Sraffa and the interpretation of Ricardo

The Marxian dimension

Samuel Hollander*

Sraffa … bit out a piece of Ricardo’s shirt and ran it up on a flagstaff claiming that it was all that the man had on

(Sir John Hicks, letter dated 2 November 1978)

1 Introduction: Sraffa’s attributions to Ricardo

Piero Sraffa’s Production of commodities by means of commodities (PCMC) (1960) concerns the problem of a given physical surplus to be distributed to assure a uniform profit rate. Output levels (‘gross output quantities’) are included among the technological data determined outside the system along with the wage rate. (Alternatively, the profit rate may be taken as an independent variable and the wage as one of the unknowns (1960, p. 33).) Assume a physical surplus in the sense of an excess of one or more commodities over the amount(s) used up as input, then the (general) profit rate (r) will be determined ‘through the same mechanism and at the same time as the prices of commodities’ (p. 6), for to distribute the (physical) surplus so as to assure a uniform profit rate requires knowledge of prices in order to calculate the value of the means of production (which are heterogeneous products), while conversely to calculate the prices implies knowledge of r. But these propositions regarding price and profit-rate determination apply specifically to basic commodities, or commodities entering (directly or indirectly) as input into the production of all commodities including itself. The simultaneous emergence of profit rate and prices is not the case in the so-called standard system, where distribution has absolute priority. A brief summary of this position is in order.

Sraffa constructs a measure of value that has the property that it is itself invariable to a change in distribution; and though a change in distribution will alter its rate of exchange against other commodities produced under different technical conditions, the variation can be said not to ‘originate’ in the measure itself but in the commodities being measured. The ‘commodity’ in question is one produced with the ‘balancing input proportion’ recurring at all stages in the vertical production process (p. 16). Although no individual commodity is likely to have the requisite characteristics, a composite commodity can be constructed — it is a weighted average of ‘actual’ commodities, which includes all basics and only basics (pp. 23–5) — with the property that the commodity-mix of the aggregate (gross) product is identical with the commodity-mix of the aggregate means of production. Sraffa proves, first, that any ‘actual’ system can be reduced to a ‘standard system’ that describes the input—output relations relating to the sought-after composite commodity, and, second, that only one such miniature system will apply (p. 26 ff.). Finally, in the standard system, the ratio of net output to means of production (the standard ratio R) can be specified independently of prices, as effectively we have the same ‘physical’ commodity in the denominator and numerator of the expression — the proportionate mix of commodities being the same for both.

And now to the major uses of the device. First and foremost, changes in the division of the net product between wages and profits may affect relative prices in terms of the measure, but the ratio (R) of the net product to means of production in the standard system will be unaffected; indeed, the role of the standard system is to ‘give transparency to an [actual] system and render visible what was hidden’ (p. 23).¹ Second, when the net product is divided between wages and profits — these shares as well as the total consisting of the standard commodity — then the rate of profit will equal the profit share times the standard ratio. Like the standard ratio itself, the rate of profit in the Standard system is effectively a ratio between quantities of commodities and is therefore unaffected by movements in relative prices (p. 22). These results may be expressed as

where r is the profit rate, w the share of wages in the net product, and R the standard ratio (or the maximum rate of profit). Variations of (proportionate) wages from 1 to 0 entail inverse variations in r in direct proportion, generating a straight-line inverse relation. Thus, in the standard system, with the wage paid in standard commodity units, the residual profit is also a quantity of that commodity, of the same mix precisely as the means of production. In brief, the profit rate is yielded as a physical ratio independent of relative prices — and a wage increase implies a directly proportional fall in the profit rate.

At first sight, Sraffa’s demonstration appears to be restricted entirely to the standard system as distinct from the ‘actual economic system of observation’ (p. 22). However, the straight-line relation in fact holds quite generally, ‘provided only that the wage is expressed in terms of the standard product’ (p. 23), for the equations of the actual system are identical to those in the standard system, except in their proportions. Given the wage in terms of the standard commodity, the profit rate is determined in both systems.

Sraffa represented PCMC as written from the ‘standpoint … of the old classical economists from Adam Smith to Ricardo [which] has been submerged and forgotten since the advent of the “marginal” method’ (1960, p. v). His ‘investigation’ would be ‘concerned exclusively with such properties of an economic system as do not depend on changes in the scale of production or in the proportions of “factors” allowing no place for marginal products or marginal costs’. To suppose his argument entails constant returns in all industries would be an error easily made by ‘anyone accustomed to think in terms of the equilibrium of demand and supply’. Such equilibrium evidently plays no role either in his own model or in his attributions to Ricardo.²

The Introduction to Ricardo’s Principles (1951) is further indicative of the relation Sraffa perceived between himself and Ricardo. Appendix D of PCMC alludes to that Introduction with reference to the corn-profit interpretation of Ricardo’s Essay on profits:

A method devised by Ricardo (if the interpretation given in our Introduction to his Principles is accepted) [in Ricardo 1951–73, I, pp. xxxi–xxxii] is that of singling out corn as the one product which is required both for its own production and for the production of every other commodity. As a result, the rate of profits of the grower of corn is determined independently of value, merely by comparing the physical quantity on the side of the means of production to that on the side of the product, both of which consist of the same commodity; and on this rests Ricardo’s conclusion that ‘it is the profits of the farmer that regulate the profits of all the other trades’. Another way of saying this, in the terms adopted here, is that corn is the sole ‘basic product’ in the economy under consideration.

(Sraffa 1960, p. 93)

Sraffa here represents the interpretation as a conjecture, arising only when, in the 1930s and early 1940s, ‘the standard system and the distinction between basics and non-basics had emerged’; it was then that the corn-ratio theory of profits ‘suggested itself as a natural consequence’. Yet more than a mere ‘rational reconstruction’ is actually at play, for Sraffa, in 1951, also maintained, positively, that Ricardo ‘must have formulated [the corn-profit model] either in his lost “papers on the profits of capital” of March 1814 or in conversation’ (emphasis added), and that he came close to an explicit statement in a letter of June 1814 (‘The rate of profits and of interest must depend on the proportion of production to the consumption necessary to such production’), and also in the table to the Essay on profits, which expresses both capital and ‘neat produce’ in corn and calculates the profit per cent ‘without need to mention price’ (Sraffa 1951–73, I, pp. xxxi–xxxii). More important still, we have moved far from a ‘rational reconstruction’ when Sraffa observes: ‘The advantage of Ricardo’s method of approach is that, at the cost of considerable simplification, it makes possible an understanding of how the rate of profit is determined without the need of a method for reducing to a common standard a heterogeneous collection of commodities’ (p. xxxii; emphasis added). As for the Principles, ‘the problem of value which interested Ricardo was how to find a measure of value which would be invariant to changes in the division of the product; for, if a rise or fall in wages by itself brought about a change in the magnitude of the social product, it would be hard to determine accurately the effect on profits’ (p. xxiii). Thus though the corn-ratio theory was no more than a passing stage, it constituted a type of analysis ‘render[ing] distribution independent of value’, and emerging again in the Principles where it was ‘labour, instead of corn, that appeared … both as input and output: as a result, the rate of profits was no longer determined by the ratio of the corn produced to the corn used up in production, but, instead, by the ratio of the total labour of the country to the labour required to produce the necessaries of labour’ (pp. xxxii–xxxiii).

To summarize: the features of PCMC attributed by Sraffa to Ricardo include a pricing analysis that denies a role for demand, with the outcome that equilibrium in the sense of profit-rate uniformity cannot be of the market-clearing variety; and construction of a measure of value with the property that it is itself invariable to changes in distribution, such changes treated as exogenous to the system.

I have questioned elsewhere Sraffa’s understanding of Ricardo (Hollander 1979, 1995). On my reading, Ricardo did not ignore the influence of demand on value and price, either of inputs or outputs, and either in the short or the long run, and treated supply and demand as functional relations, not fixed quantities. Output levels adjust to demand, and ‘natural’ prices satisfy the market-clearing condition (as was the case for Adam Smith); more generally, his economics allows for inter dependence between — and simultaneous determination of — prices, output levels, and the distributive variables.³ Assuming this to be the case, the question arises how Sraffa ‘may have gone astray’ (Bronfenbrenner 1989, pp. 40–1). Bronfenbrenner’s own ‘guess’ runs along these lines:

Sraffa was a Marxist, a refugee from Mussolini’s Fascist regime … Since Marx professed himself an admirer of Ricardo — as nearly a disciple as Marx could ever admit being of any predecessor — it may have seemed natural to attribute the same system first to Ricardo, and thence to classical economics in general — not, of course, to Smith, Malthus, Say, or the ‘hired prize-fighters’ of ‘vulgar economy’.

That Sraffa could only have come by his reading of Ricardo in post-Marx hindsight has been similarly argued by Pier Luigi Porta: ‘Sraffa [chose] to disguise Marx in a Ricardian garb’ (1986b, p. 484). For ‘no scholar of Ricardo would have discovered [the analogy between corn and the standard commodity suggested by Sraffa (1951–73, I, pp. x1viii–x1ix)] except through the Marxian reading of Ricardo’ (Porta 1986a, pp. 450–1). Porta points first to Sraffa’s admission that his corn-profit interpretation of the early Ricardo — entailing the determination of a rate of surplus independently of value — followed his own discovery of the standard system and the distinction between basics and non-basics in PCMC, implying that the interpretation constituted no more than a ‘logical by-product of the study of the standard system’, for there was ‘no evidence — as Sraffa acknowledged — that Ricardo ever explicitly recognized the importance of the rational foundation of his supposed “corn model”’ (pp. 444, 447, n. 22). Such a perspective Porta finds rather in Marx’s surplus doctrine, where surplus value emerges divorced from ‘the sphere of circulation’ or prices, with the market mechanism acting only at a subsequent stage to equalize profit rates (pp. 445–6). This is clear, runs Porta’s argument, from Marx’s use of a commodity (or commodities) of average capital composition in transforming the V-system (with its uniform s/v) to the P-system (with uniform profit rates), such that, in the average sphere(s), price corresponds to value, and profit to surplus, and the uniform profit rate corresponds to the rate prevailing in the average sphere(s) (pp. 447–8). The determination of the general profit rate in the sphere of average composition thus permits, at least in principle, an ‘escape [from] the logical necessity of determining the rate of profit and prices simultaneously’ (p. 448). Sraffa’s analysis of 1960 had ‘the merit of discovering a situation in which Marx’s approach works; certainly the standard system is one of those situations’ (p. 451).⁴

Not only does Porta reject the corn-profit reading of the early Ricardo (p. 447, n. 22). He also finds no analysis in the later Ricardo equivalent to Marx’s use of the mean commodity, so that Sraffa’s standard system is seen as wholly irrelevant to Ricardo (p. 444; also Porta 1979, pp. 91–7; 1982, pp. 734–7); Ricardo’s own ‘just mean’ had no more than negative significance as a sort of ‘counter example proving … the impossibility of finding an invariable measure of value’ (p. 444). In brief, only for Marx was the ‘true fundamental problem’ to obtain a measure of value invariant to changes in distribution (p. 444; also p. 445, n. 15). Ricardo’s ‘true problem’ entailed rather the link between diminishing returns and distributional change, and he proceeded with that analysis though he recognized that finding a measure was impossible (see also Porta 1992, p. xx).

* * *

This paper approaches the general position of Bronfenbrenner and Porta as a hypothesis: can the ‘Sraffian’ reading of Ricardo only be rationalized in ‘post-Marxian’ terms? I shall then go one step further and ask: how in actuality did Sraffa arrive at his reading? Section 2 demonstrates that to take the ‘Sraffian’ view requires that one constrains the reading of Ricardo to those parts of select chapters in the Principles — specifically Chapters 1 and 6 — involving highly simplified illustrative exercises. This constrained view neglects a broader body of evidence pointing to the market determination of wages and prices and their interdependence. Though a given wage permits (ceteris paribus) a ‘forecast’ of the average profit rate, independent of prices, and thus entails the priority of distribution, the wage is not in fact a datum, but is determined in the labour market and played upon both by the growth rate of capital (motivated by the return on capital) and the pattern of final demand, the latter itself partly governed by the (variable) income distribution. The breakdown between ‘surplus’ and ‘necessary’ labour time is, for Ricardo, a variable determined within the market economy. These objections to the Sraffa perspective are outlined in Section 3.

As an appropriately ‘truncated’ view of Ricardo does yield the Sraffian attributions, Professor Porta’s objections to the Sraffa reading prove too severe. Nonetheless, the hypothesis that the Sraffian perspective entails a reading through Marx’s spectacles cannot be dismissed, for it was certainly a central part of Marx’s programme to establish the priority of distribution.⁵ Anyone imbued with Marx’s vision and purpose would be predisposed towards the truncated perspective on Ricardo. Moreover, it seems to me perfectly reasonable for one to retain the ‘spirit’ of Marx, even though dispensing with the ‘letter’.⁶

What then do we know of Sraffa’s Marxian orientation? Sections 4 and 5 approach the issue in terms of the development of Sraffian historiography from the 1920s and draw heavily on the unpublished Cambridge Lectures on Advanced Theory, 1928–31. These materials support Porta’s position that Sraffa read Ricardo in a wholly Marxian fashion.⁷ I differ only in suggesting that there is an ‘objective’ dimension to this reading, taking the truncated view of Ricardo, where the profit-rate formula (should the denominator cover variable capital alone) emerges as identical with Marx’s rate of exploitation.

Throughout Sraffa’s accounts of the development of economics, we encounter his fervent hostility towards subjectivist economics, as manifested in functional relations entailing motivation to work and save, and in theories of value that formally allow for the demand side, characterized by Marshallian two-legged ‘symmetry’. Whether this hostility can be said to be ‘due to’ Marx is not wholly clear, but Sraffa’s praise along Marx’s lines for the Petty perspective on cost as ‘quantities of things used up in production’, and his ideologically centred reading of nineteenth-century developments, including the notion of the development of marginal-utility theory as a defensive reaction against Marx, are both suggestive.

2 The ‘truncated’ Ricardo and the Marx—Ricardo relation

The Sraffian perspective on Ricardo — at least Ricardo of the Principles — holds good as far as it goes. The problem is that it truncates Ricardo by concentrating on the profit-rate formula emerging in his Chapter 6 and applied in Chapter 1 to calculate equilibrium prices. Provided one takes so narrow a perspective, one may justify the Sraffa historiography. I proceed to clarify this assertion, attending first to a detail in the Ricardo formulation that justifies the emphasis on Ricardo’s concern to escape from the logical necessity of determining the profit rate and prices simultaneously.

As Sraffa explains, the chosen measure in the first two editions of Ricardo’s Principles is a commodity produced by given ‘unassisted labour’, regarded initially as an extreme type of process in terms of which, when the wage rises, all commodity prices decline; Ricardo, under pressure from Malthus, came in the third edition to represent this same commodity as a ‘just mean’ (allowing for com modities with a greater labour intensity) in terms of which some commodity prices rise with a rise in wages (1951–73, I, pp. x1iv–x1v). ‘If measured in such a standard’, Sraffa proceeds, ‘the average price of commodities, and their aggregate value, would remain unaffected by a rise or fall of wages.’ Ricardo himself emphasized the presumed circumstance that the majority of goods will not vary in price upon a change in the wage rate since most are produced under conditions of average composition.⁸ But he comes close to the Sraffa formulation in his Notes on Malthus:

To whatever corrections must be made for [the] irremediable imperfection in the most perfect measure of value that can be conceived, I have no objections to offer. It may affect some commodities one way, some the contrary way, the general average however will not be much affected.

(1951–73, II, p. 288)

And there is also a letter to J.R. McCulloch, dated 13 June 1820:

the medium between these two [extremes] is perhaps best adapted to the general mass of commodities; those commodities on one side of this medium, would rise in comparative value with it, with a rise in the price of labour, and a fall in the rate of profits; and those on the other side might fall from the same cause.

(1951–73, VIII, p. 193)

But it is McCulloch, in his exposition of Ricardo’s doctrine after his own conversion from Smithian price theory, who phrases the matter more precisly in the Sraffa fashion:

Though fluctuations in the rate of wages occasion some variation in the exchangeable value of particular commodities, they neither add nor take from the total value of the entire mass of commodities. If they increase the value of those produced by the least durable capitals, they equally diminish the value of those produced by the more durable capitals. Their aggregate value continues, therefore, always the same. And though it may not be strictly true, of a particular commodity, that its exchangeable value is directly as its real value, or as the quantity of labour required to produce it and bring it to market, it is most true to affirm this of the mass of commodities taken together.

(1825, pp. 312–13)

Ricardo’s presumption that most commodities, and pre-eminently corn, are produced under the same conditions as the mean measure coupled with the ‘Sraffa—McCulloch’ rationalization would help explain why he felt able to proceed in his main distribution chapters of the Principles in terms of a strict labour theory, thus avoiding the complications created by the possible effect of wage changes on relative values. In terms of such reasoning, he deduced his proposition that the profit rate is inversely related to labour’s proportionate share in the invariable value of the ‘marginal’ product — invariable precisely because of the constant labour embodied in that (variable) product. More specifically, he calculated absolute profits at the agricultural (and manufacturing) ‘margins’ as some constant reflecting the incremental labour application (his 10 men) less the labour embodied in the wages paid or F′(L) × P_c − w_m, where F′(L) is the corn product at the margin, P_c the gold price of corn — ‘gold’ designed to serve as a measure of labour input such that P_c varies inversely to the marginal product of labour — and w_m the gold wage, i.e. the labour embodied in the wage. A similar formula applies to manufacturing, where labour productivity, reflected in F′(L), is constant, such that,

in every case, agricultural, as well as manufacturing profits are lowered by a rise in the price of raw produce, if it be accompanied by a rise of [gold] wages. If the farmer gets no additional value for the corn which remains to him after paying rent, if the manufacturer gets no additional value for the goods which he manufactures, and if both are obliged to pay a greater value in wages, can any point be more clearly established that that profits must fall, with a rise of wages.

(1951–73, I, p. 115)

The rate of profit is then set by expressing profits relative to a capital stock (K) extending beyond wage goods. In Ricardo’s numerical example we have an initial situation with F′(L) at 180 quarters of corn, the price per quarter at £4, the wages of 10 men (earning a given fixed-proportions wage basket composed of corn and manufactures) at £240 and K at £3000, so that the profit rate

A decline in F′(L) to 170 qs and a corresponding increase in P_c to approximately £4.23 implies a larger wage deduction corresponding to the higher labour cost of producing the corn component in the wage basket, thus reducing the profit rate to

In brief therefore: ‘in all cases, the same sum of £720 must be divided between wages and profits’. The arbitrary choice of K = £3000 in fact adds little, since the major technical concern in the chapter on profits is to establish the numerator, especially the constant value of the (marginal) product in terms of Ricardian labour-measuring ‘gold’, such that the money wage reflects both labour embodied in the wage and proportionate wages. Nothing would have been lost as far as concerns the demonstration of a fall in the rate of profit with a rise in the money or proportionate wage, had the denominator been taken relative to a numerator reflecting solely the value of wage-goods capital, namely w_m, especially as the substance of the argument in the chapter neglects fixed capital.

Marx fully appreciated that the more-inclusive capital tacked on at the end of the substantive argument added nothing essential and took Ricardo to task for effectively identifying the rate of profit with the rate of surplus-value (1968 [1862–3], p. 373; 1971 [1862–3], p. 236). As Marx read Ricardo, quite understandably,

Indeed, if we define Ricardo’s F′(L) × P_c as the value of the product due to a workday, taken as the minimum unit of labour (instead of the value of the product of 10 men), the modified formula for r expresses precisely the fraction of the workday devoted to producing goods for the capitalist-employer (Marx’s s) relative to the fraction devoted to producing wage goods (Marx’s v).

Now Ricardo’s position in his first chapter ‘On value’ takes for granted the result emerging later in his text, namely the inverse wage—profit relation: ‘There can be no rise in the value of labour without a fall of profits’ (1951–73, I, p. 35).⁹ But the later demonstration in his chapter ‘On profits’ is the same across all three editions of the Principles, though in the first and second he had assumed gold to be produced (like corn) by an ‘unassisted labour’ process, and in the third takes gold (again like corn) as a mean-proportions product. (As already mentioned, it is not the measure that changes in 1821 — only a recognition that some commodities entail more labour-intensive processes than gold and corn.) In either event, a labour theory is applied in the chapter ‘On profits», as uniform factor proportions are assumed in gold and corn (and manufactures), as evidenced by the fact that no price changes are generated by the wage change.¹⁰ The transition from an unassisted-labour measure to a mean-proportions measure in the 1821 chapter ‘On value’ allows prices to rise as well as fall upon a wage increase, but, as in 1817 and 1819, the inverse relation itself, whereby knowledge of the wage suffices to fix the profit rate independently of prices, is taken for granted as proven. Thus in 1821:

Suppose then, that owing to a rise of wages, profits fall from 10 to 9 per cent … all commodities which are produced by very valuable machinery, or in very valuable buildings, or which require a great length of time before they can be brought to market, would fall in relative value, while all those which were chiefly produced by labour, or which would be speedily brought to market would rise in relative value.

(p. 35)¹¹

Now, as the third edition’s derivation of the inverse wage—profit relation in Chapter 6 is presumably based on the same measure as in that edition’s chapter ‘On value’ — it scarcely makes sense to switch measures between chapters — we have effectively the distributive rule based on the assumption that gold, corn, and manufactures are all produced by a mean process, which rule is then used to calculate the set of new equilibrium prices (satisfying the condition of uniform profit rates) emerging with an increase in wages, in the case of commodities produced with factor ratios deviating from the mean.

The profit rate is therefore derived by Ricardo in the mean industries — where value and price coincide (prices are unaffected by a change in the wage) — and then applied generally to all products. This is how Marx proceeded, with the difference that Ricardo obtained his profit rate in Chapter 6 on the basis of a strict labour theory of value, assuming uniform factor ratios, whereas Marx insisted on non-uniformity (his labour values in the transformation are non-equilibrium values).¹²

* * *

Ricardo was, then, as Sraffa maintained, preoccupied with obtaining a measure of value itself invariant to changes in distribution and in terms of which, given the wage, the profit rate can be calculated without the intrusion of prices. However, by working in terms of a strict labour theory in his distribution chapters, Ricardo cut corners; Marx’s procedures entail a more meaningful use of the measuring device, though Ricardo may be said to have invited such a use by his transition in the third edition between measures in the chapter ‘On profits’ to correspond to the switch in ‘On value’; and we have seen that McCulloch was inspired along these lines.

What though of Professor Porta’s insistence that Ricardo’s ‘true’ problem related to linking diminishing returns and distributional change, not to obtaining a measure of value invariant to changes in distribution? One must obviously allow for Ricardo’s conspicuous concern with the effect of diminishing returns on the wage and profit rates. But this concern in no way negates the ‘problem’ as set out by Sraffa. The exercise involving a constant value of a declining marginal product allowed Ricardo to demonstrate how, despite a falling real wage rate, the ‘gold’ wage — reflecting both labour embodied in the wage basket and proportionate wages — necessarily rises. If anything, the urgency of a solution to Ricardo’s problem as portrayed by Sraffa, is reinforced, not negated, by the diminishing-returns application.

3 Objections to Sraffa’s reading: Ricardo generalized¹³

The characteristic Sraffian priority of distribution emerges in Ricardo’s Principles, provided one concentrates solely on the formulae of Chapter 6 relating to surplus labour time. Given the wage (or assuming a given change in the wage), the profit rate (or its new level) can be forecast and then applied to ascertain the equilibrium structure of cost prices; distribution might then be said to have priority over pricing, in that relative prices will be such as to assure a uniformity of profit rates at a level dictated by the wage independently of pricing — precisely the impression Marx intended to convey by his transformation (and applied by him in his analysis of the inverse wage—profit relation) to the end of undermining productivity theories of distribution (1962 [1894], III, p. 805). Yet the notion of a ‘pre-existing’ surplus distributed across industries by a process of ‘circulation’ neglects the broader picture: the demonstrable fact that for Ricardo the wage is determined by labour-market pressures, including those exerted by the pattern of activity. Thus no ‘forecast’ can be made of the profit rate, as the wage is an endogenous variable partly dependent on the structure of final demand; distribution is not divorced from the pricing process, except in the context of the formal expository examples of Ricardo’s Chapters 6 and 1.

There is first Ricardo’s insistence on the validity of demand—supply analysis in general, an insistence that sets him apart from Sraffa. Here we do well to take note of Malthus’ distinction between cases of independent and interdependent demand—supply relations, with the negative link between quantity demanded and price applicable only where ‘demand is exterior to, or independent of, the production itself’; then only does contraction of supply raise price above costs, and conversely, in the opposite case (1986 [1815], pp. 7, 121–2; 1820, pp. 146–7; 1836, pp. 145–6). This situation, Malthus maintained, was ruled out in the case of corn:

In the production of the necessaries of life, on the contrary, the demand is dependent upon the product itself; and the effects are, in consequence, widely different. In this case, it is physically impossible that [1836: beyond a certain narrow limit] the number of demanders should increase, while the quantity of produce diminishes as the demanders [1820: can] only exist by means of this produce.

Ricardo objected, drawing attention to the subjective dimension: ‘the question is not about the number of demanders but of the sacrifices they are willing to make to obtain the commodity demanded. On that must its value depend’ (1951–73, II, p. 114). And in the Principles, he insisted that the demand—supply mechanism applied equally to all products including corn,

for you would as surely raise the rent of land yielding scarce wines, as the rent of corn land, by increasing the abundance of its produce, if, at the same time, the demand for this peculiar commodity increased; and without a similar increase of demand, an abundant supply of corn would lower instead of raise the rent of corn land.

(1951–73, I, p. 405)

The fallacious contrast could in part be explained by the presumption that increased food supply preceded population growth and demand: ‘

Mr. Malthus appears to me to be too much inclined to think that population is only increased by the previous provision of food, — ‘that it is food that creates its own demand’ — that it is by first providing food, that encouragement is given to marriage, instead of considering that the general progress of population is affected by the increase of capital, the consequent demand for labour, and the rise of wages; and that the production of food is but the effect of that demand.

(p. 406)

As for cost prices, these depended on output levels and therefore upon demand. In the first place, the magnitude of labour costs in agriculture is in part determined by the degree of land scarcity. For example, should pressure on land be relaxed in consequence of a fall in the demand for corn, or an effective increase in land supply, marginal (labour) costs and long-run price would be reduced:

Any circumstances … which should make it unnecessary to employ the same amount of capital on the land, and which should therefore make the portion last employed more productive, would lower rent … Every reduction of capital is … necessarily followed by a less effective demand for corn, by a fall of price, and by diminished cultivation.

(p. 78)

Consider next a net increase in the demand for domestic corn due to the granting of a corn-export subsidy. If agriculture is a constant-cost industry (as Ricardo provisionally assumes), the adjustment proceeds until the corn price, initially raised above costs, falls to its original level (pp. 301–2). But, in the more usual case, the equilibrium outcome reflects a higher marginal labour cost and corn price:

I have already attempted to show, that the market price of corn would, under an increased demand from the effects of a bounty, exceed its natural price, till the requisite additional supply was obtained, and that then it would again fall to its natural price. But the natural price of corn is not so fixed as the natural price of manufactured commodities; because, with any great additional demand for corn, land of a worse quality must be taken into cultivation, on which more labour will be required to produce a given quantity, and the natural price of corn will be raised.

(p. 312; emphasis added)

Here P_c/P_m rises with a switch in the policy-induced pattern of demand favouring agriculture.¹⁴

An equally clear indication of the role Ricardo accorded demand in determining the margin, and the relevant marginal labour costs, is provided by the analysis of a contemporary case where certain firms in an industry had their labour costs subsidized, thus generating a (discrete) increasing-cost supply schedule. The appropriate margin and corresponding marginal labour cost are explicitly assumed to be governed by ‘the quantity of produce required’, i.e. by demand considerations. Should the level of demand be sufficiently low for the output of the subsidized firms alone to be ‘equal to all the wants of the community’, the unsubsidized firms would be excluded, and the equilibrium will be determined by the low-cost conditions; at a higher demand, the higher marginal cost becomes pertinent (p. 73).

The role of demand in determining the location of the margin and thus marginal cost emerges very clearly in the analysis of population expansion, particularly in objections against Malthus’s linkage of population growth to preceding accumulations of food. Only if improved living conditions with higher demand for labour should generate higher marriage and birth rates will there occur an increased demand for food — in place of worker’s demand for luxuries — and in that case the agricultural margin is extended in response:

When a high price of corn is the effect of an increasing demand, it is always preceded by an increase of wages, for demand cannot increase, without an increase of means in the people to pay for that which they desire. An accumulation of capital naturally produces an increased competition among the employers of labour, and a consequent rise in its price. The in creased wages are not [‘not always’ in the third edition] immediately expended on food, but are first made to contribute to the other enjoyments of the labourer. His improved condition however induces, and enables him to marry, and then the demand for food for the support of his family naturally supersedes that of those other enjoyments on which his wages were temporarily expended. Corn rises then because the demand for it increases, because there are those in the society who have improved means of paying for it; and the profits of the farmer will be raised above the general level of profits, till the requisite quantity of capital has been employed on its production.

(pp. 162–3; emphasis added)

Long-run cost price may rise or stay unchanged, depending on the constancy or otherwise of (marginal) costs:

whether, after this has taken place, corn shall again fall to its former price, or shall continue permanently higher, will depend on the quality of the land from which the increased quantity of corn has been supplied. If it be obtained from land of the same fertility, as that which was last in cultivation, and with no greater cost of labour, the price will fall to its former state; if from poorer land, it will continue permanently higher.¹⁵

Changes in demand patterns thus directly affect relative long-run cost prices by playing upon the margin of cultivation. But there may also be an effect on relative cost prices generated by an alteration in distribution, turning on the allocative rule that ‘through the inequality of profits … capital is moved from one employment to another’ (p. 119). In the event that the wage increase impinges equally on all commodities, prices are unaffected, so that profits are uniformly depressed. But in the general case, a wage increase does disturb the structure of profit rates, thereby setting in motion appropriate supply adjustments that lead to the establishment of a new long-run cost-price structure, assuring again uniform profit rates in all industries, with markets cleared at a lower general level. This mechanism — which is the only one fully consistent with Ricardo’s own analysis of economic adjustment — is in fact explicitly elaborated in his exposition of Ricardian theory by McCulloch, who spells out (1) the expansion of relatively capital-intensive, and contraction of relatively labour-intensive, industries — and the corresponding price adjustments — engendered by the initial wage-rate change; and (2) the constancy of the supply and therefore of the prices of commodities produced with the ‘medium’ coefficients:

It is plain, however, that this discrepancy in the rate of profit [created by the initial wage increase] must be of very temporary duration. For the undertakers of those businesses, in which either the whole or the greater portion of the capital is laid out in paying the wages of labour, observing that their neighbours, who have laid out the greater portion of their capital on machinery, are less affected by the rise of wages, will immediately begin to withdraw from their own businesses, and to engage in those that are more lucrative. The class of commodities produced by the most durable capitals, Nos. 7, 8, 9, 10, &c. will, therefore, become redundant, as compared with those produced by the least durable capitals, Nos. 1, 2, 3, 4, &c.; and this increase on the one hand, and diminution on the other, will have the effect to sink the value of the commodities produced by the most durable capitals as compared with those produced by the least durable; or, which is the same thing, to raise the value of the latter compared with the former, till they all yield the same rate of profit.

The class of commodities produced by capital of the medium degree of durability, or by No. 6, would not be affected by the rise; for, whatever they lost in exchangeable value, as compared with the commodities produced by the less durable capitals, they would gain as compared with those produced by the more durable capitals.

(1825, pp. 303–4)

Inter-industry substitution thus provides the key to the Ricardian analysis of the allocative effects of a wage change; and in the general case of non-uniform factor ratios such changes in distribution affect relative cost prices by generating appropriate output variations. There is not that separation of value and distribution characteristic of the Sraffian system.

The interdependence of distribution and pricing extends further. Ricardo maintained the market determination of the wage, taking account of a possible effect on the wage exerted by the pattern of final demand by way of relative factor scarcity. Consider his analysis of the transition from war to peace:

At the termination of the war, when part of my revenue reverts to me, and is employed as before in the purchase of wine, furniture, and other luxuries, the population which it before supported, and which the war called into existence, will become redundant, and by its effect on the rest of the population, and its competition with it for employment, will sink the value of wages, and very materially deteriorate the condition of the labouring classes.

(1951–73, I, pp. 393–4)

From this it followed that ‘the labouring class have no small interest in the manner in which the net income of the country is expended’ (p. 392); ‘they must naturally desire that as much of the revenue as possible should be diverted from expenditure on luxuries, to be expended in the support of menial servants’ (p. 393). A second illustration entails alternative capital compositions induced by alternative taste patterns:

A society does one or the other [invest in labour — or machine-intensive processes] in proportion to the demand for either the objects of men’s work; or for objects which are almost exclusively produced by machinery; — in general the capital accumulated will consist of a mixture of both, of fixed and of circulating capital … [To] the capitalist it can be of no importance whether his capital consists of fixed or of circulating capital, but it is of the greatest importance to those who live by the wages of labour … If capital is realized in machinery, there will be little demand for an increased quantity of labour, — if it create an additional demand for labour it will necessarily be realized in those things which are consumed by the labourer.

(1951–73, II, pp. 234–6)

It should be added that Ricardo also recognized the reverse effect of variations in distribution on the pattern of demand, thereby endogenizing the latter: ‘if in the division of the gross produce, the labourers commanded a great proportion, the demand would be for one set of commodities — if the masters had more than a usual share, the demand would be for another set’ (1951–73, VIII, pp. 272–3).

The market determination of the wage is elaborated in the context of secular tendencies. There is first the initially upward course of the real wage in an economy not yet subject to land scarcity:

It has been calculated, that under favourable circumstances population may be doubled in twenty-five years; but under the same favourable circumstances, the whole capital of a country might possibly be doubled in a shorter period. In that case, wages during the whole period would have a tendency to rise, because the demand for labour would increase still faster than the supply.

(1951–73, I, p. 98)

This is followed by a subsequently declining course of the real wage under the market pressures engendered by increasing land scarcity:

In the natural advance of society, the wages of labour will have a tendency to fall, as far as they are regulated by supply and demand; for the supply of labourers will continue to increase at the same rate, whilst the demand for them will increase at a slower rate. If, for instance, wages were regulated by a yearly increase of capital, at the rate of 2 per cent, they would fall when it accumulated only at the rate of 11/2 per cent. They would fall still lower when it increased only at the rate of 1 or 1/2 per cent., and would continue to do so until the capital became stationary, when wages also would become station ary, and be only sufficient to keep up the numbers of the actual population.

(p. 101)

Now, as capital growth rate is partly motivated by the return on capital — ‘The motive for accumulation will diminish with every diminution of profits’ (p. 111) — the entire concept of ‘surplus’ is undermined.

The market (‘demand—supply’) determination of the real wage, the application of demand—supply analysis to pricing (including corn pricing) and to the inverse wage—profit relation; the dependence of long-run cost prices both upon demand — in the presence of increasing-cost industries — and upon distribution; and the endogenization of the pattern of demand combine to create an impenetrable barrier between the Sraffian and Ricardian orientations.

4 The origins of Sraffa’s reading of Ricardo¹⁶

Our conclusion thus far leads on to the obvious question: why did Sraffa take the ‘narrow’ view of Ricardo? The general Bronfenbrenner—Porta hypothesis (above, Section 1), that Sraffa ‘mistook’ Ricardo for Marx, cannot be dismissed out of hand, as anyone starting out from Marx would be encouraged to read Ricardo in the same light. But this is inconclusive, as many non-Marxists have read Ricardo thus, at least insofar as concerns the alleged denial of demand—supply analysis and the subsistence-wage attribution. To make any progress with our investigation, we must consider Sraffian historiography itself.

Classical value theory

In summer 1921, Sraffa as a ‘general research student’ attended Edwin Cannan’s course at the LSE on the theory of value and distribution (Potier 1991, 8). We can be sure then of an early familiarity with Ricardo.¹⁷ And we have information regarding his perspective on the English classics soon afterwards.

In an obituary notice of 1924, Sraffa described Maffeo Pantaleoni’s Principii di economia pura (1889) as ‘the first organic treatise in which — in accordance with the teaching of Marshall — the doctrines of the classical writers were harmonised with the new theories of Gossen and Jevons’, and also as ‘the most efficacious disseminator of the theory of utility in Italy as well as in other Latin countries’ (1924, pp. 650–1). This would suggest a cost-oriented perspective, of some sort, on classical value theory. The 1925 essay ‘Sulle relazioni fra costo e quantità prodotta’ — which rejected the Marshallian ‘teoria simmetrica’ on the grounds of two sorts of interdependence in cases where diminishing returns apply, namely that between the supply (cost) curves of the various industries and that between the supply and demand curves of each individual industry (Sraffa 1986 [1925], pp. 59–60)¹⁸ — refers to the constant-cost case as ‘normal’, in keeping with the opinion of Ricardo: ‘si debba, caso mai, riguardare come normale il caso dei costi costanti, piuttosto che quelli dei costi crescenti o decrescenti. Tale doveva essere l’opinione di Ricardo, poiché egli afferma che le merci che possono venir prodotte a costi costanti costituiscono “di gran lunga la maggior parte delle merci che vengono giornalmente scambiate sul mercato”’ (p. 54, citing Ricardo 1951–73, I, p. 12). Sraffa thus regarded Ricardian diminishing returns as at most a special case. And this is confirmed in the 1926 paper on ‘Laws of return under competitive conditions’. Here, Sraffa again insisted that interdependence between supply and demand conditions flowing from variation of return precluded ‘the study of the equilibrium value of single commodities produced under competitive conditions’; for the assumption of independence ‘becomes illegitimate, when a variation in the quantity produced by the industry under consideration sets up a force which acts directly, not merely upon its own costs, but also upon the costs of other industries; in such a case the conditions of the “particular equilibrium” which it was intended to isolate are upset, and it is no longer possible, without contradiction, to neglect collateral effects’ (1926, pp. 538–9). And, as in 1925, the relevance of diminishing returns for the classical analysis of value is said to be minimal:

The law of diminishing returns has long been associated mainly with the problem of rent, and from this point of view the law as formulated by the classical economists with reference to land was entirely adequate. It had always been perfectly obvious that its operation affected, not merely rent, but also the cost of the produce; but this was not emphasised as a cause of variation in the relative price of the individual commodities produced, because the operation of diminishing returns increased in a like measure the cost of all. This remained true even when the English classical economists applied the law to the production of corn, for, as Marshall has shown, ‘the term “corn” was used by them as short for agricultural produce in general’.

(Marshall 1920, VI. I. p. 2, note)

The position occupied in classical economics by the law of increasing returns was much less prominent, as it was regarded merely as an important aspect of the division of labour, and thus rather as a result of general economic progress than of an increase in the scale of production.

The result was that, in the original laws of returns, the general idea of a functional connection between cost and quantity produced was not given a conspicuous place; it appears, in fact, to have been present in the minds of the classical economists much less prominently than was the connection between demand and demand price.

The development that has emphasized the former aspect of the laws of returns is comparatively recent. At the same time, it has removed both laws from the position that, according to the traditional partition of political economy, they used to occupy, one under the heading of ‘distribution’ and the other under ‘production’, and has transferred them to the chapter of ‘exchange value’; there, merging them in the single ‘law of non-proportional returns’, it has derived from them a law of supply in a market such as can be co-ordinated with the corresponding law of demand; and on the symmetry of these two opposite forces it has based the modern theory of value (1926, pp. 536–7; emphasis added).

To summarize: at this early stage, Sraffa perceived the ‘classical economists’ as working either with constant costs or with increasing costs, which, because they apply across-the-board are irrelevant to relative price determination. And though he did recognize their connecting ‘demand and demand price’, he did not attribute to them Marshall’s ‘fundamental symmetry’ of demand and supply. This fact is also implied by a further observation that such symmetry rendered value theory irrelevant in the study of ‘social change’, an issue that had preoccupied Ricardo and Marx:

A striking feature of the present position of economic science is the almost unanimous agreement at which economists have arrived regarding the theory of competitive value, which is inspired by the fundamental symmetry existing between the forces of demand and those of supply, and is based upon the assumption that the essential causes determining the price of particular commodities may be simplified and grouped together so as to be represented by a pair of intersecting curves of collective demand and supply. This state of things is in such marked contrast with the controversies on the theory of value by which political economy was characterised during the past century, that it might almost be thought that from these clashes of thought the spark of an ultimate truth had at length been struck. Sceptics might perhaps think the agreement in question is due, not so much to everyone being convinced, as to the indifference which is justified by the fact that this theory, more than any other part of economic theory, has lost much of its direct bearing upon practical politics, and particularly in regard to doctrines of social changes, which had formerly been conferred upon it by Ricardo and afterwards by Marx, and in opposition to them by the bourgeois economists.

(p. 535; emphasis added)¹⁹

Sraffa’s unpublished Lectures on the Advanced Theory of Value given in 1928–31 to Cambridge University students suggests that he had come to regret the formulation of 1926 which implied that the premises of orthodox theory did hold good in the case of constant returns (cf. Sraffa 1960, p. vi). For we now find an indication of the ‘standpoint’ of 1960 that allowed no place for marginal products or marginal costs (above, Section 1), expressed in the assertion that the classics did not operate with a functional relation between costs and quantity produced; even the notion of ‘classical’ constant costs was anachronistic:

The interdependence of cost and quantity produced is quite a modern idea. All the classical economists ignore it altogether so much so that it cannot even be said that they assume constant costs to operate throughout, as their argument implies, since they don’t take the question into consideration at all; and their discussions of what are the causes of value refer only to whether it is only the quantity of labour, or also profits and also rent: but they are all agreed in looking for the causes only on the side of supply.

It was only with the introduction of the concept of marginal utility that a possible quantitative connection between value and utility was perceived; and it was only after this, and in consequence of it that the variations of cost as a function of quantity produced were connected with the determination of value.

The dependence of marginal utility upon the quantity of the commodity consumed is immediate and obvious; in fact marg. ut. [sic], being the rate of increase of total utility cannot be conceived apart from variations in quantity consumed. But cost of production per unit is an independent notion, that was quite clear long before that of marginal costs.

(PSP, D2/4, pp. 66–7)

As for the so-called ‘laws’ of increasing and diminishing returns, though well known to the classics, they were not applied to the theory of relative value at all, but to aspects of ‘production’ theory:

Increasing returns indeed played a very little part in classical economics, the only aspect taken into consideration being that of division of labour as a means of increasing productiveness: but division of labour was regarded much more as a result of the general progress of society than of the growth of a particular industry.

(p. 68)

A comment on the classical treatment of diminishing returns to the effect that all products are affected equally so that relative prices remain unchanged, confirms the published version of 1926, with an added identification of Ricardo with Petty on usage of the term corn:

The increase in cost consequent to an increased application of capital and labour to land, reduced the means of subsistence available per head of a larger population, and increased the share of the landlord in the produce. But it could not change the values of particular commodities because diminishing returns from land affected to the same extent different commodities, because they all, directly or indirectly, were products of agriculture, and therefore their relative positions remained unchanged. It is true that Ricardo usually speaks only of the production of corn in connection with diminishing returns: but no doubt he uses the term ‘corn’ for agricultural produce in general, as Sir W. Petty, in an often quoted passage, speaks of the ‘Husbandry of Corn, which we will suppose to contain all the necessaries of life, as in the Lord’s Prayer we suppose the word Bread does’

(Marshall, p. 509n) (Sraffa, pp. 68–9)²⁰

Sraffa then summarized by insisting that a fortiori the two tendencies of increasing and diminishing returns were never put on the same plane by the classics: ‘But even less than they saw any connection between the cost of a particular product and the quantity produced, did they see that there was any similarity between the two opposite tendencies’. Responsibility for such parallelism, and more generally for the ‘coordination of supply with demand conditions’, is laid at Marshall’s door: ‘All this: coordination between the two; connection between quantity and cost; coordination with demand is [a] very recent development, chiefly [the] work of Marshall, and [a] consequence of [the] theory of marg. ut. [sic] and attempt at compromise’ (p. 69). Marshall’s responsibility for ‘unifying’ the Ricardian cost approach with the Jevonian utility approach had been spelled out earlier in the Lectures thus:

The point I wish to make is the independence in the development of the two opposite conceptions, of cost and utility. In M’s theory they appear as closely connected, in fact they are for him two quantities of the same nature one positive and the other negative; they can be added or subtracted and balanced against one another. But this unification, and therefore the statement of the symmetry between cost and utility, and through them of supply and demand, has been to a large extent the result of Marshall’s work — not of the historical development of the theory of value. Their origin has to be traced to entirely distinct sources, and their development has been quite independent of one another. Then Marshall brought them together and has made an attempt to conciliate the two opposite views, which I shall refer to as of Ricardo and of Jevons, each of whom thought that it was possible to group all causes of values under one single notion, at the exclusion of the other. What is important to realize, however, is that the notion of cost of production, as understood by the classical economists, would not have allowed such a unification; to make this possible it had itself to pass through a series of small changes which gradually brought it to its present position. It is only when cost is conceived as a quantity of disutility, that is to say, of negative utility, that is can be brought together with marginal utility in a single theory of value.

(pp. 17–18)²¹

On classical ‘surplus’ theory

We take up next various propositions in Sraffa’s Cambridge Lectures relating to the classical notions of ‘surplus’ and ‘costs’. These clearly presage the Introduction to the Works and correspondence of David Ricardo (1951), particularly the corn-profit interpretation there given of the Essay on profits and the extension to labour attributed to the Principles.

In this context, Sraffa contrasts Marshall’s ‘real cost’, in the sense of ‘efforts and sacrifices’ respecting waiting and labour, with what in the theories of Petty and the Physiocrats ‘plays the role of cost’, namely

a stock of material, that is required for production of a commodity; the material being of course mainly food for the workers. But Petty wants to make it quite clear that his notion of cost has nothing to do with the pleasant or unpleasant feelings of men, and he defines ‘the common measure of value’ as ‘the day’s food of an adult Man, at a Medium, and not the day’s labour’.

This cost is therefore something concrete, tangible and visible, that can be measured in tons or gallons. It stands therefore at the opposite extreme of Marshall’s cost, which is absolutely private to each individual, and can only be measured (if at all) by means of the monetary inducement required to call forth the exertion.

(PSP, D2/4, p. 21)²²

Thus for Marshall wages and profits,

are the inducement required to call forth certain sacrifices … and … also the reward of those sacrifices. Their importance to production is equally subordinate: what is really necessary for producing is only the efforts, not their rewards. It is not necessary for the actual goods which compose real wages and profits to be in existence at the beginning of the process of production — the hope, or the promise, of these goods is equally effective as an inducement. They operate on production only by being expected; but they come into existence only when production is finished, as shares in the product.

(pp. 23–4)

But ‘Petty and all the classics … don’t regard at all wages as an inducement; they regard them as necessary means of enabling the worker to perform his work’ (p. 24). Accordingly:

Wages are the stock of goods that exists before production and which is destroyed during the productive process: they come thus to be identified with capital or at least an important part of capital. Profits (and rent of course) are a part of the product, and precisely the excess of the product over the initial stock. All the product belongs to the capitalist, who has advanced the wages: out of it he draws his profits and uses the rest to replace the capital consumed, thus replenishing the wages fund to be used in the following process of production. There never is at any moment of time, a division of the product between capitalist and worker; their incomes are received at the opposite ends in time of the period of production in relation to which they are paid.

On this ‘classical’ notion of ‘costs’ as ‘quantities of things used up in production’, ‘cost had to be measured in order to compare it with product and thus determine whether the product contains a surplus over and above cost’ (pp. 25–6). The Petty perspective is also attributed to the Physiocrats, though for Quesnay and the earlier members of his school ‘the idea of cost is not necessarily linked up to that of price or value’. Sraffa then traces this notion of physical surplus, which turns on the idea that ‘producing meant to increase material weight’ (p. 26), to real-world circumstances. The calculation of the surplus ‘without introducing the disturbing element of price’ is possible only where input and output are homogeneous:

We can see how the Physiocrats came to hold this view. Measuring both the product and the cost in physical amount it is obvious that in agriculture, say in a corn farm, the amount of corn produced is greater than the amount used for seed and for subsistence of the workers. But in industry such a calculation leads to opposite results: e.g. in a spinning mill the amount, in weight, of the yarn produced is necessarily smaller than the weight of the cotton consumed. But apart from this absurdity, it is no doubt true that in agriculture, owing to the identity in the quality of the product and of the materials used up in production, the comparison for the calculation of the surplus is possible to some extent without introducing the disturbing element of price for measuring the quantities: whereas in industry the quality of the two things is so fundamentally different that only their values can be compared. The idea of the ‘net produce’ or surplus product, regarded as a difference between an amount of goods advanced (consumed) in production and the larger amount of goods produced is the corner stone of the physiocratic systems.

(pp. 26–7; emphasis added)

Now, though the strict Physiocratic position that ‘only agriculture produces a net surplus … was soon discarded, the notion of the surplus product plays an important part of the classical economics’ (p. 27). Smith, however, was ambiguous regarding the nature of costs²³ giving rise both to the perspective of J.B. Say running along embryonic ‘Marshallian’ lines, and that of Ricardo, who — in contrast with Say — ‘reduces cost to a single element, labour, with some doubts as to whether to include the services of capital in addition to the labour that has produced the capital goods and who definitely excludes rent from cost’ (p. 36). For Ricardo,

all considerations about the pleasantness and unpleasantness of labour are irrelevant to this question. Workers are paid in exact proportion to what is required to keep them alive and efficient and thus to enable them to produce: the amount of wages necessary for this object is completely independent of the different sacrifices made by workers in different trades. Of course in trades in which greater efforts are expected higher wages will be paid, but this only to the extent that the greater effort requires a greater amount of food in order to be accomplished. But insofar as wages are different in different trades, this arises always only from the necessity of enabling the workers to accomplish the efforts, and not from the necessity to induce them.

(pp. 36–7)

A constant corn wage is thus central to the picture:

Wages are kept at what Ricardo calls ‘their natural level’ by the tendency of population to increase: it is no use paying to the workers more than the natural wage, because they will use the additional income to increase their numbers, and the competition of the newcomers will bring wages back to the natural level.

(p. 37)²⁴

(Admittedly, ‘the natural level of wages is not fixed once and for ever: but it changes very slowly, with the changes in the habits of the people, and not with temporary fluctuations in the supply and demand of particular classes of workers.’) If followed that, for Ricardo,

labour is the ultimate constituent of cost not because it represents the human element in production, but only because it has necessarily used up a given amount of capital as its wages, and this amount must be replaced out of the price fetched by the product. Profits being proportional to capital and capital being reduced entirely to wages as direct and indirect labour, they affect according to Ricardo in the same proportion all the different commodities and therefore do not affect relative exchange values.

(p. 38)

Ricardo subsequently recognized difficulties in that differential values emerged with differential capitals, but ‘in this again he did not regard it as entering in the form of a human element, as abstinence, but only as time lost by capital goods in one employment, while they might have been properly employed elsewhere to support labour’ (p. 39).²⁵

5 The Marxian input

Where in all this does Marx make an appearance? By way of general background, it should be mentioned that Sraffa adopted a perspective on the development of economics in general and the nineteenth century in particular that is entirely Marxian in its emphasis on ideology.²⁶ This fact emerges clearly in the Cambridge Lectures. For example:

There are opposite interests which support either one solution [to social problems] or the other and they find theoretical, that is universal, arguments in order to prove that the solution they advocate is comfortable to natural laws, or to the public interest, or to the interest of the ruling class or to whatever ideology which at the particular moment is dominating.

(PSP, D2/4, p. 2; emphasis added)

Similarly: ‘A further disturbing element is that in the background of every theory of value there is a theory of distribution … and often theories of distribution in their turn are meant not so much as a means of analysing the actual process through which the product is distributed between different classes, as for showing either that the present system is wrong and should be changed, or that it is right and should be preserved. Thus an analysis of what is the theory becomes a form of propaganda for what [it] ought to be’ (p. 4; emphasis added).

The development of theory is also said to reflect environmental factors — in Ricardo’s case the clash between landlords and others (both capitalists and labourers); in the post-Ricardian period, the increasing importance of the conflict between manufacturing employers and labour (p. 10). There is reference to the use made of Ricardo’s value theory by Thompson and Hodgskin, who had understood it as maintaining that labour quantity is the ‘only cause of value’ — whatever qualifications ‘may have been in the back of [Ricardo’s] mind, as expressed in footnotes and correspondence’ — a perspective that in Ricardo’s own day favoured manufacturers (employers and labour) against landlords, but after his death, labour alone (p. 11). The use of ‘orthodox Ricardian economics’ in this ‘unexpected way’ led to a reaction by Torrens, McCulloch, Senior, and J.S. Mill (pp. 12–14), though ‘the prestige of the Ricardian theory was far too great to enable it to be discarded altogether as being, in the circumstances, definitely mischievous’ (p. 12).²⁷ Thus the English Ricardians, Torrens and McCulloch,

made a whole series of attempts in order to save the substance of the labour theory of value and at the same time taking away from it, its anti-capitalist implications’. And ‘thanks to the influence of Mill, the Ricardian theory, though considerably qualified and changed in important respects, dominated political economy up to the seventies.

(p. 14)

Most significant is the view taken of the development of marginal utility theory as a defensive reaction against Marx. Specifically,

Marx published the Capital [sic] in which his critique of capitalism is entirely based upon Ricardo’s theory of value, although of course he interpreted it in an entirely different way from the earlier Utopian socialists. On the other hand, the entirely new theory of value, based exclusively on marginal utility, was found [sic] (or invented) almost simultaneously and independently by Jevons in England, Menger in Austria, and Walras in France.

(pp. 14–15)

Various precursors — Cournot, Dupuit, and Gossen — were considered ‘cranks’ and ‘amateurs’ (p. 15). The success of utility theory and its further development by professional economists entailed an ‘absolute break in the tradition of Political Economy’ (p. 16) and was explicable in ideological terms, Sraffa referring to,

that close relation between the emerging of Marxism and the extraordinarily ready acceptance which the theory of m.u. [sic] [received] amongst orthodox economists … Conservative minded people were only too glad to seize the opportunity of getting rid of the labour theory of value, notwithstanding the enormous authority it derived from the tradition of classical economists.

(pp. 15–16)

So much for Sraffa’s Marxian historiographical outlook turning on ideology and environmental considerations, an outlook also conspicuous in Dobb 1973 and Bharadwaj 1978.

Sraffa’s familiarity with, and sympathy for, Marx in fact goes back to his early years, before his first travels to Britain in 1920 (see, e.g., Roncaglia 1998). Potier observes regarding 1924–25 that ‘it is not easy today to determine precisely what might have been Sraffa’s opinion of Marx’s Capital’ (1991, p. 16),²⁸ but it may be significant that, at the close of his 1926 paper on costs after discussing credit and the like, Sraffa concludes in Marxian terms: ‘these are mainly aspects of the process of diffusion of profits throughout the various stages of production and of the process of forming a normal level of profits throughout all the industries of a country’ (1926, p. 550).²⁹ We also know that, in the mid 1920s, the research culminating in PCMC was set in motion, Sraffa drawing on notes from that period when preparing the work (see the Piero Sraffa Papers) and that by the late 1920s its ‘central propositions had taken shape’ (Sraffa 1960, p. vi).³⁰ Now Sraffa is on record as expressing his indebtedness to Marx at this time:

Sraffa told us [in June 1973] that he would not have been able to write Production of commodities by means of commodities if Marx had not written Capital. It is clear, he told us, that the work of Marx strongly influenced him, and that he felt more in sympathy with him than with those he called the ‘camouflagers’ [les camoufleurs] of capitalist reality.

(Dostaler 1982, p. 103; my translation: see also 1986, p. 468)³¹

More specifically: ‘Sraffa considered that his model described some aspects of the same reality that Marx had described, a reality characterized by class antagonism between workers and capitalists, the exploitation of the first by the second’; and his equation r = R(1 − w) derived from the standard commodity was seen by Sraffa to be the equivalent of Marx’s rate of exploitation, for it was

immaterial whether this reality is expressed in terms of the worker working x hours to reproduce his labour-power and y hours to create surplus-value for the capitalist, or in terms of a physical surplus, R, the distribution of which constitutes the stake [l’enjeu] in a struggle expressed ‘algebraically’ by the famous equation r = R(1 − w).

And it will indeed be recalled that the role of his standard system was, Sraffa tells us, to ‘give transparency to an [actual] system and render visible what was hidden’ (1960, p. 23), a formulation that conveys Marx’s description of his own procedures in the transformation context, where he applied the methodological rule that ‘all science would be superfluous if the outward appearance and the essence of things directly coincided’ (1962 [1894], p. 797), seeking to avoid errors of interpretation flowing from appearance — that ‘normal profits themselves seem immanent in capital and independent of exploitation’ (p. 808), and that wages, profit and rent are ‘three independent magnitudes of value, whose total magnitude produces, limits and determines the magnitude of the commodity-value’ (p. 841).³²

The informal record of Sraffa’s position that PCMC was inspired by Marx’s perspective on exploitation should be read together with Sraffa’s insistence that the main features of his own work — concerned with the problem of a given physical surplus to be distributed to assure a uniform profit rate — reflect Ricardo’s ‘method of approach’ of the Principles, not only the passing phase of the Essay, which ‘rendered distribution independent of value’ (above, pp. 285–6). Sraffa himself emphasized that Marx’s critique of capitalism turned on Ricardian value theory (above, p. 306); and we recall that Ricardo’s profit-rate formula (assuming only variable capital) is indeed identical with Marx’s rate of exploitation. Sraffa, therefore, emerges as fully in the Marxian tradition, keeping in mind always his allowance for the profound influence on Marx flowing from Ricardo.

* * *

We have also seen that Sraffa, in his Cambridge Lectures, provided a historiographical perspective relating to the Physiocrats and the British classics, Ricardo in particular, and traced back to Petty, in terms of surplus, wherein cost is perceived as ‘quantities of things used up in production’, and surplus as the excess in physical terms over such cost, thereby avoiding ‘the disturbing element of price for measuring the quantities’ (above, p. 303). Strangely, Sraffa himself — in lecturing on the surplus approach — made no mention of Marx; yet it is indubitably Marxian historiography that he was expounding. For Marx had portrayed Petty precisely as did Sraffa, considering him to be ‘the father of English political economy’, and citing precisely the same passage as Sraffa (above, note 22) — where Petty ‘proposes to speak “in Terms of Number, Weight or Measure” and leave aside arguments that depend upon the mutable Minds, Opinions, Appetites, and Passions of particular Men’ (Marx 1970 [1859], p. 53). Also relevant are Marx’s references to various ‘striking passages’ by Petty, including the subsistence wage (1954 [1862–3], p. 346) and to the notion of corn surplus, both (we have seen) alluded to by Sraffa:

Suppose a man could with his own hands plant a certain scope of land with Corn, that is Digg, or Plough, Harrow, Weed, Reap, Carry home, Thresh, and Winnow so much as the Husbandry of his Land requires; and had withal Seed wherewith to sowe the same. I say, that when this man hath subducted his seed out of the proceed of his Harvest, and also, what himself hath both eaten and given to others in exchange for Clothes, and other Natural necessaries; that the remainder of the Corn is the natural and true Rent of the Land for that year.

(pp. 346–7; Marx’s emphasis; cf. p. 177)³³

And, similarly, Marx had adopted precisely the same perspective on the Physiocrats as did Sraffa:

In manufacture the workman is not generally seen directly producing either his means of subsistence or the surplus in excess of his means of subsistence. The process is mediated through purchase and sale, through the various acts of circulation, and the analysis of value in general is necessary for it to be understood. In agriculture it shows itself directly in the surplus of use-values produced over use-values consumed by the labourer, and can therefore be grasped without an analysis of value in general, without a clear understanding of the nature of value.

(p. 46; cf. pp. 48–9, 50)

The physical basis of surplus-value is this ‘gift of nature’, most obvious in agricultural labour, which originally satisfied nearly all human needs. It is not so in manufacturing labour, because the product must first be sold as a commodity. The Physiocrats, the first to analyse surplus-value, understand it in its natural form (1971 [1862–3], pp. 115–16).

The corn-profit interpretation thus falls into the Marxian reading. And this seems to be confirmed by the 1960 account. For Sraffa notes a parallelism between Ricardo’s Essay of 1815 — as he understood it — and the Physiocrats:

Ricardo’s view of the dominant role of the farmer’s profits thus appears to have a point of contact with the Physiocratic doctrine of the ‘produit net’ insofar as the latter is based, as Marx has pointed out, on the ‘physical’ nature of the surplus in agriculture which takes the form of an excess of food produced over the food advanced for production; whereas in manufacturing, where food and raw materials must be bought from agriculture, surplus can only appear as a result of the sale of the product

(1960, p. 93)

6 Summary and concluding remarks

We have gone some way towards confirming Sraffa’s Marxian orientation concerning the place of Ricardo in the development of the history of economics, in particular with reference to the significance of the surplus conception. In fact, PCMC itself was designed, so it appears, to convey the essence of Marx’s exploitation doctrine. Now Marx had himself learned much of his economics — including the rate of surplus value based on a mean-proportions measure — from Ricardo. This interdependence — it has elements of a dog chasing its tail (Chidem Kurdas, in correspondence, 4 May 1997) — was appreciated by Sraffa, who emphasized the dependence of Marx’s theory of exploitation on Ricardian value theory.³⁴

It has emerged that the interpretation of Ricardian profit theory given in 1951 actually reflects a perspective adopted as early as 1928 in the enthusiastic accounts of Petty and the Physiocrats entailing ratios of physically homogenous product as a means of avoiding ‘the disturbing element of price’. In brief, the analytical significance of a physical corn—corn ratio — its rendering distribution independent of value — was already clear to Sraffa by the late 1920s. Moreover, at that early stage, he also represented the Ricardian theory of the Principles as following the same line — referring here to a perceived emphasis on ‘surplus product’ with cost reduced to a single element, labour, paid a corn wage ‘in exact proportion to what is required to keep [workers] alive and efficient’ (above, p. 304).³⁵ This focus on physical surplus and real or ‘objective’ costs is wholly consistent with Marx’s reading of Petty and the Physiocrats. Sraffa again confirms much of this in 1960, now noting a ‘point of contact’ between the early Ricardo — in the ‘dominant’ role accorded the farmer’s profits — and the Physiocratic doctrine of the produit net, and alluding to Marx’s reading thereof as entailing physical homogeneity between input and output in agriculture alone and thus providing a means of treating distribution independently of and prior to pricing.

This set of circumstances allows us to situate properly Sraffa’s statement that his corn-model interpretation of the Essay on profits post-dates his work on the standard system and the appreciation of the distinction between basics and non-basics. Evidently, more than a ‘logical by-product of the standard system’ (above, p. 286) is involved. That the corn-profit reading of the Essay emerged after the main lines of PCMC had been completed amounts to no more than a belated realization that the Essay — not only the Principles — can be read as falling into a long-standing tradition relating to the development of economics since the seventeenth century, a tradition much admired by Marx, and a reading that Sraffa might have derived from Marx. (That Marx himself may not have hit upon the corn-model reading of the Essay is of secondary importance, for Sraffa saw the pamphlet as only a stepping stone towards the Principles.) It is a tradition into which PCMC itself fits, to the extent that Sraffa’s main objective was to convey the notion of Marxian exploitation and of ‘class antagonism’. And here we recall Sraffa’s championship in 1951 (alluded to in 1960) of Ricardo’s ‘method of approach’, which rendered distribution independent of value — referring not merely to the Essay (a passing phase) but to the more considered version of the Principles. That Sraffa mentions in this context specifically Ricardo’s, not Marx’s, method does not necessarily imply that he distinguished the two; on the contrary, he is explicit in 1928 that Marx’s critique of capitalism ‘is entirely based upon Ricardo’s theory of value’.

As for the Bronfenbrenner—Porta ‘hypothesis’ — the original inspiration for this chapter — the main difficulty is the fact that Sraffa’s interpretation of Ricardo cannot simply be dismissed, as, within a narrow range of Ricardo texts, all the ‘Sraffian’ features will be found: the exogenously determined wage expressed in terms of the measure of value, the profit rate yielded independently of prices, and prices determined solely by costs to yield a uniform profit rate. On the other hand, Ricardo’s general model contains well-developed ‘Marshallian’ perspectives belying the priority of distribution and the clear-cut notion of surplus, and leading one either to charge Ricardo with grievous logical inconsistency or to follow the more convincing line that the priority of distribution reflects a partial picture only.

The circumstance that, like Sraffa, orthodox commentators have also read Ricardo as expounding a ‘one-legged’ value doctrine, does not gainsay that the narrow focus on Ricardo would be particularly attractive to anyone with a ‘Marxian’ predisposition towards the priority of distribution, whether or not it derived from Marx, while there is evidence that, in Sraffa’s case, this predisposition wherewith to treat ‘a reality characterized by class antagonism between workers and capitalists’ did in fact derive from Marx. One cannot, of course, exclude the possibility that Sraffa was inclined towards the ‘narrow’ view of Ricardo for independent reasons. His hostility towards subjectivist economics including the ‘Marshallian synthesis’ — already clear by the mid 1920s — it might be proposed, provides an instance.³⁶ But here too a Marxian undercurrent is suggested by the positive perspective on Petty and the ideologically centred reading of the post-Ricardian developments in theory.³⁷

Notes

* Samuel Hollander, Department of Economics, University of Toronto, Canada. Without attributing any responsibility, I acknowledge the valuable assistance of Evelyn Forget, Chidem Kurdas, Gary Mongiovi, Tom Rymes, Rachel Simeon, and Ajit Sinha. Sections 4 and 5 draw on Sraffa’s Cambridge Lectures on Advanced Theory (1928–31). I am much indebted to Pierangelo Garegnani, Sraffa’s literary executor, for permission to use and cite from those lectures; and to the Master and Fellows of Trinity College for making the file available.

This chapter is a slightly-reduced version of a paper with the same title appearing in History of Political Economy, 2000, 32(2): 187–232. I thank Duke University Press for permission to reproduce.

1   See also Pasinetti:

We are at last able ‘to see’, as it were, the alternative possible distributions of the net national income between wages and profits in ideal conditions, free from any interference due to price changes specific to the commodity used as the unit of measurement.

(1977, 120)

2   In a famous response to Harrod’s criticism that his system ‘must be indeterminate because it fails to take into account the composition of consumer demand’, Sraffa insisted that the ‘exchange ratios are … determined by the equations of production and not by the ratios between the excess productions of the commodities’ (1962, p. 477). Roncaglia appreciated this feature: ‘there is no reason to suppose that [Sraffa’s] prices of production should equate quantity demanded and quantity supplied’ (1978, p. 16; also 1990, p. 147). Hicks (1985) too has pointed out that, ‘Sraffa leaves us to find out what his prices are, but I doubt if they are equilibrium prices’. Garegnani (1990, pp. 132, 156), however, insists that Sraffa’s equilibrium cost prices are market-clearing prices.

Sraffa does discuss explicitly the problem of assuring consistency between the (given) set of commodities ‘required for use’ and the number of processes in the case that a ‘process’ exists producing two instead of one commodity (1960, Section 50 note). This special case seems close to the problem of assuring consistency between consumption and production patterns.

3   A brief summary of the textual basis for this position is given below in Section 3.

4   More specifically:

The advantage of having recourse to the standard commodity x lies in the fact that the gross output vector — exactly as would happen in a system where ‘corn’ is used up to produce ‘corn’ — is a scalar multiple of the net output vector, so that the same proposition (just stated for the net output) holds true of the gross output as well, as Marx required.

(p. 450)

Moreover,

provided wages consist of the standard commodity — whatever may be the division of net output between capitalists and workers — what remains after the payment of wages is a proportion of the standard net output, of the same amount computed either in values or prices: total profits equals total surplus value. The rate of profit itself can be equally well expressed in values or in prices.

For Meek too, ‘Sraffa’s “standard” industry is essentially an attempt to define “average conditions of production” in such a way as to achieve the identical result which Marx was seeking’ (1967, pp. 177–8). Thus ‘Sraffa is postulating precisely the same relation between the average rate of profits and the conditions of production in his “standard” industry as Marx was postulating between the average rate of profits and the conditions of production in his industry of “average organic composition of capital”.’ (See also Harcourt 1982a, p. 196.)

See also Eatwell and Panico: ‘in his construction of the standard commodity, Sraffa seeks to recreate the clarity of the classical derivation of the rate of profit from the ratio between surplus and means of production’ (1987, p. 450; emphasis added). Also Eatwell 1974: ‘Sraffa’s standard commodity … possesses all the characteristics which Marx sought in the “average commodity” which was to be the key to his solution of the transformation problem’ (1974, p. 302).

5   Notwithstanding the interdependencies between distribution and pricing that can be shown to exist in his own system (see Hollander 1992, Chapter 15.) For present purposes, I take for granted the validity of Sraffa’s interpretation of Marx.

6   On this matter see Garegnani 1984, 1998. But some loyalists who insist on Marx’s own categories — labour value and equal rate of surplus value as starting point — are incensed with Sraffa and ‘neo-Ricardians’ for dispensing with them (e.g. Shaikh 1982). On this issue, see Harcourt 1982b.

7   Porta (1986a) refers to the restrictions on citation from the Cambridge Lectures then in place. Their Marxist orientation was also alluded to informally by the late Krishna Bharadwaj (Harcourt 1995, p. 164, see below, note 32).

8   For example, 1951–73, I, pp. 45–6; IV, p. 406; IX, pp. 346–7, 361.

9   In Chapter XXXII, Ricardo refers specifically to the proof provided in the chapter ‘On profits’:

See page [120], where I have endeavoured to shew, that whatever facility or difficulty there may be in the production of corn, wages and profits together will be of the same value. When wages rise, it is always at the expense of profits, and when they fall, profits always rise.

(p. 404n)

10   See also Ricardo’s reminder in Chapter III:

It will be sufficient to remark that the same general rule which regulates the value of raw produce and manufactured commodities, is applicable also to the metals; their value depending not on the rate of profit, nor on the rate of wages, nor on the rent paid for mines, but on the total quantity of labour necessary to obtain the metal and bring it to market.

(p. 86)

11   Similarly:

Every rise of wages … or which is the same thing, every fall of profits, would lower the relative value of those commodities which were produced with a capital of a durable nature, and would proportionally elevate those which were produced with capital more perishable.

At times, Ricardo writes simply of the effect on relative prices of an ‘alteration in the permanent rate of profits when his concern is with an initiating change in the wage rate’ (pp. 43–6).

12   Hollander, 1992, Chapter 15; also Schumpeter: ‘Marx had recognized from an early stage of his thought … that exchange rates do not, even as a tendency, conform to Ricardo’s equilibrium [labour] theorem on values, which accordingly forms no part of Marx’s teaching’ (1954, p. 597).

For Marx, too, the average profit rate emerges in the mean sector or sectors should such exist (they do not in his standard Transformation illustrations). And, in such sectors, profit and surplus value and price and value coincide (Marx 1962 [1894], III, p. 196). The analysis of the effect of a wage change is effectively Ricardo’s.

13   This Section draws on materials in Hollander 1979 and 1995.

14   The relaxation of corn-import restrictions effectively amounts to a contraction of demand for home corn, and in this case the reverse result emerges:

If corn, in consequence of permanent abundance, fell to £3.10s., the capital employed on No. 6 [land] would cease to be employed; for it was only when corn was at £4, that it would obtain the general profits, even without paying rent; it would, therefore, be withdrawn to manufacture those commodities with which all the corn grown in No. 6 would be purchased and imported.

(p. 268)

15   Ricardo usually presumed that a positive marginal labour product can be defined: ‘Is it possible …seriously [to] assert, that the produce of the land cannot be increased, if the demand increases?’ (p. 252n). But what if capacity output has been achieved? Here, the more intensive use of land is ruled out, so that the marginal principle breaks down and rent emerges as a demand-determined surplus on every unit of corn produced including the last. In this case, the incidence of a tax on corn is borne entirely by producers, which implies appreciation of a negatively sloped ‘demand curve’ cutting across the vertical supply. Thus, although Ricardo usually assumes zero elasticity of demand for corn, this is not his practice when a negative slope is required for stability of equilibrium.

16   In this section, I draw on the Piero Sraffa Papers (PSP), housed at the Wren Library, Trinity College, Cambridge.

17   Notes made in April 1923 reveal sharp objections to Cannan on Ricardo: ‘“Read with the pamphlets which preceded it, Ricardo’s Principles of P. E. & T. is intelligible enough. Read without them, it is the happy hunting-ground of the false interpreter”. Cannan on himself!’ (PSP, D1/2). For Sraffa’s citation, see Cannan (1917, p. 388). What precisely Sraffa objected to must be a matter of conjecture. It may be significant that Cannan (p. 206) emphasizes Ricardo’s subscription to the motive to accumulation as a function of the profit rate. Sraffa later recommended Cannan’s ‘brilliant criticism’ of the classics to his students, though he thought it ‘all nonsense’ (PSP, D2/4). Sraffa’s more formal editorial labours on Ricardo began about 1930 (see Dobb in Pollitt 1988, p. 62).

18   Notes taken on Marshall’s Principles (8th edition), in April 1923, already reveal a critical position. These notes, in Italian, discuss inter alia the nature of demand and supply curves, increasing and diminishing returns and surplus (PSP, D1/2).

19   This perspective on Ricardo raises problems. In a letter of 21 June 1932 (intended for Gramsci), Sraffa opined that it was Marshall representing ‘vulgar economics’, not Ricardo, who concerned himself with ‘statements of tendency’; for Ricardo ‘never subjected his own thinking to historical considerations. He rarely placed himself in a historical perspective, and, as has been said, he considered the laws of the society in which he lived to be natural and immutable’ (cited by Potier 1991, pp. 65–6). The latter reference is, one supposes, to Marx, who complained that,

Ricardo never concerns himself about the origin of surplus-value. He treats it as a thing inherent in the capitalist mode of production, which mode, in his eyes, is the natural form of social production. Whenever he discusses the productiveness of labour, he seeks in it, not the cause of surplus-value, but the cause that determines the magnitude of Value.

(Marx, 1954 [1862–3]I, pp. 515–16)

How this static attribution to Ricardo in 1932 relates to the affirmation of Ricardo’s concern with ‘social change’ in 1926 is unclear. But the matter is academic, as Sraffa’s own PCMC is entirely static.

20   Though this seems to allow for marginal costs in the context of value theory, effectively Sraffa is describing aggregative phenomena.

21   Yet Sraffa allowed some validity to demand—supply analysis. For such analysis to be valid requires independence of demand from supply (p. 71), implying that prices and quantities of all other commodities be unchanged or independent of variations in the price and quantity of the commodity under consideration: ‘This is why only small changes can be considered, i.e., S. & D. curves [sic] are valid only in [the] neighbour hood of [the] point of equilibrium’ (p. 74). Sraffa’s life-long hostility to the Marshallian synthesis emerges in similar terms in a letter to Asimakopulos of 1971: ‘I had written to Sraffa in 1971 and had observed that his theoretical framework did not permit any conclusions about the effects of demand on prices unless the assumption of constant returns to scale were added. He responded in a letter dated 11 July 1971: “You say ‘I don’t see how demand can be said to have no influence on … prices, unless constant returns …’. I take it that the drama is enacted on Marshall’s stage where the claimants for influence are utility and cost of production. Now utility has made little progress (since the 1870s) towards acquiring a tangible existence and survives in textbooks at the purely subjective level. On the other hand, cost of production has successfully survived Marshall’s attempt to reduce it to an equally evanescent nature under the name of ‘disutility’, and is still kicking in the form of hours of labour, tons of raw materials, etc. This rather than the relative slope of the two curves, is why it seems to me that the ‘influence’ of the two things on price is not comparable”’ (Asimakopulos 1988, p. 142n3).

22   Sraffa here cites Petty’s Political arithmetic:

The method I take to do this in not yet very usual; for instead of using only comparative and superlative Words, and intellectual Arguments, I have taken the course (as a Specimen of Political Arithmetic I have long aimed at) to express myself in Terms of Number, Weight, or Measure; to use only Arguments of Sense, and to consider only such Causes, as have visible Foundations in Nature; leaving those that depend upon the mutable Minds, Opinion, Appetites, and Passions of particular Men, to the Consideration of others.

(1899 [1690] I, p. 244)

He contrasts this formulation with that of Marshall:

The outward form of economic theory has been shaped by its connection with material wealth. But it is becoming clear that the true philosophic raison d’être of the theory is that it supplies a machinery to aid us in reasoning about those motives of human action which are measurable.

(Marshall 1925, p. 158)

23   Smith,

adopted this notion of surplus, and with it the idea of cost of the Physiocrats. But he has also a different idea of cost — and it is in a sense true that the Wealth of N. [sic] as a whole represents the connecting link between the eighteenth century economics and the modern one.

(p. 27)

Sraffa adds that Marshall (1925, p. 126) ‘saw Smith as maintaining the idea of “a commodity as the embodiment of measurable efforts and sacrifices”’.

24   Considering the great weight placed on Ricardo’s alleged subsistence wage, one would have expected that this would be specified as the principle governing the distribution of the product-less-rent. Yet strangely, Sraffa elsewhere asserts that Ricardo ‘left in the background the question of how the distribution between wages and interest takes place, and the effects of changes in the division on the value of the product’ (pp. 9–10).

25   The account proceeds to post-Ricardo literature, and points out that, while McCulloch interpreted labour as the activities of men and machines, proving ‘how far he still was from considering labour under the aspect of sacrifice’, Senior in 1836 transformed the picture by going ‘to the opposite extreme as compared with the classical economists: the transition has been from the initial stock of necessaries and finally to the sacrifice represented by labour and abstinence’ (p. 40). This (false) line is traced further to J.S. Mill and the Austrians and, of course, to Marshall, Sraffa’s bête noire.

26   I have questioned the Marxian historiography in Hollander (1980, reprinted 1997).

27   Citing Carey’s condemnation of Ricardo’s system as ‘one of discord’, Sraffa added: ‘But in America and the Continent, where Ricardo had a considerable influence, new schools were formed which were definitely opposed to everything Ricardian’.

28   There is evidence of a difference with Gramsci at this time regarding the appropriateness of Marxian class categories for Italian politics (Potier 1991, p. 25). Again, regarding the early 1930s: ‘It is far from easy … to evaluate the influence of Marx on Sraffa at this point. The Cambridge archives may very well disclose some interesting information about these links in the years to come’ (p. 50).

29   Sraffa was apparently then working on the reproduction schemes of Capital, II (Potier 1991, p. 60). His expertise in Marxian bibliography is apparent, for example, in recommendations to Gramsci in 1932 (p. 66).

30   During the 1930s and early 1940s ‘particular points, such as the Standard commodity, joint products and fixed capital … were worked out’. The work was set aside during the war and taken up again early in 1955 with little of substance added.

31   Dostaler particularly emphasizes the Sraffa—Marx linkage, notwithstanding the subsequent ‘criticisms to which Sraffa has been subjected from certain Marxist centres’ (1982, p. 103). He points out though that Sraffa himself ‘also confirmed [in 1973] that he considered the transformation problem to be a false problem’ (1986, p. 468n).

32   We should have in mind Harcourt’s report that Sraffa had personally informed him that by the subtitle to the 1960 work — Prelude to a critique of economic theory — he had intended specifically ‘neoclassical theory … despite others’ attempts to argue that he also had some aspects of Marx’s theoretical structure, the labour theory no less, firmly in his sights’ (1995, p. 163). Of interest too is Harcourt’s observation that ‘Krishna [Bharadwaj] makes clear in the Dutt lectures [1978] that Sraffa’s positive constructions were designed either to finish unfinished business or to make coherent what was still incoherent in certain key but limited parts of the whole of Marx’s system’ (p. 164). Harcourt adds that ‘though what is in Sraffa’s papers has not yet been allowed into the public domain … she did tell me that there were many papers there that made it abundantly clear that Sraffa regarded Marx as the supreme economist and saw his role as no more than the modest but essential one set out above.’

33   See Oakley, 1985, I, pp. 18–24; Meek, 1956, pp. 35–6; Roncaglia, 1985, pp. 61–2, 1987. For fully-fledged histories of economic thought along Marx—Sraffa lines, see e.g., Dobb (1973), Bharadwaj (1978), and Walsh and Gram (1980).

34   A further complexity, alluded to in notes 5 and 26 above, remains in abeyance — the fact that Marx’s own economics contains several of the non-Sraffian features discussed in our Section 3. Sraffa took the ‘Marxian’ view of Ricardo; but it is Marx read in Sraffa’s fashion to the neglect of those features that is involved.

35   On one matter Sraffa must have changed his mind over time, namely on his assertion of 1926 and 1929 that increasing costs in agriculture apply across the board and therefore leave relative prices unaffected (above, pp. 299 and 301), as this is refuted by the rational reconstruction. In his accounts of the development of the surplus theme in economics, Sraffa makes no mention of Malthus. There is, I believe, more ‘surplus’ oriented theorizing in Malthus — extending to specification of a corn model — than in Ricardo (see Hollander 2000), which is scarcely surprising considering Malthus’s physiocratic bona fides.

36   With Sraffa’s letter to Asimakopulos in mind (above, note 21), T.K. Rymes surmises that Sraffa’s interpretation of Ricardo reflects his own view of costs as ‘objective’ and amenable to scientific treatment in contrast to the subjectivity and ephemerality of preferences (correspondence, 22 August 1995).

37   On this matter, see Porta 2001.

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—— 1986b. ‘Understanding the significance of Piero Sraffa’s standard commodity: a rejoinder’. History of Political Economy, 18 (3): 479–84.

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—— 2001. ‘Sraffa’s Ricardo after fifty years’, in Reflections on the classical canon in economics: essays in honor of Samuel Hollander,E.L.Forget and S.Peart, eds. London and New York: Routledge, 241–69.

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COMMENT ON HOLLANDER

Antonella Stirati***

1 Introduction: Hollander’s assessment of Sraffa’s interpretation of Ricardo

The contribution by Professor Hollander discusses Marx’s influence on Sraffa’s thought. While enquiries into this matter certainly have a historical and bio graphical interest, the paper steps beyond this kind of interest. In fact, in this article, Professor Hollander maintains that this influence caused a bias in Sraffa’s interpretation of Ricardo (pp. 192–97).¹ However, such a claim on Professor Hollander’s part requires a demonstration that Sraffa’s conclusions were indeed led astray by the alleged influence.² This is therefore the central question, and will be taken up in the present comment. Only in the conclusion will I touch briefly on the question of whether the claim of a Marxian influence on Sraffa’s interpretation of Ricardo is indeed correct from a biographical and historical point of view.

What exactly is wrong with Sraffa’s interpretation of Ricardo according to Professor Hollander? More clearly than in the past, Hollander concedes that Sraffa’s interpretation concerning the determination of the rate of profit is a correct, if only ‘truncated’ view of Ricardo:

The Sraffian perspective on Ricardo — at least the Ricardo of the Principles — holds good as far as it goes. The problem is that it truncates Ricardo by concentrating on the profit rate formula emerging in his chapter 6 and applied in chapter 1 to calculate equilibrium prices.

(this volume, p. 288)

According to Hollander,

This constrained view neglects a broader body of evidence pointing to the market determination of wages and prices and their interdependence. Though a given wage permits (ceteris paribus) a forecast of the average profit rate independently of prices, and thus entails the priority of distribution, the wage is not in fact a datum but is determined by the labour market and played upon both by the growth rate of capital (motivated by the return on capital) and the pattern of final demand, the latter itself partly governed by the (variable) income distribution.

(this volume, p. 287)

The above passages indicate that the central point is the determination of the wage rate. The ‘surplus’ interpretation advanced by Sraffa requires that the wage and the outputs be taken as given when proceeding to the determination of the profit rate. On the other hand, according to Hollander there is interdependence between prices, outputs and wages: that is, Ricardo’s economics ‘allows for inter dependence between, and the simultaneous determination of, prices, output levels, and the distributive variable’ (this volume, p. 286). Accordingly, Sraffa’s interpretation,

neglects […] that for Ricardo the wage is determined by labour market pressures […] is an endogenous variable partly dependent on the structure of final demand; distribution is not divorced from the pricing process, except in the context of the formal expository examples of Ricardo’s chapters 1 and 6.

(this volume, p. 292)

Therefore, Hollander’s claim here, as in several earlier contributions,³ is that in Ricardo we find a neoclassical general equilibrium type of analysis, assigning an important role to what Hollander calls ‘demand and supply analysis’ (this volume, p. 292). In fact, Hollander’s own claim in this respect becomes a little less clear when he stresses that in Ricardo ‘the market determination of the wage is elaborated in the context of secular tendencies’ (this volume, p. 297), where such secular tendencies clearly refer to the interdependence between wages and the growth rate of capital as mentioned in one of the passages quoted above. While the reference to the interdependence between patterns of demand and distribution is reminiscent of the indirect substitution mechanisms found in the marginalist approach, secular tendencies refer to a different type of relationship that does not, by itself, imply a similarity with marginalist analysis. This point will be taken up in the following section, while in the subsequent ones the alleged similarity with ‘supply and demand analysis’ as it is found in neoclassical theory will be discussed.

However, at this stage, it can already be noted that there is a striking conflict between Hollander’s claim that, in Ricardo, wages are determined in a manner similar to that found in marginalist theory and the conclusions Ricardo draws in the chapter on machinery. In that chapter, Ricardo claims that the introduction of machinery can cause unemployment, which may be corrected only by further capital accumulation (and, hence, not by changes in labour demand — at a given stage reached by capital accumulation — caused by lower wages).⁴ This is so much at variance with marginal theory to have perplexed, for example, Wicksell (1981 [1924]) and Schumpeter (1982 [1954], p. 683). As both point out, the workers made redundant by the introduction of machinery, according to ‘fundamental economic principles’ (i.e. to marginalist theory), would compete for employment, cause a fall in wages and, hence, render more profitable the adoption of processes with a higher labour intensity, leading to a return to full employment.⁵

More generally, if Hollander were right in claiming that Ricardo regarded wages as determined simultaneously with prices, output and the profit rate, then his suggested interpretation begs the question of what would be the purposes and analytical basis for Ricardo’s procedure in determining profit rate and prices in Chapter 1 and 6.

In the following sections, we shall more closely examine Hollander’s arguments concerning the role of ‘supply and demand analysis’ in Ricardo’s theory of wage determination.

2 ‘Secular tendencies’ and the determination of the wage rate

There are two aspects of the problem of wage determination, one of which we can term ‘static’, and which relates to the role of ‘demand and supply’ in a given situation, characterized by a given population and a certain stage reached by capital accumulation. The other, which Hollander refers to when he mentions ‘secular tendencies’, we can term ‘dynamic’, and addresses the interaction between wage rate and rates of growth of population and capital. The latter interaction seems to be what Hollander, as well as many other interpreters of Ricardo, often has in mind when referring to the role of ‘demand and supply’ in the determination of wages.

As indicated by the passage cited in the introduction, Professor Hollander maintains that one of the ways in which the role of demand and supply in determining wages manifests itself is the ‘secular’ analysis of the interplay between population growth, capital accumulation and wages. He also maintains that this interplay can be understood only by means of simultaneous determination of wage and profit rates by means of the functional relationships between wage, population growth, profit rate and capital accumulation. According to Hollander, this would destroy any possibility of regarding Ricardo’s framework of analysis as a ‘surplus approach’, that is, one in which, given the wage rate, profits and the other incomes emerge as a surplus.

It has been argued in earlier contributions that the relations between wages, population and capital growth were not really conceived by Ricardo and other classical economists as functional relations, and that even the directions of the effects were regarded as dependent upon historical circumstances (see Stirati, 1994: 119–20, concerning population, and Hollander, 1979: 319, fn.39, concerning the ‘vagueness’ of the connection between rate of profit and accumulation). However, and purely for the sake of argument, let us concede this proposition and imagine that the relations have a definite functional form. Would that, per se, justify the conclusions reached by Hollander (and, indeed, suggested by many other scholars)?

Suppose we can write:

(1)	p = bw - a

where a and b are given parameters, p is the rate of growth of population, and w is the real wage rate

(2)	k = c - dw

where c and d are given parameters and k is the rate of growth of capital. Let’s further assume a given proportion between capital and labour, so that k is also the rate of growth of employment.

If we make the usual assumption about the effects of the difference between k and p on the wage level, that is: k > p will cause wages to rise and vice versa, we can impose an equilibrium condition that will be the one, it is maintained, towards which the system will tend:

(3)	w* = (c + a)/(b + d)

with w* the ‘dynamic’ equilibrium wage realizing equilibrium between rate of growth of population and employment. But would we observe full employment in that position? No, not at all, except by a fluke!⁶ Without a decreasing demand schedule of the static type, there is no endogenous tendency to full employment. Thus, even if we could attribute dynamic mechanisms leading to the equality between rates of growth of population and employment to the classical economists, that would not rule out the presence of unemployment. However, if there is some unemployment, there are only two possibilities. Either (i) we accept the marginalist notion of competition, and conclude that, even if condition (3) holds, wages would tend to zero and the population would ‘die like flies’ (see Samuelson, 1978: 1423) until it reaches a level adequate to the given demand for labour — but this adjustment mechanism was certainly not to be found in the classical economists and, at the same time, is hardly suggestive of neoclassical ‘market clearing’; or (ii) we would have to accept that wages will not tend to zero because, notwithstanding com petition, they are regulated by customary and institutional factors (see Levrero, in the present volume). This, of course, leads us back to the ‘surplus’ interpretation we find in Sraffa: a given wage (determined by historical and socio-economic factors), in any given period (that is, with given population size and stage of capital accumulation) and, hence, an excess of output beyond reintegration of the means of production and wages.

Thus, ‘supply and demand elaborated in the context of secular tendencies’, to use Hollander’s phrase, do not, by themselves, challenge the ‘surplus’ interpretation of Ricardo. What would be necessary but, I would argue, has not as yet been found despite much effort in this direction, is the ‘static’ demand function for labour (on this point, see also Garegnani, 2002: 248–9, and 2007: 212–26). Thus, in the following sections, attention will be given to those arguments advanced by Professor Hollander that appear related to the existence of such a ‘static’ demand function in Ricardo’s economic analysis.

3 ‘Supply and demand analysis’ in commodity markets and the ‘interdependence’ with distribution

Although Professor Hollander maintains that the core of the problem with Sraffa’s interpretation of Ricardo has to do with how wages are determined, the arguments advanced in the chapter mostly refer to the role of supply and demand in commodity markets. This seems to suggest that Hollander attributes to Ricardo the existence of indirect substitutability mechanisms as the basis for a ‘static’ inverse relation between wages and demand for labour in classical theory. Prior to discussing Professor Hollander’s specific arguments on this question, for the purpose of clarifying the different nature and treatment of the ‘interdependences’ in marginalist and classical theories, it may be useful to start by briefly recalling their form in long-period general equilibrium marginal theory.

3.1 ‘Interdependences’ in the traditional marginalist approach

In general equilibrium marginal theory, a change in wage would affect input proportions both directly and indirectly: directly, through the choice of techniques used in each industry; indirectly, through the changes in relative prices and consequently, owing to the decreasing marginal utility principle, in the composition of output and, hence, in labour demand, with the other factors of production taken as given in quantity and fully employed. In turn, any change in tastes or other exogenous change in demand patterns would induce a change in relative prices as it causes a rise (fall) in the returns of the (fully employed) factors used more intensely in the production of the goods the demand for which has increased (decreased).

In this framework, market clearing⁷ is brought about by the mutual adjustment of demand and supply in both good and, crucially, factor markets, via price flexibility. For this adjustment to take place and the equilibrium to be stable, it is essential that demand curves for production factors be decreasing.

Therefore, the question is whether such specific ‘interdependencies’ can be found in Ricardo. In the following paragraphs, I shall discuss Professor Hollander’s arguments with the aim of establishing whether they support the existence in Ricardo of relations between variables of the same nature as those found in the marginalist approach.

As already mentioned, Hollander’s arguments do not directly address the existence of a decreasing demand curve for labour of the ‘static’ type, but rather discuss several instances of ‘supply and demand analyses’ in connection with commodity markets. In this regard, it may be useful to recall that, in the traditional marginalist general equilibrium framework of analysis, long-period equilibrium relative prices of commodities are affected by changes in demand only in so far as these cause a change in income distribution; with given factor prices no change would take place (i.e. with given factor prices long-run supply curves at industry level are horizontal).⁸ Thus, what is relevant for the present discussion is whether the examples discussed by Professor Hollander can establish the existence in Ricardo of the same approach to the analysis of interdependence between commodity and factor markets as we find in marginalist theory.⁹ In the following paragraphs, I shall only discuss those arguments that appear to point at establishing the existence of such a connection between commodity markets and distribution, and consider whether they can support Hollander’s view that wages in Ricardo were not taken as given when determining the rate of profit and relative prices, and that they were regarded as dependent on demand and supply functions of the static type.

3.2 Equalization of the rate of profit across industries and the demand curve

Professor Hollander maintains that Ricardo indicates links between patterns of demand and distribution in two causal directions: from normal wage level to patterns of demand and vice versa. The latter, that is the possible influence of the composition of demand on wage levels, which is treated by Ricardo in the machinery chapter, will be dealt with in Section 4 below; I shall now discuss the former. Professor Hollander’s main argument in this respect is based on ‘making sense’ of the process of profit rate equalization across industries after a change in wages in the manner described by Ricardo.

Ricardo maintains that when changes in the natural wage occur, this will cause, at the natural prices holding before the change, a difference in rates of profits across industries. Competition between capitals will then lead to a change in prices such that the rates of return will tend to become uniform again. This is taken by Professor Hollander as an indication that, underlying Ricardo’s analysis, there must be a supply and demand mechanism, as it is the only way to ‘make sense’ of this adjustment. Let us begin by discussing the mechanism suggested by Hollander and then see (i) in what ways it contradicts Ricardo’s clearly established views and (ii) in what other ways sense can be made of Ricardo’s statement.

For the purposes of evaluation, Hollander’s reconstruction of the mechanism can be re-proposed here in more explicit terms. On the basis of a passage by McCulloch explaining Ricardo’s views, it is maintained that, with a given numeraire, if wages increase, at the initial natural prices the rate of profit will fall in those industries that use labour in greater proportion relative to those that use proportionally less labour. This in turn will lead to capitals moving away from labour-intensive industries and towards less labour-intensive industries.¹⁰ According to Hollander, the process thus described must imply a permanent change in the quantities supplied and demanded of the two types of commodity. That is, in the new uniform rate of profit situation, the natural price will be higher than before in labour-intensive industries and lower in less labour-intensive ones, and the quantities demanded and produced must have fallen in the former set of industries (from which capitals had been withdrawn) and increased in the latter set of industries. Accordingly, it seems to be inferred, though not explicitly stated, that the higher wage would have also induced a diminished demand for labour in the economy as a whole, just as in marginalist long-period general equilibrium theory.

The process imagined by Hollander clearly requires that there is an inverse relation between the natural price and the corresponding effectual demands.¹¹ If his interpretation is correct, this relationship between the natural price and the quantity demanded of the commodity should be of an absolutely necessary and general nature, as Ricardo believed that competition would always bring about the uniformity of profit rates across industries. Yet very clear and bold statements that, particularly for items that are part of the wage basket, demand for commodities does not normally vary with changes in their natural prices can be found in the Principles:

M. Say says, that ‘the tax added to the price of a commodity, raises its price. Every increase in the price of a commodity, necessarily reduces the number of those who are able to purchase it, or at least the quantity they will consume of it.’ This is by no means a necessary consequence. I do not believe, that if bread were taxed, the consumption of bread would be diminished, more than if cloth, wine, or soap were taxed.

(I, p. 237; emphasis added)¹²

Hollander’s reconstruction contradicts statements found in Ricardo’s Principles and requires that severe inconsistencies are attributed to Ricardo. Before accepting such an interpretation, one should ask whether a different interpretation is possible, one that is more consistent with Ricardo’s writings as a whole.

In contrast to Hollander’s interpretation, for this purpose let us suppose the quantities demanded of the goods remain unchanged in the face of changes in natural relative prices;¹³ would it really be impossible to ‘make sense’ of the rate of profit equalization under this assumption? First, it may be noted that it can be expected that, following a wage rise, actual prices will tend to adjust to the new natural prices, even without capital mobility actually taking place,¹⁴ just as one would expect it to happen as a consequence of the change in the price of any other inputs (similarly, one might add, to what would be the case in the Marshallian framework of analysis).¹⁵ Unlike McCulloch, Ricardo indeed implies that, in these circumstances, relative price adjustment requires the possibility of capital mobility across industries, but it is not necessary that the latter occur:

The manufacturer, who, in a general rise of wages, can have recourse to a machine which shall not increase the charge of production on his commodity, would enjoy peculiar advantages if he could continue to charge the same price […] but he […] would be obliged to lower the price of his commodities, or capital would flow to his trade till his profit had sunk to the general level.

(I, p. 42; emphasis added)

Only in the case in which price adjustment did not occur, would capitals tend to move towards the industries with higher than normal returns and away from those with lower than normal returns (as stated in the passage by McCulloch quoted by Hollander). With given effectual demands, this would cause a supply in excess of effectual demand¹⁶ in some industries and shortage of supply with respect to effectual demand in others, thereby determining the change in prices that would lead towards the rate of profit equalization. However, the situations of excess/ shortage of supply with respect to the given effectual demands could only be transitory. With given effectual demands, at the end of the adjustment process the new natural prices would hold, and the quantities supplied would be the same as in the initial situation. Indeed, that this is what McCulloch has in mind is suggested by his own wording in the passage quoted by Hollander (this volume, p. 295) concerning the effects of an increase in wages:

The undertakers of those businesses, in which the whole or the greater portion of capital is laid out in paying the wages of labour, in observing that their neighbours, who have laid out the greater portion of their capital on machinery, are less affected by the rise in wages, will immediately begin to withdraw from their own businesses, and to engage in those that are more lucrative. The class of commodities produced by the most durable capitals […] will therefore become redundant […].

(McCulloch 1825, pp. 303–4; emphasis added)

Here, ‘redundant’ quite clearly means in excess of the effectual demand, and there is nothing to indicate, either in McCulloch’s or in Ricardo’s discussion, that the change in relative prices will normally lead to a change in effectual demands (and, hence, to a persistent change in the composition of output) in the direction suggested by Hollander.

3.3 Changes in distribution and patterns of demand, when consumption baskets differ among social groups

The other argument advanced by Professor Hollander concerning the influence of the wage level on the composition of output in Ricardo’s analysis is the fact that Ricardo refers to the influence that a change in distribution has on the structure of demand because wage and profit earners are social groups that have different consumption patterns. However, this is a relationship that has nothing to do with marginal substitutability principles. To the contrary, a marked differentiation of consumption patterns between income groups may well be a hindrance to the possibility of deriving a decreasing demand for production factors from substitutability in consumption. This point may be illustrated by means of an example based on an extreme case.

Suppose we have an economic system in which two goods (corn and rye) are produced by means of land and labour used in an annual production cycle, with given production coefficients. The price equations, with corn chosen as numeraire, will be:

where w is the wage rate (in corn); l is labour input per unit of output; r is the rate of rent per unit of land; and t is the land required per unit of output. Let’s further assume that t_c/l_c > t_r/l_r and that the consumption baskets of workers and landowners are completely different and rigid, so that landowners consume only corn and workers only rye. Finally, let us assume, consistently with the marginalist approach, that both land and labour are fully employed. In such circumstances, suppose an exogenous increase in wages (as could be caused by workers’ combinations for example). Under the above assumptions, this will cause an increase in p_r; but, as rent has diminished, the composition of demand will change towards a higher proportion of rye with respect to corn. Hence, to satisfy this demand, a greater proportion of the (still fully employed) land would have to be used to produce rye and therefore cultivated by a higher number of workers than previously. The result is a demand for labour that increases with an increase in wages, rather than the opposite. In turn, this would imply that we could not use demand and supply schedules to determine equilibrium wages, as the intersection between the two would be reached only by an accident and not brought about by competition, because, in such a situation, an excess demand for labour, which would cause competition among employers to raise wages, would in turn determine a further incresase in labour demand. The example is also useful in that it reminds us that consumer choice under the principle of decreasing marginal utility is not principally meant, in the marginalist approach, to determine the composition of demand: the position of the demand schedule for each commodity in the usual graphical representation is in fact determined (for given income levels) by exogenously and arbitrarily given ‘tastes’ of the consumers. Hence, the main role of consumer theory is to determine variations in the composition of demand following a change in distribution and relative prices from which the decreasing demand schedules for factors can be derived (Garegnani, 1983).

Even though the influence of distribution on demand patterns owing to social differentiation in consumption baskets has nothing to do with the distinctive features of marginal theories, could it still be argued that it indicates the necessity of simultaneous determination of distribution and outputs? The answer must be no, as there can be no theoretical generalization of the connection. Consumption baskets may differ in various ways and degrees according to circumstances, and there is clearly no general principle to establish how consumption patterns will be affected by changes in distribution. Accordingly, attempts at formalizing a ‘simultaneous determination’ would be devoid of any economic content.¹⁷ The only sensible procedure appears the one actually followed by the classical economists. That is, to take the wage level and the effectual demands for commodities as given when determining natural prices, while analysing the several aspects of the links between income distribution and effectual demands at separate, case-specific, stages of analysis.

4 The ‘static’ demand for labour

It has been recalled in the introduction that attributing demand and supply functions for labour of the static (neoclassical) type to Ricardo is inconsistent with his conclusions about the possibility of persistent unemployment drawn in his chapter on machinery. Several arguments advanced by Professor Hollander concerning the role of ‘supply and demand analysis’ in the explanation of distribution have also been discussed in the previous sections. I shall now return to the role of ‘static’ demand and supply in determining wages, then proceed to comment on whether the influence of output composition on wages, one of the points raised by Professor Hollander, is a further indication of the ‘interdependence’ between distribution, pricing and outputs.

As seen in the introduction, the central claim of the paper by Hollander is that wages are ‘determined by labour market pressures’ (this volume, p. 292). The first reaction to this statement might be that, in a sense, it must of course be true that wages are determined by the market — by what else, in a market economy? However, the question is how did Ricardo (and Smith, and the other classical economists) understand the normal functioning of the labour market? And, more specifically, did they conceive of a systematic inverse relation between the wage level and the employment level similar to that found in marginalist theory?

Ricardo often refers to changes in the proportion between labour demanded and population as a factor that can influence the level of wages for fairly long periods of time, but it has been contended in my contribution to the present volume and elsewhere¹⁸ that, not only the supply, but also the labour demanded are given quantities, and not functions of the wage rate. Although all the arguments cannot be repeated here, some points can be briefly restated:

(a)   There is no reason to believe that, in the case of labour, demand and supply should not have the same meaning as in the case of commodities where the ‘proportion’ between the two is that between the quantity demanded at the natural price and the quantity ‘brought to market’ (Smith, 1976, I, vii: 7–8). Hence, those terms do not refer to functions, but rather to given quantities. In addition, there is some direct textual evidence that Ricardo did not conceive of an inverse relation between wage level and labour demand. For example, he criticized Malthus’s statement that an increase in the wage caused by ‘combinations of artificers and manufacturers’ would cause a fall in employment, stating that: ‘a combination among the workmen would increase the amount of money to be divided among the labouring class’ (Ricardo, 1951–73, VII: 202–3; for other passages and further discussion of this point, see Stirati, 1994: 134).

(b)   If supply and demand are given quantities of labour, and not functions of the wage rate, they cannot possibly determine wages in the manner in which they do in marginalist theory, where supply and demand schedules contain all the information we need in order to determine the full employment equilibrium wage, which cannot be influenced by anything else.

Without a decreasing demand curve, there is no endogenous mechanism tending to ensure full employment, and some unemployment would indeed be a normal feature of the economy. Thus, the proportion (i.e. ratio) between the quantities of labour demanded and supplied describes labour market conditions. This proportion (ratio) influences the workers’ bargaining position and, hence, the wage level — as it does in the case of Smith and other classical economists.

(c)   There is much indirect evidence to support this interpretation. For instance, it is the only way in which it is possible to explain Ricardo’s position on taxation, namely the fact that he thought taxes on wages or on wage-goods (‘corn’) would not cause a fall in after-tax real wages (1951–73, I: 166; VIII: 169). This conclusion is not compatible with a Marshallian determination of wages by means of intersecting demand and supply curves, as these would give rise to: (i) no increase in the wage with a given (vertical) labour supply curve; or (ii) with an elastic supply curve, an increase in wages lower than the one that would leave its after-tax purchasing power unaltered. In that framework of analysis, only a horizontal supply curve would give rise to a full adjustment such as assumed by Ricardo. However, a ‘horizontal’¹⁹ supply curve could only be justified by the assumption of a full population adjustment in response to changes in wages. This is in sharp contrast with Ricardo’s statement that: ‘no interval which could bear oppressively on the labourer, would elapse between the rise in the price of raw produce,²⁰ and the rise in the wages of the labourer’ (1951–73, I: 166).²¹

(d)   This interpretation is also the only way to make sense of the phenomenon of unemployment caused by the introduction of machinery that is so very puzzling for those who try to read Ricardo along marginalist lines. On this point, Hollander suggests that Ricardo’s views are akin to the notion of substitution between capital and labour, as an increase in wages would tend to cause the introduction of machinery in order to replace labour. Yet there are fundamental differences. The introduction of machinery appears in Ricardo as an irreversible change in production methods. Of greatest relevance, he argues that the introduction of machinery can cause permanent unemployment, which may only be corrected through accumulation: ‘All I wish to prove, is, that the discovery and use of machinery may be attended with a diminution of gross produce; and whenever this is the case, it will be detrimental to the labouring class, as some of their number will be thrown out of employment’ (1951–73, I: 390); the possible remedy to the unemployment thus created may come from the fact that, ‘with the same wants he [the capitalist] would have increased means of saving […] But with every increase of capital he would employ more labourers; and, therefore, a portion of the people thrown out of work in the first instance, would be subsequently employed’ (1951–73, I: 390). Indeed, this is perhaps the utmost indication that Ricardo’s analytical framework is radically different from the marginalist one, and as we have recalled in Section 1 above, it is precisely for this reason that it has puzzled so many interpreters of Ricardo.

On the basis of the four arguments listed above, once it is established that supply and demand for labour are given quantities, not functions of the wage rate, we can discuss the claim by Professor Hollander concerning the influence of the composition of demand on the wage level that was noted by Ricardo. As Hollander points out, there is no doubt that Ricardo concludes his chapter ‘On machinery’ by emphasizing the importance for the workers of the structure of final demand and production (1951–73, I: 395 ff.). But, in the light of what we have just argued, this is the natural consequence of the fact that the latter contributes to determining the proportion (that is, the ratio) between the employment level and the working-age population. A lower proportion means that there is more ‘redundant population’ (i.e. unemployment; though that term was not used at the time). Besides damaging the workers per se, this in turn is also likely to have depressing effects on wages (within boundaries set by customary subsistence) by weakening the ability of workers to bargain over wages.²² However, as Ricardo’s conclusions on machinery remind us, this is not expected to lead to full employment or, at any rate, to a higher employment level, except through its possible (but not warranted) effect on capital accumulation.

6 Conclusions

The arguments advanced by Hollander do not support his interpretation of Ricardo. This is not because ‘interdependences’ or a ‘role of demand’ are not to be found in Ricardo. Rather, it is because they are not the same interdependences we find in marginal theory and were not treated and cannot, in general, be treated by means of simultaneous determination by means of supply and demand functions.

Indeed, it should be emphasized again that the issue at stake in this discussion is not whether Ricardo, or the Classics in general, recognize that there may be several forms of reciprocal influence between income distribution, structure of final demand and prices (Garegnani, 2002, Mongiovi, 1994). Some of these influences — such as the change in composition of demand following a change in distribution owing to the different commodity baskets normally consumed by different social groups (this volume, p. 297) — are so obvious, that it would be a caricature to pretend that accepting Sraffa’s interpretation of Ricardo involves denying them. At the same time, that kind of relationship between income distribution and composition of demand has absolutely nothing to do with the derivation of the demand functions for commodities and factors found in marginal theory (Section 3.3 above). Thus, the issue at stake is whether in Ricardo, (and the other classical economists), the relations and mutual influences between the above-mentioned variables had the same form and nature as we find in marginalist theory? That is, whether the causal links were the same, and were conceived as relations having a necessary and general nature: for example, whether an increase in the wage rate would systematically tend to cause a fall in labour demand with a given quantity of capital, as along a labour demand curve. An additional issue that is closely linked with the previous question arises: what was the method by which mutual influences between distribution, prices and demand patterns were analysed? That is, were these influences examined or addressed at separate stages of analysis (Garegnani, 2005, Mongiovi, 1994) or by means of simultaneous determination. If the latter, it requires that the previous question be answered in the affirmative.

Actually, in many instances, Professor Hollander’s writings seem to suffer from a ‘short circuit’, such that any reference to ‘demand’ or to relations among economic variables in Ricardo is automatically taken as evidence of similarity with general equilibrium marginal theory, even when the nature of the relation described has nothing to do with substitutability in production and consumption, that is, with the distinctive features of marginalist theory. This attitude goes hand in hand with the perspective that the only conceivable way of treating any kind of reciprocal influences of, for example, income distribution and the structure of demands and outputs, is through simultaneous determination by means of supply and demand functions. Yet, it has already been pointed out in earlier discussions that those relations were analysed by Ricardo in a different way, consistent with the ‘surplus approach’ interpretation (Garegnani, 2002).

However, at the core of the latter interpretation is the determination of wages prior to prices and the rate of profit. In this connection, it has been argued here that there is no ‘static’ demand function for labour in Ricardo, and, moreover, that the secular relations between wages, population and accumulation, even apart from their tractability as functional relations, are insufficient foundations for the ‘demand—supply determination of the real wage’ (this volume, p. 298; emphasis added — see Section 3 above). However, I fully agree with Professor Hollander in this respect, that this is the central point.

Thus, the ‘Marxian dimension’ is not necessarily important for explaining Sraffa’s interpretation of Ricardo. Indeed, Professor Hollander quite candidly admits that many other scholars, even though they were not Marxist, had seen profound differences between Ricardo and marginal theory, quoting, in particular, Samuelson, Arrow and Hicks (fn. 11, p. 195). However, there were many others before these authors who noted the differences between Ricardo and marginalism, for example Cannan (1893: 379–83), Knight (1956: 75), Schumpeter (1982[1954]: 268, 551–61; 566–7).²³ However, before Sraffa, these differences appeared as shortcomings and elicited surprise at the inability of such minds to grasp the ‘fundamental principles’ of economics. Following Sraffa, these differences began to appear as part and parcel of a distinct and alternative approach to economic theory that had been developed for over a century by the founders of economics as a science and that could be revived today. After this, and as a reaction to it, there has been a strong revival of the Marshallian interpretation of the classical economists as forerunners, albeit sometimes rough and incomplete in their analyses, of the Marshallian theory itself. So, in a sense, the question of ‘bias’ in the interpretation of Ricardo could be reversed. On the other hand, while the influence of Marx on the development of Sraffa’s ideas is still being assessed, the material found in the unpublished manuscripts suggests a sharp turning point in Sraffa’s views on economic theory and the history of economic thought, a change that also brought with it a new perspective on Marx’s value theory (Garegnani, 2005). Thus, in fact, it could well be the case, not that Sraffa read Ricardo through Marxian spectacles, but rather that he understood and fully appreciated Marx’s contribution to economics only after he had understood Ricardo.

Notes

* I wish to thank Susan Paskoff for her kind help in editing and clarifying the text.

** Economics Department, University Roma Tre.

1   All references to pages alone are to Hollander’s article in this volume.

2   An example may help clarify the point: in his intellectual endeavours, Newton might have been motivated by his belief in natural laws of divine origin, yet no one would want to claim that his scientific contribution was ‘biased’ or otherwise vitiated by this belief. More generally, any deep commitment to research in any field is most likely to be motivated by some kind of ‘passion’, be it moral, social or other. However, results must of course be evaluated on their own merit, not on the basis of what motivated the research.

3   See for example Hollander (1979).

4   It should be noted here that the novelty of the conclusions reached in the chapter on machinery consists of the admission that the introduction of machinery can diminish employment, and not in the admission of the possibility of persistent unemployment as such. The latter was, in fact, already recognized by Ricardo before his change of views concerning the effects of machinery, as in his parliamentary speech ‘On Mr Owen’s plan’ (1951–73, V: 31–2; discussed in Stirati, 1994: 136 and ff.)

5   In a number of papers, Professor Samuelson had attempted to argue that Ricardo’s conclusions can be regarded as consistent with fundamental economic principles, as they are understood today by neoclassical economists. His contribution cannot be discussed here in detail (on this, see Garegnani, 2007); however, the number of his contributions along these lines seems to suggest that the author was not fully satisfied with them.

6   On this point, see also my contribution to the present volume.

7   It can be noted here that market clearing in commodity markets in marginalist theory is very different from the process by which the production of a commodity is brought to the level of effectual demand in the classical approach. In the latter, all that is required is that the market price should exceed the natural price when effectual demand exceeds supply, and vice versa: capital mobility in response to the (transitory) deviation of actual from normal profit rate will then determine the required changes in the levels of production. This does not rely on demand and supply functions, and does not entail a mutual adjustment of demand and supply through the price mechanism. It is the supply of the commodity that adjusts to the given effectual demand (Garegnani, 1983) — it therefore appears quite misleading to use (as Hollander does, this volume, p. 295 and fn. 7) the term ‘market clearing’ for this process of adjustment.

8   Following the usual assumption of neoclassical theory, technical returns to scale are assumed constant at industry level (Wicksell, 1934: 126 ff.). Of course, constant ‘technical returns to scale’ may be associated with non-constant costs of production, if changes in output cause changes in factor prices.

9   Actually, two of the arguments and examples advanced by Professor Hollander do not appear to be relevant in establishing this point, that is, in suggesting a link between commodity and factor markets based on indirect substitutability mechanisms that would lead to a decreasing demand for labour of the static type, and they will not be discussed here. The two arguments are: (1) that quantities produced adjust to the quantity demanded (i.e. Smith’s ‘effectual demand’: the quantity demanded at the natural price). This is undoubtedly correct and is the necessary basis for the tendency towards equalization of the rates of profits across industries following a change in the patterns of demand; but it has nothing to do with the existence of demand curves either in commodity or factor markets (see also n. 6 above). (2) That cost may under specific circumstances (increasingly) depend on the quantity demanded of a given commodity. In this regard, the examples provided do not establish a general connection between quantity and costs depending on systematic changes in the remuneration of the fully employed factors used more intensively in the production of the commodity, the quantity of which has increased and, hence, a similarity with neoclassical theory.

10   Of course, we now know that when there are heterogeneous capital goods the ranking of two or more processes according to their ‘labour intensity’ cannot be established in general, but only for a specific value of the rate of profit (or wage rate), and that a change in the latter can bring about a reversal of the ranking (see Sraffa, 1960, Section 48).

11   Note that this is a different proposition from the statement that transitory deviations of actual (market) price from the natural price may bring about transitory changes in the quantity demanded.

12   All references to Ricardo are to the volumes of his Works edited by Sraffa.

13   This is not necessarily the case, as such changes may take place, but, following Ricardo’s treatment of the matter, it is not possible to say a priori whether they will.

14   The case is different of course when actual (market) prices differ from natural prices because the supply of the commodity differs from its effectual demand: in this case, a change in the levels of production is required as part of the process of gravitation of actual prices towards natural prices.

15   With reference to the familiar Marshallian supply and demand curve for a particular commodity, let us suppose an exogenous price increase for an input specific to the industry. Whatever its shape, the supply curve would shift upwards, generating an increased supply price for any quantity supplied (the opposite would happen in case of a decrease in costs). The assumption of a rigid demand curve, or of a perfectly elastic supply, would not alter this conclusion. This shows that, even in the marginalist framework of analysis, the process of adjustment in relative prices following an exogenous change in production costs does not require the operation of the usual Marshallian decreasing demand/increasing supply schedules — so why would they be needed to explain adjustment within the classical framework of analysis?

16   Following Smith’s definition, which is fully accepted by Ricardo, effectual demand is the quantity of a given commodity demanded at the natural price.

17   Unless, of course, one is willing to build not a theory, but a specific applied model, relating to a given actual situation in which such relations might be derived, always with some degree of approximation and arbitrariness, from statistical information (e.g. from social accounting matrices).

18   See Stirati, in the present volume, for further references.

19   Meaning that any deviation from a given value of the wage would give rise to indefinite fall or growth of supply, bringing the wage back to the given level.

20   ‘Raw produce’ refers here to ‘corn’, that is, wage-goods.

21   On the other hand, this statement by Ricardo is also in sharp contrast with the conclusions about the incidence of taxation derived on the basis of the wage fund theory by J.S. Mill and McCulloch (Stirati, 1999).

22   On this point, see also Levrero’s contribution to the present volume.

23   See also Hutchison (1952) who lists a large number of authorities in the field of economics and history of economics in support of the view that classical economists ‘did not understand’ proper (marginalist) economic principles.

References

Cannan,E.(1893), A history of the theories of production and distribution in English political economy from 1776 to 1848,London,Percival & Co.

Garegnani, P. (1983), ‘The classical theory of wages and the role of demand schedules in the determination of relative prices’, American Economic Review, Papers and Proceedings, vol. 73, pp. 309–14.

Garegnani, P. (1990), ‘Sraffa: classical versus marginalist analysis’, in K. Bharadwaj and B. Schefold (eds), Essays on Piero Sraffa. Critical perspectives on the revival of classical theory, London, Unwin Hyman.

Garegnani, P. (2002), ‘Misunderstanding classical economics? A reply to Blaug’, History of Political Economy, vol. 34, pp. 241–54.

Garegnani, P. (2005), ‘On a turning point in Sraffa’s theoretical and interpretative position in the late 1920s’,European Journal of the History of Economic Thought, vol. 12, pp. 453–92.

Garegnani, P. (2007), ‘Professor Samuelson on Sraffa and the classical economists’, European Journal of the History of Economic Thought, vol. 14, pp. 181–242.

Hollander, S. (1979), The economics of David Ricardo, Toronto, University Press.

Hollander, S. (2010), ‘Sraffa and the interpretation of Ricardo: the Marxian dimension, this volume; pp. 283; 318previously published in History of Political Economy, 2000, vol. 32, 2, 187–232.

Hutchison, T.W. (1952), ‘Some questions about Ricardo’, Economica, vol. 19, pp. 415–32. Knight,

F.H. (1956), On the history and method of economics, Chicago, University Press.

Levrero, E.S. (2010), ‘Some notes on wages and competition in the labour market’, this volume, pp. 361–84.

Mongiovi, G. (1994), ‘Misinterpreting Ricardo: a review essay’, Journal of the History of Economic Thought, vol. 16, pp. 248–69.

Ricardo, D. (1951–73), Works and correspondence, 11 vols., edited by P. Sraffa, with the collaboration of M. Dobb, Cambridge, Cambridge University Press for the Royal Economic Society.

Samuelson, P.A. (1978), ‘The canonical classical model of political economy’, Journal of Economic Literature, vol. 16, pp. 1415–35.

Schumpeter, J. ([1954] 1982), History of economic analysis, London, Allen and Unwin.

Smith, Adam (1976), An inquiry into the nature and causes of the wealth of nations, edited by R.N. Campbell, A.S. Skinner and W.B. Todd, The Glasgow edition of the Works and correspondence of Adam Smith, Oxford, Oxford University Press.

Sraffa, P. (1951), ‘Introduction’, in Ricardo (1951–73), vol. I, pp. xiii–1xii.

Sraffa, P. (1960), Production of commodities by means of commodities. Prelude to a critique of economic theory, Cambridge, Cambridge University Press.

Stirati A. (1994), The theory of wages in classical economics: a study of Adam Smith, David Ricardo and their contemporaries, Aldershot, Edward Elgar.

Stirati A. (1999), ‘Ricardo and the wages fund’, in F. Petri and G. Mongiovi (eds), Value, distribution and capital. Essays in honour of Pierangelo Garegnani, London, Routledge.

Wicksell, K. (1934), Lectures on political economy, London, Routledge & Kegan Paul.

Wicksell, K. (1981 [1924]), ‘Ricardo on machinery and the present unemployment’, The Economic Journal, vol. 91, March, pp. 199–205.

REPLY TO STIRATI

Samuel Hollander

Piero Sraffa, at the very outset of Production of commodities, leaves readers to understand, albeit in rather oblique fashion, that his own system eschewed ‘the equilibrium of demand and supply’; he goes on to explain that his ‘standpoint … is that of the old classical economists from Adam Smith to Ricardo, [which] has been submerged and forgotten since the advent of the “marginal” method’ (Sraffa 1960: v). For several decades now, some of his disciples have sought to justify the implication of these joint propositions that the classics had no notion of demand—supply equilibrium in the ‘marginalist’ sense of the intersection of demand and supply functions. Professor Stirati’s Comment falls into this pattern, her efforts devoted to insisting that the classics had no place for the rationing function of price. Sraffa, elsewhere, also declared himself to have been inspired by corn-profit reasoning dating back to Petty and the Physiocrats and (allegedly) found in Ricardo’s early writings whereby, given the corn wage, the profit rate emerges as a ratio of corn surplus to corn input — i.e. independently of prices — and governs the manufacturing—corn exchange rate, bringing the manufacturing profit rate into line. In this manner, distribution has ‘priority’ over pricing. Again, Professor Stirati’s Comment follows this line, representing Ricardian ‘surplus’ theory as one entailing ‘a given wage (determined by historical and socioeconomic factors), in any given period (that is, with given population size and stage of capital accumulation,) and, hence, an excess of output beyond reintegration of the means of production and wages’ (Stirati, this volume: p. 322). That the classical system entails ‘the determination of wages prior to prices and the rate of profit’ allows ‘mutual influences between distribution, prices and output demand patterns’ [sic], but — so it is asserted — these are ‘analysed at … separate stages of analysis’ rather than by ‘simultaneous determination’ (p. 330). As for the dynamic dimension, entailing variable growth rates of capital and labour and their relationship, that is wholly excluded by Stirati’s ‘Sraffian’ historiography — unless it is to be somehow incorporated into those mysterious ‘separate stages of analysis’. I shall (once again) take up these matters in this Reply.

Let me clear up one preliminary matter. Professor Stirati asserts that ‘Hollander’s suggested interpretation begs the question of what would be the pur poses and analytical basis for Ricardo’s procedure in determining profit rate and prices in Chapter 1 and 6, if [he] is right in claiming that Ricardo regarded wages as determined simultaneously with prices, output and the profit rate’ (p. 320). The answer (as I explained) is that Ricardo had one purpose in Chapter 6 — to establish in as simple a way as possible the fundamental inverse wage—profit relation by taking the real-wage basket as given and providing an arithmetical example of the implications for the profit rate of an increase in the labour costs of producing that basket, assuming uniformity of factor ratios throughout the system, having already established in Chapter 1 that relative prices are unaffected by a wage-rate change under those conditions. This expository exercise does not constitute the full picture of Ricardian economics, either with respect to the statics or the dynamics of a capitalist exchange system.

* * *

I shall begin with Professor Stirati’s main theme that Ricardo (and the classics generally) made no use of ‘supply and demand functions’ (p. 329). (I take it for granted that the issue is not one of functional relations in any strict mathematical sense.) As for labour, ‘not only the supply, but also the labour demanded are given quantities, and not functions of the wage rate’, for ‘there is no reason to believe that in the case of labour, demand and supply should not have the same meaning as in the case of commodities where the “proportion” between the two is that between quantity demanded at the natural price and the quantity “brought” to market’ — citing Adam Smith — ‘hence those terms do not refer to functions but given quantities’ (p. 328).

Now, if Ricardo and the classics lacked the conception of demand and supply ‘functions’, then their notion of market prices is impossible to comprehend. Professor Stirati, rather disarmingly, allows when mentioning my claim that wages ‘are determined by labour-market pressures’, that ‘in a sense, it must of course be true that wages are determined by the market — by what else, in a market economy?’ (p. 327). Just so. But her vision of classical economics reduces ‘the market’ to a mere word, without substance. Here, I take note of her reading of Adam Smith, which is central to her case. She has taken Smith’s definition of ‘effectual demand’ — quantity demanded at cost price in Book I, Chapter 7 of the Wealth of nations — and neglects his detailed analysis of the consequences for market price should the ‘quantity brought to the market’ happen to fall short or exceed the effectual demand. The extent of the price increase required in the former case to ration the shortfall, Smith explains, depends partly on demand elasticity, the price rising more in the case of a product characterized by relatively inelastic demand:

When the quantity of any commodity that is brought to market falls short of the effectual demand, all those who are willing to pay the whole value of the rent, wages, and profit, which must be paid in order to bring it thither, cannot be supplied with the quantity that they want. Rather than want it altogether, some of them will be willing to give more. A competition will immediately begin among them, and the market price will rise more or less above the natural price, accordingly as either the greatness of the deficiency, or the wealth and wanton luxury of the competitors, happen to animate more or less the eagerness of the competition. Among competitors of equal wealth and luxury, the same deficiency will generally occasion a more or less eager competition, accordingly as the acquisition of the commodity happens to be of more or less importance to them. Hence, the exorbitant price of the necessaries of life during the blockade of a town or in a famine (Smith 1937 [1776]: 56).

In the case of excess supply at cost price, market price falls to clear the market, the extent again depending on demand elasticity:

When the quantity brought to market exceeds the effectual demand, it cannot all be sold to those who are willing to pay the whole value of the rent, wages and profit, which must be paid in order to bring it thither. Some part must be sold to those who are willing to pay less, and the low price which they give for it must reduce the price of the whole.

(p. 57)

Supply elasticity also enters the picture — Smith’s example involves opportunities to draw commodities into inventories — the extent of the price fall required to clear the market varying,

according as the greatness of the excess [at cost price] increases more or less the competition of the sellers, or according as it happens to be more or less important to them to get immediately rid of the commodity. The same excess in the importation of perishables, will occasion a much greater competition than that of durable commodities; in the importation of oranges, for example, than in that of old iron.

The equilibration process by which market price comes to equal natural price in any industry turns on the presumption that factor owners are alert to available opportunities throughout the system, so that there is a tendency towards uniformity of the returns to factors. To say that market price exceeds natural price is to say that factors can earn more in this industry than elsewhere, with the result that the short-run supply ‘curve’ will shift rightwards along the negatively sloped demand curve that Smith had just established, until the market price comes to equal the natural price:

If … the quantity brought to market should at any time fall short of the effectual demand, some of the component parts of its price must rise above their natural rate. If it is rent, the interest of all other landlords will naturally prompt them to prepare more land for the raising of this commodity; if it is wages or profit, the interest of all other labourers and dealers will soon prompt them to employ more labour and stock in preparing and bringing it to market. The quantity brought thither will soon be sufficient to supply the effectual demand. All the different parts of its price will soon sink to their natural rate, and the whole price to its natural price.

(pp. 57–8)

Professor Stirati must be aware of these wholly ‘marginalist’ passages. But she is apparently blinded by her faith in the preconceived notion that the classics make no use of functional relationships. Thus, although she makes formal mention of ‘market price’, she feels no obligation to explain how precisely such market prices are determined — why they should settle, even if temporarily, at one rather than another particular level, signalling to factors the desirability of entry into, or exit from, the industry in question. Her account, in brief, finds no place for the precise analysis of market-price determination in both the long and short run provided by Smith:

It can be noticed here [she writes] that market clearing in commodity markets in marginalist theory is very different from the process by which the production of a commodity is brought to the level of effectual demand in the classical approach. In the latter, all that is required is that the market price should exceed the natural price when effectual demand exceeds supply, and vice versa: capital mobility in response to the (transitory) deviation of actual from normal profit rate will then determine the required changes in the levels of production. This does not rely on demand and supply functions, and does not entail a mutual adjustment of demand and supply through the price mechanism. It is the supply of the commodity that adjusts to the given effectual demand.

(note 7; see also note 9)

This is mere assertion. I trust that Professor Stirati’s students find the opportunity to study the original Smith texts cited only briefly above relating to the rationing function of price and the market-clearing process — precisely in the sense of the ‘mutual adjustment of demand and supply through the price mechanism’ — which provides the basis for his resource-allocation analysis reflected in the tendency of market to cost or ‘natural’ price. The more adventurous among them will venture beyond Book I, Chapter 7, and find Smith expatiating on policy applications involving substitution in consumption. For example, the government might, by the imposition of excise taxes, direct working-class consumption away from ‘luxuries’:

The high price of such commodities does not necessarily diminish the ability of the inferior ranks of people to bring up families. Upon the sober and industrious poor, taxes upon such commodities act as sumptuary laws, and dispose them either to moderate, or to refrain altogether from the use of superfluities which they can no longer afford.

(Smith 1937 [1776]: 823)

They will encounter the sophisticated analysis of rationing over time by the judicious use of prices, which further confirms the despised functional relationship. I shall desist from citing the entire passage and satisfy myself with the general principle:

It is [the dealer’s] interest to raise the price of his corn as high as the real scarcity of the season requires, and it can never be in his interest to raise it higher. By raising the price he discourages the consumption, and puts every body more or less, but particularly the inferior ranks of people, upon thrift and good management.

(p. 490)

By raising the price too high, ‘he discourages the consumption so much that the supply of the season is likely to go beyond the consumption of the season’; and conversely: ‘If by not raising the price high enough he discourages the consumption [too] little … the supply of the season is likely to fall short of the consumption of the season …’ (pp. 490–1). The demand ‘function’ and the market equibration process were evidently essential elements in Smith’s analytical arsenal.

Ricardo accepted the general argument of Book 1, Chapter 7 (Ricardo, 1951–73, 1: 90–1). For him as for Smith, ‘natural’ or cost price entails market clearing in the case where factors earn the ‘average’ rates of return. He complained only ‘of the opinion that the price of commodities depends solely on the proportion of supply to demand, or demand to supply’ (p. 382; emphasis added), alluding to formulations that appeared to exclude a role for cost conditions in the mechanism, whereas in truth costs imposed constraints on supply. Thus, to Say, he observed: ‘You say demand and supply regulates the price of bread; that is true, but what regulates supply? The cost of production …’ (IX: 172); and, responding to Malthus: ‘I do not say that the value of a commodity will always conform to its natural value without an additional supply, but I say that the cost of production regulates the supply and therefore regulates the price’ (II: 48–9). Robert Torrens pointed to a general appreciation of the principle of scarcity pricing in the long run as well as the short run thus:

Political Economists seem on all hands agreed, that the quantity in which commodities exchange for one another depends, in any given instance, upon the proportion of demand and supply. It is also on all hands agreed, that with respect to all commodities which industry can indefinitely increase, the cost of production is the circumstance which, by limiting the quantity of them brought to market, regulates the proportion of supply to demand, and ultimately determines the exchangeable value.

(Torrens 1936 [1822]: 9; emphasis added)

I shall take the matter of Ricardo’s comprehension of the demand dimension further, (drawing freely on Hollander 1979) to supplement the evidence already provided in my essay. The responsiveness of quantity demanded to price variation was clearly recognized in the Principles, with allowance for ranges of inelasticity:

Whatever habit has rendered delightful, will be relinquished with reluctance, and will continue to be consumed notwithstanding a very heavy tax; but this reluctance has its limits, and experience every day demonstrates that an increase in the nominal amount of taxation, often diminishes the produce.

(Ricardo 1951–73 I: 241)

Ricardo pointed out elsewhere that demand elasticity varies over the range of prices — with the inconsequential difference that, like Smith and unlike modern practice, he considers the response of price to changes in quantity — and traces out the resultant variation in total expenditure as in any of our modern Principles texts:

He would suppose, that in a particular country a very rare commodity was introduced for the first time — superfine cloth for instance. If 10,000 yards of this cloth were imported under such circumstances, many persons would be desirous of purchasing it, and the price consequently would be enormously high. Supposing this quantity of cloth to be doubled, he was of opinion that the aggregate value of the 20,000 yards would be much more considerable than the aggregate value of the 10,000 yards, for the article would still be scarce, and therefore in great demand. If the quantity of cloth were to be again doubled, the effect would still be the same; for although each particular yard of the 40,000 would fall in price, the value of the whole would be greater than that of the 20,000. But, if he went on in this way increasing the quantity of the cloth, until it came within the reach of the purchase of every class in the country, from that time any addition to its quantity would diminish the aggregate value.

(V: 171)

The closing sentence implies that, at already low prices, the opportunities to attract additional purchasers by further price reductions are limited. And, as corn was a commodity already ‘within the reach of the purchase of every class in the country’, it was characterized by inelastic — though not (at least here) zero elastic — demand: ‘Corn was an article which was necessarily limited in its consumption: and if you went on increasing it in quantity, its aggregate value would be diminished beyond that of a smaller quantity.’

A similar rationalization, entailing marginal demand price in effect, appeared in correspondence of 1813 with reference to the differential elasticity characteristics of regular commodities and of the monetary metals:

Coffee, Sugar, and Indigo, are commodities for which, although there would be an increased use, if they were to sink much in value, still as they are not applicable to a great variety of new purposes, the demand would necessarily be limited; not so with gold and silver. These metals exist in a degree of scarcity, and are applicable to a great variety of new uses — the fall of their price, in consequence of augmented quantity, would always be checked, not only by an increased demand for those purposes to which they had before been applied, but to the want of them for entirely new employments.

(VI: 91–2)

Ricardo, as far as I know, had nothing akin to the modern ‘substitution effect’, or the response of quantity demanded to a relative price change, assuming unchanged purchasing power. Variation of quantity demanded upon price change he attributed to an ‘income effect’ and, in the Principles, it is zero income elasticity of demand for corn that would account for zero price elasticity:

An increase in the cost of production of a commodity, if it be an article of the first necessity, will not necessarily diminish its consumption; for although the general power of the purchasers to consume, is diminished by the rise of any one commodity, yet they may relinquish the consumption of some other commodity whose cost of production has not risen.

(I: 343–4)

I turn now to the adjustment process in competitive markets following changes in the supply conditions, such as the imposition of a tax, with an eye on the role accorded demand and supply elasticities. As for supply:

The rise in the price of commodities, in consequence of taxation or of difficulty of production, will in all cases ultimately ensue; but the duration of the interval, before the market price will conform to the natural price, must depend on the nature of the commodity, and on the facility with which it can be reduced in quantity … Commodities … of all descriptions can be reduced in quantity, and capital can be removed from trades which are less profitable to those which are more so, but with different degrees of rapidity. In proportion as the supply of a particular commodity can be more easily reduced, without inconvenience to the producer, the price of it will more quickly rise after the difficulty of its production has been increased by taxation, or by any other means.

(p. 191)

Demand elasticity is also relevant, and Ricardo appreciated that in the case of zero-demand elasticity for corn — actually he again might be understood as allowing some small demand response — the burden would be borne by consumers:

Corn being a commodity indispensably necessary to every one, little effect will be produced on the demand for it in consequence of a tax, and therefore the supply would not probably be long excessive, even if the producers had great difficulty in removing their capitals from the land. For this reason, the price of corn will speedily be raised by taxation, and the farmer will be enabled to transfer the tax from himself to the consumer.

(pp. 191–2; emphasis added)

There are though the complexities created by the limiting case of strict zero-supply elasticity. The matter is taken up in the passage from I: 191 cited above, the first ellipses referring to the following qualification:

If the quantity of the commodity taxed could not be diminished, if the capital of the farmer or of the hatter for instance, could not be withdrawn to other employments, it would be of no consequence that their profits were reduced below the general level by means of a tax; unless the demand for their commodities should increase, they would never be able to elevate the market price of corn and of hats up to their increased natural price. Their threats to leave their employments, and remove their capitals to more favoured trades, would be treated as an idle menace which could not be carried into effect; and consequently the price would not be raised by diminished production.

(p. 191)

It is of particular interest that when, in his formal analysis of rent, Ricardo assumes for the sake of argument that agricultural output cannot be expanded in response to increased demand, having achieved literal capacity, he reasons as if there is some degree of demand responsiveness to price even in the case of corn, so that a market-clearing equilibrium becomes meaningful (see above, note 15) and obtains the Marshallian consequences flowing from imposition of a tax:

The corn and raw produce of a country may, indeed, for a time sell at a monopoly price; but they can do so permanently only when no more capital can be profitably employed on the lands, and when, therefore, their produce cannot be increased. At such time, every portion of land in cultivation, and every portion of capital employed on the land will yield a rent, different, indeed, in proportion to the difference in the return. At such time too, any tax which may be imposed on the farmer, will fall on rent, not on the consumer. He cannot raise the price of his corn because by the supposition, it is already at the highest price at which the purchasers will or can buy it. He will not be satisfied with a lower rate of profits, than that obtained by other capitalists, and, therefore, his only alternative will be to obtain a reduction of rent or to quit his employment.

(pp. 250–1; emphasis added)

What though if we insist on strict zero-demand elasticity in the analysis of a tax? Here, price will rise without supply adjustments, the latter supposed to be feasible: ‘the quantity supplied and the quantity demanded, will be the same as before; the cost of production only will have increased, and yet the price will rise, and must rise, to place the profits of the producer of the enhanced commodity on a level with the profits derived from other trades’ (p. 344). This is the outcome, for otherwise the farmer

would naturally quit a trade where his profits were reduced below the general level of profits; this would occasion a diminution of supply, until the unabated demand should have produced such a rise in the price of raw produce, as to make the cultivation of it equally profitable with the investment of capital in any other trade.

(p. 156)

Clearly, while no actual reduction in output is engendered by an increase in costs to assure the re-establishment of the return on capital to the same general level, the ability to reduce output is said to suffice to bring about the same result. A threat to contract output not supported by an evident ability to do so would not suffice to assure an increase in price and its maintenance at the higher level (p. 191; see above, p. 341). By extension, the mere possibility of agricultural output expansion would suffice to assure a reduction in price in the event of cost-reducing innovation given quantity demanded. Schumpeter was, therefore, correct when he observed that, for Ricardo, prices can fall to cost level directly ‘in a way other than by increase of output’ (Schumpeter 1954: 684), but this characteristic applies solely in the special case of zero-demand elasticity.

Now, limiting cases create problems even for Marshallians (a point made by Stirati, note 15). We have seen that frequently Ricardo fudged rather, allowing some degree of demand responsiveness even in the case of corn. He does so also when analysing technical change:

If the natural price of bread should fall 50 per cent. from some great discovery in the science of agriculture, the demand would not greatly increase, for no man would desire more than would satisfy his wants, and as the demand would not increase, neither would the supply; for a commodity is not supplied merely because it can be produced, but because there is a demand for it.

(Ricardo 1951–73, I: 385; emphasis added)

I return to Ricardo’s tax analysis, and briefly note his ‘general equilibrium’ treatment, which allows for government spending, where again alternative demand elasticities play a central role. In the case of a tax imposed on salt, demand contracts as price rises, and factors displaced in consequence are reabsorbed in industries supplying expanded government requirements financed from tax proceeds: ‘If … less salt was consumed, less capital was employed in producing it; and, therefore, though the producer would obtain less profit on the production of salt, he would obtain more on the production of other things’ (p. 237). Should resources not be released, as in the case of corn taxation, government spending is satisfied indirectly as demand for products other than corn falls — the income effect once again (see above, p. 340):

it is not necessary that my demand for corn should diminish, as I may prefer to pay 100 l. per annum more for my corn, and to the same amount abate in my demand for wine, furniture, or any other luxury. Less capital will consequently be employed in the wine or upholstery trade, but more will be employed in manufacturing those commodities, on which the taxes levied by Government will be expended.

* * *

As for the labour market, in the light of what we have said of commodities, it comes as no surprise to find at the outset of the chapter ‘On wages’ the proposition — surely incomprehensible to Professor Stirati — that ‘the market price of labour is the price which is really paid for it, from the natural operation of the proportion of the supply to the demand; labour is dear when it is scarce, and cheap when it is plentiful’ (p. 94). But, for the most part, Ricardo (this is true also of Smith) approached the labour market in dynamic terms, and here too we encounter complex market-equilibration processes. All this is wholly foreign to the Stirati view of classicism. Thus, she maintains that, ‘a decreasing [labour] demand schedule of the static type’ is required to assure full employment’ — on which matter see further below (p. 346) — ‘even if we could attribute dynamic mechanisms leading to the equality between the rates of growth of population and employment to the classical economists’ (p. 321; emphasis added) — an attribution she herself refuses to make, at the very most allowing it ‘purely for the sake of argument’ (p. 321).

Ricardo’s tax theorems, we first note, do not stand or fall with a subsistence assumption, as is so commonly believed (any more than they did for Smith), for during the course of his discussion of the effect upon the money-wage rate induced by the taxation of necessaries, in the chapter on ‘Taxes on raw produce’, he introduced the qualification that the ‘rate of progression’ of the economy is throughout taken for granted allowing for population growth:

Those who maintain that it is the price of necessaries which regulates the price of labour, always allowing for the particular state of progression in which the society may be, seem to have conceded too readily, that a rise or fall in the price of necessaries will be very slowly succeeded by a rise or fall of wages.

(p. 161; emphasis added)

Similarly, the chapter ‘On taxation of wages’ is based upon Smith’s proposition that,

the demand for labour, according as it happens to be either increasing, stationary, or declining, or to require an increasing, stationary, or declining population, regulates the subsistence of the labourer, and determines in what degree it shall be either liberal, moderate, or scanty.

(p. 215)

The general applicability of the taxation theorems is emphasized in an approving paraphrase of Malthus’s defence of Smith’s taxation propositions: ‘“The price of labour will express, clearly, the wants of the society respecting population”; it will be just sufficient to support the population, which at that time the state of the funds for the maintenance of labourers, requires’ (p. 219). But the assumption that the rate of capital accumulation (and thus of aggregate labour demand) is an independent variable unaffected by the reduction in profits corresponding to the increase in money wages — that the demand for labour in dynamic terms is unresponsive to the wage — is only a first approximation. A reduction in profits would probably have some effect on accumulation — ‘The motive for accumulation will diminish with every diminution of profits’ (p. 111) — so that the compensatory increase in money wages would not entirely prevent a fall in real wages in consequence of taxation. Ricardo, indeed, even identifies the final result of the taxation of profits and of wages: ‘I should think it of little importance whether the profits of stock, or the wages or labour, were taxed. By taxing the profits of stock, you would probably alter the rate at which the funds for the maintenance of labour increase, and wages would be disproportioned to the state of that fund, by being too high. By taxing wages, the reward paid to the labourer would also be disproportioned to the state of that fund, by being too low. In the one case by a fall, and in the other by a rise in money wages, the natural equilibrium between profits and wages would be restored’ (p. 226; emphasis added).

The implications of this analysis are profound indeed, as I pointed out in my paper (see above, p. 287), and I appreciate why Professor Stirati should be eager to avoid them. For, if a reduction in the rate of return on capital plays a part in wage-rate determination by way of its effect upon accumulation and therefore labour demand, then profits cannot be a true ‘residual’. There is a mutual relationship between wages and profits — a ‘natural equilibrium’ — and it may equally be said that ‘wages depend upon profits’ as the reverse. It is particularly difficult to understand how Professor Stirati can still question those ‘dynamic mechanisms’, considering the explicit citation from Ricardo (1951–73, I: 101) that describes so clearly the downward trend of both the rates of real wages and of profits in consequence of increasing land scarcity (above, Hollander 2000: 209). As with the demand function so too here, appeal to an investigation that occurs at ‘separate stages of analysis’ simply will not do. Ricardo provided a full analysis. Why begrudge it to him?

* * *

The basis for Ricardo’s prediction of rising money wages in consequence of wage taxation, according to the discussion thus far, lies in the proposition that at a reduced commodity wage the population growth rate would fall behind the capital (or labour demand) growth rate; money (and thus real) wages are pulled up by labour-market pressures to check the deceleration of population growth. The process ends with the wage rate net of taxation at its previous level and the population growth rate restored, provided always that there is no reduction in the rate of capital accumulation. One is led to expect a temporary fall in the real wage, especially as Ricardo allowed that, ‘the number of labourers cannot be rapidly increased or diminished in proportion to the increase or diminution of the fund which is to employ them’ (1951–73, I: 220). However, the analysis is incomplete. An extension takes account of the use of tax revenue by government in the support of service labour and helps us appreciate Ricardo’s confidence in a rapid money-wage adjustment:

If labour were not to rise when wages are taxed, there would be a great increase in the competition for labour [an excess labour demand], because the owners of capital, who would have nothing to pay towards such a tax, would have the same funds for employing labour; whilst the Government who received the tax would have an additional fund for the same purpose. Government and the people thus become competitors, and the consequence of their competition is a rise in the price of labour. The same number of men only will be employed, but they will be employed at additional wages.

(pp. 220–1)

By implication, at the higher equilibrium money wage, the rate of accumulation and demand for labour in the capitalist sector is adversely affected, though compensated by government demand for labour. At all events, the operation of the market process in determining the equilibrium wage in a dynamic context is amply confirmed.

The correspondence yields an alternative approach in support of the case for a rapid response of the money wage, even in the absence of government employment, as when the proceeds of a tax on corn are used to finance a foreign subsidy. Here, we encounter the notion of a forecast by employers of the consequences of permitting real wages to decline — namely a reduced growth rate of labour supply — inducing them to pay higher money wages unilaterally to short-circuit an otherwise lengthy and complex sequence of adjustments, for ‘the value of things I believe to be influenced, not by immediate supply and demand only, but also by contingent supply and demand’ (VIII: 196; my emphasis). It is expectations to which Ricardo evidently refers to in the closing sentence.

* * *

Professor Stirati focuses on the static ‘machinery’ analysis in Chapter 31 in an effort to prove that a wage decline, for Ricardo, is not accompanied by an increase in the demand for labour, re-employment of displaced workers depending entirely on net capital accumulation (pp. 320, 323 and 328). She fails to make her case. We can say only that Ricardo is silent on re-employment by way of wage reduction; in fact, there is no mention made of wage reduction, implying the working assumption of a constant wage (as in his Chapter 6). In the correspondence regarding machinery, however, we do find the observation that ‘labour will fall because there will be a diminished demand for it’ (VIII: 399). The detrimental effect of machinery upon labour thus might occur by a reduced wage, and the matter of consequential re-employment requires attention.

Before proceeding, I take account of a second case in Chapter 31 involving the generation of excess labour supply, namely a switch in overall expenditure from labour-intensive services to more capital-intensive products, for this case confirms a wage impact:

At the termination of the war, when part of my revenue reverts to me, and is employed as before in the purchase of wine, furniture and other luxuries, the population which it before supported, and which the war called into existence, will become redundant, and by its effect on the rest of the population, and its competition with it for employment, will sink the value of wages, and very materially deteriorate the condition of the labouring classes.

(I: 393–4)

We must turn then to consider the consequences of a wage reduction.

To be noted first is the notion of factor substitution appearing in Chapter 31 itself, where Ricardo attempts to rationalize the adoption of machinery as endogenous to the growth process, in order to play down concerns generated by his technical analysis, which supposes ‘the sudden’ discovery and application of labour-saving technology: ‘Machinery and labour are in constant competition, and the former can frequently not be employed until labour rises’ (p. 395; emphasis added). We have here a rationalization of a negative slope to the labour demand curve in the case of rising wages. By extension, a fall in the wage could have been accommodated in Chapter 31 in terms of the encouragement of more labour-intensive processes, had Ricardo chosen to take account there of the effect of machinery on the wage rate and trace out the consequences for re-employment.

Second, Ricardian theory, I maintain [Hollander 2000: 206–7], incorporates inter-commodity substitution — upon which, incidentally, the first generation of marginalists had to rely before recognizing the ‘true’ marginal-productivity principle. This mechanism will assure a net increase in the aggregate demand for labour in response to wage reduction, except of course in the case of identical factor proportions across all industries. (I might add that Ricardo’s allowance for the income effects of price changes would certainly complicate the adjustment process generated by a wage decline.)

Inter-commodity substitution would obviously also be precluded by universal zero-demand elasticity for products, and one can appreciate how much turns for Professor Stirati on the alleged absence of demand functions in the classical literature: ‘With given effectual demands, at the end of the adjustment process [following an experimental wage variation] the new natural prices would hold, and the quantities supplied would be the same as in the initial situation’ (p. 325; emphasis added). But, as we have shown in some detail, zero-demand elasticity is certainly not the typical case for Ricardo.

* * *

There is one final substantive matter. Professor Stirati’s historiography loses sight of the pervasive policy orientation of the classicists — their case for competitive markets from a welfare or efficiency or allocative perspective with an eye to the consumer, taking for granted the possibility of industry adjustments to various disturbances, such possibility being essential for the case. It is quite ludicrous that, in the year 2010, it should be necessary to have to argue this point with respect to the Wealth of nations. But I shall give one striking instance from Ricardo, namely his proposal for a countervailing duty on corn to compensate for the differential burden on domestic agriculture imposed by the contemporary system of tithes:

With a view to the real interest of the consumer, in which the interests of the whole community are, and ever must be, included, whenever any peculiar tax falls on the produce of any one commodity, from the effects of which all other producers are exempted, a countervailing duty to that amount, but no more, should on every just principle be imposed on the importation of such commodity; and further … a drawback should be allowed, to the same amount also on the exportation of the like commodity.

(IV: 243)

By this means, Ricardo concludes, ‘the course of trade’ — the allocation of activity — ‘would be left precisely on the same footing as if we were wholly an untaxed country, and every person was a liberty to employ his capital and skill in the way he should think most beneficial to himself’ (p. 244). If this is not an appeal to the market mechanism so familiar to ‘neoclassicals’, it is nothing.

References

Hollander, S. 1979. The economics of David Ricardo.Toronto: University of Toronto Press.

Hollander, S. 2000 ‘Sraffa and the interpretation of Ricardo: the Marxian dimension’History of Political Economy, 32 (2), pp. 187232.,

Ricardo,D.1951–73.The works and correspondence of David Ricardo.11vols. Edited byP.Sraffa. Cambridge: Cambridge University Press

Schumpeter,J.A.1954. History of economic analysis. New York: Oxford University Press.

Smith, A. 1937 [1776].The wealth of nations, Modern Library Edition. New York: Random House.

Sraffa,P. 1960 Production of commodities by means of commodities. Cambridge: Cambridge University Press.

Stirati.A. 2011. ‘Comment’. This volume, pp. 318–34.

Torrens, R. 1936 [1822]. ‘Political economy club’, The Traveller, 2 December 1822; in A reprint of economic tracts: John Stuart Mill on the measure of value. Edited by Jacob H. Hollander, Baltimore: The Johns Hopkins Press, pp. 9–14