Sraffian Long-Run Equilibrium Prices of Production and Post Keynesianism

I find this whole issue to be very interesting because it seems clear to me that Sraffian long-run equilibrium prices (on which, see Brinkman 1999: 44) are fundamentally the same concept as Marx’s “average prices” or long-run “prices of production” (for this concept in Marx, see Fred Moseley’s excellent paper “Marx’s Concept of Prices of Production: Long-Run Center-of-Gravity Prices”), which in turn are the same concept as Ricardo’s long-run “prices of production” or “natural prices”. In all cases these are long-run equilibrium prices based on cost of production and a uniform rate of profit and they are anchors or centres of gravity for the price system around which prices fluctuate.

Now a starting point on this subject is the relation of Sraffianism to Post Keynesian economics.

I quote John King below who argues that Sraffian economics is today no longer even considered part of “broad tent” Post Keynesianism:

“Almost no one today regards ‘Post Keynesian-Sraffian’ economics as a single coherent school of thought (an exception is Luigi Pasinetti, 2007). By the end of the last century the Sraffians had been expelled (or, perhaps, had expelled themselves) from the Post Keynesian tradition, and in 2012 it is not at all clear whether the classical surplus approach to political economy (as its few remaining practitioners prefer it to be known) will long survive the retirement of the first post-Sraffa generation of theorists like Heinz Kurz and Neri Salvadori.” (King 2012: 314).

We can also note that Pratten (1996: 439), Arestis, Dunn and Sawyer (1999), Dunn (2000: 350), Minsky (1985; 1990) and Mongiovi (2003: 218) seem to agree with this assessment.

One of the most serious points of disagreements, so it would appear, is nothing less than the empirical relevance of Sraffian long-run equilibrium prices:

“The main characteristic of Sraffian economics relevant here is the use of long-period analysis where there would be an equalization of the rates of profit and full capacity utilization in the long period. The assumption that there are persistent forces that drive the economy toward a normal or long-period position when the world is characterized by uncertainties, nominal contracts, and path dependency sits rather uncomfortably with the general thrust of Post Keynesian economics” (Arestis, Dunn and Sawyer 1999: 544).

Lavoie (2010: 11) is even more explicit: he states that Sraffian long-period equilibrium and long-run equilibrium prices are “the cause of all the troubles” (Lavoie 2010: 12) between Sraffians and Post Keynesians.

Although some dissident Sraffians, Lavoie notes, have given up this long period equilibrium obsession (Lavoie 2010: 23, citing Roncaglia 1995: 120), it is the Marxian Sraffians following Garegnani who appear to be most extreme in their defence of the Classical view that competition really brings about a tendency towards a uniform rate of profit in capitalism, and that long-period prices of production are centres of gravity for market prices (Lavoie 2010: 14).

Many Post Keynesians reject Sraffian long-period equilibrium prices and the tendency to such equilibrium (see Lavoie 2014: 176), because of

(1) Joan Robinson’s arguments against long-run equilibrium positions (Robinson 1978a and 1978b; 1979: 179–180);

(2) the role of fundamental uncertainty in economic life,

(3) the severe barriers to entry that exist in real world capitalist economies (including aggressive use of capacity utilisation as a barrier to entry), and

(4) the significant, persistent differences in profit mark-ups in different sectors and industries.

On (4) one can refer to the work of the late Frederic S. Lee (Lee 1994: 325–327; Lee 1998: 226, n. 17; Lee and Jo 2011: 868–869).

He argued that 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).

So therefore what rational reason is there to believe in such a long-run tendency as an empirical reality if it is never observed and countervailing forces always thwart it in the short run? And advocates of the alleged long-run tendency to a uniform profit rate cannot evoke the analogy of gravity here, because – while the evidence for a force called gravity is overwhelming – they have not even proven that their long-run tendency actually exists. They cannot move to analogies from the natural sciences until they can demonstrate that long-period equilibrium prices really are a force as well supported as gravity. But they have not done so, and there is much empirical evidence against it. So the alleged long-run tendency seems to reduce merely to an unrealistic assumption in an overly analytic, abstract model set in logical time (Lee and Jo 2011: 868–869), where ultimately it can only be assumed by definition to be true.

So, all in all, if most Post Keynesians reject Sraffian long-run equilibrium prices, then logically they should reject Marx’s long-run equilibrium prices of production too.

Further Reading
“Matias Vernengo on Marx’s Labour Theory of Value,” April 3, 2015.

“Lavoie on ‘Should Sraffian Economics be dropped out of the Post-Keynesian School?,’” June 19, 2014.

“Sraffians versus Kaleckians versus Fundamentalist Post Keynesians,” June 17, 2014.

BIBLIOGRAPHY
Arestis, Philip, Dunn, Stephen P. and Malcolm Sawyer. 1999. “Post Keynesian Economics and its Critics,” Journal of Post Keynesian Economics 21.4: 527–549.

Brinkman, Henk-Jan. 1999. Explaining Prices in the Global Economy: A Post-Keynesian Model. E. Elgar, Cheltenham, UK and Northampton, MA.

Dunn, S. P. 2000. “Wither Post Keynesianism?,” Journal of Post Keynesian Economics 22.3: 343–364.

King, J. E. 2012. “Post Keynesians and Others,” Review of Political Economy 24.2: 305–319.

Lavoie, Marc. 2010. “Should Sraffian economics be dropped out of the Post-Keynesian School?,” Paper prepared for the Conference at the University of Roma Tre, 2–4 December.
http://host.uniroma3.it/eventi/sraffaconference2010/abstracts/pp_lavoie.pdf

Lavoie, Marc. 2014. Post-Keynesian Economics: New Foundations. Edward Elgar, Cheltenham.

Lee, Frederic 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.

Lee, Frederic S. 1998. Post Keynesian Price Theory. Cambridge University Press, Cambridge and New York.

Lee, Frederic S. and Tae-Hee Jo. 2011. “Social Surplus Approach and Heterodox Economics,” Journal of Economic Issues 45.4: 857–875.

Minsky, Hyman. 1985. “Sraffa and Keynes: Effective Demand in the Long Run,” Hyman P. Minsky Archive, Paper 321
http://digitalcommons.bard.edu/hm_archive/321/

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.

Mongiovi, G. 2003. “Sraffian Economics,” in J. E. King (ed.), The Elgar Companion to Post Keynesian Economics. Edward Elgar, Cheltenham. 318–322.

Moseley, Fred. “Marx’s Concept of Prices of Production: Long-Run Center-of-Gravity Prices”
http://www.mtholyoke.edu/~fmoseley/lrcgpric.html

Pratten, S. 1996. “The Closure Assumption as a First Step: Neo-Ricardian Economics and Post-Keynesianism,” Review of Social Economy 54.4: 423–443.

Robinson, Joan. V. 1978a. “A Lecture delivered at Oxford by a Cambridge Economist,” in J. V. Robinson, Contributions to Modern Economics. Blackwell, Oxford.

Robinson, Joan. V. 1978b. “History versus Equilibrium,” in J. V. Robinson, Contributions to Modern Economics. Blackwell, Oxford. 126–136.

Robinson, J. 1979. “Garegnani on Effective Demand,” Cambridge Journal of Economics 3: 179–180.

Roncaglia, A. 1995. “On the Compatibility between Keynes’s and Sraffa’s Viewpoints on Output Levels,” in G. C. Harcourt, A. Roncaglia and R. Rowley (eds.), Income and Employment in Theory and Practice. St. Martin’s Press, New York. 111–125.