Sraffa and the Reconstruction of Economic Theory: Volume One

It is widely recognised that Sraffa’s Production of Commodities by Means of Commodities (PCMC) is not simply a variant of a class of linear models, nor an incomplete general equilibrium model with stationary prices. Together with Sraffa’s 1951 ‘Introduction’ to Ricardo’s Works, Sraffa (1960) revived the old classical economists’ approach to value and distribution, proving that a correct price theory can spring from within that approach, and illustrating properties of the price system and of the choice of techniques which have resulted in a sharp contrast with the foundations of neoclassical (or marginalist) theory.

The post-war capital controversy seems to have had two distinguishable stages. Thanks to the unambiguous phenomena of reswitching and reverse capital deepening, the first stage was conclusive in discarding from pure theory the traditional versions of neoclassical theory that relied on the notion of capital as a single quantity. Subsequently, however, when the implications of those phenomena took centre stage in the controversy, together with the reformulations of the theory which intended to do away with the ‘quantity of capital’, several misunderstandings prevented, I shall contend, decisive progress in the analysis and we entered an inconclusive phase of the discussion.

Two lines of thought may be discerned in the half-century arc of critical writing on capital theory which extends from Garegnani (1960) to Garegnani (2010). The first concerns the conception of the quantity of capital as an endowment to be put on a par with land and labour - the traditional three ‘factors of production’ (which is not to discredit Marshall’s fourth factor, organisation, which, like capital, is produced). The second draws attention to a related methodological shift within neoclassical theory prompted by a seeming recognition, originally on the part of Hicks, but essentially found in Walras (as Garegnani has repeatedly pointed out), that the treatment of a given capital endowment as an arbitrary vector of capital goods—each one a separate resource or factor input—is inconsistent with ‘the uniformity of returns on capitals’ supply prices pertaining to the “normal position”’ (Garegnani, 2010, p. 81). A central point in this second line of argument is that the ‘normal position’ was the bedrock upon which both classical and traditional neoclassical theory had been built.

Wage curves have become the main tool for the analysis of technical choice, but what does their envelope look like? Joan Robinson used to say that one should expect one technique to dominate all others, independently of distribution. It sounded like a polemical remark to counteract all reference to neoclassical substitution, and she was more cautious in her writing,¹ but the drawing on the blackboard resembled Figure 3.1, w1, w2 representing two techniques. (The reader not familiar with the Sraffa analysis and the notation used here can pick it up in the first paragraph of Section 3.2.)

Because of the neo-Walrasian shift in general equilibrium theories of value and distribution symbolically associated with the publication of Hicks’s Value and Capital,¹ Wicksell’s contribution to economic theory has been forgotten by most of the modern mainstream economists. There is, for example, no reference to him in Debreu’s Theory of Value (1959) or Arrow and Hahn’s General Competitive Analysis (1971).

This work aims to clarify some aspects of classical wage theory, looking at the form in which it was advanced by Marx. It also aims to analyse the ability of this theory to explain income distribution in the context of the present capitalist societies, especially with respect to the relationship in a fiat money economy between money wages and real wages. In particular, Sections 7.2–7.4 reconstuct the notion of the subsistence wage and the determinants of distribution according to Marx; Sections 7.5 and 7.6 consider the effects of technical changes on the secular trends in real wages; Section 7.7 focuses on the different possible forces at work in determining income distribution, and thus in ‘closing’ Sraffa’s price system, when the wage rate happens to be above the subsistence level; lastly, Appendix A deals more exhaustively with the relationship between money wages and real wages, and the effects on price inflation and income distribution of a discrepancy between the real wage rate pursued by the workers in wage bargaining and the real wage rate targeted by the monetary authorities.¹

It is useful to start our analysis with the question of technological change, since it is in these terms that the general increase in inequality experienced by advanced capitalism over the last 30 years has, by consensus, been explained.

The last 30 years have witnessed a dramatic change in income distribution, with the wage share¹ falling in all major industrialised countries (Figure 9.1).

This chapter aims to show how a true ‘revolution’ in economic theory during the last century can be attributed jointly to Sraffa and Keynes. Despite following different research paths, both went deeply into the foundations of established economic theory, to the point of subverting, within their own framework, traditional ways of thinking about and representing the functioning of an economic system. We will also reflect on the persistence, despite Keynes’s and Sraffa’s corrosive critiques, of the very uncomfortable state of contemporary economic theory.

This work defends a number of assertions concerning some basic features of post-Keynesian macroeconomic models.

Italian wage and salary earners have experienced a critical change in their position in recent decades. This change has two dimensions. On the one hand, since the mid-1970s, Italian employees have obtained a lower share of value added.¹ On the other hand, since the late 1980s, wider disparities in workers’ pay structure have meant that a small segment of the salaried workforce has not seen its share decline.² The proportion of income allotted to the bulk of the working class has thus been reduced not only by the expansion of other incomes, but also by the expansion of the income of employees at the top of the pay scale.

This chapter is a comparative study of monetary policy and the inflationary process in Argentina and Brazil, based on the classical approach to the determination of prices and distribution. Our aim is to suggest some lines of inquiry in a specific framework for the analysis of inflation, and its relation to macroeconomic policies and structural heterogeneity in Argentina and Brazil.