Piero Sraffa (pronounced SRAH-fah) made two related contributions to economics. First, he pointed out that the marginalist theory of value was logically inconsistent. Second, he attempted to construct a superior value theory based upon the work of Ricardo and the notion of a surplus generated during the production process.
Sraffa was born in Turin, Italy, in 1898. His father was a distinguished and wealthy lawyer who practiced law and also taught law at various Italian universities. As his father moved from one university to another, Sraffa moved from city to city and school to school. After graduating from secondary school, he enrolled in the law faculty at the University of Turin and studied political economy under Luigi Einaudi, a well-known specialist in public finance and later President of the Italian Republic. Following a brief stint in the Italian army, Sraffa completed his degree in 1920, writing his doctoral thesis under Einaudi on monetary inflation during the period 1914—20 in Italy.
For a short time Sraffa worked at an Italian bank; but he left this job in the spring of 1921 to spend time in England studying British monetary problems. Through a friend of his father, he made the acquaintance of John Maynard Keynes.
At the urging of Keynes, Sraffa wrote two articles on Italian banking. One was published in the Economic Journal, a scholarly journal edited by Keynes (Sraffa 1922a). It concerned the bankruptcy of an Italian bank. The second article appeared in the Manchester Guardian (Sraffa 1922b), a popular newspaper. It criticized the reporting procedures of Italian banks as well as government supervision of bank reporting procedures. This article was soon translated into four languages, including Italian. As a result, it came to the attention of Mussolini, who became enraged and called it “an act of true and real sabotage of Italian finance” (Kaldor 1985, p. 618). Mussolini contacted Sraffa's father, insisting on a full and complete retraction. Sraffa refused, but had to flee Italy until Mussolini calmed down.
Despite his precarious relationship with Mussolini, Sraffa held numerous jobs in Italy during the 1920s. He set up a government department in Milan to collect labor statistics, but resigned as soon as the Fascist regime took power. Then he lectured in Public Finance and Political Economy at the University of Perugia, and he held the position of Professor of Economics at Cagliari University in Sardinia.
As the Fascist government became increasingly repressive, Sraffa sought employment outside Italy. Keynes helped arrange a lectureship at Cambridge University. Sraffa, however, found lecturing difficult. He disliked talking about his ideas in public and felt uncomfortable having to lecture in English. Again Keynes came to the rescue, getting Sraffa a job as head of the Marshall Library of Economics at Cambridge. Keynes also arranged for him to edit the works of David Ricardo for the Royal Economic Society. This project shifted Sraffa's interests from money and economic policy to the abstract and theoretical issues of value theory. Sraffa spent a good deal of time in the 1930s, 1940s, and early 1950s compiling the ten-volume edition of Ricardo's Works and Correspondence (Sraffa 1951—55). While he received many awards for this scholarly endeavor (including the Soderstrom Gold Medal of the Swedish Royal Academy of Sciences, a precursor to the Nobel Prize in Economics), Sraffa made his mark mainly through his work on value theory.
Supply and demand analysis came to dominate economic thinking in Europe by the 1920s (see Marshall). Sraffa was unhappy with this march of ideas. His contributions were two-fold — one destructive and one constructive. First, he pointed out some logical flaws in the analysis of supply. Second, he took the notion of a surplus from classical economics and used it as a building block for a consistent theory of supply and value.
In 1925 Sraffa published an article in Annali di Economia, attacking the foundations of orthodox Marshallian economics. Edgeworth read this paper in Italian and told Keynes about it. He also asked Keynes to have Sraffa write a shorter version of the paper for the Economic Journal (Sraffa 1926). Both articles pointed out logical problems with the Marshallian supply curve.
According to Marshall, the supply curve of any firm was independent of the supply curves of all other firms in the industry. An industry supply curve was derived by simply adding up the supply curves for every firm in the industry. If there were 200 firms in the industry, and 100 would produce 1,000 coffee mugs at $1, while the other 100 firms wanted to produce 2,000 coffee mugs if the price was $1, total output in the industry would be 300,000 coffee mugs if the price was set at $1. Similar calculations could be made for other possible prices. Adding up the quantity of coffee mugs produced at each different price gives us the industry supply of coffee mugs.
Sraffa argued that the conditions of production, and thus the supply curve, for any one firm had to affect the conditions of production for all its competitors. For example, when one firm expands its production of coffee mugs it will increase its demand for the materials (e.g. clay) that are needed to produce coffee mugs, and so the price of these materials will increase. But if the cost of making coffee mugs rises because of higher material costs, all firms make less profit by producing coffee mugs. As a result, other firms will want to produce fewer coffee mugs at each price. Because of such interdependence, Sraffa contended, it was illegitimate to draw Marshallian supply curves for any industry (see Mongiovi 1996). Likewise, it was illegitimate to combine supply curves with demand curves to determine the price and output produced for each good.
Second, there were problems with Marshall's assumption of diminishing returns. Sraffa argued that most production, especially the production of manufactured goods, took place under conditions of increasing returns. As Smith showed, more output could be produced at lower costs. In addition, Sraffa showed that diminishing returns cannot apply to a particular industry in isolation, since changes in the cost of production in one industry will affect the cost of production in all other industries using the good of the first industry in their production process. For this reason, Sraffa held that the economic model of perfect competition had to be abandoned and replaced with a model acknowledging firm interdependence. This critique led to the development of models of monopolistic competition by Joan Robinson and others (see Harcourt 1986), as well as game-theoretic models of firm pricing (see von Neumann).
Sraffa was responsible for another critique of orthodox microeconomics. The Cambridge Controversy (see Robinson), suggested by Sraffa to Robinson, involved the argument (being made in Cambridge, England) that the orthodox theory of value was circular because it had to assume the values it was seeking to determine. These many problems required another approach to value theory.
According to Sraffa, value and distribution theory had to return to the classical conception of production — goods used to produce goods, with a surplus generated if you produce more goods than you start with. Sraffa (1960) then went on to show the consistency of this approach.
Beginning with a given technology that details what is necessary to produce each good, and given either a real wage (determined by the subsistence needs of workers) or the rate of profit, Sraffa demonstrated how relative prices would be determined. An important implication of the Sraffian model is that the distribution of income between wages and profits gets determined outside the model; it arises from the subsistence wage paid to workers and/or the rate of profit in the economy. Another key implication of this analysis is that current technology determines relative prices.
A simple case, one with no surplus, can help demonstrate this last point. Suppose that the economy produces only two types of goods — manufactured goods (M) and agricultural goods (A). To make this example concrete, we can think of these goods as plows and bushels of corn. The technological requirements for producing these goods are as follows:
2A+2M = 6A
4A+1M = 3M
The first equation tells us that two bushels of seed corn and two plows are required to produce six bushels of corn. The second equation tells us that four bushels of corn and one plow are needed to produce three plows. Starting with six bushels of corn and three plows (the sum of what is on the left side of the equal signs), we get six bushels of corn and three plows. Our economy reproduces itself; but it creates no surplus, or fails to expand during the year.
If we think about prices in terms of these equations, we should recognize that the cost of inputs must equal the value of the output produced in each sector. Thus we can regard A as the price of a bushel of corn and M as the price of a plow. In value terms, the price of two bushels of corn plus two plows (the cost of production) must equal the price of six bushels of corn (the price of the output produced). Similarly, the price of four bushels of corn and one plow must equal the price of three plows.
To find the prices of these two commodities we need to solve the above two algebraic equations for A and for M. Unfortunately, there is no unique mathematical solution here; all we know is that the mathematics of production technology requires A to equal 2M, or the price of a bushel of corn must be twice the price of a plow. Technology thus determines values or relative prices, although it does not tell us what the price of each good will be.
Sraffa extended this model to a world of many goods and again showed that the technology of production still determines relative prices. He also extended the model to cases where a surplus (and its value equivalent, profit) gets produced. Here things become even more complicated, and Sraffa had to make a few simplifying assumptions. First, he assumed that capital mobility would lead to a uniform rate of profit for all industries. This is a reasonable assumption, since capital should flow to industries or sectors yielding greater returns and should leave those industries or sectors with lower returns. This should reduce profit rates in the former set of industries and increase profit rates in the latter set of industries. Next, Sraffa assumed that the rate of profit depended on the rate of interest (Roncaglia 1993). With these two assumptions, Sraffa was again able to demonstrate that the technological requirements of production determine relative prices.
This analysis has several theoretical implications. Values or relative prices can be explained without resorting to the circularity of marginalist analysis. Moreover, economics does not have to employ the suspect notion (as shown in the Cambridge Controversy) of aggregate capital. In Sraffa's classical model, the distribution of income between wages and profits is determined by monetary policy, by competition, and by other forces that affect interest rates and worker wages. Furthermore, when technology determines (relative) costs and prices, the firm supply curve becomes horizontal. As in most of classical economics, supply determines prices and demand determines the quantities produced.
This return to a more classical theory of distribution also has some real-world implications (see Sen 2003, pp. 1246—47). The large profits received by some firms and the high wages received by some individuals are no longer the result of the productivity of capital or the great productivity of some workers. Rather, profits and high wages are the result of technology, political decisions regarding interest rates, and the economic power held by different economic actors.
Sraffa's place in the history of economics is rather difficult to pin-point. He made several telling criticisms of standard economic theory, and he began to develop a new and different theory of value. Yet few economists, even the majority of economists who are critical of traditional economic theory, have followed the path pioneered by Sraffa.
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