Sraffa and Long-Run Equilibrium

["RICHARD P.F. HOLT" <holtri@xxxxxxxxxxxxx>]

This is from PKT's archives by Robert Vienneau

> 8.0 Theories of Distribution
>
> At least three theories of distribution are consistent with long-run
> equilibrium:
>
> 1) Neo-Marxian.  The wage is externally specified.  One possibilty is
> that Malthusian population pressure reduces it to a physically specified
> subsistence level when it is above the equilibrium value, while it
> cannot fall below without workers dying.  The assumption that the wage
> is socially determined is more in keeping with Marx.  Class struggle may
> raise it for a while.  The resulting pressure on profits will induce
> technological innovation eventually bringing it down. A complex story
> arises explaining the interaction of business cycles and growth. Marx
> was wrong in thinking that technological change logically must be
> capital-using and labor-saving. Increased productivity in the iron or
> tin industries can result in a more capitalistic technique being adopted
> by the economy as a whole. The issues brought up here are still a matter
> of debate.
>
> 2) Neo-Ricardian Keynesian. The rate of interest is externally
> determined by the monetary authority. A Keynesian macrotheory shows
> how the level of income varies with the resulting investment. Despite a
> famous aside by Piero Sraffa, I do not feel comfortable in ascribing
> this value to him.
>
> 3) Post-Keynesian. The rate of profit is determined by the interactions
> of investment, profit, and savings. Given fixed savings rates, the
> distribution of income is determined by the rate of growth, which, in
> turn, is determined by investment. The rate of growth that firms desire
> is a function of "animal spirits" and the expected rate of profit. Two
> equations determine the two unknown quantities the rate of growth and
> the rate of profit. Prices fall out in the wash. Investment is not
> constrained by savings, but savings adjusts to the investment decisions
> of capitalists. Consumption per head is known given the technique and
> the rate of growth.
>
> 8.1 Neoclassical Theory
>
> Is there a consistent long-run Neoclassical theory of distribution? This
> is a debated point. Whatever it may be, it cannot be equated with
> marginalism. Marginal techniques are the common possession of all
> theoretical economists.
>
> The theory of intertemporal equilibrium is commonly thought to provide
> the Neoclassical theory. Consider an economy in equilibrium at a single
> point of time in the sense that all markets clear. All markets are
> barter and all transactions planned for forever are contracted for at
> this single moment. In other words, all possible future markets exist.
> The initial endowment is given and individuals must make decisions
> trading leisure for goods at various times and consumption decisions
> across time. Since markets are assumed to clear, the entire future
> course of the economy is pre-coordinated.
>
> Overlapping generation models are another variant. Instead of the future
> being precoordinated, it is assumed to be perfectly known. All markets
> are then assumed to be spot markets operated at various points of time.
> In either case, the ultimate determates of equilibrium are
>
>   1) Initial endowments
>   2) Tastes
>   3) Technology.
>
> Now imagine that the long-run condition is imposed that the rate of
> interest be the same in all lines of production actually in use.
> Furthermore, relaitve prices are stationary. Then, in general the model
> is overdetermined. So the method of intertemporal equilibrium is, at
> best, a short run model.
>
> Is this a sufficient basis for economic theory? I do not think so. A
> model of capitalism that does not show competition tending to level out
> the rate of return by the ebb and flow of finance just seems to be a
> contradiction in terms. On the other hand, a lot of economists have
> seemed content in the last two decades to articulate this model. Perhaps
> they are not aware of these limitations.
>
> 9.0 Conclusions and Open Questions
>
> 9.1 The Rebirth of Classical Theory
>
> The implications of the Sraffian approach are far reaching.  First, they
> have vindicated the approach of Classical economists and Marx.  Here is
> a theory in which prices of production attract market prices.  Inputs
> become parameters determined by the model, not externally given
> endowments.  The ability of the economy to generate a surplus provides
> an alternate basis for economic theory.  Economics is not about the
> allocation of scarce resources among competing ends.
>
> The classicals had the insight that only objective conditions of
> production matter.  Subjective tastes can be ignored.  Of course, the
> classicals made lots of mistakes that need to be cleared up in
> developing this theory.  For example, the labor theory of value goes by
> the wayside.  Whether or not this is an historically accurate
> interpretation is very much a point of contention.  Samuel Hollander
> says not, that the classicals were striving to develop Neoclassical
> theory. Sraffians, of course, disagree.
>
> 9.2 The Failure of the Neoclassical Revolution
>
> Second, a whole body of Neoclassical theories developed between 1870 and
> 1930 are seen to be mistaken.  These theorists has prices being
> determined by endowments, tastes, and technology.  They had well-behaved
> supply and demand curves, a supposedly complete theory of marginal
> relationships, and substitution working in the expected directions.
> They also had the economy approaching a state of long run equilibrium
> whose values are determined by the same forces.
>
> This theory now seems to have been mistaken. The stumbling block is the
> existence of goods that serve as inputs into production and are
> themselves produced. Some of the best Neoclassicals, for example,
> Marshall and Wicksell, were quite aware that they had not totally
> figured out the theory of capital.
>
> (Although this note is not promarily directed at Libertarians, I will
> mention that their favorite theorist, von Mises, is revealed to have
> been wrong on a most basic level. In Human Action he has the usual
> nonsense about supply and demand. He calls a long run equilibrium
> stationary state an "Evenly Rotating Economy," and has the economy
> always tending there as the forces of competition level out differences
> in prices and profit. This theory is wrong, and he is not even aware of
> the problems or, for that matter, General Equilibrium theory.)
>
> 9.3 Fixed Capital and Land
>
> A third point of debate is whether or not introducing heterogeneous
> labor, fixed capital, and land restores the Neoclassical theory. I think
> not. It is always the case that given the technical conditions actually
> used and all but one of the rate of profit and the wages of the various
> types of labor; the remaining distributive variable, prices of
> production, rents, and depreciation are determined. The Sraffian core
> remains unchallenged.
>
> Of course, the theory becomes considerably more complicated.  Suppose a
> number of different qualities of land exist.  Each quality of land each
> year can provide a fixed level of services and no additional land can be
> produced. Given the rate of profit or the wage, land can be ordered from
> high rent to low rent. This order varies along with the wage or rate of
> profit. Ricardo was wrong in thinking the order to be technically
> determined, but he was right to think the marginal no-rent land to be of
> particular importance.
>
> Now consider how the equilibrium position is altered by a change of
> tastes. What land is actually used depends on the total output of corn.
> But the total output does vary with changes in tastes. If different
> lands are employed, the solution to the whole system of prices changes.
> So consumer demand can affect prices and distribution. Even though the
> direction of influence is through the technique of production, this is
> quite a concession for a Sraffian to make.
>
> But the Neoclassical theory is not restored.  Substitution and prices do
> not move in the expected way.  The paradoxes are not removed.  In fact,
> new ones arise.  For example, consider a reproducable good used in
> production that lasts several years (a fixed capital good).  Even though
> its physical life is many years, its economic life can be much shorter.
> The case can arise in which a higher interest rate induces a firm to
> junk this good sooner.
>
> 9.4 Sraffians and Post-Keynesians
>
> Another point of contention is the relationship to Sraffianism to
> Post-Keynesianism. Post-Keynesians have always emphasized "historical
> time." Prior to Sraffa's book, they have argued that Classical theory
> was set in historical time, while Neoclassical theory was not.
> Neoclassical theory abstracts from the fact that the future is not
> known.
>
> Contrary to Peter Dorman, it was the leading Post-Keynesian Joan
> Robinson who interjected the idea of historical time into the Cambridge
> capital controversy, not the Neoclassicals. She had an independent
> criticism of Neoclassical capital theory.
>
> She has also criticized the Sraffians for abstracting from historical
> time. Some Post-Keynesians seem to think Sraffian theory is just another
> mistaken method that relies on a known future. On the other hand,
> different methodologies have been assigned to Sraffa. It's all very
> complicated, but as long as neither is in the mainstream, Sraffians and
> Post-Keynesians have an interest in cooperating. In fact, some have
> argued their theories are consistent.
>
> 9.5 Extensions and Empirical Work
>
> Where to go from here is also a matter of dispute. Developing
> Sraffianism beyond the state of things in 1960 is a difficult task. What
> short-run theories will lead to long-run equilibrium? How can theories
> of less than perfect competition be incorporated? What are the
> implications for empirical work? These are all areas of research.
>
> 9.6 A Scandal
>
> Finally, I think that both the teaching and the practice of mainstream
> economic theory is scandalous.  Nothing above is new, and much of the
> argument has been around for thirty years now. Yet most undergraduate
> microeconomic texts do not even give a hint of these disputes and how
> much of theory is a matter of contention. And they remain full of, at
> least, misleading theories. As far as I can tell, mainstream graduate
> eduction is not any better. Where the theories are correct (i.e.
> intertemporal equilibrium) the student is not told about the limitations
> and the problem domain the theory was developed to address, or rather,
> avoid. I suppose I should not be too hard on teachers for this last bit.
> Technical subjects are always taught with this limitation.
>
> But the professional literature is equally awful. The Sraffian criticism
> has never been really addressed by mainstream theorists. The Cambridge
> Capital Controversy focused on some minor points and never reached a
> consensus. Based on sci.econ comments, it's already shrouded in myth.
>
> Instead, theorists have blithely developed a short-run theory with
> hardly any discussion of why this is the proper way to go. You can see
> why I remain extemely uninterested in rational expectations, for
> example. What good is basing macro on micro when microeconomic theory is
> in complete disarray and the resulting macrotheory exhibits all sorts of
> characteristics that have been shown to only apply to one good models?
>
> So does anybody want to offer a suggestion to why the Sraffian critique
> and alternative are ignored?
>                                  Robert Vienneau
>
>
>
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