Piero Sraffa: An Introduction

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.

Division of Labour: some comments

Division of labour is generally associated with Adam Smith (1776). The concept of division of labour attains significance because it helps in formulating an endogenous growth model, along with the extent of the market. The idea is that specialization has a positive effect on the extent of the market, which in turn leads to more division of labour.

Apart, from this, in everyday life, we come across division of labour in various shapes and sizes. A very strong example of this is that of outsourcing. Earlier, physicians attended to a patient and they were quite knowledgeable in many aspects of medicine. Now, we have ENT specialists, paediatricians, cardiologists, nephrologists, neurologists, orthopaedicians, etc. This is visible in the IT industry as well. And specialization has not left academic untouched either. Within economics, one finds econometricians, economic historians, experimental economists, macroeconomists and so on.

In the Wealth of Nations, Smith [1776] talks of pin-making to illustrate division of labour:

“One man draws out the wire, another straights it, a third cuts it, a fourth points it, a fifth grinds it at the top for receiving the head; to make the head requires two or three distinct operations; to put it on, is a peculiar business, to whiten the pins is another; it is even a trade by itself to put them into the paper; and the important business of making a pin is, in this manner, divided into about eighteen distinct operations, which, in some manufactories, are all performed by distinct hands, though in others the same man will sometimes perform two or three of them.” [p. 15]

Today, while going through Sir William Petty’s ‘Another Essay in Political Arithmetick Concerning the Growth of the City of London‘ which was published in 1682, I found division of labour mentioned. Petty illustrates it using the example of watch-making:

“In the making of a Watch, If one Man shall make the Wheels, another the Spring, another shall Engrave the Dial-plate, and another shall make the Cases, then the Watch will be better and cheaper, than if the whole Work be put upon any one Man.” [p. 473]

Then, while going through the Campbell and Skinner edited Volume of Wealth of Nations, I noticed that in the first foot note, they refer to Petty as probably being the first modern author to talk about division of labour.

Interesting to know that William Petty, hailed by Marx has the first political economist, had developed notions of division of labour!

Experimental Economics: What Does it Offer?

The research output of experimental economics has been showing a marked increase in the recent past. This post provides a few insights regarding the works of the experimental economists. As Shyam Sunder writes, there are three streams within experimental economics: (1) macro stream to examine the properties of social structures, (2) micro stream to examine the behavior of individuals, and (3) agent stream to explore the links between the micro and macro phenomena using computer simulations.[Sunder 2007] At the first look, experimental economics seems capable of handling the micro stream as well as the agent stream.

The following image shows how laboratory data is presented for a double auction. (Retrieved from http://veconlab.econ.virginia.edu/htm_small/da_06_small.png )
An Illustration

It is believed that Edward Chamberlin conducted the first experiment in economics. Chamberlin examined market conditions in his classroom in a controlled atmosphere, whose results deviated from the prevalent Walrasian conclusions. The rationale of experimental economics is that theory/models suggest general tendencies among the variables of interest. The strength of the general tendency is not provided by theory. In other words, theory cannot tell us about its explanatory power. This is where experimental economics makes its contribution. Also, this is the reason why one carries out field surveys and why econometricians look for a high R-square.

Initially, experimental economics seemed to be aping the sciences to a large extent. However, after reading Sunder’s account, I am begining to get convinced about its potential in understanding aggregate economic behaviour. Sunder wonders how we can study social beings by completely negating free will – that is, by treating it as a science. The other option is to highlight the heterogeneity of human behaviour and refuse to come up with general tendencies. As he writes:

“Hence we see the dilemma of social sciences. Do we abandon free will, personal responsibility, and special human identity; and treat humans like other objects of science? That is, drop the “social” qualifier, and become a plain
vanilla science? Or, do we drop the “science,” abandon the search for universal laws, embrace human free will and unending variation of behavior, and join the humanities? Either way, there will be no social science left. Is there a place where we can keep the “social” and the “science” together?”

Advances in computer technology assists economists working on aggregate economic variables. This is done by conducting computer simulations. The model can be taken from any theory – Marxian, Walrasian, Ricardian, Keynesian, etc – and specific behavioural rules can be assigned so as to arrive at some conclusions. But what is to be remembered is that, these computer simulations are tools which assist the policy maker and are not substitutes for theory. It must be noted that when assigning behavioural restrictions, we are negating the free will of the individual economic agents. As economists, we are used to making such an assumption – utility maximization, bounded rationality, tit-for-tat strategy, satisficing, reciprocative behaviour are all aspects of an individual’s behaviour.

To conclude, experimental economics offers economics the following benefits. Firstly, it provides data for verifying/falsifying a particular hypothesis. Secondly, through computer simulations, aggregate economic behaviour can be replicated to a limited extent. And lastly, experimental economics provides a strong flavour of science to economics.

Reference

Sunder, Shyam (2007) ‘Determinants of economic interaction: behavior or structure’, Journal of Economic Interaction and Coordination.