Keynes, Sraffa, and the Criticism of Neoclassical Theory

Essays in Honour of Heinz Kurz

Neri Salvadori, Christian Gehrke, Neri Salvadori, Christian Gehrke

• Publisher: Routledge
• Year: 2012
• eBook ISBN: 9781136731150
• Topic: Business
• Subtopic: Business General
• Index: Business

Heinz Kurz is recognised internationally as a leading economic theorist and a foremost historian of economic thought. This book pays tribute to his outstanding contributions on the occasion of his 65th birthday by bringing together a unique collection of new essays by distinguished economists from around the world.

Keynes, Sraffa, and the Criticism of Neoclassical Theory comprises twenty-three essays, covering themes in Keynesian economic theory, in the development of the modern classical approach to economic theory, linear production models, and the critique of neoclassical theory.

The essays in this book will be an invaluable source of inspiration for economists interested in economic theory and in the evolution of economic thought. They will also be of interest to postgraduate and research students specialising in economic theory and in the history of economic thought.

1    Introduction

Christian, Gehrke and Neri, Salvadori

The essays collected in this volume honour the work of Heinz D. Kurz, who has contributed to the advancement of economic theory with scholarly dedication, good humour and untiring effort for over forty years. Early on in his career Kurz became deeply fascinated with Piero Sraffa’s work, which has provided a major source of inspiration for virtually all his research activities ever since. Kurz’s work focuses mainly on the historical reconstruction and modern re-formulation of the classical approach to economic theory, and his main research areas are the theory of production, value and distribution; the theory of capital; the theory of growth and technological change; the analysis of exhaustible and renewable resources; and, of course, the history of economic thought.

Heinz D. Kurz was born on 29 March 1946 in Pfaffenhofen an der Ilm, a small Bavarian town just north of Munich. In 1948 his parents moved to Lohhof, a town even closer to Munich, where he later went to elementary school. While at boarding school, he spent a year at Eton College, UK, as an exchange pupil. He then studied for a Diploma in Economics at the University of Munich, from where he moved on to the University of Kiel in order to work on his doctoral dissertation, which he completed in 1975. The thesis, published in 1977 as Zur neoricardianischen Theorie des Allgemeinen Gleichgewichts der Produktion und Zirkulation (On the Neoricardian Theory of General Equilibrium in Production and Circulation) (Berlin, Duncker and Humblot), gained him recognition as a rigorous economic theorist and a foremost historian of economic thought. He became an Associate Professor of Economics at the University of Kiel from 1975 to 1979, and spent the academic year 1977–78 with a British Academy Visiting Scholarship at the University of Cambridge as a Visiting Fellow of Wolfson College. Shortly afterwards, in 1979, he was appointed as Professor of Economics at the University of Bremen on the strength of his scholarly publications, without having written a habilitation thesis (the then standard requirement for a professorship in Germany). In Bremen he collaborated closely with Harald Hagemann, his former colleague at the University of Kiel, and with Peter Kalmbach from the economics department, as well as with Ulrich Krause from the department of mathematics. For two almost consecutive periods, in 1981–82 and in 1983–85, he served as Dean of the Faculty in a particularly difficult period, which saw the introduction of a new curriculum in economics and a major re-structuring of the faculty.

In 1988, Heinz Kurz accepted a chair in the Department of Economics at the University of Graz, Austria, which he still holds. In the academic year 1990–91 he taught as the Theodor Heuss Professor at the Graduate Faculty of the New School for Social Research in New York, USA. In 1993, he initiated the founding of the Graz Schumpeter Society, which organizes and publishes the annual Graz Schumpeter Lectures, now in their fifteenth year. Since 2006 he has also been Director of the Graz Schumpeter Centre, which organizes bi-annual summer schools as well as conferences and international research workshops.

Besides his multifarious teaching and research activities in Graz, Kurz has held Visiting Professorships at over thirty universities from around the world. Moreover, he was one of the founders of the European Society for the History of Economic Thought and served as its Secretary General from 1999 to 2000 and as President from 2006 to 2008. He also chaired the ‘Committee for the history of economic thought’ in the association of economists from the German-speaking countries, the Verein für Socialpolitik, from 2006 to 2010. Kurz serves on the boards of several international journals and is a co-founder of The European Journal of the History of Economic Thought, of which he has been a managing editor since its foundation in 1993, and has also been a managing editor of Metroeconomica since 1998. He was appointed as the general editor of The Unpublished Writings of Piero Sraffa, which is to be published on behalf of Cambridge University Press and Trinity College, Cambridge.

Heinz Kurz is not only a very prolific writer, but also a much sought after co-author and co-editor, who has written or edited some thirty books and published some 180 scholarly papers. A collection of his early essays was published as Capital, Distribution and Effective Demand (Cambridge, Polity Press, 1990). With his frequent co-author, Neri Salvadori, Kurz has written what he considers his most important work, Theory of Production: A Long-period Analysis (Cambridge, Cambridge University Press, 1995) and many joint papers; some of them were reprinted by Routledge in three edited collections of essays: Understanding ‘Classical’ Economics, Classical Economics and Modern Theory, and Interpreting Classical Economics (London, Routledge, 1998, 2003, and 2007). Kurz and Salvadori also co-edited the Elgar Companion to Classical Economics (Cheltenham, Edward Elgar, 1998, 2 vols) and The Legacy of Piero Sraffa (Cheltenham, Edward Elgar, 2003, 2 vols). Kurz also edited Critical Essays on Piero Sraffa’s Legacy in Economics (Cambridge, Cambridge University Press, 2000) and, jointly with Erik Dietzenbacher and Christian Lager, a collection of contributions to Input-output Analysis (Cheltenham, Edward Elgar, 3 vols, 1998). In German, a collection of Kurz’s essays was published as Ökonomisches Denken in klassischer Tradition (Marburg, Metropolis, 1998); there is also a small but well-selling book by him on Joseph A. Schumpeter. Ein Sozialökonom zwischen Marx und Walras (Marburg, Metropolis, 2004); and recently Kurz edited the collection Klassiker des ökonomischen Denkens (Munich, C. H. Beck, 2008 and 2009, 2 vols). For full references to the works mentioned, see the list of Heinz Kurz’s publications at the end of this volume.

The yessays in this book develop three interconnected themes that run through modern theory and Heinz Kurz’s work. The first of these themes concerns the Keynesian idea that an economy, both in the short run and in the long run, is demand-driven. The first three essays explore this theme with an explicit reference to Keynes’s contribution. Chapter 2, by Jean Cartelier, explores the transition within Keynes’s thought from the Treatise (disequilibrium dynamics) to the General Theory (static competitive equilibrium with involuntary unemployment). Chapter 3, by Ingo Barens, attempts to clarify the meaning, relevance and source of Keynes’s term ‘animal spirits’, also through an analysis of the structure of the General Theory, in order to understand the relevance of this notion for Keynes’s critique of orthodox economics. Chapter 4, by Man-Seop Park, analyses three alternative ways through which savings are generated to match investment in the long period: changes in income distribution, changes in the degree of capacity utilization, and changes in the size of productive capacity.

Three further essays explore the same theme, but are more focused on the theory of growth. Chapter 5, by Amit Bhaduri, tries to capture some properties of path dependence through the evolving time structure of the capital stock in relation to variations in the state of aggregate demand and, in this way, to indicate how incorporating the Keynesian problem of effective demand affects the path dependence of the economy. Chapter 6, by Amitava Dutt, uses a simple framework within which alternative models (neoclassical new growth theory models, classical-Marxian and post-Keynesian models) of capital accumulation, distribution and endogenous technological change are represented and compared. Chapter 7, by Peter Skott, introduces labor heterogeneity, inequality and institutional change into the picture, but, differently from previous chapters, the aim is mainly applied.

Another theme concerns Sraffa’s contribution to the understanding of price formation in the long period. Five essays explore this theme with an explicit reference to Sraffa’s work. Chapter 8, by Jonathan Smith, is a contribution to the biography of Sraffa and concerns his association with Trinity College over a period of forty-three years and the impact of such an association on Sraffa’s life and work. Chapter 9, by Neri Salvadori, explores the relationship between the proof of the existence of the Standard commodity contained in section 37 of Sraffa’s book and the proof supplied to Sraffa by Besicovitch on 21 September 1944, and postulates some reasons which led Sraffa to omit this proof in his book in favour of an incomplete argument. Chapter 10 is a general assessment of Sraffa’s 1960 book; its importance is also related to the author of the assessment, Duncan Foley. Chapter 11, by Enrico Bellino and Ariel Wirkierman, analyses and compares two different streams along which Sraffa’s analysis has been developed and extended. Chapter 12, by Ulrich Krause, moves from the circularity in the production structure of commodities of Production of Commodities by Means of Commodities to the circular structure of interacting individuals. Bertram Schefold, in Chapter 13, relates Sraffa’s joint production method in the treatment of fixed capital to Max Weber’s theory of modern capitalism.

Four further essays explore the same theme, but are more focused on linear models of production. Chapter 14, by Christian Bidard, is a contribution to extensive rent theory when more than one agricultural product exists. Chapter 15, by Christian Lager, helps to reduce the gap between applied input–output analysis and the Sraffian economic literature by suggesting ways to deal with joint production in applied input–output models. Chapter 16, by Eiji Hosoda, uses a three-sectoral linear model to determine a formula for the supply of emission permits by which the government can meet the target amount of emission while keeping the economy in a steady-state equilibrium. Chapter 17, by Takao Fujimoto and Alejandro Valle Baeza, explores the relation between the labour value and the market price of a commodity and presents a new theory of the tendency of the rate of profit to fall in spite of Okishio’s theorem.

The third theme concerns Neoclassical theory and its criticism. Heinz Kurz has always been a critic of Neoclassical theory, but his rigour and competence attracted the interest of several eminent Neoclassical theorists like Paul A. Samuelson and Takashi Negishi, who on many occasions showed their friendship with him. In Chapter 18, Takashi Negishi provides a restatement of some of his results on the stability of a competitive economy. Chapter 19, by the late Paul Anthony Samuelson and Erkko Etula, introduces a model in which all margins are ‘ spurious’ to help the understanding of the last half-century of ‘miracle’ developments outside of the United States. Chapter 20, by Mika Kato and Willi Semmler, provides a theoretical framework of the dynamics of competition between dominant firms and fringe firms where dominant firms can build up competition-restricting capital. Chapters 21 and 22, by Sergio Parrinello and Harvey Gram, respectively, contribute to the recent debate on the consistency of the theory of general intertemporal equilibrium. Chapter 23, by Arrigo Opocher and Ian Steedman, shows by means of numerical examples that familiar results concerning marginal variations of inputs do not extend to the cases in which variations are not marginal, i.e. cases in which the quantity of an input may be either a or zero, where a is a positive number. Chapters 24 and 25, by Ian Steedman and Fabio Petri, respectively, contribute to the recent debate on the probability of reswitching.

Part I

Keynes

2 Keynes’s Treatise on Money

The Case for a Rehabilitation

Jean Cartelier

The so-called ‘fundamental equations’ (in fact identities) are the core of Keynes’s Treatise on Money. Prices are defined (and determined) there as the ratios of money expenditures to quantities of commodities brought to market. From these identities Keynes elicits three important propositions:

1. The price of consumption goods is independent from that of investment goods: ‘a fall in the price of consumption goods due to an excess of saving over investment does not in itself – if non accompanied by any change in the bearishness or bullishness of the public or in the volume of saving deposits … – require any opposite change in the price of new investment goods’ (Keynes (1930), p. 130).
2. Profits seem to be an inexhaustible source for entrepreneurs consumption: ‘profits, as a source of capital increment for entrepreneurs, are a widow’s cruse which remains undepleted however much of them may be devoted to riotous living’ (Keynes (1930), p. 125).
3. This ‘widow’s cruse’ argument may be extended without difficulty to investment. Whatever the amount of saving, any increase of investment expenses triggers an identical increase in windfall profits (defined as the difference between investment and saving).

The fact that these conclusions were rejected by Keynes’s followers and close friends raises at least two interesting questions. The first one is: to what extent have discussions among the Circus influenced the transition from the Treatise to General Theory? On that point we may follow Cristina Marcuzzo (2002). She shows how Kahn influenced Keynes and led him to integrate Marshallian elements (a short-term supply curve, for instance) into his own theory, which previously was almost free of them. Thanks to an analysis of their correspondence (partly unpublished) she evokes with great precision the different stages on the way to the effective demand theory. This point is not discussed here. The second question is: did Kahn’s critiques (and Keynes’s acceptance of them) lead to the abandonment of the monetary approach initiated by Wicksell? In this paper we will try to deal with the latter question.

We shall restrict our ambition to assessing the analytical relevance of Kahn’s arguments. The members of the Circus seem to share two intuitions. The first is that prices and quantities should be distinguished. A (Marshallian) supply curve is the ‘natural’ device to overcome the apparent fixity of quantities in Keynes ‘fundamental equations’. The second is that taking...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright
• Contents
• Contributors
• 1. Introduction
• Part I: Keynes
• Part II: Theory of growth
• Part III: Sraffa
• Part IV: Linear models of production
• Part V: Neoclassical theory and its critics
• Heinz Kurz’s publications
• Index