Andreas G. Papandreou - The economist

Paper for inauguration of Andreas Papandreou Hall in the University of Athens

24 September 1999 - Last year we were honored to hear Amartya Sen discuss Andreas Papandreou's work at the Memorial Lecture titled The political element in economic development. Professor Sen used this title on purpose, since it was also the title for Andreas' 1966 Wicksell lectures. I will not examine Andreas Papandreou's conception of politics, his belief in man's freedom or his ideas concerning democracy. I would not be able to go beyond anything that Professor Sen has already said, and furthermore, I would certainly not be able to match the his eloquence and comprehension of the underlying issues. Suffice it to say that it is clear from Professor Sen's paper that Andreas Papandreou was extremely interested in making economic theory relevant to society and to the functioning of democracy. I would add from my recent research into Andreas' work that this tendency is clear from early on.

For those of you interested in professor Sen's paper -- which goes far beyond it's title and analyses some of the most philosophically exciting concepts of our day - copies are available today. Furthermore the Andreas Papandreou Foundation will be publishing it in booklet form in time for the next Memorial Lecture, to be given by Joseph Stiglitz, Chief Economist for the World Bank, this January.

First of all, what kind of an economist was Andreas Papandreou? Most people outside the academic arena, and perhaps many within it, at least all those who are unfamiliar with his academic work, would most probably think Andreas Papandreou was a hard-core Marxist. After all, Andreas was Trotskyite in his teens and later founded and led the Socialist party. Some might have heard of his book Paternalistic Capitalism and this title certainly reinforces the conviction that he was an outsider, a critic of the system. However between his teen years and those of his political leadership there is little indication of any Marxist influence.

His academic work begins squarely within the boundaries of orthodox economics and then only slowly shifts outside it, but never completely. Let me answer the question as to what kind of economist he was. He was an orthodox economist who was not satisfied with orthodox theory and who for that reason wished to improve it. Not to get rid of it. To make it better. To borrow from the world of psychology, he was engaged in a love-hate relationship with the neo-classical model. He wanted the theory to which he was married to be perfect, and though it wasn't, it was still the best thing around.

Andreas Papandreou arrived in the United States on the eve of World War Two, having completed his first two years in the law school of Athens University. He remained in New York, working at Columbia University's International House, thinking of continuing an education in law. When it was suggested that it would be more wise to follow economics rather than get an American law degree, a degree which would be of little use to him if he ever returned to his own country, he switched directions. In October of 1941 he arrived at Harvard, where, at the age of 22, on the basis of his two years at law school, he was immediately admitted into the doctoral program.

The economists he was to meet and work with in Cambridge were nothing short of stellar. His professors were people like Joseph Schumpeter, Abba Lerner, and the mathematician W. J. Crum; students that had either just graduated from Harvard or were still working on their doctorates were people like Paul Samuelson, John Galbraith, James Tobin, James Duesenberry, and Paul Sweezy. [2] Andreas was teaching assistant to James Tobin and Vassily Leontieff and taught both statistics and accounting.

Though I don't have his Masters thesis, Andreas himself once told me that he wrote a very long masters thesis on Marxist thought and that his professor told him that because it was so long he wouldn't read it but precisely because it was so long it was worth at least a B and that was the grade he gave him. Andreas Papandreou read his Marxism well and would return to it in later years, but his essential training was in neo-classical economics.

What books did he read? From his library, his footnotes and his Ph.D. thesis, it is clear that highly relevant to his early economic education were the works by Edward Chamberlin who had just published his The Theory of Monopolistic Competition (1939), while extremely relevant to Andreas Papandreou's thinking was the work of Berle and Means, The Modern Corporation and Private Property (1932) and Schumpeter's The Theory of Economic Development (1936). In this context I wish to mention another book by A. R. Burns, The Decline of Competition (1936) and Robert Triffin's Monopolistic Competition and General Equilibrium Theory (1940). In the year he arrived at Harvard, Schumpeter, one of Andreas' professors, would publish his magnificent Capitalism, Socialism and Democracy. As for the previous generation, influential were Frank Knight and Maurice Dobbs and in particular Lionel Robbins, who had written his Essay on the Nature and Significance of Economic Science in 1935.

From this brief survey of what he was reading at the time, we can see that he was already interested in deviations from the neo-classical model of general equilibrium and perfectly competitive markets. He was interested in the relevance of traditional theory to the "real world" and in particular to the relations of power that it ignored. For those of you who aren't economists, let me briefly say that orthodox economics posits a world of perfectly competitive firms that can't influence price. Andreas was concerned about a world that deviated from this assumption, a world for example, characterized by large, monopolistic firms that not only influence price but the functioning of society as a whole.

He received his Ph.D. at the age of 24, in the fall of 1943, under the guidance of professor W. L. Crum. Titled The Location and Scope of the Entrepreneurial Function, it is a highly readable and accessible piece of work running about 350 pages long. Already Andreas is having doubts about the fundamental assumption of micro-economics: he is concerned about the validity of the proposition that the firm is a profit-maximizing agent and more the point, about the potency of large firms in society.

In this work he traces the rise of the modern corporation in order to investigate an issue that occupied many economists at the time: just who exactly controls the modern corporation and what precisely is the role of the entrepreneur in a modern capitalist society.[3]

After a concise survey of the rise of the corporation from the middle ages onwards, he investigates the separation of ownership from entrepreneurship and looks in some detail at the various relationships between ownership and entrepreneurship that arise through holding companies and interlocking directorships. Rather than a corporation, he proposes the term "poly-corporation", using the Greek word for the Latinate term multi because firms have now gone beyond the production of single products or participation in single markets. He classifies two hundred of the largest American firms by a novel system which accounts for the various levels of control and using a statistical technique he concludes that, in the majority of cases, at this point in time, entrepreneurship has indeed been separated from ownership, thus contributing empirical proof to the theses advanced by many economic thinkers of the time.

The shift in ownership challenges the validity of the profit-maximizing assumption. Entrepreneurial activity is, in certain cases, pursued for its own sake and thus deviates from the condition of profit-maximization.[4] For the purposes of this exposition, whether this is true or not is not the point. The point is that Andreas Papandreou wanted to build his life on a theory that could be validated empirically and not on a castle of sand.

In 1943, fresh with his Ph.D., he joined America's war effort and volunteered for the US Navy where, after serving as a male nurse at Bethesda hospital for war wounded, he was sent to California where he used the concepts of operational research to determine the optimal timing for fleet repairs.When he returned to Harvard in 1946 he became an assistant professor (ifigitis) and in the fall of 1947 he went to Minnesota where he became associate professor in theoretical or micro-economics. (Ektaktos kathigitis)

In 1949 he published an article in the American Economic Review titled Market Structure and Monopoly Power. Here he is concerned with the power of large corporations in American society, and in particular with the fact that the legal framework for judging monopolistic behavior has not yet caught up with the new economics. The legal framework, he writes, "lacks the economist's emphasis on consumer welfare." [5] From that article industrial economists coined the term the "Papandreou coefficient" which is an index of firm penetration in the market. The new element that he brought to the traditional measures of monopoly was that he included a firm's capacity as an indication of its potential to strike back or to make life difficult for competitors by expanding supply and dropping price. He proposed an empirical method for testing his hypothesis.

In the period 1952-55 he received a grant from the Social Science Research Council to study logic and mathematics. In terms of his technical skills, set theory and topology have now come to the fore. At the same time he works as a consultant in the US justice department on anti-trust, a manifestation of his desire to marry theory to practice.

Besides the empirical work on monopolies, he pursues a parallel path of work on high theory. His concern with the relevance of economics is apparent throughout his research in the nineteen fifties. He wishes to test the basic axiom of economics. After all, what good is a theory if the assumptions on which it is constructed are false? He investigates a pillar of neo-classical economics, what is known as the theory of choice, and he does so through direct experimentation with small groups of people - something which has also come back into fashion in recent years. His paper, published in Econometrica in July of 1953, is titled An experimental test of an axiom in the Theory of Choice. Employing a stochastic (Bayesian) model, he shows that the axioms of the theory of choice cannot be rejected. In other words, he confirms one of the fundamental assumptions of neo-classical economics. [6]

This is ironic, for in the next few years he has serious doubts about the validity of the basic assumptions of neo-classical economics. In his 1952 piece, Some basic problems in the theory of the firm [7] he expresses reservations concerning the traditional definition of the firm – it needs improvement he says, it does not live up to the standards of theoretical rigor Andreas requires. Rather than examine the question empirically, as he did in his Ph.D. and his first published articles, he analyses the situation from a highly theoretical perspective.

What does he talk about? The neo-classical theory of the firm needs improvement, for one because it does not adequately reflect the actual way firms operate. For another, the theory of the firm as it stands is not general enough to be a real theory. [8]

He wishes to find a universal classification of the firm. Only this will be intellectually satisfying for him. He provides a definition of the firm that encompass both the competitive firm as well as the monopolistic firm and beyond. It is not enough, in Papandreou's mind, to define a firm by its goal or even its conduct. It is not enough to say that such and such an agent is a profit maximizer. The firm, according to him, should be treated as a specific case of the general phenomena of social organization and must include the internal decision-making process.

Under this classification, the firm becomes a system of communication and coordination, operating under a central authority. This more general definition allows for a firm that is fully competitive, but also allows for firms with large-scale management, firms with interlocking directorships, firms that are vertically integrated or even firms under a socialist system. This latter grouping, the firm under socialism, does not and I would say almost never occupies his time.

Finally, a proper theory of the firm must explain how a firm gets started, the operation of the firm itself, the functions of capital investment, expansion and external financing and how changes in direction, technological innovation and dropping and creating new products are decided upon.

For Andreas Papandreou relevance to the real world was of great concern; at the same time he believed that only a highly sophisticated theory could adequately describe the real world. In this battle between relevance and abstractedness lies an unresolvable "inner" tension which was to haunt him for the duration of his intellectual life. It is the intellectual's desire for purity, I would say, that does not leave him alone. Again and again he turns to the question of finding a model that is generalizable enough to be good theory.

However, it's not that he wants to replace or reject the theory and come up with a completely different paradigm and turn say to Marxism, it is that he wishes it to become a more intellectually powerful tool with greater applicability to explain the world.

One direction for economics to go, he argues as far back as 1950 (Economics and the social sciences, Economic Journal, Vol. LX, No. 240, December 1950) is to utilize the findings of other social sciences.

This procedure calls for a careful inventorying of all the tentatively valid propositions of psychology, anthropology and sociology in an effort to equip economics with the tools necessary to impose restrictions upon the relations among economic variables in order that operationally meaningful hypotheses may be formulated.

Without "reaching out" to use modern parlance, to other fields of knowledge, economics reaches an impasse. Today's institutional economics would, I imagine, have suited him far better.

In Economics as a science, published in 1958, he goes beyond the issue of the firm and begins to probe the overall structure of economics itself. Using set theory and logical proofs, using the system of deduction, he attempts to show, among other things, that the science of economics cannot make predictions. However he also lays the conditions under which economics can become a science. Economists like Samuelson and Friedman argued that it's not so important to worry about the assumptions of the model -- as long as it can make predictions. Now along comes Andreas Papandreou and argues, using elegant math, that it cannot in fact do so. If this is true, we are in very shallow water indeed. Not only is economics problematic in its assumptions, but its key claim to fame, that it is at least useful, is also problematic. In this book he also lays the foundations for a more general economic theory, one that allows for greater variety of economic behavior. Perhaps for most it is too advanced. I myself am unable to comprehend its mathematics. [9]

It is not enough for him that a model is internally consistent. Papandreou wants a theory whose basic propositions can be empirically tested and then rejected or accepted. I think that ideally he wishes to see a grand theory that would allow for all states of the world – for example a theory that could take under its wing not only capitalism but also feudalism, mercantilism, perfect competition, and monopolistic competition, or I suppose today, "globalization." What he's looking for, it seems to me, is the equivalent of the Unified Field Theory in physics – an overall theory that could account for the shifts in the underlying structure of the world economy.

Given this very high intellectual standard, it is no wonder that he grew increasingly frustrated with orthodox economics. From they very first he pursued the study of monopolies, a blatant contradiction to the traditional theory of perfect competition and one which has to do with power relationships.

By the late sixties and early seventies his focus shifts, but only by a few degrees. He is now also concerned with how theories themselves come about. [10] It is not enough to posit states of the world – a difficult task in itself. It is also of interest to examine the specific social events that lead to the development of certain theories what Andreas calls meta-economics -- theory construction.

The emergence of totalitarian states in the thirties, for instance, and the experience of the second world war caused intellectuals, especially those from Europe like Debreu, to pursue the marginalist (Jevons) tradition in which the economy is composed of highly atomistic and highly individualistic agents. This, in opposition to other founders of economics like Marshall who argued in favor of socialism or Adam Smith who argued that government was essential to prevent the "evils" of the economy from cropping up and also the only way to soften worker alienation. [11] This emphasis on the individual is a response to the fascist and communist emphasis on collective action which relegates individual needs below the all-powerful but indeterminate "higher good." Thus, he argues, the post-war economists who more or less determined the neo-classical model emphasized, for historical and political reasons, the atomistic model. [12]

But if this is true, then it means that theory is actually influenced by social events. In what sense can we claim that it is theory and not ideology? Schumpeter, Andreas argued, spent his life arguing that economics was not ideology but objective science. But that shows that the argument for the prosecution was not a trivial one if Schumpeter spent so much time on the side of the defense.

In one of his class lectures, (Michigan lectures, 1973) Andreas talked with great respect about Kenneth Arrow, his former colleague who was in the news because he had just been awarded the Nobel prize. [13] He told his Ann Arbor graduate seminar that Arrow was a top economist who nonetheless believed that the traditional frame of reference was enough to solve all problems, even problems that seemed to have no place in the model, such as distribution and inequality of information. (I would add also the problems of increasing returns to scale and externalities.) For Arrow these are concerns that distort the performance of the market but which, "not to worry," will be solved in due time. There is no need, therefore, to drop the original theory and work for another one.

I think that Andreas' argument with economists like Arrow can be refined further. No doubt there are certain propositions which seem historically valid -- like the downward sloping demand curve. However, how do you separate what can be substantiated by solid historical experience from the messy underpinnings of modern economics which uses the system of logical deduection to build its "universal" models?

In Andreas' words, Arrow believes that "if we work harder and get more information, develop better theoretical tools, we'll do better." Andreas doesn't buy this at all. Why doesn't he? Andreas believed that such problems required a re-working of the fundamental assumptions. For example, economists assume a model populated by competitive firms but do not care if the world doesn't fit that proposition and he argues that most economists have abandoned the effort to test the fundamental hypotheses of economics as a criterion for its relevance.

How was it possible, he wondered in these lectures, to be part of a profession that claimed it could model and represent society mathematically and yet it not only failed to take into account fundamental shifts in the underlying shape of the modern capitalism society but also rejected (in the extreme case of Friedman) the importance of such changes on the fundamental model of perfect competition? Does not history play any role in the field of economics?

It was now time to write his own analysis of the world as he saw it which he did in the book, Paternalistic Capitalism (1972). He wrote it during a difficult but productive time, while in exile in Canada, between making speeches against the Greek junta that had once jailed him, while teaching, running a "liberation movement" and also squeezing in ‘quality' time for family life. [14]

He now fully believed that orthodox interpretations of capitalism were ideologically loaded and wished to propose his own "synthesis" as he called it, a new presentation of capitalism that differed from conventional wisdom. He begins, where else, with the problems that concerned him since his first intellectual engagement with the field of economics thirty years ago, back in 1943.

In the sixty page introduction he returns to his initial concern about the role of the firm in society and agrees with the Galbraithian analysis of the firm as being run by a "technostructure." Technology has removed control from the owners and placed it in the hands of the industrial managers and technocrats. It is clear from our discussion how prepared Andreas Papandreou was to receive Galbraith's ideas about the large firms that try to control the market uncertainties by eliminating the market wherever they can – either through buying out firms from which they purchase inputs or through price arrangements or, when possible, through complete control over natural resources. [15]

Baran and Sweezy's concept of monopolistic capitalism and the role of the military-industrial state also found fertile ground in Andreas' efforts to come up with his own analysis. He relates the managerial elite to the national security managers and shows that paternalistic capitalism – in short the capitalism as expressed by the workings of the American economy must be aggressively expansive. [16]

Yet having written Paternalistic Capitalism, is Andreas Papandreou happy? I think not. He is too much of an intellectual to be satisfied with a book that "only" describes the way the world works. What he wants, what attracts his mind, is high theory. He wants a serious model of the serious world and not merely a serious model of an imaginary world.

In the introduction to Paternalistic Capitalism he says as much. Yes, it might be true that neo-classical economics, he says, has little to say about the behavior of modern capitalism. Yes it might be true that it is fraught with inconsistencies. But it is also true that so far at least, it's the best thing we have. We have no other theory that is as logically coherent or as convincing to replace it. His own hypothesis, his Paternalistic Capitalism, is only a partial explanation. This is a brave admission.

This discussion is based on only partial reading of his works. I come away with the sense that Andreas Papandreou, had he pursued his academic career to its fruition, would have made life very difficult for the pure theory economists. Not only would he have been a constant critic of neo-classical economics, using the tools of topology and calculus to take them on, but he would also have advanced the field of history of science and the epistemology and methodology of economics.

Perhaps his dream of coming up with a model where the fundamental assumptions are more realistic and empirically verifiable would not have been realized, but it would have been interesting to have seen where he would have taken it. But to have gone in that direction would have meant robbing another world from his talents. In the end he chose not only to understand the world but to change it.

Thank You

  1. My thanks to professors Louka Katseli, Heracles Polemarchakis, Lena Valavani, Andreas Papandreou Jr., Faye Zika and especially Louis Lefeber for comments made on short notice. Back to main article
  2. Paul Samuelson had just finished his doctoral thesis the year Andreas arrived, a thesis which was later to become the now famous Foundations of Economic Analysis (1947) and the core of all textbooks since. James Duesenberry, also at Harvard, was working on his own theory of consumer behavior which would appear in 1949. The main economics textbook of the time was that of Alvin Hansen's, in collaboration with F. B. Garver, titled "Principles of Economics," and had been published five years earlier, in 1937. Back to main article
  3. In the tradition of Berle and Means as well as Schumpeter, Frank Knight and Maurice Dobbs. Back to main article
  4. The issue of who controls the firm is firmly outside the scope of pure neo-classical economics at the time but has recently become an item of great interest, especially for those working on the question of "agency" and the role of institutional arrangements. Back to main article
  5. In this work he incorporates the research of economists like Joe Bain, Abba Lerner, Robert Triffin, and Edward Chamberlin, but shifts the emphasis to an aspect of monopoly power "which has not been treated sufficiently by economic theorists." What he adds to the literature here is a measurement of monopoly power which takes into consideration the capacity of the firm to penetrate a given market by reducing price. This is what he calls "the coefficient of penetration," and measures a firm's ability to cut into the volume of another firm's sales by decreasing its own price and increasing its own output. At a bare minimum his empirical test for monopoly power requires information on shares of the market represented by each firm's sales and degrees of plant and equipment utilization by the firms in the industry and using modern regression techniques, is certainly a doable proposition. Back to main article
  6. To those of you who are not economists, suffice it to say that this work is similar to modern research on the nature of voting and in particular, what sorts of voting systems can actually express individual preferences. Just to get a feel for what this entails, let's take a familiar example to Greeks: the vote for new president of PASOK. In 1996 four candidates were fielded for president of PASOK. It was decided to have two rounds of voting, in which the second round would include only the top two winners from the first round of votes. Who can deny that if there had only been one round of voting or if there had been three rounds, the outcome would be different? If we had for example only one round, those who voted for the last candidate (Charalambopoulos) would most likely have ignored him and voted for the third candidate (Arsenis). Those extra 11 votes(out of a total of 100) would have popped the third candidate into first position. The winner of this two-round system then went on to become prime minister. Back to main article
    Some of you may know that the vote for the Italian president in parliament takes about 75 to 85 rounds (!)
    A further example: as an undergrad I had to vote on a single newspaper to ask the Yale library to order from Greece – their budget allowed them one paper. Although the majority of students at the time were center-left, the newspaper that was decided upon was the conservative Kathimerini because the minority formed a solid block, as opposed to the progressive camp which was split. If there had been a voting system which could include not only preference but intensity of dislike, then the outcome might have been different. In Greece itself, although 60% of the population for the past forty years is center left, the conservatives have ruled with 40%. The issues are fascinating and some of them, as I pointed out, were dealt with by AGP in the early fifties, but he did not pursue that line of economics. See Sen's AGP memorial of last year for a fascinating discussion.
  7. See also Theory Construction and Empirical Meaning in Economics, American Economic Review, May 1963. Back to main article
  8. Recall Keynes ‘unorthodox' belief that "animal instincts" motivated entrepreneurs rather than some empirically testable hypothesis like profit maximization. Back to main article
  9. From his class notes in 1973 (Michigan lectures) he makes the following argument: Lionel Robbins argued in 1931 that the propositions of economics need not be tested because they are self-evident because they are deduced from premises about rational choice and orderly preferences. Samuelson destroyed this by saying that what is relevant are the consequences, the theorems, the conclusions and the derivations that can be tested – like what will happen to consumer prices from the imposition of an indirect tax. If we can use our model to predict that prices will rise by such and such a percentage, then we should be happy with the model. Friedman went a step further to say that who cares about monopolies and multinationals. If I assume the world is a competitive economy my theory still predicts nicely enough. Who cares about testing the basic assumptions? For Andreas the standards of economics fail when compared to those of pure science. And this Andreas can't accept. For him, a theory that cannot be falsified and especially where its practitioners do not test its basic assumptions cannot claim to be a science. Economists, he argues, are no longer trying to come up with fully determined theories but are in fact creating only paradigms which can only be confirmed and never rejected. Econometrics is interesting but is not relevant to basic theory, does not test basic theory. (This, you may recall, was Keynes' position in his paper for a Pigou, which Pigou rejected outright.) Finally he argues that it is impossible for "our kind of economics" to ever yield a proposition which will be disconfirmed or refuted by empirical data, Friedman and Samuelson notwithstanding. Back to main article
  10. The two graduate seminars in Michigan were titled Political Development, and Economics respectively (1973). Back to main article
  11. For a discussion on Smith's position and the fact that the Pelican and Penguin editions of Wealth of Nations omit the last two books that argue in favor of government, See Louis Lefeber, Classical vs.neoclassical economic thought in historical perspective, Journal of Political Science, 1, January 2000 forthcoming. Back to main article
  12. In personal discussions between Andreas and the author of this paper. Also, in a discussion with Debreu, Debreu expressed his astonishment that his work on the theory of value should become the banner for theoretical micro-economics. If one wished to examine the issue of how the theory of economics is constructed over time, one needs to look at how certain ideas are incorporated and accepted (like Debreu's) and other's – which open up the field – are rejected (like Duesenberry's 1949 model of consumer choice). Back to main article
  13. From the archives of the Andreas Papandreou Foundation. Back to main article
  14. In the first letter from jail to his wife, he asks for two books: One on linear algebra and another on set theory. (May 1967, Papandreou Archives) Back to main article
  15. In his model, prices no longer reflect marginal cost as in the competitive model, because they are the result of a far more complex activity. For one thing, they reflect a firm's long-term profit strategy. Today's prices might be sub-optimal because they are linked to a future price matrix, especially for a firm with many products in various markets. The determination of prices is further complicated by the simultaneous appearance of a firm that operates in many markets and in varying industrial sectors. Add to this a firm with interlocking directorships, in a world subject to restrictions from the financial sector on expansion and firm behavior, and a group of managers who have absorbed the values, ideas and activities of the social elite – and you get a firm that no longer fits the traditional model. In fact the firm is obliged to engage in a form of collective behavior which Andreas defines as a form of planning – "paternalistic capitalism." The state plays the role of ensuring that demand is smooth through massive military procurement and traditional Keynesian economics. Back to main article
  16. During a session of the central committee of the Socialist Party of Greece which took place in the early eighties, Andreas analyzed the differences between the Soviet Union and the United States. He claimed that while the Soviet Union expands its empire for strategic and military reasons, in other words, the Kremlin itself makes a conscious decides as to when and whether to expand its "empire," in the United States expansion is a natural tendency, is essential to the system's survival and requires no central decision-making but is a product of capitalism itself. I mention this because his speech to the central committee was given front page coverage in the New York Times where it was argued that Andreas was apologizing for Russia. Had they read his books they might have seen that this was the product of a deeper theory of the world, a more complete weltanschauung. Back to main article

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