Sraffa and the Reconstruction of Economic Theory: Volume One

Theories of Value and Distribution

E. Levrero, A. Palumbo, A. Stirati, E. Levrero, A. Palumbo, A. Stirati

• Publisher: Palgrave Macmillan
• Year: 2013
• Print ISBN: 9781349346974, 9780230355262
• eBook ISBN: 9781137316837
• Topic: Economia
• Subtopic: Econometria

This book accounts for the work done around the two central aspects of Piero Sraffa's contribution to economic analysis, namely the criticism of the neoclassical theory of value and distribution and the reconstruction of economic theory along the lines of the Classical approach.

Part I
The Capital Controversy and General Equilibrium Analysis

1

On the Present State of the Capital Controversy

Pierangelo Garegnani^*†

1.1 Introduction

The post-war capital controversy seems to have had two distinguishable stages. Thanks to the unambiguous phenomena of reswitching and reverse capital deepening, the first stage was conclusive in discarding from pure theory the traditional versions of neoclassical theory that relied on the notion of capital as a single quantity. Subsequently, however, when the implications of those phenomena took centre stage in the controversy, together with the reformulations of the theory which intended to do away with the ‘quantity of capital’, several misunderstandings prevented, I shall contend, decisive progress in the analysis and we entered an inconclusive phase of the discussion.

These unclarified misunderstandings, I shall also contend, have then left space for the credence that, whatever their methodological deficiencies, the reformulations of neoclassical theory that have been introduced in the theoretical mainstream – essentially by Hicks’s Value and Capital (1939) – and which have become dominant after the first stage of the capital controversy, are immune of the inconsistencies affecting previous theory on the conception of capital. This has in turn left space for a second, no less unwarranted, consequence: a feeling that since those reformulations, and in particular general intertemporal equilibrium, would confirm at the level of pure theory the essential validity of the neoclassical demand-and-supply apparatus, they would also provide some validation for the admittedly imperfect previous concepts – foremost that of a ‘quantity of capital’ – as workable approximations in applied work.

To gain an understanding of the situation just outlined, it may be necessary to take a broad view of the problem, starting from the essential role that the notion of capital as a single magnitude played in originating neoclassical theory by extending the Malthusian theory of rent to cover also the division of the product between wages and profits, which classical economists had explained by a surplus principle. It is, in fact, the essential double role of providing (i) a foundation for the central neoclassical conception of general substitutability among ‘factors of production’ and (ii) a notion of equilibrium that makes a correspondence between theory and observation possible.

This double role will allow us to confirm, in the face of some conjectures recently advanced, the essential nature of Sraffa’s critique of the neoclassical notion of capital and, more generally, of his contribution in Production of Commodities as comprising a rejection of the neoclassical explanation of a market economy and an opening to the alternative surplus explanation provided by the English classical economists.

Returning, then, to our main line of argument, we shall recall in Section 4 the essential terms of the difficulty of capital in neoclassical theory – i.e. the impossibility of conceiving that quantity independently of the distribution and prices it is brought in to determine – and we shall examine the way out of the problem influentially proposed in Hicks’s Value and Capital (1939), based on Walras’s old conception of capital as a physical vector of capital goods. That conception, which had gained little following in mainstream theory during the six decades since it was first advanced, will then be considered with the radical changes it renders necessary in the notion of equilibrium. They are the changes characterising the neoclassical reformulations that, we noted earlier, came to the centre of the post-war capital controversy in its later phase.

We shall then be able to proceed to the misunderstandings that, we shall contend, have marred that second phase of the controversy and which, we shall claim, characterise its present state. We shall there refer to the argument developed elsewhere (Garegnani, 2000; 2003), according to which those reformulations of neoclassical theory also ultimately depend on the notion of capital as a single quantity, the same, as we just said, found indefensible at the level of pure theory in the early stage of the controversy.

1.2 The quantity of capital and its neoclassical role

A preliminary observation may be useful in order to get a grasp of the role of the conception of capital as a single quantity at the origin of neoclassical theory. The observation is that from the point of view of their owners, capital goods, however heterogeneous, are in fact perfect substitutes in proportion to their values.¹ As Walras had lucidly pointed out nearly 150 years ago, capital goods are demanded by savers as elements of the single commodity that he called ‘perpetual net income’.² It is indeed the single commodity whose existence we imply when we assume competitive arbitrage that tends to realise a uniform ‘effective’ rate of riskless return on the price of such goods.³ The reciprocal of that rate is in fact nothing but the price of that Walrasian commodity: if the interest rate is 10 per cent, the value of a ‘perpetual net income’ of one pound is 10 pounds. This definition assumes constancy of prices and the rate of interest over an infinite future, but little changes in that conception if – more in keeping with contemporary intertemporal equilibrium, its finite horizon and its changing prices – we refer at any time t to the ‘income for next year’ and to the price of a (gross) unit of it, i.e. 1/(1 + r_t).⁴

Now, it is the notion of the quantity of this single commodity, thus rooted in the experience of the wealth owners and of the firms in which they invest, that has evidently been a key to the shift from the first to the second of the two broad approaches. These approaches, at the cost of severe simplifications, can be said to have successively dominated economic theorising since its systematic inception: the classical and then the marginalist or neoclassical approach to the theory of distribution and relative prices.

We do not need a detailed distinction between these two broad approaches.⁵ The first approach in order of time is the classical one and centres on the conception of a social surplus that the community can dispose of without infringing on the possibility of reproducing its outputs on a constant scale. It is the idea that – with wages linked to the subsistence of workers and therefore conceived as no less a necessity for social reproduction than are the means of production – underlies the theory of distribution and relative prices, running from the physiocrats down to Marx via Adam Smith and Ricardo. The subsequent approach is the dominant neoclassical one, which, after a half-century of transition from classical theory, did crystallise in the ‘marginalist revolution’ of the last quarter of the nineteenth century. It is founded ultimately on the conception of substitutability between ‘factors of production’ and on the demand-and-supply functions for factors and commodities, which are taken to result from that substitutability.

What requires deeper discussion is the sense in which I consider that the notion of capital as the single Walrasian commodity ‘future income’ has been a key to the passage from the classical to the neoclassical approaches.

The marginalist or neoclassical approach arose essentially, we noted, out of the Malthusian theory of rent, which, when reformulated in terms of homogeneous land, could be extended to cover the distribution of the product among any number of ‘factors of production’ and, hence, in principle, also to the determination of the division betwee...

Table of contents

• Cover
• Title
• Copyright
• Contents
• List of Tables and Figures
• Preface
• Acknowledgements
• List of Contributors
• Introduction
• Part I The Capital Controversy and General Equilibrium Analysis
• Part II The Revival and Development of the Classical Theory of Distribution
• Index