“… [sc. Ricardo in his early writings presumed] that the economy produced corn (grain) with corn and labor, and the surplus was a physical amount of corn, so the rate of profit could be measured as ratio of corn (the surplus) to corn (the means of production advanced for production). He, then used, the labor theory of value as an approximation to the solution in his Principles, knowing that prices were not exactly proportional to the amounts of labor directly and indirectly used in production.The central problem as it emerged in Classical economics and taken over by Marx was, according to Vernengo: how is the rate of profit determined independently of prices? (where the long-run, normal uniform rate of profit determines long-run prices). But it seems to me that the LTV was much more to Marx in volume 1 of Capital than just a way to “determine the rate of profit independently of prices.”
That was, also, essentially the role of the LTV in Marx’s volume I of his masterpiece Capital. That is, the LTV allows Marx to determine the rate of profit independently of prices. Note that Marx was also aware that relative prices determined by the amounts of labor directly and indirectly incorporated are incorrect once you have produced means of production. However, Marx thought that embodied labor redistributed by the process of competition meant that in the aggregate total surplus value corresponded to total profits, even if prices of production deviated from embodied labor. As a result, on the basis of the LTV it was still possible to obtain the correct rate of profit. As it turns out, there is no reason for positive and negative deviations of prices of production from the labor values to cancel out. You cannot argue with the algebra.
Marx had no way of knowing this. Only with Bortkiewicz, Dimitriev and Tugan-Baranovsky’s work, early in the 20th century, this was clearly understood. If in general commodities do not exchange at labor values, then there is no reason why that should be correct for two composite commodities that make the total physical surplus and the physical advanced means of production.
Sraffa's solution, based on the standard commodity (to be discussed in another post), shares with Ricardo's corn model the idea that one can measure the rate of profit as a share of a particular commodity (Sraffa’s being a composite commodity, that is, composed of several goods). It also shares with Ricardo the fact that only basics (commodities that enter the production of all goods including their own production), which for simplicity can be related to subsistence goods, affect the rate of profit, while non-basics, or luxury goods, are not relevant. Further, as noted by Sraffa too, his solution resembles Smith’s since the standard commodity can be seen as akin to the former's idea of labor commanded, that is relative prices are proportional to the amount of labor that they can command (buy). In that sense, Sraffa's prices are firmly based on a certain notion of the labor theory of value.”
Matias Vernengo, “Sraffa and Marxism or the Labor Theory of Value, what is it good for?,” Naked Keynesianism, August 14, 2012.
Marx really does try to explain individual commodity prices in terms of their abstract socially necessary labour time (SNLT) in volume 1, as in his absurd example of how rising unit SNLT in a reduced cotton crop after a spoiled crop is supposed to explain the rising price of cotton and even the price rise of cotton produced in previous production periods (Marx 1982: 317–318). When Marx says that exchange of commodities is an equality of value and that the cause of this equality is equal SNLT (Marx 1982: 127–129), how on earth can he say such a thing if he thinks that SNLT doesn’t actually determine individual commodity prices?
Right in Chapter 1 of Capital (vol. 1), Marx explains exchange value in these terms:
“We have assumed that the coat is worth twice as much as the linen. But this is merely a quantitative difference, and does not concern us at the moment. We shall therefore simply bear in mind that if the value of a coat is twice that of 10 yards of linen, 20 yards of linen will have the same value as a coat. As values, the coat and the linen have the same substance, they are the objective expressions of homogeneous labour.” (Marx 1982: 124).If this was not meant to be an explanation of any real world exchange values at all, then Marx was one of the most incompetent economic writers ever, as Gray (1946: 320) notes.
But let us move on with the main points raised by Vernengo. First, Marx’s solution of saying that “in the aggregate total surplus value corresponded to total profits, even if prices of production deviated from embodied labor” was only published in volume 3 of Capital, so this seems to gloss over the contradiction between volume 1 and 3, which was noted by many people after volume 3 was published in 1894 such as V. K. Dimitriev, Werner Sombart, Achille Loria, Conrad Schmidt, Mikhail Ivanovich Tugan-Baranovsky, Ladislaus von Bortkiewicz, Peter Berngardovich Struve, and Eugen von Böhm-Bawerk. Even worse, some of these critics were actually Marxists themselves.
But even if we put these concerns above aside, we come to the issue of whether Sraffa provided a viable way to embed the idea of a certain labour value in a coherent theory of prices and capitalism, where the rate of profit is determined independently of prices.
The trouble here is that Sraffa’s own economic model has serious problems, as identified in Post Keynesian critiques of Sraffianism such as Halevi and Kriesler (1991), Lee (1994: 325–327), Minsky (1990) and Robinson (1979).
Sraffa’s model excludes real world money (Davidson 2003–2004: 247; Hodgson 1981: 83–84), and even if one might pick some commodity to function only as a numèraire/unit of account in it, everyone knows that this isn’t real world money, just as it isn’t in neo-Walrasian general equilibrium models, as argued by Rogers (1989: 46–47). Once real world money and uncertainty are introduced into Sraffa’s long-run model, one cannot legitimately defend the idea that prices and the profit rate are determined by technological factors and the real wage (Hodgson 1981: 93). A monetary production economy with uncertainty means the determination of wages, prices and profits becomes highly complex and, for want of a better word, messy.
Even worse is the notion of Sraffian long-run prices, where there is a uniform rate of profit (Lavoie 2014: 176). Many other Post Keynesians would reject the idea that there is any actual tendency to an economy-wide uniform rate of profit (Lavoie 2014: 176), and not just because there are permanent, severe barriers to entry and free competition in many sectors of a real world capitalist economy (and not just based on monopoly but on fundamental factors such as capacity utilisation). In essence, (1) one cannot reduce actual mark-up pricing to a simple practice of a mark-up on labour costs (Lee 1994: 325) and (2) the rate of profit mark-up in each industry and business will be determined by many factors such as custom, convention, different desires and needs for various profit rates, different levels of competition, and what mark-up the market will bear, etc., and these factors will themselves vary in different times and places (Lee 1994: 325–326). Consequently the Marxist and Sraffian notion of a real world tendency in capitalism to long-run prices of production with a uniform rate of profit is untenable (Lee 1994: 326–327).
But, then, with a highly variable rate of profit (determined through prices and mark-ups) being a permanent condition of real world capitalism, it would seem that the profit rate is not independent of prices, and prices are not necessarily proportional to the amount of labor, given the failure of the system to converge to any long-run prices of production and the existence of permanent, different target profit rates in different industries that are never competed away. And we need only look at some real world mark-ups to see how absurd it is to think that prices or profits must be proportional to the amount of labour cost or time. If you are charging an astronomical mark-up of 2,000–4,000% (and get away with it in the long-run!), then many prices have only a tenuous relation to labour cost. Then when we add to this Philip Pilkington’s insightful observation that there is “a strongly subjective element in price formation that is manipulable on the supply-side (advertising and marketing etc.),” we can see that businesses can increase and maintain their mark-ups by affecting human psychology and subjective and intersubjective values.
All in all, if Sraffa’s model fails, then it cannot save Marxism, no matter how watered down a labour theory of value Sraffianism has.
Davidson, Paul. 2003–2004. “Setting the Record Straight on ‘A History of Post Keynesian Economics,’” Journal of Post Keynesian Economics 26.2 245–272.
Halevi, Joseph and Kriesler, Peter. 1991. “Kalecki, Classical Economics and the Surplus Approach,” Review of Political Economy 3.1: 79–92.
Hodgson, G. 1981. “Money and the Sraffa System,” Australian Economic Papers 20: 83–95.
Lavoie, Marc. 2014. Post-Keynesian Economics: New Foundations. Edward Elgar, Cheltenham.
Lee, F. S. 1994. “From Post-Keynesian to Historical Price Theory, Part I: Facts, Theory and Empirically Grounded Pricing Model,” Review of Political Economy 6.3: 303–336.
Marx, Karl. 1982. Capital. Volume One. A Critique of Political Economy (trans. Ben Fowkes). Penguin Books, Harmondsworth, England.
Minsky, H. P. 1990. “Sraffa and Keynes: Effective Demand in the Long Run,” in Krishna Bharadwaj and Bertram Schefold (eds.), Essays on Piero Sraffa: Critical Perspectives on the Revival of Classical Theory. Unwin Hyman, London. 362–371.
Robinson, J. 1979. “Garegnani on Effective Demand,” Cambridge Journal of Economics 3: 179–180.
Rogers, C. 1989. Money, Interest and Capital: A Study in the Foundations of Monetary Theory. Cambridge University Press, Cambridge.