The Cambridge Revival of Political Economy

Nuno Ornelas Martins

• Publisher: Routledge
• Year: 2013
• ISBN:
  9781134666492
• Edition: 1
• Topic: Business
• Subtopic: Business generale
• Index: Business

The marginalist revolution of the late nineteenth century consolidated what Karl Marx and Piero Sraffa called 'vulgar economy', bringing with it an emphasis on a scarcity theory that replaced the classical surplus theory. However, the classical political economy of Adam Smith and David Ricardo has been revived within the Cambridge economic tradition. This book looks at how different branches of the Cambridge economic tradition have focused on various aspects of this revival over time.

The author shows that classical political economy is distinct from vulgar political economy in terms of its economic, social, and ethical theory, with each difference resting on an issue of ontology. Structured in three parts, the book examines the central contested aspects of these theories, namely the nature of value, the relationship between human beings and social structure, and the nature of human wellbeing.

The Cambridge Revival of Political Economy will be relevant to students and researchers within the fields of political economy, history of economic thought, politics and philosophy.

Part I

Economic theory

Let us note here, but merely in passing, that the ‘social need’ which governs the principle of demand is basically conditioned by the relationship of the different classes and their respective economic positions; in the first place, therefore, particularly by the proportion between the total surplus-value and wages, and secondly, by the proportion between the various parts into which surplus-value itself is divided (profit, interest, ground-rent, taxes, etc.). Here again we can see how absolutely nothing can be explained by the relationship of demand and supply, before explaining the basis on which this relationship functions.

(Marx [1894] 1981: 282)

When reduced to its simplest elements, the errors of the ‘marginal’ theory of distribution consists in saying that the ‘shares’ (i.e. level of wages and profits) depends {sic} upon, is governed by, the methods of production (including proportions of factors). Whereas the opposite is the case, the methods adopted depend upon the shares.

(Sraffa D3/12/42/26)

1 The theory of value and distribution

The classical theory

For classical political economy, economic analysis consists of a study of the production and distribution of the economic surplus. The surplus, which is the fundamental concept, is the part of production which is not necessary for the reproduction of the existing economic system (and can be used in the consumption of luxuries, or for expanding the existing economic system). The first question to ask, in this context, is how do we value the surplus and distribute it? The first topic to address is the theory of value and distribution. According to Adam Smith:

The word value, it is to be observed, has two different meanings, and sometimes expresses the utility of some particular object, and sometimes the power of purchasing other goods which the possession of that object conveys. The one may be called ‘value in use,’ the other, ‘value in exchange’.

(Smith [1776] 1993: 34)

Objects must possess utility (that is ‘value in use’) in order to have exchange value. Concerning exchange value, David Ricardo notes that ‘[t]here are some commodities, the value of which is determined by their scarcity alone’, such as ‘rare statues and pictures, scarce books and coins, wines of a particular quality’. But Ricardo adds that ‘[t]hese commodities, however, form a very small part of the mass of commodities daily exchanged in the market’, since we can always produce more commodities if we are ‘disposed to bestow the labour necessary to obtain them’ (1817 [1821]: 6). So if the exchange value of a commodity is above its cost of production, labour is available and the commodity is not a rare one, we can increase its production until the exchange value becomes identical to the cost of production. If there is competition, prices will then tend to the cost of production. Ricardo (1817 [1821]: 6) then adds that his analysis addresses the cases when exchange value depends upon the conditions of production, and not the case of rare commodities, the exchange value of which depends upon scarcity.

In the classical theory of value and distribution, there is an objective conception of exchange value, where exchange value depends upon the conditions of production which determine the natural price. The natural price reflects the cost of production, measured in terms of human labour. The market price, which is the price that is actually observed in the economy, may be different from the natural price. But if demand is systematically driving the market price above (or below) the cost of production, more (or less) goods will be produced, bringing the market price back to the natural price. Thus the market price will gravitate around the natural price, as Smith argues, but it is very difficult to trace the exact steps by which this gravitation takes place.

For Smith and Ricardo natural prices are not, in general, determined by the relative scarcity of supply compared to demand. The natural price depends upon the conditions of production, and demand and supply only come into the classical theoretical scheme in order to explain the accidental variations of the market price around the natural price. As Pierangelo Garegnani notes:

in classical theory, demand (‘effectual demand’) and supply (‘quantity brought to market’) were only introduced to explain the tendency of a commodity's actual price – or ‘market price’ as the classical economists called it – towards a normal or ‘natural’ level which was itself determined without reference to such a demand and supply. Thus, ‘effectual demand’ was defined by Smith as ‘the demand of those who are willing to pay the natural price of the commodity’ with the ‘natural’ or normal price being therefore a necessary datum for defining that ‘demand’ itself.

In fact Smith's ‘effectual demand’ could only be described as a point, and not a schedule, in the price-quantity space.

(Garegnani 1998: 417)

For classical political economists like Smith and Ricardo, effectual demand is not a determinant of the natural price, for it emerges after natural prices are formed by the conditions of production. That is in the classical scheme, the conditions of production (the cost of production measured in terms of human labour) determine the natural price, which in turn is a determinant of effectual demand. Effectual demand is constituted by those who are willing to pay the natural price, and have the means to do so.

The natural price is composed of wages, profits and rent. Wages tend to the subsistence level, since the workers have less bargaining power (due to their unfavourable situation) than the capitalists. But for Smith and Ricardo, subsistence means more than physical subsistence – it takes into account what is normal according to custom and social conditions in general. Thus, wages depend upon custom and social conditions in general. Supply and demand for labour only explain the accidental and temporary deviation of wages away from what is dictated by custom and social conditions of subsistence.

The difference between the total product and wages leads to a given surplus to be distributed between profits and rent. For Ricardo, the rate of profits in agriculture depends upon the physical determination of the agricultural surplus by the ratio between outputs and inputs. Even if competition drives the prices of outputs to a lower level, in agriculture it is always possible to obtain a surplus. Since the cheaper outputs can be used as cheaper inputs (in Ricardo's example, corn is used to produce more corn), a surplus is maintained (the converse can be argued if output prices are higher, and a surplus is also maintained). Competition between sectors ensures that the rate of profits in the whole economy is the same as in agriculture (capital will be taken into agriculture from other sectors, or away from agriculture into other sectors, if the rate of profits is different across sectors, leading to an equal rate of profits in the whole economy due to competition). Thus the surplus is maintained throughout production (and determined in agriculture).The cost of production, measured in terms of human labour, includes this surplus which is (like the means of reproduction) also produced by human labour.

This means that a surplus exists not only in non-competitive economies where some companies have a high degree of market power (and appropriate a surplus due to their market power), but also in competitive economies where prices tend to the cost of production. The surplus is the central concept for the study of capitalist economies, regardless of the existing degree of competition. Scarcity is a relevant concept for particular cases, such as rare commodities, non-reproducible natural resources such as land, or cases where there is full employment and labour is not available for further production.

Sraffa interprets Ricardo's focus on corn as an attempt to reach a physical measure of the surplus which is independent of prices, for it consists in merely

comparing the physical quantity on the side of the means of production to that on the side of the product, both of which consist of the same commodity; and on this rests Ricardo's conclusion that ‘it is the profits of the farmer that regulate the profits of all the other trades’.

(Sraffa 1960: 93)

This physical explanation of the surplus already existed in the Physiocrats. Sraffa (D3/12/42/47) writes, referring to a passage of Marshall on the Physiocrats, that for the Physiocrats, after wages and profits are determined, what remains, the rent, is the surplus – the surplus is obtained as a difference.

To explain the division of the surplus between profits and rents, Ricardo adopts a different procedure. While for the Physiocrats the surplus equals the rent, Ricardo notes that different lands have different productivities, and he defines profit as the surplus obtained in the worst land. Lands more productive than the worst land generate a rent, which is then the difference between the productivity of a given land, and the productivity of the worst land, which by definition yields no rent, only profit. Since there is a limited number of more fertile lands, the notion of scarcity plays an important role in the Ricardian analysis of rent.

Christian Gehrke and Heinz Kurz (2001) note how Jean-Baptiste Say's analysis was significantly different from Ricardo's, since Say was developing a framework where supply and demand explain not only the variations of the market price, but also the natural price. Malthus follows a similar line of reasoning, criticising Ricardo. Malthus attributes a systematic role to demand and supply in the determination of natural prices too, rather than seeing them merely as forces that govern the gravitation of the market price around the natural price.

Malthus notes how, according to Smith, the cost of production, and thus the natural price, is composed of wages, profits and rents. And according to Malthus, the value of each of these components is determined by supply and demand. Therefore, the cost of production, and thus natural price, which is the sum of those components, is also determined by supply and demand. Malthus writes:

But if it appear generally that the ordinary cost of production only determines the usual prices of commodities, as the payment of this cost is the necessary condition of their supply; and that the component parts of this cost are themselves determined by the same causes which determine the whole, it is obvious that we cannot get rid of the principle of demand and supply, by referring to the cost of production. Natural and necessary prices appear to be regulated by this principle, as well as market prices; and the only difference is, that the former are regulated by the ordinary and average relation of the supply to the demand; and the latter, when they differ from the former, are determined by the extraordinary and accidental relations of the supply to the demand.

(Malthus 1820: 84)

Thus, Malthus agrees that the accidental fluctuations of demand and supply influence the market price, but he argues that there is also an ‘ordinary and average relation of the supply to the demand’, which governs the natural price.

Malthus seems to presuppose that demand is independent from the natural price, contrary to Smith and Ricardo, who defined effectual demand in terms of the natural price. Only when demand is independent from the natural price can we argue that the natural price is governed by the ordinary relations between supply and demand without engaging in circular reasoning, as Malthus does.

Ricardo saw clearly the differences between his approach and Malthus's. In the same year that Malthus published the first edition of his Principles, from which the previous passage by Malthus is taken, Ricardo wrote the following to Malthus, in a letter from 9 October 1820:

You say demand and supply regulates value – this, I think, is saying nothing … it is supply which regulates value – and supply is itself controlled by comparative cost of production.

(quoted in Kurz and Salvadori 2002: 56)

For Malthus, wages, profits and rent are determined by the same law: the law of supply and demand. For Ricardo, in contrast, wages, rents and profits are determined by different causes: wages are determined by custom and social conditions, profits are determined by the physical productivity of the agricultural sector, and rents are determined by the differences of productivity between lands. And wages, rents and profits are not independent from each other. An increase in wages leads to a decrease of the surplus and thus of profits, for example.

So because of the interrelationships between the components of value, we cannot appeal to supply and demand for a systematic explanation of the natural price. Demand and supply are not independent forces, and changes in one will lead to changes in the other which we cannot know without analysing the whole system. Supply and demand describe, at best, the accidental variations of the market price as it gravitates around the natural price.

As Marx argued, even if supply and demand are in equilibrium in an ‘ordinary and average relation of the supply to the demand’, then they balance each other out, and thus the effect of one is cancelled by the effect of the other. In the classical analysis, supply and demand explain variations around the natural price, rather than being the equilibrium conditions under which the natural price is formed. If there is an ‘ordinary and average relation of the supply to the demand’ which governs the natural price, as Malthus argues, it is also true that we can only perceive the effect of supply and demand when they lead the economy away from equilibrium, as accidental forces that drive the market price away from the natural price, as Smith and Ricardo argued.

Thus, Marx concludes that in the natural (or normal) situation in which the market price corresponds to the natural price, we have to look at the underlying causes that lead to the natural price, by studying the underlying conditions of production. We have to go deeper, into the underlying relations that characterise the conditions of production. Hence, Marx writes:

Let us note here, but merely in passing, that the ‘social need’ which governs the principle of demand is basically conditioned by the relationship of the different classes and their respective economic positions; in the first place, therefore, particularly by the proportion between the total surplus-value and wages, and secondly, by the proportion between the various parts into which surplus-value itself is divided (profit, interest, ground-rent, taxes, etc.). Here again we can see how absolutely nothing can be explained by the relationship of demand and supply, before explaining the basis on which this relationship functions.

(Marx [1894] 1981: 282)

For Marx, classical economists like Petty, Smith and Ricardo developed a scientific study of value, where a distinction is made between surplus value and wages on the one hand, and between various types of surplus value (such as Ricardo's distinction between profits and rents) on the other hand. But the classical contributions were misrepresented by the vulgar economists who did not go beyond surface phenomena (such as the variations of supply and demand). The different perspectives of Ricardo and Malthus on value show the differences between what Marx called ‘classical political economy’, and ‘vulgar economy’. Marx writes, in a footnote of Capital:

Once and for all I may here state, that by classical Political Economy, I understand that economy which, since the time of W. Petty, has investigated the real relations of production in bourgeois society, in contradistinction to vulgar economy, which deals with appearances only, ruminates without ceasing on the materials long since provided by scientific economy, and there seeks plausible explanations of the most obtrusive phenomena, for bourgeois daily use, but for the rest, con-fines itself to systematising in a pedantic way, and proclaiming for everlasting truths, the trite ideas held by the self-complacent bourgeoisie with regard to their own world, to them the best of all possible worlds.

(Marx [1867] 1999: 483n1)

Marx believed that supply and demand analysis is a vulgar study of su-perficial phenomena and he also believed that economic science should investigate the underlying forces behind it. In this context, Marx saw Ri-cardo's analysis of value in terms of cost of production (which includes the surplus) as a scientific study of the underlying causes of value which clarified many of Smith's ambiguities. But Marx argued that the surplus is generated by the exploita...