Normal Prices, Technical Change and Accumulation

‘Piero Sraffa was one of the greatest economists of this century’, wrote P.A. Samuelson, one of Sraffa’s greatest critics, in his obituary in the Italian newspaper Corriere della Sera. Anyone who is familiar with the very large literature on capital theory, in which Sraffa’s name is most prominent, and has seen the possibly still larger literature on Sraffa’s own theory, with books, articles and comments written in many languages, might be very surprised to hear, if he had not yet been told, how modest and unpretentious Sraffa was. Friendly, with shining eyes, he was always prepared to engage in a discussion when students met him walking in the backs of Trinity College.

Sraffa, in his Production of Commodities by Means of Commodities (Sraffa, 1960), intended to achieve two purposes: to lay the foundation for a critique of neoclassical theory and to prepare for a return to the classical theory of accumulation by providing a modern formulation of a classical theory of value. He showed that prices are determined and vary in function of the rate of profit, if the quantities to be produced are given with the technology in use. On the one hand, the variations in the total value of capital goods so induced are incompatible with traditional views of a determination of distribution and employment through supply and demand for capital as a factor of production. On the other hand, room was made for a determination of the levels of output and employment, and of distribution, through non-neoclassical theories. As a matter of fact, a given real wage rate had been the key to the explanation of distribution in the Ricardian system (with profits being a residual in the surplus after the payment of rents), and with the level of accumulation reached in any period determining the number of workers then to be employed. The theory of distribution (Pivetti, 1985), of the level of output (effective demand, Garegnani, 1964/5) and of its composition (Chapter 14 in this volume) would have to be rather different under modern circumstances; the reconstruction of classical theory therefore remains a laborious task.

There was very little discussion of Sraffa’s theory of joint production during the first ten years after the publication of Production of Commodities by Means of Commodities (Sraffa, 1960) because attempts to understand his theory of single product systems and the critique of the dominant theory of capital absorbed all attention. Thereafter, the theory of joint production came increasingly into focus. One reason, little understood at first, was that for the first time Sraffa’s approach provided economists working in the classical tradition with the possibility of defining prices of production in the presence of multiple product industries. When I wrote my ‘Mr Sraffa on Joint Production’ in 1970, Luigi Pasinetti drew my attention to the famous passage in Jevons ([1871] 1957) in which he invokes joint production to prove that a classical cost of production theory — as he understood it — could not explain the relative prices of by-products. A little later, Sraffa’s solution to the explanation of relative prices was used by Steedman to criticise Marx’s form of the labour theory of value (Steedman, 1975).

As is well known, the classical theory of value would still be stuck in an impasse without Sraffa’s theory of joint production, because the authors of the 19th and early 20th century saw no possibility of providing a general explanation for the pricing of the outputs of multiple product industries without having recourse to the subjective theory of preferences, as the early mariginalists did. The solution was very elegant and agreed with the new approach, which superseded the Ricardian and Marxian idea of explaining prices of production as modified labour values, by having direct recourse to the structure of production and consumption. The structure was expressed in the form of an input-output system, with given output levels, so that prices could be calculated for single product industry systems, given the rate of profit, as being equal to the normal cost of production. The extension to joint production systems then followed from the simple consideration that the production of a given vector of commodities as (gross or net) outputs (the ‘requirements for use’) is generically possible — if there is some variability in the scale at which processes may be run — only if there are at least as many processes used as there are commodities to be produced. Hence there will be enough processes in use to determine prices, and if the rate of profit is to be uniform, the number of processes cannot exceed that of commodities; otherwise, prices would be overdetermined. The system therefore is ‘square’.

The classics, Smith and Ricardo, used their theory of value to base their theories of accumulation, technical progress, and the long-term trend of distribution on the analysis of the technological development in specified industries such as textiles, corn production, watch-making, etc. Marx undertook vast studies of the history of technology and related it to the evolution of the productive relations. The chapters on cooperation, the division of labour, and on modern industry in Das Kapital are the best known distillates of that research, and they link up with his theory of accumulation. The modern neoclassicals, on the other hand, tend to separate their microeconomic theory of value — be it at the level of firms or of industries — from the macroeconomic theory of accumulation. The static character of much general equilibrium theory has prevented its use for an analysis of technical progress — hence the need for aggregate production functions in neoclassical economics for the analysis of accumulation. This dichotomy of the theory of value and of the theory of accumulation is unfortunate, all the more so since the foundations of neoclassical macroeconomics have been undermined in the reswitching debate.

There is a silent conflict between theories of growth which tend — with notable exceptions — to describe smooth evolutions in growth processes based on neutral technical progress, and capital theory which emphasises the potentially radically different features of alternative techniques in static comparisons. Capital theory has shaken the neoclassical theory of growth by discrediting the construction of the surrogate production function but I shall attempt to show here briefly that capital theory in its full abstract generality is incompatible with any reasonable theory of growth and progress so that progress must be represented on the basis of more concrete specifications if any notion of steady growth and of regular increases of productivity is to be retained.