In the first half of 20th century, Marshallian economics dominated economic theory and policy. Keynes in his 1936 book (The General Theory) tries to break away from the orthodoxy by challenging its concepts such as full employment and equality of savings and investment. In 1960, Sraffa mounted a strong critique through his book Production of Commodities by Means of Commodities.
Concepts such as utility, capital, prices, marginal product, marginal cost, etc were questioned by Sraffa. In fact, not only were they challenged, but they were also shown to be problematic. The following paragraphs will show how Sraffa pointed out the inadequacies with the above mentioned neoclassical conceptions of the economy.
Traditional theory lists land, labour and capital as ‘factors of production’. This means that production is carried out using some combination of the above factors. However, the process of production is seen as a one-way avenue from factors of production to production of final goods for consumption. Sraffa, in the tradition of classical economists argued that production is a circular process, or to use Myrdal’s phrase- production is a circular and cumulative process. This was in the tradition of the Classical economists who visualised the economy as an interdependent entity- Francois Quesnay was the first to provide a systematic account of interdependence in his Tableau Economique.
As we know, neoclassical theory of equilibrium prices (value) is built on the twin pillars of production and consumption. It is the production side that provides the supply function; and the consumption side provides the demand function. Through the interaction of demand and supply, equilibrium prices or value is created. This seems plausible and true, at the very outset. Why? When we think of the production of, say, a car, we presume that both the buyer and the seller has some role in price fixing. Yes, this would be the case if we viewed production (of cars) as an independent activity. Whereas, in reality, production is a social activity and so is consumption. Marshall’s partial equilibrium analysis sought to understand equilibrium price and quantity formation in isolated firms/industries. Sraffa’s 1960 book provides a framework for understanding values (or in neoclassical terms, equilibrium prices) in an economy where production is a social activity and where the nature of production is circular. Hence the title of his book: production of commodities by means of commodities. This highlights the interdependent production structure, which is the case in today’s economies.
In the preface of his 1960 book, Sraffa points out the obvious problems of the ‘marginal method’. To have marginal cost, one needs to pay attention on change. To illustrate, suppose Hero Cycles produce 100 cycles a day using 10 machines and 10 labourers. And production is carried out in this way. How does one calculate marginal cost? Do we add a machine and see how much extra output is produced? Or do we ask one worker to work in Hero Cycles for a day?
The above paragraphs are only meant to introduce a reader to Sraffa. To me, Sraffa’s work has brought about a change in how I visualise the economy. Earlier, the linkages between various macroeconomic variables and their micro counterparts were vague. In the following posts, the above mentioned concepts will be explained in more detail. And, concepts such as increasing/diminishing returns, scarcity and prices, joint production, surplus approach, capital theoretic problems, etc will be tackled in the following posts.