Category Archives: Sraffa

A Foreword to Sraffa’s Production of Commodities by Means of Commodities

Piero Sraffa’s classic Production of Commodities by Means of Commodities (PCMC) was published in 1960. It runs into 87 pages of main text (inclusive of the content list), 6 pages of appendices, less than 3 pages of Preface and a 3-page index. As we pointed out in A Foreword to Keynes’s General Theory, by foreword, we mean the following: ‘The introduction to a literary work, usually stating its subject, purpose, scope, method, etc.’ (Oxford English Dictionary).

The book is subtitled ‘Prelude to a Critique of Political Economy’. This slim book is divided into 3 parts: (1) ‘single-product industries and circulating capital’; (2) ‘multi-product industries and fixed capital’; and an untitled third part containing a single chapter titled ‘Switch in Methods of Production’. In the Preface, Sraffa acknowledges Keynes, A. S. Besicovitch (‘for invaluable mathematical help’), Frank Ramsey and Alister Watson. Sraffa was friends with Gramsci and Wittgenstein. [Ramsey, a friend of Keynes, supervised the 40-year old Wittgenstein’s PhD thesis at the age of 26 (source).] Appendix D contains the ‘references to the literature’ wherein works by Quesnay, Smith, Ricardo, Torrens, Malthus and Marx are mentioned. As Sraffa writes in the appendix, ‘[t]he connection of this work with the theories of the old classical economists have been alluded to in the Preface. A few references to special points, the source of which may not be obvious, are added here’ (p. 93). The orthodox economists mentioned by Sraffa are Marshall and Wicksteed.

With respect to method, Sraffa adopts the standpoint of the old classical economists – the surplus approach to value and distribution. This is contrast to the orthodox marginalist scarcity approach to value and distribution. In the surplus approach, one distributive variable is exogenously determined. This is in fact a realistic assumption because the rate of interest is set by monetary authorities and the rate of profit can be conceptualised as a sum of the riskless rate of interest (on government securities) and a pure rate of return on capital.

The conception of the ‘system of production and consumption as a circular process’, Sraffa notes in Appendix D, is to be found in Quesnay which ‘stands in striking contrast to the view presented by modern theory [marginalist], of a one-way avenue that leads from “Factors of production” to “Consumption goods”’ (p. 93) [cf. Kurz & Salvadori 2005]. The subject matter of PCMC is the theory of value and distribution – how are relative prices and distributive variables determined? More specifically, in an economy where the production of commodities is undertaken by means of commodities, how are prices and distributive variables determined? Sraffa’s correct solution is that ‘the distribution of the surplus must be determined through the same mechanism and at the same time as are the prices of commodities’ (p. 6). What are the data or givens? (1) size and composition of output; (2) methods of production; and (3) one distributive variable (either the wage rate or profit rate). The first two givens are mentioned in the Preface when Sraffa writes that his ‘investigation is concerned exclusively with such properties of an economic system as do not depend on changes in the scale of production or in the proportions of “factors”’ (p. v). The rationale for the third given is as follows: ‘…the practice, followed from outset, of treating the wage rather than the rate of profits as the independent variable or “given” quantity’ has been reversed because the ‘rate of profits, as a ratio, has a significance which is independent of any prices, and can well be “given” before the prices are fixed … in particular by the level of the money rates of interest’ (p. 33).

While the scope of PCMC is limited to the subject matter, its implications on general economic theory are far reaching; for instance, his work has implications for the theory of value and distribution (capital theory forms an important part of this). Therefore, his work has positively contributed to the theorising of economic growth and environmental economics. Also, Sraffa’s work is to be a ‘basis for a critique of’ ‘the marginal theory of value and distribution’ (p. vi). Sraffa’s work is a coherent articulation of the theory of value and distribution the classical economists attempted to solve. At the same time, it also forms the basis for a critique of the marginalist theory of value and distribution by underscoring the logical fallacy in treating capital as a quantity independent of prices.

In a sense, the purpose of Sraffa’s work depends on the use that is made of it and there is a growing body of literature emanating from PCMC (a useful survey is Aspromourgos’s 2004 paper titled ‘Sraffian Research Programmes and Unorthodox Economics’). The classical approach to economics has been made more articulate and coherent. By marrying the classical or ‘surplus’ approach to value and distribution with the principle of effective demand, an alternative explanation for the determination of activity levels and economic growth has been developed. Work is also going on in the areas of environmental economics, public debt, monetary economics and history of economic thought, all of which draws upon and/or are inspired by Sraffa’s work.

The Indian readers would be interested to know that an Indian edition of PCMC was published by Vora & Co. Publishers, Bombay (available online).  However, PCMC is out of print since 1996 according to Cambridge University Press.

Those of us who are dissatisfied with mainstream neoclassical economics will find valuable insights and an economically superior but modest basis in Sraffa’s work to develop a coherent alternative to the mainstream approach to economic thinking. Particularly fruitful is this research programme when combined with the rich insights of the classical economists and Marx as well as the principle of effective demand of Kalecki and Keynes.

On the Determinants of Investment

It is well known that an economy’s output levels and employment levels are determined by the level of investment. The popular story presented in mainstream textbooks and taught in conventional courses is that of planned saving adapting to planned investment, with the rate of interest as the equilibrating factor. This is the supply-side vision of the economy wherein demand can never be a constraint except temporarily due to frictions or imperfections. Additionally, this view reaches the conclusion that that there is a tendency to full-employment in capitalist economies. This blog post revisits the saving-investment relationship, the investment function and the link between the rate of interest and investment. Given the crucial role investment plays in an economy, it is important that we critically appraise its determinants.

By investment, economists mean the purchase of capital goods and not financial assets. Saving refers to the income that is not consumed. Saving is a leakage from the economy while investment is an injection. Marginalist (neoclassical) economics maintains that planned saving and planned investment are equilibrated through variations in the rate of interest which is assumed to be sufficiently sensitive to any saving-investment disequilibrium. Planned saving is a positive function of the rate of interest while planned investment is a negative function of the rate of interest. When planned saving is in excess of planned investment, there is excess savings which puts a downward pressure on the rate of interest and vice versa. However, is such an a priori functional link between the rate of interest and the rate of accumulation a correct one? The 1960s capital theory debate demonstrates the implausibility of an interest-elastic investment function on logical grounds. Also, in a world where the rate of interest is set by monetary policy (and therefore exogenous to the saving-investment process) it is unclear how it can play the role of an equilibrating force as suggested by marginalist economics.

The non-orthodox approach to activity levels and growth draws inspiration from the principle of effective demand of Kalecki and Keynes. The investment function is not interest-elastic in this theoretical approach, also called the demand-led approach. Here, investment depends on ‘the future expected level of effective demand (D+1), which tells us how much capacity firms will need, and on the current technical conditions of production (represented in this simple model by the normal capital-output ratio)…’ (Serrano 1995: 78; available freely here). In this simple model, note that production is assumed to be carried out with circulating capital only. So, I = aD+1 where a is the capital-output ratio. A change in technology will affect the capital-output ratio, which indicates how much of capital is required to produce one unit of output. Further, we make the realistic assumption that firms do not systematically err in their expectations. The expectations of firms of course depend on policy certainty. Policy uncertainty affects consumption and investment decisions in an adverse manner.

As a matter of fact, a recent IMF working paper on the situation of India provides partial support to the demand-led approach. They note: ‘Real interest rates account for only one quarter of the explained investment slowdown.’ For them, the key factor is policy uncertainty, but, the demand-led growth theorists, I think, will advocate the examination of the exact mechanisms through which monetary and/or fiscal policies have deterred investment. Without explaining further in this blog post, the answer might be found in the manner in which autonomous elements of demand such as autonomous consumption, research & development expenditures, government expenditures and foreign expenditures are affected by policy uncertainty. To conclude, it is time that the interest-elastic investment function is seriously questioned both on theoretical and empirical grounds, and subsequently discarded.

Robert Torrens: An Introduction

Robert Torrens’s An Essay on the Production of Wealth (1821) is an important contribution to economic theory, in particular, to classical economic theory. Torrens was involved in the founding of the London Political Economy Club along with James Mill, David Ricardo, Thomas Tooke and others. Torrens has written extensively on monetary issues, on colonisation and on price theory. He is also credited with having discovered the comparative costs principle independently of Ricardo. This blog post focuses on his contributions to the theory of value and the possibility of a general glut in his debate with Ricardo.

Torrens is one of the very few (to be precise, nine) economists mentioned by Piero Sraffa in his Production of Commodities by Means of Commodities; Sraffa approvingly cites him for his method of treating fixed capital. Fixed capital is conceptualised as a distinct commodity (a joint product) alongside new commodities which emerge from the production process. Torrens utilises a theory of value based on ‘capital’ as opposed to Ricardo’s labour theory of value. But, how is ‘capital’ to be measured without the knowledge of values/prices? Ricardo recognises that when labour-capital ratios are not uniform across sectors, value will not be proportional to the embodied labour. And, as Carlo Benetti writes in his entry on Torrens in The Elgar Companion to Classical Economics, when the rate of profit is zero, the labour theory of value holds; however, the existence of positive profits does not per se invalidate Ricardo’s labour theory of value. A satisfactory resolution of this problem in value theory is to be found in Sraffa’s simultaneous determination of profits and prices.

The macroeconomics of Torrens, built on his theory of value and distribution, suggests the possibility of a general glut in the economy. On general gluts, Torrens writes: ‘a glut of a particular commodity may occasion a general stagnation, and lead to a suspension of production, not merely of the commodity which first exists in excess, but of all other commodities brought to the market’ (Torrens 1821: 414; as quoted in the Benetti entry on page 473). The underlying reason for this is a disproportion between the different sectors of the economy. Owing to the structural interdependence prevalent in an economy, a disproportion can lead to a fall in ‘effectual demand’. This will lead to a glut in commodities in that particular sector and in other sectors as a consequence of a fall in sales and incomes in that sector. This, evidently, is in direct contrast with Say’s law, loosely understood as – supply creates its own demand.

Other notable commentators on Torrens include Giancarlo DeVivo and Lionel Robbins. The latter published his work in 1958 entitled Robert Torrens and the Evolution of Classical Economics. In 2000, DeVivo edited and put together the Collected Works of Robert Torrens. Studying Torrens will certainly prove invaluable in gaining a deeper understanding of classical economics, and especially his views on general gluts might have contemporary use in relation to the economics of Keynes and Kalecki.

Pierangelo Garegnani (1930 – 2011)

On October 14, 2011, heterodox economics (in particular, classical economics) lost one of its warriors. This post attempts to summarise some of his key contributions towards economic theory. First and foremost, he was an economic theorist par excellence. He contributed to the famous (now, almost forgotten) capital theory debates in 1960s along with Piero Sraffa and Joan Robinson on his side and Paul Samuelson and Robert Solow on the other. Alongside others, he pointed out logical flaws in the marginalist conception of capital and its devastating effects on equilibrium. Basically, marginalist theory of value and distribution (in modern parlance, microeconomic theory) was shown to be logically inconsistent. Today, these debates hardly ever appear in economics textbooks because marginalist or neoclassical economics invented inter-temporal equilibrium to take care of capital-theoretic issues. Moreover, history of economic thought has been sidelined – through famous graduate economic programs and by preaching that history of economic thought is of no use to a “practical” economist, both in academia and in business.

Garegnani made significant contributions to the revival of classical economics on the foundations laid down by Piero Sraffa. In particular, Garegnani, through various journal articles (in Italian and English) resurrected the works of old classical economists – mainly Smith, Ricardo and Marx. More than Sraffa, perhaps, it is Garegnani who has aided the revival and resurrection of classical economics. His command over the history of economic thought with a special focus on old classical economists and ‘old’ and ‘new’ neoclassical economists (Walras, Wicksell, Hicks, etc) is evident from his clear exposition of their analytical structure.

Like ‘old’ classical economists, Garegnani’s interest has been to explain growth dynamics of an economy. This, he believed and also demonstrated that it is possible by drawing insights from Keynes and working on a classical (Sraffian) foundation. In this regard, Garegnani and his friends-colleagues-students have been quite successful in their analysis of capacity utilization, supermultiplier, role of wages, profits being a monetary phenomenon and so on.

Given the massive contributions made by Garegnani, it has been an honour for me to have been introduced to his work during my Masters in Economics at University of Hyderabad. It is one of the few Universities, in India and possibly, in the world, which still teaches classical economics as a distinct approach to understanding contemporary economies. I hope that more Universities begin to recognise the benefits of a pluralist education and start teaching classical economics as a distinct subject.


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