History of thought traditions chart

Gary Mongiovi send me this version of my chart, that he nicely organized, that he will use in his own class, I'm glad to say. In mine Jeremy Bentham is at the top. I think Bentham is actually very useful precisely because he is a foil to Smith rather than a parallel “founder of economics.” He lets me establish very early the methodological distinction I want students to see. On the left side, classical political economy, with analysis centered on social classes, production and reproduction, the distribution of the surplus, and distribution as conflict that is embedded in historically/institutionally situated economic relations. On the other side, the Benthamite/utilitarian lineage, where the individual is the primitive unit, of analysis. The rational choice tradition that enshrines utility as the basis for evaluation, and ultimately allows the possibility of understanding social outcomes as the aggregation or interaction of individual decisions.*

 

That makes the marginalist revolution look less like something that appears ex-nihilo in the 1870s. Jevons in particular is much easier to understand as part of a longer individualist-utilitarian tradition. Bentham therefore gives the right side of the chart an intellectual prehistory analogous to the Petty–Quesnay–Smith/Ricardo prehistory on the left. The chart is not simply classical political economy versus neoclassical economics, in that sense. Also it is simply Keynesians (accept effective demand) versus non-Keynesians (accept Say's Law). It is closer connected to the methodological traditions. Some sit uneasily in their side (hence the dotted lines).

 

I hope it is useful to others, as it seems to have been for Gary. 

* Gary adds correctly Jean-Baptiste Say, Robert Malthus and Nassau Senior. I neglected them, perhaps because of my dislike of their work, that tries to derive something from Smith, but has a starting point in the rights side. A great and important addition.

The Marxologiosity of TSSI

Lately, I have been delving into the debate on the supposed logical consistency of Andrew Kliman's Temporal Single-System Interpretation of Marxian Economics (see here). After reviewing the relevant literature, I am of the disposition to suggest that the supposed solution to Marx's problem of perceived incoherence in Das Kapital is indeted suspect (see here). More generally, I am a bit perturbed by the way in which TSSI advocators, in particular Kliman, promote the approach with such religiosity. For an outstanding refutation of TSSI, see Gary Mongiovi's Vulgar Economy in Marxian Garb (subscription required):

"Although Marx did make a number of errors in elaborating his theory of value and the profit rate, these missteps do not undermine his larger scientific project. Far greater damage has been inflicted by his would-be Temporal Single System defenders, who camouflage Marx's errors by detaching him from his Ricardian roots; in the process they redefine value in a way that trivializes its function in Marx's system."

Sraffa and the Marshallian system

(Sraffa circa 1976)

G. L. S. Shackle argues in The Years of High Theory that ‘there began in the mid-1920s an immense creative spasm, lasting for fourteen years until the Second World War, and yielding six or seven major innovations of theory, which together have completely altered the orientation and character of economics’ (Shackle, 1967, p. 5). However, by 1967, the two most important developments of this period—Keynes’s principle of effective demand and Sraffa’s criticism of the marginalist theory of value—were rapidly fading from the main corpus of mainstream theory.

The relative ease with which neoclassical economics reasserted its main conclusions is, in fact, explained by Shackle’s account of those years. First, Sraffa’s critique of the Marshallian theory of value is seen only as a step in the development of the theories of imperfect competition by Joan Robinson and Edward Chamberlin. Second, Keynes’s General Theory is seen as stating that unemployment results from the existence of uncertainty and irrational expectations (Shackle, 1967, p. 129). Both developments can be interpreted as asserting that market imperfections render neoclassical theory, although internally coherent, irrelevant for the analysis of the real world.

Also Shackle’s failure in 1967 — well after the publication of Production of Commodities — to acknowledge the importance of the revival of classical political economy to the debates of the 1930s represents a serious inadequacy of his interpretation of ‘the years of high theory’.

Before getting into Sraffa's critique of Marshall, it is worth noticing that Sraffa came to economics via monetary economics, like Ricardo and Keynes. His dissertation for the Law Degree, L’Inflazione Monetaria in Italia Durante e Dopo la Guerra (subscription required), dealt with postwar inflation and the return to the Gold Standard, the same topic of Keynes’s Tract on Monetary Reform. According to Eatwell and Panico (subscription required), in the analysis of the asymmetric effects of inflation and deflation Sraffa reveals the heterodox character of his position, more akin with the works of the classical authors and Marx than the conventional marginalist analysis. The notion that social conflicts and monetary factors determine the normal real wage was part of Sraffa’s analysis, although several elements of his analysis were still conventional, e.g. the acceptance of the Quantity Theory and of the Purchasing Power Parity theory.

Sraffa’s criticism of the Marshallian theory of supply represents an analogous situation, in the sense that some elements of the conventional marginalist views were still present. Marshall’s or Sraffa’s dilemma (which appears in Sraffa's 1926 paper) refers to the incompatibility between increasing returns and perfect competition. It is a long period problem. Sraffa’s critique can be summarized in the following way. First, rising costs derive from diminishing returns to substitution, and, therefore, in the general case where there are no fixed factors, increasing costs do not seem to exist. Secondly, increasing returns are incompatible with perfect competition. In the long period, when the firm cannot experience marginal costs arising from the existence of some fixed input, there can be no diminishing returns. Replication is always possible, except for the case of indivisibilities. In addition, Sraffa showed that increasing returns to scale are inconsistent with the notion of perfect competition.

In the case of increasing returns, the average cost is decreasing, implying that the marginal cost is below average variable cost, and, hence, there is no infinite, non-zero solution for the profit maximization problem. In other words, there is a tendency for the firm to expand to infinite size. Sraffa’s argument proves the failure of perfectly competitive assumptions to determine any equilibrium of the individual firm. Two alternatives are opened by Sraffa’s critique of Marshallian theory. If it is not legitimate to treat average cost as either increasing or decreasing within the framework of perfect competition, we are left with the result that the only satisfactory assumption is that of constant returns. On the other hand, ‘everyday experience shows that a very large number of undertakings work under conditions of individual diminishing costs’ (Sraffa, 1926, p. 543), which suggests that we should instead abandon the notion of perfect competition.

Sraffa considered the imperfect competition approach to be the only logical way to develop the theory of value along Marshallian lines. However, he showed no inclination to pursue this solution, and he appears to have already been working toward the revival of the classical approach. The origins of this project can be traced back to his early draft of the opening propositions of the Production of Commodities, which he asked Keynes to read in 1928 (Sraffa, 1960, p. vi). The reasons for not pursuing imperfect competition were never quite explained by Sraffa, but are fairly reasonable to infer (note that in Cambridge it was two of his students, Richard Kahn and Joan Robinson, that developed the imperfect competition theory).

Note that in order to obtain partial equilibrium, which is what the Marshallian model presumes, one must assume that prices in a particular industry are not affected by and do not affect the prices in other industries. Hence, externalities have to be internal to the industry, since otherwise production in one sector would affect the prices in other industries [perfect competition in partial equilibrium, the U-shaped cost curves and the equilibrium at the minimum with marginal cost equal marginal revenue, require also that externalities are external to the firm, since if they weren't the firm would became a monopolist; of course externalities that are internal to an industry and external to firms are an empty set]. That seems to be a dead end. Sraffa was already interested in the determination of long term prices. By this time, the summer of 1927 when he was preparing his ‘Lectures on Advanced Value Theory’ that he gave from 1928 until 1930, it was already clear to him that he needed to start from classical preocupation of determining relative prices and one of the distributive variables (the rate of profits or wages) strictly in material terms, that is, the quantities of labor and commodities needed to produce commodities.

For further on Sraffa's critique of Marshall see Gary Mongiovi's paper here (subscription required). For a general critique of Shackle's stance in the history of 'the years of high theory' read this one. For the implications of Sraffa's 1960 book for economics go to this old post (yes on the capital debates!).

Sraffa and Marxism or the Labor Theory of Value, what is it good for?

An old, but not completely closed, debate revolves around whether Sraffa was a Marxist or instead he should be seen as Ricardian, hence the term Neo-Ricardian used derisively by Bob Rowthorn (subscription required) and other Marxists authors (and also by Frank Hahn, again subscription required). From a personal point of view there is little doubt that Sraffa identified with Marxism, and close friends like Antonio Gramsci and Maurice Dobb would agree. But the important question is whether his contributions in Production of Commodities by Means of Commodities (PCMC) should be seen as a development or a criticism of Marx's theoretical tradition.

For the most part the question revolves around the relation between Sraffa's prices and the labor theory of value. Several authors tend to believe that the latter theory is central for Marx's theory of exploitation. Recent interpretations such as the so-called New Interpretation (NI) and the Temporal Single System (TSS) would agree on that point.

For example, Foley and Duménil (2008; subscription required) argue that:

"Central to Marx's framework of analysis in Capital is the labour theory of value (LTV), which defines the value of a commodity as the ‘socially necessary’ labour time required by its production, that is, the labour time required by average available techniques of production for workers of average skill. 

The LTV is central to Marx's theory of exploitation, a term he uses to describe a situation in which one individual or group lives on the product of the labour of others."

On the similar claims by the TSS Marxism see Mongiovi (2002; subscription required). [Vienneau provides a list of readings on the TSS topic here.]

The question then is what was the role of the labor theory of value in Marx and the classical authors, i.e. for the surplus approach. The initial problem that Smith was trying to deal with the LTV was to determine the rate of profits independently of prices, since profits were considered essential for capital accumulation. Note that one needs the prices to determine profits, in particular the price of the means of production advanced for production, but one needs the rate of profit (the normal uniform rate of profit) to determine long term normal (or production) prices.

Smith (1776, book I, chapter 6) makes the value of commodities depend on the quantity of labor required to produce them is where there has been no accumulation of capital or land. In his words:

"In that early and rude state of society which precedes both the accumulation of stock and the appropriation of land, the proportion between the quantities of labour necessary for acquiring different objects seems to be the only circumstance which can afford any rule for exchanging them for one another."

But when profit and rent make their appearance alongside the worker's income, the rule is no longer applicable. The price of a commodity is then obtained by 'adding up' its component parts, namely: wage, profit and rent. The adding up theory implied that profits and wages had an independent determination. Hence, if profits went up, and prices too, real wages might not decrease. As a result, one cannot determine profits independently of prices.

Ricardo saw the limitations of the adding up theory. In his early writings he solved the problem by presuming that the economy produced corn (grain) with corn and labor, and the surplus was a physical amount of corn, so the rate of profit could be measured as ratio of corn (the surplus) to corn (the means of production advanced for production). He, then used, the labor theory of value as an approximation to the solution in his Principles, knowing that prices were not exactly proportional to the amounts of labor directly and indirectly used in production.

That was, also, essentially the role of the LTV in Marx's volume I of his masterpiece Capital. That is, the LTV allows Marx to determine the rate of profit independently of prices. Note that Marx was also aware that relative prices determined by the amounts of labor directly and indirectly incorporated are incorrect once you have produced means of production. However, Marx thought that embodied labor redistributed by the process of competition meant that in the aggregate total surplus value  corresponded to total profits, even if prices of production deviated from embodied labor. As a result, on the basis of the LTV it was still possible to obtain the correct rate of profit. As it turns out, there is no reason for positive and negative deviations of prices of production from the labor values to cancel out. You cannot argue with the algebra.

Marx had no way of knowing this. Only with Bortkiewicz, Dimitriev and Tugan-Baranovsky's work, early in the 20th century, this was clearly understood. If in general commodities do not exchange at labor values, then there is no reason why that should be correct for two composite commodities that make the total physical surplus and the physical advanced means of production.

Sraffa's solution, based on the standard commodity (to be discussed in another post), shares with Ricardo's corn model the idea that one can measure the rate of profit as a share of a particular commodity (Sraffa's being a composite commodity, that is, composed of several goods). It also shares with Ricardo the fact that only basics (commodities that enter the production of all goods including their own production), which for simplicity can be related to subsistence goods, affect the rate of profit, while non-basics, or luxury goods, are not relevant. Further, as noted by Sraffa too, his solution resembles Smith's since the standard commodity can be seen as akin to the former's idea of labor commanded, that is relative prices are proportional to the amount of labor that they can command (buy). In that sense, Sraffa's prices are firmly based on a certain notion of the labor theory of value.

Mind you, in the central issues Marx's theory was correct. Once you determined exogenously the real wage, and the technical coefficients of production are given, one can determine the rate of profit, and it is inversely related, everything else constant, with the real wage. Hence, the theory of distribution based on class conflict which is the central element of the surplus approach, including Marx, is logically consistent [which is more that can be said about marginalism, as showed by the capital debates].

But does the Sraffian system mean that exploitation as interpreted by Marx is not valid anymore, since, as noted above, some Marxist authors think that the LTV (narrowly interpreted as prices of production proportional to embodied labor) is essential for that part of the Marxian project? Petri (2012)* has published an excellent review of the limitations of the NI and TSS. He clearly states (p. 3) that:

"The proof that labour is exploited, in particular, does not lie in the validity of a quantitative correspondence of surplus exchange value with surplus labour time; this is a misconception that derives from a mistaken acceptance of the argument that the inability to prove such a correspondence might mean that the capitalists contribute to production, that profits reflect their contribution, and that this is the reason why commodities do not exchange in proportion to labours embodied – the argument of the ‘vulgar’ economists and then of the marginalist critics of Marx" (emphasis added).

Why is that the case that there is no correspondence between the LTV and whether labor is exploited or not? Note that for Marxists this is a necessary condition because workers work more time than what is needed for their reproduction, and that is the supposed basis for exploitation. It is worth quoting Petri at length here:

"Imagine an isolated market economy where production is carried out by self-employed artisans and cooperatives, and the rate of profit is zero: prices of production are proportional to labours embodied. One day Gengis Khan’s army invades this community, but instead of killing everybody Gengis Khan announces that he will be content with collecting a yearly monetary tax at a rate r=20% on the value of the capital employed in each productive activity, a tax he will then use to buy goods on the market. The community is obliged to accept, and prices of production come to include a 20% tax on the value of capital which has the same effect on relative prices, and on real wages, as a 20% rate of profit. Relative prices are no longer proportional to labours embodied, Marx’s r=S/(C+V) does not work, but production is still performed by the same labourers, and the goods appropriated each year by Gengis Khan with the income deriving from the tax do not reflect any productive contribution of the oppressors. One would have little hesitation, it would seem, to say that Gengis Khan is exploiting this community. But if Gengis Khan had imposed the tax as a given percentage of wages, with the rate of profit remaining zero, then relative prices would have remained proportional to labours embodied, but exploitation would be still there. On the other hand, imagine that the 20% tax rate on the value of capital is imposed not by Gengis Khan but by unanimous popular vote because it is decided to use it to help for some years another community struck by an earthquake: in this case the surplus product would again be associated with an impossibility to explain prices with the labour theory of value, but few would call the surplus product the fruit of labour exploitation. All this shows that the proportionality or non-proportionality between exchange values and labours embodied reflects, not the absence or presence of other productive contributions besides that of labour, but only the specific way the mode of appropriation of the surplus product affects relative prices; the origin of the surplus remains to be ascertained" (emphasis added).

Hence, as the simple example shows one might have exploitation without the LTV, and no exploitation with the LTV, which should be a black swan for those that think that Marxism stands or falls with the narrow definition of the LTV. For our purposes what matters is that the correct solution of the problem of the determination of the rate of profit independently of prices, provided by Sraffa, actually strengthens and is a development of the theories of Marx and the other authors of the surplus approach. Sraffa is the author that makes Marx's conclusions possible.**

Notes:

* Petri provides a critique of NI and TSS solutions of the transformation problem too. A different solution, that is more Ricardian in assuming that embodied labor provides a good empirical approximation to production prices, is provided by Shaikh (1977).

** Interestingly Petri quotes several passages in which Foley tends to suggest that Marxism and marginalism are not necessarily incompatible.

References:

Foley, Duncan and Gérard Duménil (2008). "Marxian transformation problem." The New Palgrave Dictionary of Economics. Second Edition. Steven N. Durlauf and Lawrence E. Blume. (eds.), The New Palgrave Dictionary of Economics. Palgrave Macmillan.

Mongiovi, Gary (2002). "Vulgar Economy in Marxian Garb: A Critique of Temporal Single-System Marxism," Review of Radical Political Economics, 34(4), pp. 393-416.

Petri, Fabio (2012). "On Recent Reformulations of the Labour Theory of Value," Quaderni del Dipartamento di Economia Politica e Statistica, Università degli Studi di Siena, No. 643.

Shaikh, Anwar (1977). "Marx's Theory of Value and the Transformation Problem,"in Jesse Schwartz (ed.), The Subtle Anatomy of Capitalism. Goodyear Publ. Co.

Macro vs. Micro

A debate on the relation between micro and macroeconomics has been raging in the mailing list of the Societies for the History of Economics (SHOE; yep that's the acronym they went for!).  The main question being discussed is whether micro-foundations are necessary for coherent macroeconomic theory. I have argued in a previous post that, in fact, this is the other way round, macro-foundations for microeconomics are essential.

From a history of thought point of view, it is important to note that the distinction is a relatively modern one, starting in the 1930s.  The term macroeconomics was first used, most likely, by Ragnar Frisch in his lectures notes in 1933-34, and first used in print by Jan Tinbergen and Eric Lindahl in 1936 and 1939, respectively (for a full discussion see Vela Velupillai, 2009; subscription required).  Keynes did not use the term in his General Theory, even though the book is considered the foundational book of macroeconomics. To a great extent the work of John Hicks -- both his ISLM paper and his Value and Capital -- is central to understand the direction in which the profession developed.

Yet, Keynes book was central in the eventual split of macroeconomics and microeconomics.  In particular, because Keynes defied the conventional wisdom, associated with marginalism, that the rational maximizing behavior of firms and individuals would lead to the optimal (meaning full) utilization of resources, including obviously labor resources.  Full employment was not the normal equilibrium position of the economy.  In that sense, Gary Mongiovi provided the most enlightened note to the SHOE debate.  He tells us:

"the macro/micro distinction actually arose after Keynes's theory took root, and students had to be taught two distinct and apparently incompatible stories about how market economies work: (1) a neoclassical distribution theory in which the real wage adjusts to bring the S & D for labor into line with one another; and (2) a Keynesian story about how the economy could settle into an equilibrium in which the labor market doesn't clear."

That incompatibility and incoherence is still with us.  Students are taught that markets are efficient in their micro text, and some imperfectionist story is told in order to provide a foundation for the Keynesian macro story (at least in salt-water departments).  Of course an alternative would be to discard the marginalist approach altogether, since it does have insurmountable problems as admitted by Paul Samuelson during the capital debates in the 1960s.  But that's another story for a different post.