13 On Sraffa's Contribution to

Economic Theory
Pierangelo Garegnani*

1. It is not only during the last few decades that Sraffa has acquired an
important place in discussions of economic theory. An article on the laws of
variable returns published as early as 1926 (Sraffa, 1926) when he was 28, in
which he was already pointing towards a criticism of the demand and supply
theory of value, attracted much attention as soon as it appeared. At that time
however the interest focused on some remarks on the theory of the firm,
which were to be developed later by Joan Robinson in her theory of
imperfect competition. The work by Sraffa which is at the heart of the
discussion today belongs mainly to the period since 1951. I am referring to
the Works of Ricardo (1951-73) which Sraffa edited for the Royal Economic
Society, and to his book, Production of Commodities by Means of Commod-
ities, ( 1960). These works relate to two connected themes which are import-
ant (more important, perhaps, than is immediately apparent) for an under-
standing of the present situation ·of economic theory. The two themes are the
criticism of the dominant demand-and-supply theory of distribution and
relative prices, and the revival of a different approach to these problems: that
of the British classical economists down to Ricardo. An attempt, however
brief, at reporting Sraffa's contribution therefore requires some preliminary
words about the dominant and the classical approaches to distribution, and
the criticism levelled against the former.

2. I have referred to the 'modem' theory of distribution and relative prices,

and to Sraffa's role in the criticism of it. By that I mean the theory based on
the 'marginal' method that has held almost undisputed sway over economic
thought since the last quarter of the nineteenth century. At its basis lies the
idea of a substitutability between factors of production, traditionally
founded upon the twin concepts of 'marginal utility' (i.e. the increment of
satisfaction derived from a unit-increment of the consumption of a particular
good) and 'marginal productivity' (i.e. the increment in output with a unit-
increment of the 'factor of production' applied), By correlating a decrease
(whether 'smooth' or 'by steps' is irrelevant here) in marginal utility and
•with some modifications regarding the arrangement and presentation of the material, this text
is the same as that published in Italian, together with texts by other authors, in the weekly paper
Rinascita of 4 August 1978, on the occasion of Sraffa's eightieth birthday. It was therefore
intended for a public consisting mainly of non-economists.

368
 Pierange/o Garegnani 369

marginal productivity with an increase in the use of the good and of the
factor of production respectively, this theory has sought a rational founda-
tion capable of sustaining the notion of 'demand functions' for factors of
production (traditionally: labor, capital and land). These 'demand functions'
are then assumed to determine the remunerations of the factors by their
intersection with the corresponding 'supply' functions. This intersection or
'equilibrium' of the demand and supply of factors of production can be then
shown to entail similar equilibria on the markets for the products, thereby
determining the relative prices and outputs of the latter. In the words of the
author who, more than anybody else among the initiators of the theory,
contributed to its extraordinary success, Alfred Marshall:

The normal value of everything, whether it be a particular kind of labour

or capital or anything else, rests, like the keystone of an arch, balanced in
equilibrium, between the contending pressure of its two opposite sides.
The forces of demand press on one side, those of supply on the other.
(Principles, 1st ed., Vii, i; Marshall, 1961, II, p. 593)

The practical implications of this theory for our view of the economy and
of its management are, of course, far-reaching. Thus, for example, the theory
underpins the generally accepted idea according to which competitive prices
tend to reflect the 'scarcity' of 'factors of production' and products, and to
guarantee a maximum of satisfactions for the community in some exactly
definable sense.

3. Now, marginal theory, with its complex analytical structure, has been
increasingly called into question as a result chiefly of two theoretical
developments of the last four or five decades. The first development goes
back to the late thirties and is a result of Keynes's work, and of the
experience of the great economic crisis of those years. The idea was then
admitted that, at least in the short period, there would be no spontaneous
tendency to that equality between the quantity of labor demanded and
supplied on which the theory relied for its determination of wages, profits
and prices.
However, Keynes's criticism did not question the basic premises of
orthodox theory and in particular the idea of a regular 'substitutability'
between factors of production ensuring an inverse relation between the
quantity of these employed and their relative rates of remuneration. On the
contrary, Keynes explicitly accepted those premises. It was the second of the
two theoretical developments referred to above that went on to question
these premises. This was done, essentially, by criticizing the concept of
capital as a factor or set of factors of production characteristic of the theory.
This criticism has already shown the invalidity of some central propositions
of the theory- such as that which postulates a direct relationship between
370 On Sraffa's Contribution to Economic Theory

'capital intensity' and real-wage rates. It has also shown that a production
technique which has been abandoned because of a rise in wages may
profitably 'return' after wages have undergone a further rise: the phenome-
non which has become known as the 'reswitching of techniques'. Of course,
the latter possibility directly contradicts the proposition according to which
wage rises lead to the introduction or expansion of more capital-intensive
processes, thereby reducing the level of labor employment compatible with a
given endowment of capital. And it was this proposition that was supposed
to provide the rational basis for declining 'demand curves' of labor and the
other factors of production and hence 'stable equilibria', thus supplying the
foundation for an attempt to explain the distribution of the social product in
terms of the marginalist supply and demand.

4. However, if we are to understand the place which Sraffa's work occupies

in today's economic theory- it is not enough to refer to the criticism of
marginal theory. We must also take a step back in the history of economic
thought. As mentioned already, marginal theory was preceded by the
theoretical approach which had been progressively worked out up to the time
of the French Physiocrats and was then developed by the classical econo-
mists, particularly Ricardo. The analytical problems we shall presently
mention (par. 5) were important in favoring the abandonment of this earlier
approach, but no doubt important was also the theoretical support which the
socialist movement was able to derive from Ricardo's work, especially in
England, and already before the time of Marx.
In that earlier theoretical approach, the wage was not seen to be deter-
mined by an equilibrium between counterposed forces of demand and supply
for factors of production. It was rather seen to be regulated by socioecono-
mic forces such as the historically determined level of subsistence (FranfYois
Quesnay, Ricardo) or, more generally, the relative bargaining position of the
social classes involved (Adam Smith, Marx). As a result the wage could be
explained independently of the other forms of income: that is to say, it could
be taken as a known quantity when determining the other forms of income,
and especially the profits on capital.
Incomes other than wages could accordingly be calculated as what
remained of the social product after deducting the known amount allotted to
the workers: that is, income other than wages appeared as a 'surplus' over
and above that amount- regardless of whether this surplus was determined
in value form, as a 'surplus-value' or in physical terms, as a 'surplus-product'.

5. We now have the main elements for attempting to situate Sraffa's

contribution. The importance of his work for today's economic theory seems
to me to rest essentially on the three following elements: (i) his rediscovery of
the theoretical approach characteristic of the classical economists; (ii) his
 Pierange/o Garegnani 371

solution to a number of analytical difficulties that were not resolved by

Ricardo and Marx; (iii) his criticism of marginal theory.
For the first of these three elements, we should refer, apart from Produc-
tion of Commodities, to the critical edition of Ricardo's work which absorbed
the middle years ofSraffa's life. (cfRicardo, 1951-73: for this classic among
critical editions in all subjects, the Swedish Academy of Sciences awarded
him the gold medal for the economic sciences, an honor which he shares only
with Keynes and Myrdal.) It was in fact in his 1951 Introduction to the first
volume of that edition, and especially in the pages of it dealing with
Ricardo's need to measure the product in terms independent of its distribu-
tion, that Sraffa succeeded in bringing back to light the approach peculiar to
the classical theories (Sraffa, 1951, pp. xxx-xxxvii). As he himself was later to
say, this approach had been 'submerged and forgotten' (Sraffa, 1960, p.v). It
had been submerged and forgotten beneath a thick layer of interpretations
depicting Adam Smith and Ricardo as primitive precursors of subsequent
marginal theories. There may indeed be a sense in which this first aspect of
Sraffa's work is the most fundamental one since it provides the basis on
which the remaining two stand.
As regards the second element, we should turn to Production of Commodi-
ties by Means of Commodities (1960). Here we find Sraffa's solution to the
problem of determining the rate of profits and the relative prices of
commodities, a solution based on more general hypotheses than those under
which commodities would exchange in accordance with the labor necessary
in order to produce them. These latter hypotheses were those to which the
solution put forward by Ricardo and Marx had remained confined, because
of the difficulties of the general case which they did not succeed in fully
overcoming, and which were to play the role already mentioned in the
abandonment of the classical approach.
Finally, with regard to the third main element of Sraffa's contribution, the
same book rigorously sets out the propositions concerning that 'reswitching
of techniques' which we already mentioned, and whose implications for a
criticism of marginalism were then to be developed further by other writers.

6. These three main elements ofSraffa's contribution may help to clarify an

issue which has been frequently aired in discussions both in Italy and
elsewhere: the relationship between Sraffa's work and that of Marx. The
question is a complex one which does not lend itself to a short answer. A first
thing which may be said is that the conception which some people appear to
have concerning that relationship is to my mind seriously misleading. In
order to reach a correct understanding of the matter we should first try to
understand the relationship between Marx and the classical economists,
particularly Ricardo.
As I have argued elsewhere (Garegnani, 1984, pp. 305--9) this relationship
372 On Sraffa's Contribution to Economic Theory

should be seen in terms of a strict continuity at the level of economic analysis.

This constitutes no contradiction of the obvious fact that unlike Ricardo and
the classical economists, Marx sought to show that the capitalist mode of
production is no more permanent than the modes which had preceded it- the
fact, that is, that Marx aimed at a 'critique of political economy'. There is no
contradiction between the two things because it is normal that one author
operating within a given theoretical approach should reach conclusions
which were not reached by his predecesors, and which, for that matter, may
then be either confirmed or disproved by the work of his successors. This is
just the way in which a theoretical approach develops, so long as it is alive.
This, I believe, is exactly the kind of relationship which Marx saw, and we
can see, between his 'critique of political economy' and the work of Ricardo.
Thus Marx deduced the transitory character of capitalism from a kernel of
analysis whose contents is what he often called the 'inner' or 'intrinsic'
connections of the bourgeois system and, in particular, the antagonistic
relation between wages and profits (cf. e.g. Marx, 1969, pp. 164--6; 216-22).
Now, as Marx himself repeatedly stated these 'inner connections' were
discovered by the classical economists, and especially by Ricardo in connec-
tion with his theory of the rate of profits. And it was precisely this theory of
profits which Marx took up and developed for his 'critique'.
Once this continuity between the classical economists and Marx is
correctly understood, it becomes easy, I believe, to grasp the true relation
between Sraffa and Marx. A resumption of the classical approach had
naturally to start from the highest points of analytical development which
that approach had achieved in the past- and in many respects these points
are those at which we find that approach in Marx' work.

7. Once the relation between Marx and Sraffa is understood in these terms
we are in better condition to deal with one aspect upon which the current
discussion on the relation between Marx and Sraffa has sometimes insisted.
A criticism of Marx has sometimes been seen to be implicit in the fact that we
do not find in Sraffa the labor theory of value. It appears, however, that this
point simply brings us back to the second of the three aspects of Sraffa's
work we mentioned above: namely, the solution he provided for the problem
of value for more general hypotheses than those under which Ricardo and
Marx had solved it. Solving this problem and abandoning the labor theory of
value as understood by Ricardo and by Marx are, in reality, two sides of the
same coin. As should not need recalling, any living theoretical approach does
develop, that is, it modifies some of its propositions.
In fact the idea according to which Sraffa would have exposed the
invalidity of Marx's economic theory, since we do not find there Marx's
labor theory of value, can only be understood, I believe, by recalling the
ethical or sociological meanings ascribed to the labor theory of value by that
Marxist tradition which had its beginnings at the end of the nineteenth
 Pierange/o Garegnani 373

century, following upon the criticism of Marx and of the labor theory of
value by marginalist authors. I have argued elsewhere (cf. Garegnani, 1981,
pp. 71-3; 76-88) that these meanings of the labor theory of value were not in
fact present in Marx. They were developed later, largely as an answer to the
marginalist criticism, and appear to have reflected the obfuscation which, by
that time, had spread over the approach of the classical economists. That
obfuscation appears in particular to have prevented an understanding of the
analytical role which the labor theory of value played in allowing Ricardo
and Marx to overcome the basic error by which Adam Smith had overlooked
the constraint which binds the real wage and the rate of profits, given the
technical conditions of production. It is significant that this role of the labor
theory of value (which was a discovery of Ricardo, and not of Marx) should
have been brought back to light by Sraffa himself, in his Introduction to
Ricardo's Principles (Sraffa, 1951, pp.xxxii-xxxiii). In this way, far from
criticizing Marx for his use of that theory, Sraffa in fact made an effective
defense of it in the analytical sense in which it had been used by Ricardo and
by Marx. It should be recalled in this connection how Marx himself had
always been contemptous of any attempt to draw ethical or sociological
conclusions from the labor theory of value (cf. e.g. Marx, 1970, p. 62 n.).

8. This having been said, it is important to remember that Sraffa only laid
the premises for a resumption of the classical approach to distribution and
relative prices. He did this by clarifying anew the basic elements of that
approach, and by providing a solution to the problems of value theory that
had been left open by Ricardo and Marx. It would therefore be a mistake to
seek in Production of Commodities what is not actually there: to seek, that is,
an explanation of capital accumulation, or even (except for some hints) an
analysis of the way in which social relations determine the division of the
product between wages and profits. As indicated above, so far as these
problems are concerned, Sraffa appears to refer us to the places where they
have received the most advanced treatment in the framework of this
theoretical approach, and therefore to all the work which has to be done in
order to develop the ideas of the classical economists in conformity with the
present state of economic reality and of economic knowledge.

9. Another basic issue, which has been aired in current discussions in Italy
and elsewhere, concerns the relation that can be established between the
analysis of Sraffa and that of Keynes. I can attempt to say something on this
issue here only after reformulating it in terms of the relationship which in my
opinion exists between Keynes and the resumption of the classical theoretical
approach which has been initiated by Sraffa. For, in his published writings,
Sraffa has only marginally concerned himself with Keynes.
Looking at things in this more general light, we are immediately struck by
Keynes's complex relationship to marginal theory. True, Marshall's variant
374 On Sraffa's Contribution to Economic Theory

of this theory constituted the entire horizon within which Keynes received his
training and beyond which, in a sense, he never went. In this respect, Sraffa's
work is of a profoundly different character, being directed from the very
beginning to a criticism and replacement of marginal theory. Yet, at the same
time, Keynes dealt a serious blow to that theory when he disputed the
tendency to an equality between the supply and the demand of labor. This
second element could not fail to draw Keynes close to those, like Sraffa, who
criticized such a theory.
In my view, however, this negative, critical element is not the only, or even
the main contribution which the contemporary resumption of classical
theory can draw from Keynes's work. As I said, this resumption inevitably
has in Marx's analysis one of its main starting points. Now, unlike what is
true in subsequent marginal theory- indeed, unlike in Ricardo himself- the
idea that aggregate demand tends to adjust to the productive capacity of the
economy is quite foreign to Marx's analysis. As is well known, Marx's theory
of crises clearly raises the very problems of 'effective demand' which are
posed by Keynes. Keynes's 'multiplier' principle, which does a great deal to
explain the mechanism by which slumps come about, may provide us with a
highly valuable element for developing the analysis of the link between
economic cycles and the process of accumulation. As a matter of fact, the
principles of the 'multiplier' and of 'effective demand' are entirely indepen-
dent of other Keynesian concepts bearing the traces of marginal theory (like
the concept of a regular inverse relation betweeen investment and the interest
rate), which are also those that allowed marginal theory to achieve some
success over the last thirty years in its attempt to reabsorb Keynes's criticism.

References

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Marx, K. (1969) Theories of Surplus Value, vol. II (London: Lawrence & Wishart).
Marx, K. (1970) Critique of Political Economy (Moscow: Progress Publishers).
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