Competition, Value and Distribution in Classical Economics

Studies in Long-Period Analysis

Heinz D. Kurz, Neri Salvadori

• Publisher: Routledge
• Year: 2022
• Print ISBN: 9780367687052
• eBook ISBN: 9781000453140
• Edition: 1
• Topic: Economics
• Subtopic: Economic Theory
• Index: Economics

Drawing in particular on the work of Sraffa, Smith, Ricardo and Marx, the essays in this volume explore the characteristic features of the Classical economists' approach to economic problems, and the renewal of interest in that approach in modern times.

In recent years, new material has been made available on both Sraffa and Marx which have made new insights and interpretations possible. The release of Sraffa's hitherto unpublished papers and correspondence has led to reconsideration of doctrinal questions such as to what extent Sraffa built upon, or deviated from the analyses of Adam Smith, David Ricardo and other representatives of the classical British school and Karl Marx. A major theme is also to what extent we can today, equipped with Sraffa's insights and analytical tools, re-interpret and develop ideas of classical authors, which they could present only in primitive forms, on technological progress, exhaustible resources and other contemporary issues. On Marx, the publication of the MEGA2 edition of the works, papers and correspondence of Marx and Engels also gives rise to a reconsideration of this relationship, given Marx's disenchantment with some of his own work and return to ideas advocated by Ricardo, especially as regards the long-term tendency of the rate of profits. Finally, the classical notion of competition and monopoly deserve to be scrutinized carefully again and frequent misinterpretations in the literature refuted.

This volume is vital reading for scholars of classical economics, Marx and Sraffa, and the history of economic thought more broadly. It also deals with issues in the areas of machinery and technical progress, joint production, and economic development and growth.

1 Introduction

Heinz D. Kurz and Neri Salvadori

DOI: 10.4324/9781003138709-1

This volume is the fifth in a series of collections of essays written by the two of us, by one of us alone, or by one or the two of us with some other author. The previously published collections of essays were

• Understanding ‘Classical’ Economics. Studies in Long-period Theory (1998),
• Classical Economics and Modern Theory. Studies in Long-period Analysis (2003),
• Interpreting Classical Economics. Studies in Long-period Analysis (2007), and
• Revisiting Classical Economics. Studies in Long-period Analysis (2015).

Each collection reflects the discussions we were and still are involved in regarding the characteristic features of the Classical economists’ approach to economic problems and those working in their tradition and the ongoing relevance of this approach. The focus of attention is on its genuine significance, analytical structure, and explanatory power; its resumption in modern times especially by Piero Sraffa; and its difference from the marginalist or neoclassical approaches. In the course of time these discussions have both deepened and widened, which can be inferred from comparing the contents of the five volumes.

All chapters here presented were previously published in journals or in other books. Only one chapter is a revision of a review article that one of us, jointly with Rodolfo Signorino, has published in a journal. Several chapters in our collections of essays have grown out of controversies and two chapters of previous collections were devoted to exchanges we had with Mark Blaug. Salvadori and Signorino got the opportunity to review a book in honour of Blaug after he had passed away, and we thought that a revised version of that review article would have been appropriate to say good-bye to Mark, who in some respects was an intellectual adversary, but never an enemy.

The material in this volume is subdivided in four parts.

Part I is dedicated to ‘Classical economics, old and new’ and has three chapters.

Chapter 2 deals with David Ricardo’s remarkable capacity to ‘elucidate economic principles’ in the face of a ‘labyrinth of difficulties’. It is first argued that Ricardo was not a purely abstract theorist who lacked any realism. Next, his method of analysis is scrutinised and the role of numerical examples to illustrate important findings explained. The theory of value and distribution constitutes the core piece of Ricardo’s analysis. His consecutive attempts to elaborate a coherent theory are reported, and it is stressed that to Ricardo the labour theory of value was a makeshift solution to a problem he did not manage to master completely. The chapter then shows that the criticism levelled at his analysis of different forms of technical progress in chapter II of the Principles (Ricardo, 1951, pp. 80–84) cannot be sustained. It is then argued that Ricardo’s treatment of exhaustible resources is perfectly sensible and not incompatible with the analysis put forward by Harold Hotelling. Next, Ricardo’s famous investigation of the introduction of (improved) machinery into the economic system is discussed and some misunderstandings in the secondary literature are cleared up. Finally, Ricardo’s theorem of comparative advantage is explained, and it is emphasised that it cannot be properly understood without a reference to merchants that exploit arbitrage possibilities and the role of money in trade.

Chapter 3 reconstructs and analyses the examples that are reported in the famous chapter ‘On Machinery’ added by Ricardo in the third edition of his Principles. In this chapter Ricardo considers three examples. One of these, actually the last one, is an historical example. In it, employment actually decreased for a while, but new work opportunities were created a little later, albeit not as a consequence of the same process of innovation. This was due to the fact that the economy was growing. To avoid this circumstance and to make his point crystal clear, Ricardo produced his main examples in conditions in which there is no accumulation: the economy is stationary and the profit rate is at its minimum level. But with a given wage rate, technical change has the typical property of increasing the rate of profit: an innovation usually triggers a phase of accumulation. Ricardo was aware of two special cases in which technical change cannot affect the rate of profit: (i) the case in which the technical change affects neither which type of land is marginal nor the processes of production operated on the marginal land; (ii) the case in which the rate of profit is determined in agriculture and the technical change affects only the technology of manufacturing. Ricardo’s examples are fully understood when these two cases are considered.

Chapter 4 is the chapter on Blaug mentioned above. A new section is devoted to the analysis of some of Sraffa’s unpublished documents concerning the reconstruction of Classical economics. This allows the authors to clarify Blaug’s as well as Sraffa’s thoughts on the relationship between rational and historical reconstructions. Sraffa has consciously chosen to elaborate a rational reconstruction of a well-defined part of Classical economics, because he thought that any attempt to propose an historical reconstruction of the totality of Classical theory would be a vain enterprise.

Part II is ‘On Sraffa’s contribution’ and has three chapters.

Chapter 5 proposes a rational reconstruction of Sraffa (1925) that makes use of the tools of modern theory of production in order to serve an immediate didactical purpose. In particular, it reformulates the criticism of Sraffa (1925) concerning the construction of the market supply curves used in partial equilibrium analyses with the help of examples, also numerical ones, and by making use of the analytical tools elaborated by the modern theory of production.

Chapter 6 deals with the impact of Sraffa’s contribution, in particular, his edition of Ricardo’s works and correspondence and his 1960 book, on our understanding of the Classical economists and especially Ricardo. It is argued that Sraffa managed to bring to our attention the genuine significance of the Classical approach to the theory of value and distribution and to show that it was not flawed beyond remedy, as its marginalist critics contended. Rather, it could be reformulated and elaborated in several directions in a coherent way. This concerns, for example, the problem of scarce natural resources, both renewable and exhaustible, economic development, and growth and foreign trade. Sraffa also showed that removing the deficiencies with which the theory was handed down by the Classical authors and Marx and elaborating on its strengths provided the basis for a criticism of marginalist theory. Sraffa’s contribution has not only revived an interest in Classical authors, it also implied that the rise to dominance of marginalism was based on a serious misunderstanding – it strongly underestimated the fecundity of the Classical theory and strongly overestimated that of the marginalist one.

Chapter 7 discusses the view that Sraffa’s price equations are best interpreted as a ‘photograph’ of the economic system taken at a given moment of time, which Alessandro Roncaglia had prominently put forward. The chapter shows that Sraffa himself used the metaphor in his preparatory notes leading up to his 1960 book and did so with the explicit intention to discriminate the Classical approach to the problem of value and distribution from the marginalist one: while the former analyses a given system of production with regard to its properties concerning income distribution and relative prices, the latter confronts the given system with an imagined adjacent system, as is reflected in concepts such as marginal productivity and marginal cost. The metaphor of the photograph was meant to express the focus on a given system and the absence of change. As Sraffa remarked in the preface of his book, confronting the marginalist and the Classical approach: ‘The marginal approach requires attention to be focused on change, for without change either in the scale of an industry or in the “proportions of the factors of production” there can be neither marginal product nor marginal cost’ (Sraffa 1960, p. v). He went on:

In a system in which, day after day, production continued unchanged in those respects, the marginal product of a factor (or alternatively the marginal cost of a product) would not merely be hard to find – it just would not be there to be found.

(ibidem)

Part III is on ‘Production of Commodities by Means of Commodities in the Making’ and has four chapters.

Chapter 8 provides a summary account of Sraffa’s constructive and interpretative work on the Classical approach to the theory of value and distribution and its relationship with Marx’s contribution. It is pointed that in the first period of his constructive and interpretative work, extending from 1927 to the beginning of 1931, Sraffa adopted a ‘physical real cost’ and, therefore, a strictly objectivist approach to his production equations and completely eschewed a labour value-based approach. He called the labour theory of value a ‘corruption’ of the correct concept of cost, which in his view had been advocated by William Petty, the Physiocrats, and also, in principle, the British Classical economists. In this period, Marx played no prominent role in his investigation. Only at a later stage, beginning in the early 1940s, did he explore systematically the relationship between his own re-formulation of the surplus approach to the theory of value and distribution and Marx’s contribution. According to Sraffa, one of Marx’s perhaps most important findings is his concept of a maximum rate of profits to describe a given system of production.

Chapter 9 turns to the intricate question of how to go about the literary heritage of an author, who during his lifetime has published relatively little, but has written a lot. The published material relative to the unpublished one may be compared to the visible tip of an iceberg relative to its main body, which is sunk in the dark sea. The considerations in the chapter were provoked by some interpreters of Sraffa’s hitherto unpublished papers, who based their interpretations on bits and pieces of evidence from the Sraffa archive, stemming from different periods of his intellectual life. Alas, some interpreters made no effort to find out whether their interpretations reflected what Sraffa intended and whether he still advocated the views ascribed to him at an advanced stage of his work or whether he had abandoned them in the course of time. The chapter therefore begins by formulating criteria that ought to be followed when interpreting an author. This is done against the background of Antonio Gramsci’s reflections on the ‘question of method’. Sraffa, as is well known, was a close friend of Gramsci’s and apparently discussed such matters with him when visiting him in prison and especially with regard to the edition of the works and correspondence of David Ricardo to which Sraffa had been appointed at the beginning of the 1930s. The detrimental effects of neglecting such criteria are then illustrated in a first round of criticisms of several interpretations advocated in the literature on Sraffa. Next, a succinct account of the early developments of Sraffa’s interpretive and (re-)constructive work is provided. This sets the stage for a second round of more detailed criticisms of the interpretations under consideration.

Chapter 10 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 investigates the completeness and consistency of such a proof. It also postulates some reasons which led Sraffa to omit this proof in his book in favour of an argument that the subsequent literature has recognised to be incomplete. The chapter sheds some more light on the issue of the proof of the existence of the Standard commodity from an historical perspective.

Chapter 11 deals with Sraffa’s early work on joint production. It is pointed out that Sraffa had studied cases of joint production as early as the late 1920s, but at the time within a Marshallian framework of supply and demand. Marshall had argued that in the simple case of just two products (mutton and wool) produced jointly by means of a single process of production, there was only one price equation to determine two prices. He closed the system in terms of a given function or schedule of (relative) demand for the two products. The relative demand function was taken to provide the needed extra equation in order to ascertain relative prices. Sraffa had criticised Marshall’s partial equilibrium analysis in his 1925 and 1926 papers. Did the case of joint production imply that his physical real cost approach to the problem of value, which he had elaborated in the late 1920s, was unable to cope with the problem at hand and that subjective elements expressed in demand functions had to be introduced? Sraffa’s answer was no. He responded to the challenge by pointing out that the requirements for use of the various commodities could be met by operating several joint production processes that used or produced the joint products in different proportions. While Sraffa managed to establish important results as early as 1942, including, for example, the possibility of negative labour values vis-à-vis strictly positive prices, others had to wait until the second half of the 1950s.

Part IV is on ‘Competition and monopoly’ and has three chapters.

Chapter 12 distinguishes and compares two different conceptions of market competition: the Walrasian notion of perfect competition and the Classical notion of free competition, focusing in particular on Adam Smith and Karl Marx. While the Walrasian notion may be described as an equilibrium state in which atomistic agents treat prices parametrically, the Classical notion is a situation in which agents employ their market power by setting prices strategically. Yet, though for the Classical authors price undercutting or outbidding are typical phenomena occurring in any market characterised by free competition, it is fair to say that they went no further than providing some metaphors and some numerical examples that do not give us much more than some unsystematic guidelines on how to analyse in detail the competitive process of market price determination. Marx was conscious that between a buyer’s market, in which the price is determined by the reservation price of sellers, and a seller’s market, in which the price is determined by the reservation price of buyers, there is something in between in which the price is not unique and any equilibrium can concern only distributions of probability (mixed strategies) on the behaviour of the traders. An appendix substantiates this fact by using a formalism derived from the analysis of Bertrand competition.

Chapter 13 analyses Adam Smith’s views on monopoly by focusing on Books IV and V of The Wealth of Nations. It argues that the majority of scholars have assessed Smith’s analysis of monopoly starting from premises different from those actually, though implicitly, used by Smith. The chapter shows that Smith makes use of the word ‘monopoly’ to refer to a heterogeneous collection of market outcomes, besides that of a single seller market, and that Smith’s account of monopolists’ behaviour is richer than that provided by later theorists. Smith was also aware of the growth-retarding effect of monopoly and urged state regulation.

Chapter 14 argues that according to Smith markets and trade are in principle good things, provided there is competition and a regulatory framework that prevents ruthless selfishness, greed, and rapacity from leading to socially harmful outcomes. But competition and market regulations are always in danger of being undermined and circumnavigated, giving way to monopolies that are very comfortable and highly profitable to monopolists and may spell great trouble for many people. In Smith’s view, political economy – as an important, and perhaps even the most important, part of a kind of master political science, encompassing the science of the legislator – has the task to fight superstition and false beliefs in matters of economic policy, to debunk opinions that present individual interests as promoting the general good, and to propose changing regulatory frameworks for markets and institutions that help to ward off threats to the security of society as a whole and provide incentives such that self-seeking behaviour also has socially beneficial effects. The East India Companies of Great Britain and the Netherlands were scary cases in point of the enormous damage that unfettered selfish behaviour endowed with monopolistic powers could bring about. Clearly, selfishness alone did not yield socially beneficial outcomes. Checks and balances were needed in order to channel selfish behaviour in directions that were socially beneficial and prevent it from developing its dark and destructive sides. The chapter shows that the ideas of Adam Smith may still resonate and illuminate the problems of today and the theories that try to tackle them.

I Classical economics, old and new

2 David Ricardo On the art of ‘elucidating economic principles’ in the face of a ‘labyrinth of difficulties’

Heinz D. Kurz

DOI: 10.4324/9781003138709-3

Original paper: Heinz D. Kurz (2015) David Ricardo: on the art of “elucidating economic principles” in the face of a “labyrinth of difficulties”, The European Journal of the History of Economic Thought, 22(5), 818–851, DOI: 10.1080/09672567.2015.1074713. London: Taylor & Francis Group.

2.1 Introduction

Major interpreters of David Ricardo assess his contribution to political economy in vastly different terms. Karl Marx praises Ricardo’s ‘scientific impartiality and love of truth’ (Ma...

Table of contents

• Cover
• Half Title
• Series Page
• Title Page
• Copyright Page
• Table of Contents
• About the authors
• List of contributors
• Acknowledgements
• 1 Introduction
• I Classical economics, old and new
• II On Sraffa’s contribution
• III Production of commodities by means of commodities in its making
• IV Competition and monopoly
• Subject index
• Name index