Lavoie on “Should Sraffian Economics be dropped out of the Post-Keynesian School?”

This excellent paper by Marc Lavoie can be read here:

Marc Lavoie, “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 2010.

This subject is particularly interesting because many Post Keynesians have come to the view that Sraffian economics should not be part of “broad tent” Post Keynesianism, as noted by John King writing in 2012:

“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).

Pratten (1996: 439), Arestis, Dunn and Sawyer (1999), Dunn (2000: 350), and Mongiovi (2003: 218) seem to agree with this assessment.

Even though Lavoie himself says that the “project to build a fruitful alternative to neoclassical economics that would be based on a synthesis of the Keynesian monetary production economy and the Sraffian surplus approach is dead” (Lavoie 2010: 9), he still argues that Sraffians should not be expelled from “broad tent” Post Keynesianism (Lavoie 2010: 1), but nevertheless others disagree and even Lavoie himself sees problematic issues with certain aspects of Sraffian economics.

First, Lavoie (2010: 2) notes that Roncaglia (1991) identified three subgroups of Sraffians, as follows:

(1) the Marxian Sraffians, such as Pierangelo Garegnani (1930–2011) and John Eatwell;

(2) the Ricardian Sraffians, such as Luigi Pasinetti, and

(3) the Smithian Sraffians, such as Paolo Sylos Labini (1920–2005) and Alessandro Roncaglia.

Debates between the Marxian Sraffians and the Fundamentalist Keynesians were a major source of conflict at the Post Keynesian Trieste summer schools and conferences that were held between 1981 and 1990 (Lavoie 2010: 2), and even to the point of thwarting any synthesis between the various strands of “broad tent” Post Keynesianism, according to some observers (King 2002: 158).

The conflict centred on both methodological issues and Sraffian economic theory and its alleged deficiencies.

Pratten (1996) argued that Sraffian economics was a closed-system model and hence incompatible with the open-systems Post Keynesian approach (Lavoie 2010: 6).

Many Post Keynesians have also found the Sraffian fixation on long period equilibrium positions as a “centre of gravitation” towards which the economy moves as unacceptable, as Arestis, Dunn and Sawyer point out:

“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).

Many Kaleckians and fundamentalist Post Keynesians reject any tendency to Sraffian long-period equilibrium as empirically irrelevant for a real world economy (Arestis, Dunn and Sawyer 1999: 545).

Lavoie (2010: 10), however, points to the historical association of Sraffianism with Post Keynesian economics through the Cambridge capital controversies and a common preference for government intervention.

But differences also exist:

“Sraffians and Post Keynesians seem to disagree most about the fatal flaws of mainstream theory. For Sraffians the flaws of neoclassical theory are mostly due to their adoption of continuous downward demand curves for investment or for labour, based on diminishing marginal productivity. All Sraffians (Eatwell, Garegnani, Kurz, Mongiovi, etc.) complain of Keynes because he kept an excess baggage of neoclassical theory, a complaint even made by Herbert Simon (1997, p. 14). For several other post-Keynesians, the flaws are to be found in the neoclassical school’s avoidance of fundamental uncertainty, the instability of expectations, and the nonneutrality of money.” (Lavoie 2010: 12).

Furthermore, even Lavoie (2010: 11) admits that Sraffian long-period equilibrium remains a contentious issue, and indeed refers to this as “the cause of all the troubles” (Lavoie 2010: 12).

Marxian Sraffians following Garegnani appear to think 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).

But Lavoie (2010: 16) argues that “dissident” Sraffian strands are compatible with Post Keynesianism, that some Sraffian positions have been caricatured by their opponents (Lavoie 2010: 19–21), and that some modern Sraffians have given up the more extreme positions on long run equilibrium (Lavoie 2010: 23, citing Roncaglia 1995: 120).

For Lavoie (2010: 17), the “conception of production prices … is, in my view, the only remaining obstacle in the attempt to integrate Sraffian and Keynesian analyses.”

Lavoie’s conclusions are worth quoting at length:

“One of the lessons of the present study is that the interpretation of Sraffa’s outputs as actual normal outputs has already been given up by all strands of the Sraffian school. There is no clash here between Sraffians and post-Keynesians: they all recognize that both in the short and in the long period, rates of capacity utilization are likely to be different from their normal level. Even more surprising, many Sraffians accept the possibility of path dependence, a characteristic which other post-Keynesians take to heart as it exemplifies Joan Robinson’s historical time and the presence of radical uncertainty.

What is instead at stake is whether dominant Sraffians are ready to give up the concept of the gravitation towards production prices. This in my view is the crucial issue, as recognized earlier by Frederic Lee, who, despite his sympathies with Sraffian economics and the surplus approach as well as his belief in a ‘Post Keynesian-Sraffian tradition’, rejects the notion of prices of production as centres of gravity (King 1995, p. 195), even concluding some years later that ‘with the long period method problematical, it appears that the Sraffian social surplus approach is a dead end’ (Lee and Jo 2010, p. 21). Arestis, who explicitly supports the position taken by Roncaglia that was stated at the beginning of this conclusion, is just as anxious, claiming that ‘once we have got rid of long-run centres of gravity, we may be able to demonstrate that Sraffian and Post Keynesian economics have much in common’ (King 1995, p. 205).

I would argue that due to specialization and the outpour of literature, Sraffian and other post-Keynesian economists have grown somewhat apart since the 1990s. However, all strands of post-Keynesian economics, when dealing with similar issues, have converged towards each other. … Thus efforts to provide a synthesis of the various strands of post-Keynesian economics ought to be maintained and should keep track of Sraffian economics.” (Lavoie 2010: 23–24).

BIBLIOGRAPHY
Arestis, P. 1996. “Post-Keynesian Economics: Towards Coherence,” Cambridge journal of Economics 20.1: 111–135.

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

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

Harcourt, G. C. 2001. “Post-Keynesian Thought,” in G. C. Harcourt, 50 Years a Keynesian and Other Essays. Palgrave, London. 263–285.

King, J. E. 1994. Conversations with Post Keynesians. Macmillan, Basingstoke.

King, J. E. 2002. A History of Post Keynesian Economics since 1936. Edward Elgar Publishing, Cheltenham, UK and Northampton, MA.

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

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

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

Roncaglia, A. 1991. “The Sraffian Schools,” Review of Political Economy 3.2: 187–220.

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.

Does the Market Tend to Drive Profits to Zero?

The short answer is “no.”

The reason is not just that competition in real world markets falls far short of the imaginary “perfect competition” of neoclassical theory, but because most prices are mark-up prices and businesses are almost always setting them to make a profit. Even new entrants into a particular market where mark-up pricing exists will generally set their price to make a profit as a mark-up over costs of production. The profit will not be competed away.

As Lee notes,

“… business enterprises do not consider profits as part of costs. Consequently, the typical statement made by Sraffians and Marxists that prices equal their costs of production (which includes a uniform rate of profit) in long-period positions has no conceptual correspondence to the concepts of costs and prices used by business enterprises. Without this link, the Sraffian and Marxian theory of prices cease to be grounded in the real world inhabited by actual business enterprises and their costing and pricing procedures.” (Lee 1998: 204, n. 10).

But it is not just Sraffians and Marxists who make serious errors on this subject: neoclassicals and Austrians also think prices tend to be driven towards marginal cost in competitive markets, and profits will be competed away in a convergence towards an equilibrium state (which itself will not be reached), whether it is the Austrian “final state of rest” or Walrasian general equilibrium.

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