Since the advent of the ‘marginal’ method, the doctrines of the old classical economists have been submerged and forgotten. It is this standpoint that Sraffa revives in his 1960 book Production of Commodities by Means of Commodities. Being third in the series of posts [Post 1; Post 2] on Sraffa, this post examines the origin of the ‘marginal’ method and its subsequent (mis)use by the neoclassical economists. The posts concludes with a brief mention of how history of economic thought is important so as to place theories in a proper context.
In the preface of his book, Sraffa points out that in a system of production where the scale of an industry or proportions of factors of production remained unchanged, one would not be able to locate marginal product and marginal cost. To put it differently, marginal analysis is done by considering ‘potential change’. That is, we try to find out variations in equilibrium quantities and prices with respect to infinitesimal changes in the neighbourhood. [Bharadwaj 1986, p 39]
What we do not pay adequate attention to, is that the most familiar case of ‘marginal analysis’ is that of the product of marginal land (also known as no rent land) in agriculture, when lands of different qualities are cultivated side by side. This refers to the well known differential rent theory of David Ricardo. In fact, it is the case of diminishing marginal returns on land which is at the junction of the ‘fundamental methodological shift from classical to equilibrium theory’. [Bharadwaj 1986, p 40] This can be understood only through a discussion of ‘extensive’ and ‘intensive’ margins.
Cultivation on lands of different qualities is visualised as the outcome of a process of ‘extensive’ diminishing returns. On the other hand, successive use of more output producing techniques refers to the process of ‘intensive’ diminishing returns. [Sraffa 1960, p 76] In the case of ‘extensive’ margins in cultivation, ‘the rents can directly worked out on the basis of the single observed situation.’ [Bharadwaj 1986, p 41] Whereas, in the case of ‘intensive’ margins, the calculation of rent requires a quantitative change in the situation. That is, successive doses of labour and ‘capital’ need to be added to the land. And, a further assumption is made on the nature of these ‘doses’. These ‘doses’ are considered to be homogeneous. As Krishna Bharwadwaj explains: ‘At any moment of observation, no dose is distinguishable from each other. No ‘marginal product’ can, therefore, exist in this case without introducing potential change.’ [Bharadwaj 1986, p 42]
Thus, it is the Ricardian theory of rent which provided the basis for the neoclassical theory of distribution by providing an inverse relationship between successive doses of labour and ‘capital’ and their remuneration. This theory of Ricardo was intended to explain the origin of rents. In the hands of later authors, this was generalised to labour and ‘capital’. Hence, we see the inverse relation between ‘capital intensity’ and rate of profit in microeconomics textbooks of today.
From this excursion into the Ricardian theory of rent, two aspects are very clear. First, the concept of ‘marginal’ or ‘margins’ was used exclusively in the domain of cultivation. In ‘intensive’ cultivation, it is obvious that the output would increase only until a certain point, owing to the quality of that piece of land. Whereas, in the case of ‘extensive’ cultivation, the output would increase till all the acres of land are cultivated- notice the scarcity element here. What is not clear is the rationale of extending such an analysis into the area of manufacturing! Also, it is well accepted that land is scarce; but, is ‘capital’ or produced commodities scarce in a similar way’
No book of microeconomics mentions the origins of the famous ‘marginal’ analysis. And this method is so entrenched in the profession, that it is almost impossible to throw it away. It is in this context that other conceptual frameworks, that pay more attention to the changing historical conditions, assume importance. Probably, we need to revisit earlier theories and theorists not just for their own sake but for our sake as well in throwing light on contemporary issues. Sraffa’s work has inspired a lot of work on the history of economic thought, which will be summarised in a later post.
Bharadwaj, Krishna (1986), ‘Classical Political Economy and Rise to Dominance of Supply and Demand Theories‘, Universities Press: Calcutta.
Sraffa, Piero (1960), ‘Production of Commodities by Means of Commodities: Prelude to a Critique of Economic Theory‘, Cambridge University Press: Cambridge.