Piero Sraffa is certainly not a household name. I suspect that most undergraduate students may not be familiar with it. It is therefore necessary to begin with a brief account of his life.
Sraffa was born in Turin (Italy) in 1898. His father was a famous jurist and a professor of commercial law. Sraffa completed his economic studies in the university of Turin in 1920 and, while still a student, he encountered one of the leading Marxist intellectuals of Italy – I should say, of Europe – Antonio Gramsci. Gramsci became secretary of the Italian communist party soon after it was formed in 1921. Young Sraffa started to contribute to Gramsci’s weekly journal, New Order, and this was the beginning of a friendship that lasted until Gramsci’s death in 1937. Gramsci was arrested in 1926 by the Mussolini government and remained incarcerated until his
death. Sraffa gave him all the support he needed, sending him all the books he wanted, making arrangements for medical assistance when necessary, and playing a critical role in salvaging his notebooks, later published as Prison Notebooks.
In 1921, Sraffa travelled to London to attend lectures at the London School of Economics as a part-time student. He did that again in 1922 and, while in London, made contact with a leading figure of the recently formed communist party, Rajni Palme Dutt. Another person he contacted was John Maynard Keynes—from that time on Keynes played an important role in Sraffa’s academic life. Keynes was impressed by the young Italian. He asked him to write an article for the Manchester Guardian’s regular supplement on the Reconstruction of Europe, of which he was the editor. Keynes asked Sraffa to write another article, this for the Economic Journal, which was also edited by him. Both the articles, on Italian banking, were published in 1922.
In 1923, Sraffa was able to obtain a lectureship in economics in the University of Perugia (Italy). (Despite Fascist control of the government, universities still enjoyed a degree of freedom). The following year he again visited England and met Keynes who asked him to write an obituary, for the Economic Journal, of the Italian economist, Maffeo Pantaleoni who had died recently, and this was published in 1924.
During this period, Sraffa had been working on an article criticising the central propositions of the theory of value of Alfred Marshall, the leading exponent of the mainstream theory at the time. (Marshall, professor at Cambridge University, died in 1924.) This article was published in an Italian journal in 1925. When Keynes’s attention was drawn to this paper, he asked Sraffa to write a shorter version of this
article for the Economic Journal. This Sraffa did, and it was published in the December 1926 issue of the Economic Journal. The title of the article was ‘The laws of returns under competitive conditions’. (‘Returns’ refers to the laws of diminishing and increasing returns.)
Within weeks of the publication of this article Keynes wrote to Sraffa offering him a lectureship in economics at Cambridge University. At the same time the University of Cagliari (Italy) offered Sraffa a Professorship in economics. He accepted the Cambridge offer. He was to give lectures on the ‘Advanced Theory of Value’. Sraffa would spend the rest of his life in Cambridge, though he kept his Italian citizenship. The lectureship was reconfirmed in 1930, but he resigned in 1931. Keynes then arranged for him to be appointed Librarian of the Marshall Library, and sometime later as the assistant director of research. He was elected a Fellow of Trinity College in 1939.
The next major academic event in Sraffa’s life was his appointment by the Royal Economic Society as editor of the collected works of David Ricardo. This was in 1930, and the appointment was made at the suggestion of Keynes, who was the secretary of the Society. At around the same time Sraffa met the Austrian philosopher Ludwig Wittgenstein (1889-1951).
Wittgenstein had first come to Cambridge as a student in 1911 and had established an outstanding position as a student. Bertrand Russell, the philosopher, treated him as almost his equal. When the first world war started, he went back to Austria (without any formal qualification) and enlisted as a soldier in the Habsburg army. During the war (and as a prisoner of war) he kept contact with his Cambridge friends, and during this time wrote a book (on the philosophy of language) which was published under the title Tractatus Logico-Philosophicus. The book made a tremendous impact and became a focus of debate among the Cambridge elite. In 1929 he came back to Cambridge as a celebrity. Keynes, who met him at the Cambridge railway station, wrote to his wife “Well, God has arrived. I met him on the 5:15 train.” Soon after, Keynes introduced him to Sraffa. They became friends.
According to Wittgenstein, Sraffa (untrained in philosophy) made a profound impact on his thinking. He completely changed his standpoint, from an individualist approach to a social view of language. The new viewpoint was adopted in his second book, Philosophical Investigations.
In the preface to this book, acknowledging the advice he had received, Wittgenstein wrote: ‘For since beginning to occupy with philosophy again, sixteen years ago, I have been forced to recognise grave mistakes in what I wrote in that first book… I am indebted to that [criticism] which a teacher at this university, Mr P. Sraffa, for many years increasingly practised on my thoughts. I am indebted to this stimulus for the most consequential ideas of this book.’ The book, Philosophical Investigations was published in 1953, two years after his death.
To return to Sraffa’s appointment as editor of Ricardo’scollected works: Sraffa spent years searching unpublished papers and correspondence of Ricardo. By the spring of 1940 most of the work was complete but the publication was delayed with problems relating to the war. Then, in 1943 a large cache containing Ricardo’s correspondence and papers was discovered in Ireland. Sraffa decided that the original idea about the publication needed to be revised. The complete Works and Correspondence (ten volumes) were published in 1951-2 and 1954. The index to the entire works (eleventh volume) was published in 1973. Sraffa’s editorial introduction offered a completely new interpretation of Ricardo. The edition was universally acknowledged as a monumental work. Professor Paul Samuelson has written that it was ‘one of great scholarly achievements of all time.’ In recognition of this work Sraffa was made a fellow of the Royal Academy, and in 1961 the Royal Academy of Sweden awarded him its gold medal – the predecessor of the Nobel Prize in Economics (later instituted in 1969).
During the work on the Ricardo edition, Sraffa was also engaged in his own research which culminated in 1960 in the publication of his book Production of Commodities by Means of Commodities: Prelude to a Critique of Economic Theory. The ‘revolution’ in the title of this article refers to this book. The ‘production of commodities by means of commodities’ refers to Sraffa’s attempt to reconstruct the political economy of Adam Smith and David Ricardo on a more logical foundation, and the ‘prelude to a critique of economic theory’ refers to the present-day mainstream economic theory, the ‘supply and demand theory’, also referred to as marginal economics, sometime as ‘modern’ economics.
To understand the nature of the ‘revolution’ some understanding of the history of economics as a scientific subject is needed.
The birth of economics as a scientific discipline can be traced to the 16th century when, according to Marx, ‘the modern history of capital starts to unfold’ in Europe. Before that economic matters were part of the scholastic jurisprudence. The 16th century was also the time of the emergence of the modern state in Europe, and what may be called merchant capital. (The East India Company was founded in 1600.)
The economic literature of the time is referred to as Mercantilism. The central issue in this literature was national wealth, defined as gold and other precious metals, and the idea that it could be increased through exchange, foreign trade and a positive balance on foreign trade. The policy advanced was state support to exports and discouragement of export of raw materials that could support foreign competition.
Discussion was largely focused on policy, rather than theory.
Economic theory, abstract models of the real economy, began to develop in the 18th century. The credit for that goes to the French school of Physiocracy (rule of nature). Physiocrats rejected the Mercantilist notion that wealth consists of precious metals and that it is created in exchange, selling dearer and buying cheaper; instead, wealth consists of what a nation produced in a year over and above the costs of that production. This surplus is what we today call net national income. But they confined the notion of wealth to agriculture; manufacturers simply altered the form of the materials they bought from agriculture, thus adding nothing to the national wealth. The surplus produced in agriculture was a gift of nature. Despite this weakness of the theory, they attempted to show that the capitalist economy has a logic of its own, it functions on its own accord, without any intervention of the state. We can say that this was the beginning of economics as a scientific subject.
Physiocrats were followed by Adam Smith (1723-1790) whose The Nature and Causes of the Wealth of Nations was published in 1776. This work defined the objective of economic science as the investigation of the sources of economic growth (in the context of the capitalist economy). This investigation led to a number of theoretical issues, such as the concept of competition, formation of prices, principle of income distribution between the three classes in the capitalist economy: capitalists, landowners and workers. Adam Smith’s Wealth of Nations is the first full-scale treatise on political economy, and he is generally regarded as the founder of the school of classical political economy. Smith defined the wealth of a nation as all annual (not just agricultural) production of the economy minus all the means of production, including labour’s subsistence, required to produce this production. The source of this wealth is the productivity of labour, and the part of the surplus produce that is devoted to the employment of ‘productive’ labour. Smith believed that capitalists invest much of their profit, whereas landowners spend much of their income on ‘luxury’ consumption. The source of increase in labour productivity is technical progress and the size of the market, which in turn is increased by technical progress. Economic expansion is good for all sections of society.
Karl Marx criticised Smith for having mixed purely theoretical ideas with material addressed to the ‘practical’ man. Thus, purely theoretical ideas were lost in general discussion and historical narrative. By contrast, he praised Ricardo for having captured the‘physiology’ (‘inner working’) of capitalism.
David Ricardo (1772-1823) focused his work on those aspects of the Wealth of Nations on which he disagreed with Adam Smith. These he identified principally with ‘the principles of rent, profit and wages’, that is, the distribution of income between the three main classes of capitalist society. The essential points of this theory may be summarised as follows. Wages are ‘given’ (that is, determined outside the theoretical model at the level of ‘subsistence’). The notion of subsistence of labour had changed over time. In the early period, say the 17th century, subsistence of labour was conceived in purely physiological terms: like farm animals, workers must be fed so that they can work efficiently and produce workers of the future. By Adam Smith’s time subsistence had come to include a social and historical element – what society had cometo consider as ‘reasonable’. Ricardo, as a simplification, considered all costs as labour costs (other inputs such as wheat for bread are also produced by labour). Wages become inversely related to profits. Since wages are ‘given’ in real terms, whenever there is an increase in the prices of subsistence goods, workers must be compensated – money wages have to rise accordingly. The burden of this increase would fall entirely on profits. This is the inverse relation between wages and profits.
However, Ricardo’s main interest was the distribution of income between the landowning class and the capitalist class. With continuing development and increase of population there would be increase in demand for food. With good quality land being a limited resource, recourse would have to be taken to less and less fertile land, prices of food would rise, and workers would have to be compensated, the burden of higher prices falling entirely on profits.Rents on land would rise entirely at the expense of profits. This is the inverse relation between rents and profits, a conflict of class interest between the land-owning class and the capitalist class.
The answer to the problem was import of cheaper food, which the landowners opposed. This was at the time a hot political issue debated in parliament. The class interest of landowners was said to be opposed not only to the capitalist class but the entire society. (Adam Smith had described landowners as a class of ‘indolents’, incapable of comprehending their own class interest, let alone that of society). Classical political economy thus highlighted class conflict in capitalist society, though this notion was restricted to landowners and capitalists. Workers, and society in general, had interest in economic expansion, driven by high profits.
Ricardo subscribed to the labour theory of value, according to which ‘value’ is entirely created by labour (as noted, all means of production are also created by labour).
After Ricardo one could speak of a ‘Ricardo school’, of the completion of classical political economy as a school of thought. There
were of course detractors, pointing in the direction of the ‘supply and demand’ theory. On the fringes of the debates that followed were the so-called ‘Ricardian socialists’ who wrote books with titles such as ‘Labour Defended against Claims of Capital’ and ‘Right to the whole produce of labour’.
It is in this intellectual environment that Karl Marx appears on the
scene. In a sense, Marx can be regarded as a ‘Ricardian’ or, perhaps, as a ‘critical Ricardian’. His criticism of Ricardo is largely internal to Ricardo’s model, and in an important sense an extension of it. Whereas Ricardo focused his attention on the conflict of interest between the class of landowners and capitalists, Marx directed his attention to the conflict between the working class and capitalist class. Equally, whereas both Ricardo and Adam Smith had confined their discussion of economic development within the frame of capitalist mode of production, Marx argued that the working of the logic of capitalist system itself would alter capitalist relations, and result in the demise of the system. This is Marx’s leading insight: economic evolution necessarily leads to social evolution. This is so because behind economic categories lie social relations, something that both Smith and Ricardo neglected. Economic process, changing by virtue of its own logic, changes the framework of society.
The next stage in the development of the ‘modern’ (marginal) economic theory was the ‘demand and supply’ theory taught in colleges and universities. This is the theory subject of Sraffa’s ‘critique’. It was developed in the 1870s. The names most closely linked with its development are Stanley Jevons (English, 1835-1882), Carl Menger (Austrian, 1840- 1921) and Leon Walras (French, 1834-1910). The first edition (1890) of Alfred Marshall’s Principles established what we may call the classic position of the new theory.
The most important innovation which this theory introduced is that it changed the subject matter of economics as a scientific discipline.
As already indicated, economics or political economy was developed in the 18th century as a theoretical construction aimed at understanding the nature and causes of the increase in the wealth of nations.
The wealth of nations was conceptualised as production of goods and services produced in a year. Not in exchange. It was about the nation, society, with a particular social structure that has come to be known as Capitalism with its three main social classes – landowners, capitalists and workers. Adam Smith put development at the centre of his discussion, and Ricardo, who further developed classical political economy placed income distribution between classes, or the theory of profits, at the core of his analysis. The reason for this was that income distribution, particularly profits, are the sources of accumulation of capital and economic growth.
As noted earlier, the physiocrats conceptualised the production system as an objective phenomenon where output could be measured in tons; inputs, labour’s subsistence, seeds, animal feed, etc., are saved from the preceding year and used for the following year’s production. This aspect of production – cycle of production—was highlighted by Sraffa. The second major feature of classical political economy was introduced by Adam Smith. In the first chapter of his book, he referred
to two types of division of labour, one in the plant or the factory, and the other in society, between industries, as industrial specialisation. In the first kind he gave the example of a pin factory. When one man tried to make a metal pin he could hardly produce one in a day, but when division of labour had been introduced the output was manifold larger.
In the second type he gives the example of a woollen coat and traces back the number of industries that participated in its production. There were the makers of the shears of the shepherd, the makers of the iron or the steel, they are made of furnaces and transport of materials by ships and the makers of ships. And so on and so forth. Practically, all sectors of the production system are involved. All the products used are both inputs and products. There is no distinction between ‘factors of production’ and ‘final’ consumption goods. This is Sraffa’s production of commodities by means of commodities.
This is the vision of the capitalist process that Sraffa takes as the basis of his own work and provides a complete logical theory. The critique of or the ‘revolution’ against the ‘marginal’ is simply an aspect of it. It is a complete ‘rehabilitation’ of the old theory of the Physiocrats, Adam Smith and Ricardo. The ‘modern’ theory starts with the individual – his or her wants, psychological tastes, preferences. These can be placed in an order of importance – food, shelter, clothing, entertainment, etc. Second, as we go on consuming one more item each successive increment (marginal unit) gives us less and less satisfaction. It could become negative at some point. In other words, the marginal utility of each unit declines. Total utility declines, after a point it can become zero or even negative. Every ‘rational’ individual distributes his resources to maximise his total utility or satisfaction or welfare. (All this is familiar stuff.)
This approach represents a complete discontinuity or break with the
classical theory, which was about the nation, society. Former British Prime Minister, Margret Thatcher was articulating the marginal theory when she said ’There is no such thing as society. There are individual men and women and there are families. And no government can do anything except through people, and people must look after themselves first. It is our duty to look after ourselves and then, also, to look after our neighbours.
