A Revolution in Economic Theory: The Economics of Piero Sraffa
Ajit Sinha presents the economics of Piero Sraffa as an example of how archival research can advance our understanding of economics.
A Revolution in Economic Theory: The Economics of Piero Sraffa is a splendid example of how archival research in the history of economics can contribute not only to a better understanding of the history of the subject, but also help advance the subject itself. For those who may not know much about Piero Sraffa (1898-1983), it should suffice to say that arguably he was one of the most enigmatic and philosophically the most sophisticated minds in the history of economic science. No less a philosopher than Ludwig Wittgenstein credited Sraffa for ‘the most consequential ideas’ of his celebrated book, Philosophical Investigations, and put him high on his short list of geniuses. Wittgenstein had regular discussions with Sraffa for more than a decade during the 1930s and 40s in Cambridge, England, and on many occasions he told his friends that those discussions ‘made him feel like a tree from which all branches had been cut’. Thus the philosophical sophistication and sharpness of Sraffa’s mind is beyond doubt. In 1925, at the age of 27, Sraffa published a long article on the theory of prices in an Italian journal, which came to notice of Keynes who invited him to write an English version of it for The Economic Journal, the leading journal in Economics at the time. So the second paper followed in 1926 with the summary of the first and further extension on the subject. These two papers seriously challenged the then established hegemony of the Marshallian partial equilibrium analysis and also gave birth to the literature on imperfect competition. Sraffa was the toast of the town and was invited to join the economics faculty at Cambridge, which he did in 1927. Strangely enough, after this brilliant performance at an early age, Sraffa went silent for decades. Apart from a book review of Hayek’s Prices and Production, written on the request of Keynes in 1932 and his magisterial editing of The Works and Correspondence of David Ricardo in 11 volumes, most of which was published during 1951-52, Sraffa mostly remained silent until he published his slender classic, Production of Commodities by Means of Commodities: Prelude to a Critique of Economic Theory, in 1960. Archival evidence reveal that this book was in the making since late 1927. It is less than 100 pages long and reads like an example of minimalist art in economic prose. After this he did not publish anything except a short response to Sir Roy Harrod’s review of his book in 1962. One of the leading orthodox economic theoreticians of the 20th century, Paul Samuelson once wrote: ‘…Did any scholar have so great an impact on economic science as Piero Sraffa did in so few writings? One doubts it. And there cannot be many scholars in any field whose greatest works were published in their second half century of life. Piero Sraffa was much respected and much loved. With each passing year, economists perceive new grounds for admiring his genius’.
Yet, if you ask a young economist trained at a leading economics department about Sraffa, chances are that he or she would not have even heard of him. One important reason for the relegation of Sraffa to the dust bin of history of economics is the narrow prism through which Sraffa’s magnum opus of 1960 was viewed. A proposition of Sraffa’s book, which showed that the same technique of production could be adopted as the most efficient technique at two or more different levels of wages or the rates of profits, proves that the theoretical concepts of ‘capital intensive’ or ‘labor intensive’ techniques of orthodox economics and its idea of aggregate production function are illogical. Samuelson, as the leading representative of the orthodoxy, first rejected it and then later conceded the truthfulness of Sraffa’s proposition. But then it was argued by the orthodox economists that the modern intertemporal general equilibrium theory need not aggregate capital prior to the determination of prices and thus Sraffa’s critique was not fatal to the more sophisticated modern orthodox economic theory. Frank Hahn went a step further and argued that Sraffa’s theory can be incorporated within the orthodox general theory as a special case of it, and therefore the book on Sraffa could be closed.
Now, after an exhaustive research of Sraffa’s archive, housed at Wren Library, Trinity College Cambridge, Sinha has unearthed a trove of evidence that brings to light Sraffa’s philosophical and methodological concerns that lie silently underneath the austere minimalist architecture of his book. The archival evidence show that Sraffa’s famous proposition regarding ‘re-switching’ of technique was not the central concern of his book. Rather, Sraffa was mainly interested in shifting the foundation of economic theorization from either essential or mechanical causation to a non-causal logical relations—in some sense Sraffa wanted to shift the foundation of economic theory from mechanics to geometry, as Einstein’s theory of gravitation had already done in physics. In this context, Sraffa took inspiration from early 20th century quantum physics and emphasized the holistic properties of an interconnected economic system. A consequence of this approach was a complete removal of 'agent's subjectivity' or demand and 'marginal method' or counterfactual reasoning from economic analysis—the two fundamental pillars of orthodox economic theory.
Sinha argues that Sraffa’s book was misunderstood by both friends and foes alike because the postulate of a uniform rate of profits in Sraffa’s system of equations was misunderstood to be an assumption of the equilibrium of the system based on the usual atomistic reasoning of competition and profit maximizing behavior of the firms. With careful analysis of the evidence found in the archive, Sinha shows that this was precisely what Sraffa wanted to deny. By mathematically constructing a ‘standard system’ and a ‘standard commodity’ uniquely associated with any given system of inputs and outputs, Sraffa showed that both the maximum rate of profits that a system can achieve and its average rate of profits, given wages from outside in terms of the standard commodity, are non-price phenomenon or the property of the structure of the system and can be determined independently of prices. A consequence of this is that the postulate of a uniform rate of profits turns out to be a mathematical property of a system that in not itself a standard system. Prices, in this context, do not carry any information that prompts ‘agents’ to adjust their supplies and demands to bring about an equilibrium in the market. The questions of equilibrium as well as market structure are simply irrelevant to the problem. The fundamental peg on which Sraffa’s theory hangs is the assumption that either wages or the rate of profits is given from outside the system of equations, a proposition he considered to be characteristically ‘classical’ in opposition to the modern economic theory in which the size and the distribution of the net income are simultaneously determined with prices. This represents an extremely bold and logically sound foundation for building a new paradigm for understanding the relations between income distribution and prices and calls for a second and more constructive look at Sraffa’s contribution to economic theory.
Ajit Sinha, author of A Revolution in Economic Theory: The Economics of Piero Sraffa, is Professor of Economics at Azim Premji University.