James Meade

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James E. Meade
James Meade Nobel.jpg
Born(1907-06-23)23 June 1907
Died22 December 1995(1995-12-22) (aged 88)
Nationality British
Institution London School of Economics
Field Macroeconomics
School or
tradition
Neo-Keynesian economics
Alma mater Oriel College, Oxford
Christ's College, Cambridge
Malvern College
Doctoral
students
Jacques Parizeau
Influences John Maynard Keynes
ContributionsTheory of international trade and international capital movements
Awards Nobel Memorial Prize in Economic Sciences (1977)
Information at IDEAS / RePEc

James Edward Meade, CB , FBA (23 June 1907 – 22 December 1995) was a British economist and winner of the 1977 Nobel Memorial Prize in Economic Sciences jointly with the Swedish economist Bertil Ohlin for their "pathbreaking contribution to the theory of international trade and international capital movements".

Contents

Meade was born in Swanage, Dorset. He was educated at Malvern College and attended Oriel College, Oxford in 1926 to read Greats, but switched to Philosophy, Politics and Economics and gained an outstanding first. His interest in economics grew from an influential postgraduate year at Christ's College, Cambridge and Trinity College, Cambridge (1930–31), where he held frequent discussions with leading economists of the time including Dennis Robertson and John Maynard Keynes.

After working in the League of Nations and the Cabinet Office, he was the leading economist of the early years of Clement Attlee's government, before taking professorships at the London School of Economics (1947–1957) and the University of Cambridge (1957–1967).

Early life and education

Meade was born in Dorset, England on June 23, 1907. [1] He was brought up in the city of Bath, Somerset in south-west England. He attended the Lambrook school in Berkshire from 1917 to 1921, where his education revolved around the Greek and Latin languages. In his time in Oriel College, Oxford, Meade switched at the end of his second year from Greats to Philosophy, Politics and Economics which was a very new concept at that time having started only in 1921. Meade's interest in economics grew due to various reasons.

He considered the heavy unemployment in the United Kingdom in the inter-war period as a menace and a social evil. His association with Major C. H. Douglas, to whom he was introduced to by his aunt, helped him come up with a cure for this evil.

In 1930 Meade was elected to a fellowship at Hertford College, Oxford. There he received the option of continuing his study of economics as a post graduate student. In 1930–31 Meade joined Trinity College, Cambridge after being invited to do so by Dennis Robertson whom he met through his great aunt.

While in Cambridge Meade became close friends with Richard Kahn, Piero Sraffa, Joan Robinson and Austin Robinson, forming the Cambridge Circus for economic discussion. Together they started discussing Keynes' work namely the A Treatise on Money . Every weekend Keynes appeared and was presented with the circle's discussion over the week by Kahn. They also discussed theories with Keynes when they met on Monday evenings at the political economy club in Keynes' room in King's College.

Career

Meade became a lecturer at Hertford College, Oxford in 1931 and continued until 1937. Meade along with young enthusiasts such as Roy Harrod, Henry Phelps Brown, Charlie Hitch, Robert Hall, Lindley Fraser, Maurice Allen and Eric Hargreaves, who was his old tutor at Oriel College, started the concept of teaching economics as a regular subject for examination which was relatively new at Oxford. Meade was assigned with the responsibility of teaching the whole subject of economic theory. The economics of mass-unemployment and international economics interested Meade in particular. At that time Oxford had a really strong branch of the League of Nations Union with Gilbert Murray as its chairman and Margaret Wilson as its secretary. (Wilson married Meade in 1933. [2] ) Meade was made a member of the economics section of the League of Nations in Geneva in 1937. He worked as the main editor of the journal "World Economic Survey" and published the 17th and the 18th editions.

In April 1940 Meade was forced to leave Geneva for England with his family of three children because of the war. He became a member of the Economic Section of the War Cabinet Secretariat in England and remained member until 1947 rising to the post of Director in 1946. Meade was joined by Lionel Robbins and Keynes and together they used the section to solve everyday economic problems ranging from the rationing system to the pricing policy of nationalized companies. Meade became the professor of trade at London School of Economics in 1947 where the Economics department was headed by Lionel Robbins. While he was in Oxford, Meade had written a short textbook titled "An Introduction to Economic Analysis and Policy." Meade believed it was time to rewrite the book while teaching international economics, more precisely the theory of international economic policy. It slowly cultivated into Meade's two books, The Balance of Payments (1951) and Trade and Welfare (1955).

The first volume The Balance of Payments stresses the fact that for each of its policy objectives, the government requires a policy tool. The second volume Trade and Welfare deals with conditions under which free trade makes a country better off and conditions under which it does not. Meade concluded that, contrary to previous beliefs, if a country was already protecting one of its markets from international competition, further protection of another market could be "second best." That is, although the ideal would be to eliminate all trade barriers, if for some reason this was not feasible, then adding a carefully chosen dose of protectionism could improve the nation's economic well-being.

The two books took Meade a decade to complete, however according to him they still did not cover the entire field of international economic policy since he had given less attention to the issue of international aspects of economic growth or dynamic imbalance. Despite his words, Meade shared the Nobel Prize in Economics along with Bertil Ohlin in 1977.

In 1957 Meade moved from London to the chair of political economy in Cambridge, which he held until 1967, after which he resigned to become a senior research fellow of Christ's College, Cambridge. Meade left the fellowship at the retirement age in 1974. During this time Meade started thinking about writing one or two volumes on the domestic aspects of economic theory and policy. He successfully wrote four volumes in this series namely The Stationary Economy, The Growing Economy, The Controlled Economy, and The Just Economy. Even after the four volumes Meade still believed that he had just made the beginning. He believed that the frontiers of knowledge when it comes to economics keep expanding at such a rate that it was almost impossible to establish a soundly based understanding of the entire subject and its ever-evolving parts.

In 1974 Meade took time off to act as full-time chairman of a committee set up by the Institute for Fiscal Studies to examine the structure of direct taxation in the United Kingdom. The committee consisted of a number of first-rate economic theorists and of leading practitioners in tax law, accountancy and administration.

In 1976, he was awarded an Honorary Degree (Doctor of Science) by the University of Bath. [3]

Meade died on 22 December 1995 in Little Shelford, Cambridgeshire. [4]

Meade's model of economic growth

The basic assumptions for J.E.Meade's model are as follows: (1) The economy in question is a closed economy with no relationship with the outside world. (2) There is no government activity involving taxation and expenditure. (3) Perfect competition exists in the market. (4) Constant returns to scale prevails in the economy. (5) There are only two commodities-a consumption good and a capital good. (6) There is full employment of land, labour and machinery. (7) All machinery are alike and the ratio of labour to machinery can be easily varied, hence there is perfect malleability of machinery. (8) There is perfect substitutability between capital goods, consumption goods and any given stock of machines, no matter how old or new they are, a certain percentage gets replaced every year. Meade calls this phenomenon the assumption of depreciation by evaporation.

Determinants of the rate of economic growth

According to the assumptions given above, the net output produced by the economy depends on the following four things: (1) The amount of existing stock of machines in the economy (2) The amount of labor for production process (3) The amount of land or natural resources available for productive use in the economy (4) The technological progress in the economy which is expected to improve over time.

Hence the production function for the economy is given by:

Where:

 net output or net real income           existing stock of machines            the amount of labour           amount of land            time

Time is accounted for because with the passage of time the production would increase without any increase in , , or . An increase in with time (denoted by ) can take place in three ways. First, the machine stockpile may increase if the community starts saving part of their income thereby accumulating real capital. If the increase in the stock of capital taking place in one year is given by , the output would increase by where denotes the marginal net physical product of a machine.

Secondly, , the working population, may grow. If denotes an increase in the amount of labour productivity employed in a single year and measures the marginal product of labour, the output will increase in that year by .

Finally, the net output can increase if there is an increase in the technical progress (hence enabling increased efficiency). The total increase in net output due to technical progress is given by . Hence the total increase in net output in one year is the sum of the three influences. Combining this we get the equation:

Dividing both sides by , we get

Or,

(Equation 1)

Here is the annual proportionate rate of growth of output, the annual proportionate rate of growth of machinery stock, the annual proportionate rate of growth of productively employed labour and the annual proportionate rate of growth of output due solely to increase in technical progress.

Meade denotes these four proportionate rates of growth as and respectively. is the proportion of net national income to be paid in net profits (provided the owners of machinery receive a reward equal to the value of the net marginal product of the machinery). Meade denotes this as and calls it "the proportional marginal product of machinery". Under the assumption of constant returns to scale, it is equal to the proportion of national income received in profits. Similarly represents the proportional marginal product of labour and is equal to the proportion of the net national income going to wages under conditions of constant-returns competitive equilibrium. Meade denotes this as . Hence equation 1 can be written as

(Equation 2)

This shows the growth rate of output as being the weighted sum of three other growth rates, the sum of the growth rate in the stock of machines weighted by the marginal importance of machinery in the productive process i.e., in a competitive equilibrium by the proportion of the national income going to profits plus the growth rate of the population weighted by the marginal importance of labour in the productive process or, in a competitive equilibrium by the proportion of income going to wages plus the growth rate of technical progress Hence equation 2 can be written as

(Equation 3)

Since is the difference between the growth rate of total output and growth rate of the workforce, the growth rate of the real income per head can be measured. For example, if the total real income is increasing by 10 percent every annum but the working population is growing at 8 percent per annum, the income per head is rising by approximately 2 percent per annum.

Equation 3 shows that the growth rate of real income per head (y – l) is the output of three factors.

Firstly it is raised by the growth rate in real capital weighted by its proportional marginal product or by the proportion of net national income which would be paid min profits in a competitive equilibrium . Secondly it is depressed by the growth rate in the working population weighted by one minus the proportional marginal product of labour . Lastly it is raised by the amount of technology in the economy .

The element in equation 3 can also be written down as since the growth rate of machine stock is where is the proportion of the net national income that is saved. Therefore, we have which expresses the same thing in three forms namely the contribution which capital accumulation makes to the growth rate of the final output. Hence the basic relationship between the growth rate of real income per head and its three basic determinants can be expressed as:

Meade explains the application of these equations by taking a simple numerical example. Suppose the people save one tenth of their income such that and that the marginal product of real capital goods or the market profit rate is 5 percent per annum. Hence percent per annum. The contribution of capital accumulation to the growth of output, would be one tenth of 5 percent per annum. Hence ½ percent per annum. The explanation of this is, out of a year's income of 1000, if people save 100 units of product and if a once-for-all addition of 100 units to the stock of machines increases annual output in every future year by 5 units, then the initial annual income of 1000 will be raised by this year's capital accumulation to 1005 or by ½ percent during the course of the year. Assuming initial annual income to be 1000 and the initial machinery stock to be 2000 and . Similarly, the same thing can be expressed by saying that the stock of machines had increased from 2000 to 2100 or by 5 percent per annum. Then and per annum.

Thus the contribution of capital accumulation to growth rate of the final output was one tenth of 5 percent per year or ½ percent per annum.

The same result can be obtained by multiplying the proportion of the national income going to profits , the proportion of the national income which is saved and the annual income to capital stock ratio Our numerical example is: percent per annum.

Critical appraisal of Meade's growth theory

The growth theory provided by Meade is neo-Classical in nature. It is simple and attractive as it promises a state of steady economic growth. However it suffers from a few drawbacks First, for a steady state of economic growth to exist, the technological progress should be assumed to be entirely labour-augmenting. This is the special case of Harrod-neutral technological progress. However this does not seem to exist in the model.

Second, the neo-Classical adjustment mechanism depends on the flexibility of factor prices. But if they are not flexible a lot of difficulty is established. For example, in the Keynesian liquidity trap, the interest rate may fail to go down beyond a minimum level hence preventing the capital-output ratio to be high enough to reach growth equilibrium.

Third, there is no mention about investment function in the model. It is assumed to be solely determined by savings. Hence entrepreneurial expectations about the future are not taken into account.

Fourth, in the neo-Classical models capital is assumed to be jelly-like, homogeneous and malleable. This assumption is truly unrealistic, but without it present, it becomes very difficult to reach a stage of steady growth.

Finally, the technological progress is considered to be totally exogenous which is again extremely unrealistic and has been pointed out by many economists. To sum up, the neo-Classical growth model of Meade is based on certain restrictive and unrealistic assumptions. Hence applying this model in the case of under developed nations is almost impossible since the assumptions of perfect competition, full employment of labour and machinery and constant returns to scale do not fit in their economic realities.

Other contributions

Professor Meade made other contributions to economics. For example, he showed that the labour-managed firm (or worker cooperatives) need not respond inefficiently to price rises even in theory. [5] Along with fellow Neo-Keynesian economist James Tobin in 1980, [6] [7] Meade proposed nominal GDP targeting as a monetary policy rule during his Nobel Prize memorial lecture on 8 December 1977. [8] [9]

Published works

His books include:

Notes

  1. Richard W. Stevenson (28 December 1995). "James E. Meade, Nobel Economist, Dies at 88". The New York Times .
  2. https://www.britac.ac.uk/pubs/proc/files/105p473.pdf
  3. Honorary Graduates 1966 to 1988 – University of Bath
  4. Richard Layard, Martin Weale (23 October 2011). "OBITUARY: Professor James Meade". The Independent .
  5. "Perverse" market responses, known as the "Ward effect," need not hold if a cooperative allows simple inegalitarian features when allotting shares to new-joining members: James Meade, "The Theory of Labour Managed Firms and of Profit Sharing," Economic Journal 82, 325 (Supplement, March 1972): 402–428.
  6. Tobin, James (1980), "Stabilization policy ten years after" (PDF), Brookings Papers on Economic Activity , Brookings Institution, 11 (1): 19–90, doi:10.2307/2534285, JSTOR   2534285
  7. Tobin, James (1980). "Stabilization Policy Ten Years After" (PDF). Brookings Papers on Economic Activity . Brookings Institution. 1980 (1): 19–89. doi:10.2307/2534285. JSTOR   2534285.
  8. Meade, James (September 1978), "The Meaning of "Internal Balance"", The Economic Journal , Wiley-Blackwell, 88 (351): 423–435, doi:10.2307/2232044, JSTOR   2232044
  9. Meade, James (December 1993), "The Meaning of "Internal Balance"", The American Economic Review , American Economic Association, 83 (6): 1–9, JSTOR   2118018

Related Research Articles

Growth accounting is a procedure used in economics to measure the contribution of different factors to economic growth and to indirectly compute the rate of technological progress, measured as a residual, in an economy. Growth accounting decomposes the growth rate of an economy's total output into that which is due to increases in the contributing amount of the factors used—usually the increase in the amount of capital and labor—and that which cannot be accounted for by observable changes in factor utilization. The unexplained part of growth in GDP is then taken to represent increases in productivity or a measure of broadly defined technological progress.

In economics, the fiscal multiplier is the ratio of change in national income arising from a change in government spending. More generally, the exogenous spending multiplier is the ratio of change in national income arising from any autonomous change in spending. When this multiplier exceeds one, the enhanced effect on national income may be called the multiplier effect. The mechanism that can give rise to a multiplier effect is that an initial incremental amount of spending can lead to increased income and hence increased consumption spending, increasing income further and hence further increasing consumption, etc., resulting in an overall increase in national income greater than the initial incremental amount of spending. In other words, an initial change in aggregate demand may cause a change in aggregate output that is a multiple of the initial change.

Marginal cost

In economics, marginal cost is the change in the total cost that arises when the quantity produced is incremented by one unit; that is, it is the cost of producing one more unit of a good. Intuitively, marginal cost at each level of production includes the cost of any additional inputs required to produce the next unit. At each level of production and time period being considered, marginal costs include all costs that vary with the level of production, whereas other costs that do not vary with production are fixed and thus have no marginal cost. For example, the marginal cost of producing an automobile will generally include the costs of labor and parts needed for the additional automobile but not the fixed costs of the factory that have already been incurred. In practice, marginal analysis is segregated into short and long-run cases, so that, over the long run, all costs become marginal. Where there are economies of scale, prices set at marginal cost will fail to cover total costs, thus requiring a subsidy. Marginal cost pricing is not a matter of merely lowering the general level of prices with the aid of a subsidy; with or without subsidy it calls for a drastic restructuring of pricing practices, with opportunities for very substantial improvements in efficiency at critical points.

Production function

In economics, a production function gives the technological relation between quantities of physical inputs and quantities of output of goods. The production function is one of the key concepts of mainstream neoclassical theories, used to define marginal product and to distinguish allocative efficiency, a key focus of economics. One important purpose of the production function is to address allocative efficiency in the use of factor inputs in production and the resulting distribution of income to those factors, while abstracting away from the technological problems of achieving technical efficiency, as an engineer or professional manager might understand it.

In economics, the marginal propensity to consume (MPC) is a metric that quantifies induced consumption, the concept that the increase in personal consumer spending (consumption) occurs with an increase in disposable income. The proportion of disposable income which individuals spend on consumption is known as propensity to consume. MPC is the proportion of additional income that an individual consumes. For example, if a household earns one extra dollar of disposable income, and the marginal propensity to consume is 0.65, then of that dollar, the household will spend 65 cents and save 35 cents. Obviously, the household cannot spend more than the extra dollar.

Okuns law Economic relationship

In economics, Okun's law is an empirically observed relationship between unemployment and losses in a country's production. It is named after Arthur Melvin Okun, who first proposed the relationship in 1962. The "gap version" states that for every 1% increase in the unemployment rate, a country's GDP will be roughly an additional 2% lower than its potential GDP. The "difference version" describes the relationship between quarterly changes in unemployment and quarterly changes in real GDP. The stability and usefulness of the law has been disputed.

Marginal product

In economics and in particular neoclassical economics, the marginal product or marginal physical productivity of an input is the change in output resulting from employing one more unit of a particular input, assuming that the quantities of other inputs are kept constant.

Diminishing returns

In economics, diminishing returns is the decrease in marginal (incremental) output of a production process as the amount of a single factor of production is incrementally increased, holding all other factors of production equal.

The Solow residual is a number describing empirical productivity growth in an economy from year to year and decade to decade. Robert Solow, the Nobel Memorial Prize in Economic Sciences-winning economist, defined rising productivity as rising output with constant capital and labor input. It is a "residual" because it is the part of growth that is not accounted for by measures of capital accumulation or increased labor input. Increased physical throughput – i.e. environmental resources – is specifically excluded from the calculation; thus some portion of the residual can be ascribed to increased physical throughput. The example used is for the intracapital substitution of aluminium fixtures for steel during which the inputs do not alter. This differs in almost every other economic circumstance in which there are many other variables. The Solow Residual is procyclical and measures of it are now called the rate of growth of multifactor productivity or total factor productivity, though Solow (1957) did not use these terms.

Solow–Swan model model of long-run economic growth

The Solow–Swan model is an economic model of long-run economic growth set within the framework of neoclassical economics. It attempts to explain long-run economic growth by looking at capital accumulation, labor or population growth, and increases in productivity, commonly referred to as technological progress. At its core is a neoclassical (aggregate) production function, often specified to be of Cobb–Douglas type, which enables the model "to make contact with microeconomics". The model was developed independently by Robert Solow and Trevor Swan in 1956, and superseded the Keynesian Harrod–Domar model.

Harrod–Domar model

The Harrod–Domar model is a Keynesian model of economic growth. It is used in development economics to explain an economy's growth rate in terms of the level of saving and of capital. It suggests that there is no natural reason for an economy to have balanced growth. The model was developed independently by Roy F. Harrod in 1939, and Evsey Domar in 1946, although a similar model had been proposed by Gustav Cassel in 1924. The Harrod–Domar model was the precursor to the exogenous growth model.

In economics, the Golden Rule savings rate is the rate of savings which maximizes steady state level of the growth of consumption, as for example in the Solow–Swan model. Although the concept can be found earlier in John von Neumann and Maurice Allais's works, the term is generally attributed to Edmund Phelps who wrote in 1961 that the golden rule "do unto others as you would have them do unto you" could be applied inter-generationally inside the model to arrive at some form of "optimum", or put simply "do unto future generations as we hope previous generations did unto us."

A marginal value is

  1. a value that holds true given particular constraints,
  2. the change in a value associated with a specific change in some independent variable, whether it be of that variable or of a dependent variable, or
  3. [when underlying values are quantified] the ratio of the change of a dependent variable to that of the independent variable.
Ramsey–Cass–Koopmans model

The Ramsey–Cass–Koopmans model, or Ramsey growth model, is a neoclassical model of economic growth based primarily on the work of Frank P. Ramsey, with significant extensions by David Cass and Tjalling Koopmans. The Ramsey–Cass–Koopmans model differs from the Solow–Swan model in that the choice of consumption is explicitly microfounded at a point in time and so endogenizes the savings rate. As a result, unlike in the Solow–Swan model, the saving rate may not be constant along the transition to the long run steady state. Another implication of the model is that the outcome is Pareto optimal or Pareto efficient.

Average propensity to save

In Keynesian economics, the average propensity to save (APS), also known as the savings ratio, is the proportion of income which is saved, usually expressed for household savings as a fraction of total household disposable income.

The Incremental Capital-Output Ratio (ICOR) is the ratio of investment to growth which is equal to the reciprocal of the marginal product of capital. The higher the ICOR, the lower the productivity of capital or the marginal efficiency of capital. The ICOR can be thought of as a measure of the inefficiency with which capital is used. In most countries the ICOR is in the neighborhood of 3. It is a topic discussed in economic growth. It can be expressed in the following formula, where K is capital output ratio, Y is output (GDP), and I is net investment.

The Goodwin model, sometimes called Goodwin's class struggle model, is a model of endogenous economic fluctuations first proposed by the American economist Richard M. Goodwin in 1967. It combines aspects of the Harrod–Domar growth model with the Phillips curve to generate endogenous cycles in economic activity unlike most modern macroeconomic models in which movements in economic aggregates are driven by exogenously assumed shocks. Since Goodwin's publication in 1967, the model has been extended and applied in various ways.

The AK model of economic growth is an endogenous growth model used in the theory of economic growth, a subfield of modern macroeconomics. In the 1980s it became progressively clearer that the standard neoclassical exogenous growth models were theoretically unsatisfactory as tools to explore long run growth, as these models predicted economies without technological change and thus they would eventually converge to a steady state, with zero per capita growth. A fundamental reason for this is the diminishing return of capital; the key property of AK endogenous-growth model is the absence of diminishing returns to capital. In lieu of the diminishing returns of capital implied by the usual parameterizations of a Cobb–Douglas production function, the AK model uses a linear model where output is a linear function of capital. Its appearance in most textbooks is to introduce endogenous growth theory.

A Robinson Crusoe economy is a simple framework used to study some fundamental issues in economics. It assumes an economy with one consumer, one producer and two goods. The title "Robinson Crusoe" is a reference to the 1719 novel of the same name authored by Daniel Defoe.

A nominal income target is a monetary policy target. Such targets are adopted by central banks to manage national economic activity. Nominal aggregates are not adjusted for inflation. Nominal income aggregates that can serve as targets include nominal gross domestic product (NGDP) and nominal gross domestic income (GDI). Central banks use a variety of techniques to hit their targets, including conventional tools such as interest rate targeting or open market operations, unconventional tools such as quantitative easing or interest rates on excess reserves and expectations management to hit its target. The concept of NGDP targeting was formally proposed by Neo-Keynesian economists James Meade in 1977 and James Tobin in 1980, although Austrian economist Friedrich Hayek argued in favor of the stabilization of nominal income as a monetary policy norm as early as 1931 and as late as 1975.

References

Awards
Preceded by
Milton Friedman
Laureate of the Nobel Memorial Prize in Economics
1977
Served alongside: Bertil Ohlin
Succeeded by
Herbert A. Simon