Sraffa and the Reconstruction of Economic Theory: Volume Three

Sraffa's Legacy: Interpretations and Historical Perspectives

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

• Publisher: Palgrave Macmillan
• Year: 2013
• Print ISBN: 9781349347056, 9780230355309
• eBook ISBN: 9781137314048
• 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 construction of economic theory along the lines of the Classical approach.

Part I

Sraffa’s Contribution and Contemporary Streams in Economic Analysis

1

Sraffa’s System in Relation to Some Main Currents in Unorthodox Economics

Tony Aspromourgos^*

1.1 Introduction

If one asks the question ‘How is Sraffa’s book, and the system of theory contained within it, related to the scope and content of economics as a whole?’, the answer, on one level, seems clear and obvious half a century on. On the one hand, it reconstructs with a new coherence at least a foundational element of classical economics, a tradition running from William Petty and Richard Cantillon to David Ricardo and Karl Marx, and beyond. On the other, that same system of theory entails a critique of the marginalist approach to the theory of functional income distribution, insofar as the latter relies upon well-behaved substitutability between ‘factors of production’ for generating demand functions for factors. Absent that supply-and-demand approach to factor pricing, the supply-and-demand approach to commodity prices and quantities also collapses (Garegnani, 1983).

As to scope, the primary purpose of the marginalist theory, as an ‘economic’ theory, has been to explain and determine prices and quantities of commodities and factors of production supplied and demanded (including growth dynamics), by recourse to individual preferences and ‘endowments’, together with technology. But from Philip Wicksteed (for example, 1914, pp. 1–9) forward there arose a further ambition, to make marginalism a generic theory of human choice as such, insofar as those choices could be reduced to constrained individual optimisation, a project much advanced by Lionel Robbins’s (1935, pp. 15–16, 22–3) famous constitutive definition of economics. On the other hand, the scope of classical economics has a rather different character and quality. One reason for this is that for most of its history up to Ricardo it was not an organised academic discipline, produced and reproduced via systems of university education, as the marginalist theory has been for most of its history. Another is that for most of its history up to Marx economic science was not sharply demarcated from other elements of social science. Indeed in its Enlightenment foundations, political economy as framed by Adam Smith was part of an intellectual project of constructing a comprehensive ‘science of man’ (Aspromourgos, 2009b, pp. 53–9), a fact captured in the title of Andrew Skinner’s (1996) collected essays on Smith. It almost goes without saying that that projected comprehensive social science was very different in character from any supposed marginalist general theory of human choice. In any case, one may say that economic growth, the distribution by functional category of the resulting aggregate output, and its allocation between accumulation and surplus consumption, were the central themes of the classical economics project – all this being conceived of within a broader framework of economic development, involving qualitative change.

In the face of all this one could say that, in one sense, Sraffa’s system is a ‘modest’ construction, with the very form, character and size of the book giving concrete, physical expression to the limited, and very precisely limited, domain of the intellectual project. Notwithstanding attempts to assimilate Sraffa’s system to the general equilibrium form of marginalism, as a limiting case (Hahn, 1982; Garegnani, 1990, esp. pp. 112–18), the book’s economy of purpose and of execution cause no intractable problems for grasping its relationship to orthodoxy.¹ But what of its relationship with other streams of unorthodox economics? The two most salient such streams of thought are Marxist economics and Post-Keynesian economics. The significance of Sraffa’s book for the former was very considerably debated in the decades immediately following its publication, with Steedman (1977) in particular the catalyst for much controversy (see also Garegnani, 1984). The focus here is therefore upon Post-Keynesian economics; but also, in one fundamental respect pertaining to the theory of functional income distribution, the relation between Sraffa’s system and Marxism will also be considered. The three sections which follow successively consider price theory, income distribution, and activity levels and growth, in the process drawing on Aspromourgos (2004), which considers more deeply a number of these issues, as well as some pertinent other matters not touched upon here (and includes a substantial survey of Sraffa-inspired economic literature to 2001).

1.2 The theory of commodity prices

With regard to the theory of prices, Sraffa’s system represents the outcome for relative commodity prices that would result if ‘free competition’ (freedom of entry and exit of capital) fully works itself out, so that it is equally attractive to invest a dollar of capital in any and all industries or activities (hereafter, just ‘industries’ for short). The parameters for this determination are: 1) the quantities of gross outputs of the system; 2) the available production methods for each industry, as expressed in input–output ratios associated with production of the given gross outputs; and 3) a distributive variable – either the wage share, real wage rate, or general rate of profit. The first of these parameters is the one most perplexing to those accustomed to more conventional modes of economic analysis. Much could be said about this issue (see Garegnani, 1984, pp. 292–9, or 1987, pp. 560–6; Kurz and Salvadori, 2003, pp. 13–24, abbreviated in Kurz and Salvadori, 2002, pp. 226–32). Suffice it to make here the following observations.

If input–output ratios are variable with respect to scale of production, then the second parameter cannot be known without the first. The use of scarce natural resources as production inputs is the most obvious factor pertinent here, as well as scale economies. It might be tempting to seek some kind of supply-function-like constructions in response to these possible relations between scale and input–output ratios. But since these possible relations have no general character which could be posited a priori, for all commodities in general, this is not a plausible route to take. (The orthodox commodity supply function, or ‘rising supply price’, on the other hand, is posited on an a priori general principle, albeit a spurious one: the marginal productivity or supply-and-demand approach to factor pricing.) If input–output ratios are invariant with respect to scale, for all commodities and over all economically relevant levels of gross outputs – whether as a matter of plausible realism, or merely assumed for simplicity or analytical convenience – then the data reduce to just the available, constant-returns production methods and a distributive variable. But this is a special assumption, justifiable only on the basis of analytical convenience for particular, limited theoretical purposes.

The fundamental Post-Keynesian reaction to this approach to price theory has been, on the one hand, at the substantive level, to prefer a mark-up-on-cost approach to commodity prices, posited on an appeal to market structures that are non-competitive in some sense or other. And on the other hand, at a methodological level, at least many Post-Keynesians reject what they perceive as an ahistorical, timeless ‘long-period’ method of analysis entailed in Sraffa’s system. This kind of methodological critique was championed by Joan Robinson (1979; cf. Garegnani, 1979; Harcourt et al., 1995 deals extensively with the issue). The methodological issue, the substantive question of non-competitive market structures, and additionally, the status of the mark-up as an explanatory variable in price theory, may be dealt with distinctly and successively.

The first requires little comment: if we make the analytically convenient or simplifying assumption of constant returns, an assumption generally employed also in the mark-up approach, we can write equations for Sraffa prices and equations for mark-up prices, side by side. Both are equilibrium constructions, in some sense, even if in perhaps somewhat different senses. Even if there is no uniform net rate of profit embedded within the mark-up prices, there are uniform commodity prices and uniform wage rates – and these uniform variables too are equilibrium concepts, the outcomes of a form of competitive process which equalises returns (or costs) from sale (or purchase) of homogeneous commodities and labour. The one set of ‘equilibrium’ prices, Sraffa or mark-up, is no more or less ahistorical or timeless than the other; the issue of which is to be preferred as an approach to price theory cannot be decided on such purely methodological grounds.

As to the question of non-competitive market structures, even allowing for the existence of restrictions to free competition in the classical sense – less than unrestricted entry to (and exit from) industries, and positive costs of entry and exit (so less than ‘free’ competition in two senses) – this by no means necessarily renders the notion of a general rate of profit on capital redundant for the theory of prices. If that were so, then mark-ups (supposing them otherwise theoretically coherent: see further, below this section), could be conceived of as determined independently of any such magnitude. The most direct and observable empirical analogue of the general rate of return on capital in the contemporary world is the riskless rate of return on government securities held to maturity, to which there attaches zero default risk. This may be interpreted as the minimum rate of return under competitive conditions, to which are added premia for differential risk and illiquidity, in order to arrive at required rates of return across the variety of available possible investments.

Under non-competitive conditions in which there are barriers to entry and exit, the competitive minimum rate and wider required rates of return would only be irrelevant to price theory if the non-competitive mark-ups or non-competitive rates of return were determined completely independently of the competitive rates. This is highly implausible for most industrial and financial circumstances. In an industry subject to restrictions on competition, the margin or ‘spread’ between the competitive required rate of return and the actual rates of return on capital pursued by existing firms in the industry is incentive for potential new entrants to contest the market (so long as there is no legal prohibition against entry). For example, suppose an industry with a monopoly supplier who earns above-competitive profits on capital in production, and is owned via traded equities which (let us say for simplicity) are a claim to the total net profits from production. In order to equalise the net yield from equity ownership in this monopoly, with yields on other equities, or returns on other forms of income-yielding wealth, the total money value of the equities which constitute ownership of the monopoly firm will tend to exceed the replacement cost of the real capital employed in production. The greater this divergence between the financial value of the firm and its replacement cost the greater must be the threat of new entrants, a fact which could hardly escape the monopoly firm. The greater this divergence, the less that needs to be spent, relative to the financial value of the existing firm, in order to establish a similar, new firm, and perhaps acquire a similar profit stream.²

In any case, putting aside this particular example, these kinds of circumstances seem more generally applicable than the alternative possibility, that non-competitive mark-ups or target rates of return are determinable completely independent of competitive rates (see also Clifton, 1977; 1983). Under those generally applicable circumstances, the returns on capital in non-competitive industries are best conceived of as the sum of a competitive required rate of return plus margins, the latter determined by a complex of economically relevant factors, pertaining to particular industries or commodities, which determine the ‘contestability’ of particular markets. The competitive returns remain an ‘anchor’ for non-competitive target rates of return, in some degree or other; the non-competitive mark-ups are partly determined by the competitive required rates of return (cf. Mainwaring, 1992). The resulting system of commodity price determination will not be different in its formal structure from a price system with differential profit rates due to differences in risk and illiquidity. It is well known that, subject to technological and sociological constraints (with regard to the latter, minimum real wages rates in particular), such differential profit rates can easily be incorporated into Sraffa price systems (for example, Semmler, 1984; Steedman, 1984; Kurz, 1985).

There is finally the question of whether mark-ups have integrity as independent explanatory variables in price theory. The argument immediately above, concerning rates of return under non-competitive conditions as a function of competitive rates of return, does not necessarily render mark-ups completely void of causal significance for price theory: one might still be able to conceive of mark-ups as independent variables with respect to production costs and prices, even if mark-ups are in turn partly (or fully) reducible to competitive profit rates. From the standpoint of Sraffa’s system – in which the ‘circular’ character of the production system makes transparent the mutual dependence, or simultaneous determination, of ...

Table of contents

• Cover
• Title
• Copyright
• Contents
• List of Tables and Figures
• Preface
• Acknowledgements
• List of Contributors
• Introduction
• Part I Sraffa’s Contribution and Contemporary Streams in Economic Analysis
• Part II The Evolution of Sraffa’s Ideas and the Manuscripts
• Part III Sraffa’s Legacy and the Interpretation of Ricardo
• Index