Frederic Lee and Post-Keynesian Pricing Theory

ABSTRACT

Frederic Lee has been a major contributor to post-Keynesian economics, mainly to its theory of pricing. This article summarizes his objections to the neoclassical view of the firm and pricing, as well as his view that changes in quantities, rather than in prices, provide the important information to firms. It also outlines Lee's views on competition, and examines the three pricing doctrines Lee carefully analyzed—markup pricing (associated with Kalecki), normal-cost pricing or full-cost pricing (associated with Andrews), and target-return or administered pricing (associated with Means). The article then discusses the relationship between Lee and three strands of post-Keynesianism: Kaleckian, Sraffian and Eichnerian pricing theories. It explains why Lee objected to some features of each of these. The article concludes by discussing why, towards the end of his life, Lee felt (mistakenly) that his ideas had been dismissed by heterodox economists.

KEYWORDS:

• Post-Keynesian economics
• Sraffian economics
• pricing
• markup
• normal cost

JEL CODES:

• B21
• B31
• B50
• D4

Acknowledgments

I wish to thank my long-time colleague Mario Seccareccia as well as Tae-Hee Jo and Steve Pressman for their useful comments.

Disclosure statement

No potential conflict of interest was reported by the author.

Notes

¹I got involved in one of Fred Lee's recent projects when we got together to edit a special issue of ROPE on the future of post-Keynesian and heterodox economics, which then became a book with the addition of several other contributions (Lee and Lavoie 2013). The symposium was split over two issues, those of April and June 2012.

²This led King (1995, p. 248), who was present at the conference, to argue that my claim that post-Keynesian theory offered a ‘viable and coherent alternative to the mainstream’ was overly optimistic or premature, pointing out that I had been ‘subjected to a good-natured but comprehensive roasting by a panel of reviewers’. These were Lee, Paul Davidson and Franklin Serrano, then a student at Cambridge, who identified the main weakness of the book as not linking the micro and the macro sections.

³A few years later, when discussing post-Keynesian price theory, Lee (1998, p. 5, note 6) noted that ‘there have been attempts by Eichner (1991) and Marc Lavoie to establish a core set of ideas, but they have not been successful’.

⁴The need to set a price high enough to entertain and finance research and development activities was also a point emphasized by Eichner (1976), and it certainly constitutes a point of entry with the work of heterodox Schumpeterians.

⁵If I may refer to the experience of one of my sons in running an online store, except for clear-outs, producers impose limits on how low a price their products are allowed to be offered.

⁶Identical sentences can be found in Lee (2011b, p. 18).

⁷For instance, Kenyon (1979) did mention Godley in his short survey of post-Keynesian pricing theory. Ironically, despite Godley having been a student at Oxford, Nordhaus and Godley (1972) refer mainly to members of the administered price doctrine and not to Andrews!

⁸The terminology is somewhat different in Gu and Lee (2012).

⁹In my opinion, the clearest expositions of normal-cost pricing in the tradition of Andrews can be found in Brunner (1975) and Lee et al. (1986).

¹⁰Gu and Lee (2012) also refer to a new cost-plus pricing procedure—ABC pricing—but Nubbemeyer (2010, p. 67) implies that few firms have picked it up, thus calling it ‘yesterday's hope’.

¹¹Lee's (2014b) last paper dealt with the Burchardt model, and its different possible variants.

¹²Some Kaleckian pricing models do include intermediate goods (see Lavoie 2014, p. 159). Also in open-economy models, it is often assumed that intermediate goods (or raw materials) are imported from abroad, although production circularity is then excluded.

¹³Lee (1984a, p. 162) complains about this as early as 1984, making a reference to the proof provided by Koutsoyannis (1975) in a microeconomic textbook that gave lots of room to cost-plus pricing theories.

¹⁴The exact references can be found in Lavoie (1992, p. 123) or Lavoie (2014, p. 151).

¹⁵There were further comments and replies in Lee (1986), Lee (1988) and Yordon (1988).

¹⁶Lavoie (2014, pp. 154–156) discusses whether constant unit direct costs are a myth or a stylized fact in slightly more detail.

¹⁷An identical critique was made by another student of Eichner, Deprez (1988, p. 131): ‘Prices are different every period. This means that a proper macrodynamic model must recognize that cost prices and output prices of any commodity and related to a specific period are not the same, contrary to what is implied by input–output analysis.’

¹⁸Although it could be claimed that accountants now rely more on replacement costs, as I pointed out more than 20 years ago (Lavoie 1992, p. 147).

¹⁹After writing this sentence and this section, I discovered that Dzarasov (2015, p. 150, note 8) recalls that in an e-mail to him, Lee wrote: ‘My ever changing views on this are that demand for investment goods has a weak impact on profit markups’.

²⁰Seccareccia (2010) sought to find a macroeconomic relationship between the rate of change of the markup and the percentage rate of growth of business investment or the percentage share of investment in GDP in Canada, but to no avail. This is certainly a good PhD dissertation topic; the subject is open to several different specifications and data. Tae-Hee Jo told me that Fred Lee encouraged his students to tackle the topic of the determination of markups, a suggestion that Lee (2013d, p. 481) made in writing.

²¹As Dow (2015, p. xxii) pointed out, ‘nobody could accuse Fred of holding back from direct criticism of positions with which he did not agree’.

²²Further thoughts can be found in Lee (2013b).

²³Regardless of what has been said above, I believe that the harshest critique came from a former teacher of Lee at Rutgers University—Nina Shapiro. In her review of Lee's 1998 book, she wrote: ‘While a work on Post Keynesian theory would be a welcome addition to the literature … this book does not live up to its title. Lee neither illuminates the theory nor develops its concepts, and readers will have a difficult time following his presentation of its arguments’ (Shapiro 2000, p. 990). It seems that Shapiro thought that Lee attached too much importance to ‘cost-determined’ prices and not enough to ‘firm-determined’ prices, and that he underplayed the importance of demand. I remember meeting Nina Shapiro at a conference, in 1998 I believe, and her telling me about her dissatisfaction with Lee's book. If so, I responded spontaneously, she ought to write her own book on post-Keynesian pricing theory.

²⁴Their key contribution, as they themselves point out, is that they deal with foreign competition.