration principle is that the demand for capital goods
is a derived demand and that changes in the
demand for output lead to changes in the demand
for capital stock and, hence, lead to investment. Its
distinctive feature, then, is its emphasis on the role
of (expected) demand and its de-emphasis on relative prices of inputs or interestrates.
The acceleration principle is a relatively new
concept: it is possible to find its antecedents in
Marx’s Theories of Surplus Value, Part II (1863,
p. 531). Amongst the earliest exponents of the
acceleration principle is Albert Aftalion in Les
Crises périodiques de surproduction (1913).
Later contributions by J.M. Clark (1917), A.C.
Pigou (1927) and R.F. Harrod (1936) discussed
the acceleration principle both as a determinant of
investment and in its role in explaining business
cycles. Haberler (1937) provides a fairly comprehensive account of the acceleration principle up to
that date. Since then the contributions by Chenery
(1952) and Koyck (1954) provide important
extensions and developments of the theory. In
recent years work by Eisner (1960) has employed
the acceleration principle in econometric work.
Almost all macroeconomic models of the economy employ some variant of the acceleration
principle to explain aggregate investment.

Underlying the acceleration principle is the
notion that there is some optimal relationship
between output and capital stock: if output is
growing, an increase in capital stock is required.
In the simplest version of the acceleration
principle,
K t ¼ vY t
where K t is planned capital stock, Yt is output and
v is a positive capital–output coefficient. On the
assumption that the capital stock is optimally
adjusted in the initial period (that is K t ¼ K t
where Kt is the actual capital stock) an increase
in output (or planned output) leads to an increase
in planned capital stock,
K tþ1 ¼ vY tþ1
and again on the assumption of an optimal adjustment in the unit period
K tþ1  K t ¼ K tþ1  K t ¼ I t ¼ vðY tþ1  Y t Þ
¼ vDY t :
In other words, for net investment to be positive, output must be growing: v is called the
accelerator.
The acceleration principle can be derived from
a cost-minimizing model on the assumption of
either fixed (technical) coefficients and exogenous
output, or variable coefficients with constant relative prices of inputs and exogenous output.
Some of the shortcomings of this simple model
were well known; for example, the problem of
being optimally adjusted: this was discussed in
the context of whether or not the economy
(or the firm) was working at full capacity. If the
economy was operating with surplus capacity, an
increase in aggregate demand would not lead to an
increase in investment. Similarly, it was well
known that the accelerator may work in an asymmetric fashion because of the limitations imposed
on decreasing aggregate capital stock by the rate
of depreciation: the economy as a whole could
only decrease its capital stock by not replacing
capital goods that were depreciating. Another

Acceleration Principle

important qualification to the simple accelerator
model was than an increase in (expected) output
would lead to an increase in investment only if it
was believed that, in some way, the increase was
‘permanent’ or at least of long duration.
A generalization of the simple accelerator is
provided by the flexible accelerator or the capital
stock adjustment principle (also known as the
distributed lag accelerator). It overcomes one of
the major shortcomings of the simple accelerator,
namely, the assumption that the capital stock is
always optimally adjusted. The flexible accelerator also assumes that there is an optimal relationship between capital stock and output but allows
for lags in the adjustment of the actual capital
stock towards the optimal level. This is written as


I t ¼ b K t  K t1
where b is a positive constant between zero and
one and K t equals vYt. This equation implies that
the adjustment path of actual capital stock towards
the optimal level is asymptotic. In this version, the
adjustment is not instantaneous either since,
because of uncertainty, firms do not plan to
make up the difference between K t and Kt1
and/or because the supply of capital goods does
not allow the adjustment to be instantaneous.
A similar equation was derived by assuming
increasing marginal costs of adjusting capital
stock by Eisner and Strotz (1963).
In evaluating the acceleration principle it is
worth stressing that, in some versions, it is used
as an explanation of investment demand with the
implicit assumption that the supply of capital
goods will always satisfy that demand. In models
where the acceleration principle is used to explain
the supply of capital goods, it is assumed that they
always satisfy the demand for them. The flexible
accelerator is a hybrid version which includes
both demand and supply elements. Although
there is no formal treatment of replacement investment, it is usually postulated to be determined in
the same way as net investment. A major shortcoming of the acceleration principle is its simplistic treatment of expectations of future demand as
well as its neglect of expectations of the time paths

19

of output and input prices. Although most of the
work in this field treats the acceleration principle
as applying to the aggregate economy, it has also
been used to explain investment by firms. It is
especially important that the supply of capital
goods is formally modelled along with the acceleration principle determining investment demand.
Aggregation over firms is usually assumed to be a
simple exercise of ‘blowing up’ an individual
firm’s investment demand. However, it should
not be forgotten that in a modern capitalist economy an individual firm may invest by simply
taking over an existing firm rather than by buying
new capital go