Review

Author(s): R. F. Harrod
Review by: R. F. Harrod
Source: The Economic Journal, Vol. 71, No. 284 (Dec., 1961), pp. 783-787
Published by: Wiley on behalf of the Royal Economic Society
Stable URL: http://www.jstor.org/stable/2228250
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 REVIEWS

Production of Commodities by Means of Commodities. Prelude to a critique of

economic theory. By P. SRAFFA. (London: Cambridge University
Press, 1960. Pp. xii + 99. 12s. 6d.)

THE publication of this book is a notable event. Mr. Sraffa's work is

marked by great originality and high distinction. In many passages the
reasoning has a beautiful elegance. It is often extremely condensed. This
is one of those rare books that, despite being inherently difficult, gives the
reader pleasure as he proceeds, page by page.
Mr. Sraffa's volume makes a new approach to certain central parts of
economic theory. A reviewer would be presumptuous if he supposed that
he could give a final assessment of the value of its net product, or even single
out what may prove to be its most lasting contributions. Before that result
could be achieved, much prolonged consideration and reconsideration would
be required. Nor could he summarise the many points of interest, as these
are rather tightly packed together. There are complicated interconnections
between the various themes. It must suffice to touch on a few points, and to
indicate certain difficulties.
Perhaps the most remarkable feature of the book is that, while the deter-
mination of prices is one of its central topics, no reference is made to the scale
or elasticity of the demand for end-products. (The word " demand " does
not occur in the index.) It is surprising that one can get a system of price
determination without reference to final demand. It might be thought that
this was simply a reversion to early classical tradition, such as might come
naturally from so profound a student of Ricardo.
The book is not, however, in its main approach to its problems, in the
classical tradition. Indeed, Mr. Sraffa notes that " the term ' cost of
production' has been avoided in this work " (p. 9). The first part of the
book is concerned with single product industries. Stress is laid on the use of
commodities to produce commodities, as stated in the title. He opens with
the case where all commodities produced are required for the production of
further commodities in the endless cycle of a self-maintaining system, labour
coming in under the head of the commodities required for its subsistence, in a
sort of Marxist fashion. Starting with two industries and two commodities,
industry A may produce an excess of its commodity, a, over the amount of it
that is used in its own production, and similarly with industry B. The rate
of exchange of a for b is determined, quite simply, by the ratio of the excess
production of a to the excess production of b. If we proceed to a greater
number of industries and commodities we have a system of simultaneous

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 784 THE ECONOMIC JOURNAL [DEC.

equations, in which the exchange values of the commodities in terms of one

another are determined by the same principle.
Then we pass to a state of affairs in which more commodities are produced
than are required for their own reproduction (and labour can have more
than a subsistence wage). Before proceeding to Mr. Sraffa's theories con-
cerning wages and profit, we may note at the outset that Mr. Sraffa does not
seem to be interested in the commodity-mix in which wage- and profit-
earners choose to take out their net income. In an early passage (p. 7),
where he is still dealing with a two-commodity world of wheat and iron, he
assumes that the whole net income is taken out in wheat. That may seem
sensible, as consumers do not presumably desire iron as such. But there is
nothing in this passage to require that the second commodity, iron, is specific-
ally a capital good. On the contrary, it is supposed to be setting the
matter out in a perfectly general way. This is a difficulty arising, at the very
outset, from the neglect of the composition of consumer demand. If con-
sumers did happen to wish to have some iron, that would at once, in accord-
ance with Mr. Sraffa's own equations, affect the price ratios, which his
system purports to be determining without reference to consumer demand.
I believe that this objection runs through all the complications of his subse-
quent treatment.
In this treatment wages and profit (though not the commodity-mix in
which wages and profit are taken out) play their part in the system of equa-
tions showing the interdependent determination of prices. He drops the
supposition that wages consist of subsistence only and finds it more convenient
not to divide the wages element in cost into subsistence and non-subsistence,
but gives wages their own independent place. In order to determine what
wages will be, he requires a measure of value which is called a " Standard
commodity." (One has to move forwards and backwards in reading this
book.) This is a composite commodity which would be produced by a
" Standard system " in which " the various commodities are produced in the
same proportions as they enter the aggregate means of production " (p. 20).
If it be objected that in an actual system there might be no such composite
commodity, he claims that " in any actual economic system there is embedded
a miniature Standard system which can be brought to light by chipping off
the unwanted parts of the actual system." The elaboration of the Standard
system is done with beautiful elegance, but space forbids a detailed exposition.
The Standard commodity is used to measure net income-the surplus of
commodities over what is required for their own reproduction. The whole
of net income might be assigned to wages or to profit (not quite the whole in
the latter case, since something would presumably be required for subsistence),,
or be divided between them. The distribution between wages and profit is
not, so it appears, determined by a supply and demand relation. On the
contrary, it seems to come in as an arbitrary datum. The marginal produc-
tivity analysis is not used at all. On p. 11 Mr. Sraffa writes:

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 1961] PRODUCTION OF COMMODITIES BY MEANS OF COMMODITIES 785

" The result of adding the wage as one of the variables is that the
number of these now exceeds the number of equations by one and the
system could move with one degree of freedom; and if one of the
variables is fixed, the others will be fixed too."

On p. 33 he writes:

" The last steps of the preceding argument have led us to reverse the
practice, followed from the outset, of treating the wage rather than the
rate of profits as the independent variable or ' given quantity."'

He then proposes to reverse this.

" The rate of profits, as a ratio, has a significance which is indepen-

dent of any prices, and can well be ' given ' before the prices are fixed.
It is accordingly susceptible to being determined outside the system of
production, in particular by the level of the money rate of interest. In
the following section the rate of profits will therefore be treated as the
independent variable."

Profit is taken to be at a certain rate on the commodities used in produc-

tion; but wages are not conceived of as being, as in the classical system,
"advanced." Accordingly, profit is not at a uniform rate, from commodity
to commodity, either on the value of the commodity or on the labour engaged
upon it. Mr. Sraffa has similar difficulties to those that beset Ricardo and
Marx on this point, and surmounts them. Prices are determined so as to
yield a uniform rate of profit, commodity by commodity, on the commodities
required for the production of each commodity.
I cannot find anything in this more elaborate account of price determina-
tion that justifies ignoring the influence of the commodity-mix that con-
sumers wish to have.
Having proceeded so far, Mr. Sraffa adopts an alternative approach to
price formation, namely by the method of " reducing" the commodities
engaged in the production of other commodities to " dated labour ": he
resolves each commodity into the labour and other commodities required to
produce it, working back through time until the commodities themselves
constitute but a negligible residual. Prices are thus formed by adding
together all the dated labour, the value of each segment being increased
through time at compound interest. (In this chapter Mr. Sraffa is presum-
ably reverting to the idea that wages have to be " advanced.") This treat-
ment brings us on to ground with which we are all thoroughly familiar. It
is in fact a labour (cum profit) theory of the cost of production. What is
peculiar about this is that, in this alternative approach, the crucial part
played by the relations between the excesses of each commodity produced
over the amounts required for their own production disappears from view
completely. The reader surely requires a little more help than the author
gives him about how this conventional labour-cost approach can give the
same result as the commodity approach supplied in the earlier chapters.

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786 THE ECONOMIC JOURNAL [DEC.

In the second part Mr. Sraffa proceeds to joint production. This may
be taken to be the general case. The chapter heading ("Joint Production ")
raises the hope that now at last consumer demand must have some part to
play, as it does so notably in the orthodox theory of a valuation of joint pro-
ducts. But it does not turn out to be so. Mr. Sraffa recognises the familiar
point that in the case of joint production one cannot readily determine the
quantity of labour required for each of the joint products. He meets this
problem by considering that there may be more than one method of produc-
tion. He assesses the amount of labour required for the production of a
particular commodity by taking the same quantities of commodities to be
used in two processes of production, and by assessing how much extra labour
would be required to increase the product by one unit by altering the pro-
portion in which the two processes are used. This looks uncommonly like the
employment of a marginal product (of labour) theory, but we are warned in
the preface that " instances will be made in these pages which at first sight
may seem indistinguishable from examples of marginal production," but
that they are not really so.
In the case of joint production the " reduction " to " dated labour " is
said to be impossible, and, as joint production is omnipresent-Mr. Sraffa
likes to think of a plant as jointly producing during a year both the commodi-
ties for which it is designed and also the partly worn fixed capital outstanding
at the end of the year-, it follows that we must take the theory of price forma-
tion through the production of commodities by commodities to be the over-
riding one, and the more familiar approach by " dated labour " to be of not
much help.
It may be permitted to refer to one of Mr. Sraffa's many subordinate
propositions. He holds that-
" the reduction to dated labour terms has some bearing on the attempts
that have been made to find in the 'period of production' an indepen-
dent measure of the quantity of capital which can be used, without
arguing in a circle, for the determination of prices and of shares in
distribution" (p. 38).
In other passages too he objects to the idea of a quantity of capital. In this
passage he gives a most ingenious example of two industries in which the
time pattern of the period of production is different. He shows how at a
low rate of interest a rise in the rate of interest will cause a greater rise in the
price of A, at higher rates of interest a rise in the rate of interest will cause a
greater rise in the price of B and at still higher rates of interest a rise will again
cause a greater rise in the price of A. This complicated example illustrates a
point that could be more simply put.
In favour of the " period of production" the following points may be
made. First, at a given rate of interest industries can be ranked as of greater
or less capital intensity by the proportion that interest bears to the value of
the product (which simply reflects the length of the production period).

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 1961] WILSON: INFLATION 787

Secondly, at a given rate of interest, improvements can be ranked as capital-

saving or capital-requiring by whether they lower or raise the total interest
payment as a proportion of the. value of the product.
In the case of all the factors of production, there are two components in the
proportion of the share of the factor in the value of the product, namely the
quantity of the factor and its price-the latter may be its " opportunity cost."
In the case of capital, however, there is this peculiarity. A rise in its price
(rate of interest) also increases the quantity used, without there being any
change in the physical processes of production, owing to the effect of compound
interest. The mere fact that the opportunity cost of capital (rate of interest)
becomes greater means that one has to do more waiting (forgo more present
advantage), the physical set-up of production remaining the same, owing
to compound interest; for one is forgoing, year by year, the higher net pro-
duct of capital, as reflected in the higher rate of interest, that one could have
enjoyed, had one used the said capital on a shorter process of production.
This is the point that really gives rise to the " reversals " of the effect of
interest increases in Mr. Sraffa's complicated example. While it is impor-
tant to bear it in mind, it does not seem that it damages the usefulness of, still
less that it creates ambiguity in, the concept of the period of production.
Such difficulties as have been expressed notwithstanding, it may be
evident that Mr. Sraffa's approach to well-known problems from quite a new
point of view is of absorbing interest. It is to be hoped, however, that he
may proceed to set out the interconnections of his system with the traditional
system, rather than treat his system as the " prelude to a critique of economic
theory." Surely what is true in the two systems can have a peaceful co-
existence.
R. F. HARROD
Christ Church,
Oxford.

Inflation. By THOMAS WILSON. (Oxford: Basil Blackwell, 1961. Pp. 280.

30s.)

IN this thoughtful, agreeably written and temperately phrased book,

Professor Wilson passes in review the whole complex of problems centering
round the behaviour of the value of money in a society which aims at
continuing progress and stability without abandonment of the principle of
free enterprise. The plan of the book is somewhat complex and, naturally
enough, does not entirely avoid repetition; so an attempt at signposting
may be useful. After a preliminary chapter briefly documenting the course
of events in Western countries since the War, Professor Wilson gives us
(Chapters II-VI) his fundamental analysis of demand inflation, viewed
as the result of " inconsistency of plans," and discusses the extent to which,
in the absence of central intervention, " natural forces may operate either

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