I tend to agree with mark Blaug's statement:

"First of all, it is highly doubtful that we can speak of one economic science in the 1860's as if it were a common heritage shared among economist around the world, studying the same treatises, reading the same journals and employing a common set of tools in the analysis of a similar range of problems."  

I like the question Blaug posits:

"When is a Revolution a Revolution?"

The lack of interaction among scholars in different countries in the 1870's stands in stark contrast with what we find today, especially with ResearchGate, electronic journals, and so much more. Many were unaware of both similar and competing ideas. 

It is no coincidence that the ideas of the so-called marginalists and mathematics are connected. Blaug contends "the kind of mathematics that economists employed in this period was confined to calculus..."

Blaug also notes: "With is exception (Menger), however, all the great economic theorists of this period had at least intermediate training in mathematics... It is a striking fact that among the great economists of the latter half of the 19th century, only J.B. Clark and Bohm-Bawerk managed to make fundamental contributions to economic theory without use or knowledge of mathematics."

The lack of interaction among scholars in different countries in the 1870's stands in stark contrast with what we find today, especially with ResearchGate, electronic journals, and so much more.  Economics seems to evolve in part because economists are not afraid to communicate with each other and those outside the discipline; moreover, we seem seem comfortable considering different and sometimes controversial approaches.  

Rob

Thank you, Rob.

It must be true that there were many economics in 1860's. Even in 1960's, few information moved from non-English world to English world. 

We can derive many questions from Blaug's observation.  By the way, the paper I refer to as Blaug (2001) is the following:

"No History of Ideas, Please, We're Economists" in Journal of Economics Perspective 15(1): 145-164, Winter 2001.

In p.159, Blaug (2001) writes

• first appearance of subjective value theory and a demand and supply diagram---with price on the vertical axis as in Marshall---was in the fourth 1841 edition of Rau's Grundsätze der Volkswirtschaftslehre (1826), the first standard German textbook that ran into eight editions in the next 40 years. (p.159)

It is now commonly accepted that demand and supply diagram appeared in a textbook in Marshall's Principles of Economics (1890, 1920) first. Blaug (2001) teaches us that this "common knowledge" is wrong.

If what Blaug indicates is right,  we can ask in two ways:

(1) Why could German go ahead of English?

(2) What factors retarded the introduction of demand and supply diagram?

I believe that the send question is more significant  for the history of economic thought and for economics itself. 

In England, the influence of Ricardo was strong. John Stuart Mill followed him in majority of his value theory except for the famous recommendation:

• Since cost of production here fails us, we must revert to a law of value anterior to cost of production, and more fundamental, the law of demand and supply. The law is, that the demand for a commodity varies with its value, and that the value adjusts itself so that the demand shall be equal to the supply. This supplies the principle of repartition which we are in quest of. (Mill, 1848, III.16.5.)

I have argued how this recommendation made a grave significance to the later development of English economics in my recent working paper:

• Mill's reversion and an origin of neoclassical economics
• https://www.researchgate.net/publication/305810200_Mill%27s_Reversion_and_an_Origin_of_Neoclassical_Revolution

My paper asked in essence how demand and supply curve appeared. Question (2) asks the converse of  this contraposition. This question may clarify a deeper logic of the marginal revolution, or neoclassical revolution. 

Working Paper An Origin of the Neoclassical Revolution: Mill's "Reversion"...

I have written about the marginalist as opposed to the classical approach to the theory of value and distribution in my recent book "Economic Thought: A Brief History" (New York: Columbia University Press 2016), especially chapters 2 and 4. You might perhaps find the argument there of some interest.

You might also wish to consult the three vols of the "Handbook on the History of Economic Analysis" (edited by Gilbert Faccarello and me) (Chelthenham and Northampton: Edward Elgar 2016). I attach my piece on the German and Austrian schools of economics.

HDK

I like to share some thoughts on this matter.

 In the “History of Economic Thought by Harry Landreth and David C. Colander, Houghton Mifflin,  Forth Edition, p. 9, we read that “In the second edition of Theory of Political Economy (1879), Jevons reported that he had become aware of a book by H. H. Gossen published in 1854 that completely anticipated his own. But even though Gossen’s work clearly antedated that of Jevons, Menger, and Walras, it did not influence subsequent theory as theirs later did”.

 Regarding production vs. exchange, it is not that production is overlooked. As Schumpeter puts it, “… consumers in evaluating (‘demanding’) consumer goods ipso facto also evaluate the means of production which enter into the production of those goods.” (Schumpeter, J.A. (1950) Capitalism, Socialism and Democracy, 3rd ed., Harper and Row, p. 175)  

 Later on Misses and Hayek looked into the will of the consumer to strengthen Menger’s subject position. Misses created an Action Axiom as the initial condition for subjective choices, while Hayek postulated that information for choices reside in a person’s brain cell, and therefore can be best used by the individual himself and not say, a central planner. Here is a sample of Hayek position: 

“…the work of William Stanley Jevons, Carl Menger, and Leon Walras was developed, especially by the Austrian school following Menger, into what became known as the `subjective' or `marginal utility' revolution in economic theory… most elementary and important discoveries of this revolution have even now not reached general awareness. It was the discovery that economic events could not be explained by preceding events acting as determining causes that enabled these revolutionary thinkers to unify economic theory into a coherent system… The whole market process then became understood as a process of transfer of information enabling men to use, and put to work, much more information and skill than they would have access to individually.(Hayek, Fatal Conceit, Routledge, 1988 p. 97)

I should have a line about Israel Kirzner’s contribution that it takes an entrepreneur to bring the process together.

Dear Heinz,

thank you. It is very helpful. I will learn the paper. Faccarello is writing enormously on French economists. It is amazing.

Would you like to visit another question of mine?  

What retarded demand and supply diagram to emerge in English speaking world?

https://www.researchgate.net/post/What_retarded_demand_and_supply_diagram_to_emerge_in_English_speaking_world

In fact, I have posted this question first, but by a judgement of somebody who controls the visibility of questions in "topics" (the category of theme you see at the lower part of the question) has cut off the links of my question to all topics and my question remains in a black box. 

Do you have any specific idea on it? 

Dear Lall,

I am more interested on the emergence of demand and supply curves. In my understanding, demand curve (or demand function) has something contradictory to "subjective revolution" you have mentioned.

If "information for choices reside in a person’s brain cell, and therefore can be best used by the individual himself", how can we write down a demand function? If central planner cannot know it, how does a market know it?

In the British case, as I have traced in my working paper (Mill's conversion and an origin of neoclassical revolution), I believe it is closely related to Mill's "conversion" and his treatment of the "gains from trade division" problem.

German and Austrian case is different. If Blaug's mention is right, demand and supply curves appeared and accepted (consumed, if you like) as a popular textbook far before Marshall's Principles. We can ask two questions here, as I have posed them in my "Thank you, Rob" post. 

Dear Heinz,

I have read your paper.  It was full of information that I do not know. This is of course natural, because I know very little about  German-language economics. For most of Japanese who do not read German,  what we know is heavily biased on German and Austrian socialism.

At the end of heading Karl Heinrich Rau,  you wrote:

• In an appendix to the fourth edition of his Lehrbuch, published in 1841, Rau introduced intersecting demand and supply curves – only three years after and independently of the first use of demand curves in Cournot (1838). Rau’s analysis was the starting point of Mangoldt’s investigation (1863).

Have you written anything on this point? How did Rau come to possess concepts like demand and supply curves? You tell that he inserted this diagram in the fourth edition. Does this mean that Rau had an idea/concepts even before? For example, had he concepts of demand and supply curves? 

Another important point  with this respect is whether he gave any account on why we can get such functions. If Rau is the originator of this concept, he must have added some explanations justifying himself. Or, is he simply connecting price and demand (or supply) without any particular reasoning? Did he connect his theory of utility to construct the demand function?

My rough impression of rapid reading of Kurz and Riemer (2016) Economic Thought: A Brief History.

This book is a good brief and concise summery of the history of economic thought. As for marginal revolution, it is a good overview on what happened but I had an impression that they did not focus sufficiently on the internal logic of this important development or evolution of theories.

I have an impression that we should differentiate British evolution and German or French speaking worlds. Throughout the classical period, utility was conserved in France and in Germany as an important part of its subjective value theory. Roughly speaking, there were no classical revolutions in French and German speaking worlds. This explains early development of utility maximization, demand curve, and so on. On the other side, in English speaking world, classical economics (or more narrowly Ricardo's cost-of-production theory of value) prevented for a substantial period the resurgence of pre-classical common sense.

The arrival of Jevonian subjective economics and Edgeworth and Marshall's economics of exchange were a sort of counter-revolution to the classical revolution. this is confirmed by the shift of focus from production to exchange or demand, symmetry of demand and supply, and introduction of autonomous isolated man. All these occurred as a "loss of memory."

My paper Mill's Reversion and an Origin of Neoclassical Revolution has traced why this counter-revolution occurred. My paper is complementary to Kurz and Riemer's new book and presents a new point of view on the development / evolution of.economic theories.

Dear Yoshinori,

Thanks very much for your many interesting comments and queries. I think that several of your questions are being answered in the three volumes of the Handbook on the History of Economic Analysis edited by Gilbert Faccarello and me. I attach the covers of the volumes. Please kindly have a look at the work. Volume II deals with Schools of Economic Analysis and volume III with Developments in various Felds of Economic Analysis.

As regards my book Economic Thought: A Brief History, I am the only author of it. Jeremiah Riemer did an excellent job as a translator of the German text, but the work is mine.

I shall read with much interest your piece on Mill. Let me just add that the view, widespread amongst some historians of economic thought, that the marginalists focused attention (almost exclusively) on exchange, whereas the classical economists focused attention (almost exclusively) on production cannot be sustained. Both schools of thought were concerned with production and exchange. How could it be otherwise, since they were trying to understand the economic system they faced, characterised by a division of labour and the coordination of economic activities via a system of interdependent markets? As regards their very different approaches to come to grips with this, see the detailed comparison of them in my book. The interpretation of the two schools in terms of a dichotomy between exchange and production perhaps wishes to express the fact that the classicals were concerned first and foremost with an economic sytsem in motion, in which (i) technical progress continually brings about new goods and means of production, a fact that cannot possibly be dealt with in terms of given utility functions, defined in terms of a given set of goods, and (ii) in which the stratification of society in different classes shapes consumption behaviour, a fact that is difficult to reconcile with methodological individualism. In my book I deal with these (and some other aspects) of the difference between the two approaches in greater detail.

Best,

Heinz

Dear Heinz,

thank you for your detailed response. Handbook on the History of Economic Analysis in three volumes is too voluminous and I will not be able to digest it in a few weeks. 

As for the characterization of two schools (classical and neoclassical), you must be right. As you put it, the classical economists were concerned first and foremost with an economic system in motion. This is a total view of the economic world and no body can be free from his or her world and time he or she lives in. In this global view, perhaps Ricardo and Say had the same concern and interest. However, we can make differentiation in a very narrow but crucial point. In case of economics, it is the theory of value or price theory.

In terms of theory of value, we cannot classify Say and Ricardo in the same group. In my understanding, Say did never understand Ricardo, or his theory value. If we focus this difference, we may say that Ricardian theory of value did never take root in France. If my memory is correct, this was also the judgement of Faccarello.

Even in the U.K., we cannot say that Ricardo was understood well. Even though, through the authority of John Stuart Mill, Ricardo remained reference point and this had the power to suppress utility theory of value, which in my view is more close to popular and common sense understanding  of the people. So the utility theory of value is a return to the "common sense." It is rather natural that France and Germany/Austria preceded the UK in this return. Then the questions to ask are quite different. In the UK, the main question must be how and why Ricardian theory of  value was taken over by the rudimentary law of demand and supply.

My paper on Mill's reversion gives light that this "retreat" or "reversion" occurred precisely when Mill wanted to solve questions left unsolved by Ricardo. It seems there is no such drama either in France and Germany, simply because in these countries values were understood to depend on subjective evaluations.

Dear Yoshinori,

Thanks for your kind words. I perfectly agree with you that Say never fully understood Ricardo and was perhaps even intent on not understanding him or rather misunderstanding him. I attach a paper Christian Gehrke and I published in 2001 on Say and Ricardo on value and distribution.

That utility matters in order for goods to have value was not disputed by Smith or Ricardo, but neither of them was a utilitarian. They also did not object to the view that demand and supply matter in determining market prices, but they disputed that they play a role in determining natural or normal prices. Supply in this context was taken to be a given actual offer and not a supply function. Similarly, demand was used in an everyday language and not in the sense of a definite quantitative relationship between the amount demanded and the price of a commodity. Representatives of the German use value school, who invented the concept marginal utility, did not see their ideas in conflict with Adam Smith's theory, but rather as adding some flesh to it. (See my piece on the German and Austrian schools.)

John Stuart Mill interestingly stated that due to Ricardo's achievement the theory of value was complete. However, when dealing with the problem of joint production he abandoned this view and claimed that demand plays an important role. Alas, in discussing the case of two products being produced by means of a single process (e.g. wool and mutton) he assumed that there is only one process available and the system of equations is thus short of one equation to determine all unknowns. Had he allowed for two (or several) methods of production he would have had to develop a more sophisticated argument. (I published a paper on "Early Classical and Marginalist Economists on Joint Production"  in 1986 in Metroeconomica.)

Ricardo was not well received in Germany, which was under the spell of old cameralist traditions and later of Say. People abhorred abstract reasoning and understandably had difficulties to come to grips with it. But there were notable exceptions to the rule. These included Hermann and von Thünen in the first half of the 19th century and then towards its end von Bortkiewicz, to name but a few.

Best,

Heinz

Gehrke and Kurz (2001) Say and Ricardo on value and distribution, European Journal of History of Economic Thought 8(4):  449–486.

Seems interesting. It must contain various stimulating points of discussion. I will try to read it.

Gehrke and Kurz (2001) Say and Ricardo on value and distribution was, as expected, a good and detailed account of intercourse between Ricardo and Say. The first version of this paper was read in  Colloque International Jean-Baptiste Say in 2000, but there are no compliments to J-B. Say. This proves authors' conviction that Ricardo's logic was far superior than Say's. I totally agree with them. The paper confirms with clear evidence that Say never fully understood Ricardo. Say remains in the level of ordinary "demand and supply" arguments.

To return to my point of question, Say and Ricardo were two representatives of the second period of classical economics.  We have a custom to class the two in the same classical school. If this classification is right, this is a very wide class that comprises so different strands of economic theories  and gives sufficient doubts if we can talk of a classical economics. The ambiguity of this classification permits an ultra-neoclassical economists to label themselves  "new classical economics."

From this point of view, I cannot totally agree with Heinz Kurz on the traditional usage the term classical economics. This classification includes all economists in the period from Smith to John Stuart Mill among the classical school. It is like to call all contemporary economists neoclassicals.

Heinz Kurz wrote:

• How could it be otherwise, since they were trying to understand the economic system they faced, characterised by a division of labour and the coordination of economic activities via a system of interdependent markets? (post #9 in this question page)

As I commented on this point, it is true that all economists in the age of classical economics lived and thought within their time and the world. In this point, they must inevitably have some common characters, but it does not prevent them to possess and construct different theories. Is it a good way to continue to call both Say and Ricardo classical economists?

Classification depend on the purpose of analysis. As regards to value theory, Smith and Say may be grouped in one class, whereas Ricardo and a few of his loyal followers are another group. Normally these people are called Ricardians, but I do not think this is a good term, because this does not indicate what the rational core of Ricardian economics is. Different people have different opinions on this point.

Characterization of “marginal revolution” depends on this classification. If we think that Say and Ricardo are in the same group, marginal revolution is a simple mathematization of common sense. If we think Ricardo’s cost-of-production theory of value is the core of classical economics, marginal revolution, or more correctly, I believe, neoclassical revolution is a reversion to “anterior” law of demand and supply. This is the reason why I named my paper Mill’s reversion and an origin of neoclassical revolution.

A wonderful story of Piero Sraffa's intellectual adventure

Heinz Kurz suggested me to read

• Christian Gehrke and Heinz D. Kurz (2006) Sraffa on von Bortkiewicz: Reconstructing the Classical Theory of Value and Distribution. History of Political Economy. 38 (1): 91-149.  Available from RG:

https://www.researchgate.net/publication/31405061_Sraffa_on_von_Bortkiewicz_Reconstructing_the_Classical_Theory_of_Value_and_Distribution?ev=prf_pub

It is well known that Sraffa kept long silence in theory of prices between 1926 (On law of returns under competitive conditions) until 1956 (Production of commodities by means of commodities). This paper traces how Sraffa's idea evolved mainly form the state of 1927 to that of 1958 through his fictive discussion with Bortkiewicz on Böhm-Bawerk in one side and Ricardo ad Marx in another. The paper is a bit too long for a first reader (61 pages), but this is a well planned paper and its contents are condense. The present length is necessary to understand how Sraffa's idea evolved. This is a wonderful story of Sraffa's intellectual adventure and a "must" not only for those economists who are interested in Sraffa, but also those economists who seek possibility to reconstruct a theory of value as a radical alternative to neoclassical theory of value.

Although many economists have appealed, after 2007-08 financial crisis, to change economics based on maximization-cum-equilibrium framework, the way out is not yet seen. However, it is clear that a superficial change or addendum of neoclassical theory will not be sufficient. On this occasion, a paradigm change from very basis of theory of prices (or theory of value) is required. From this point of view, Sraffa stands on a peculiar position. He was in the 20th century practically the only person who has rediscovered a long buried tradition in the theories of value and reconstructed and presented a system now we know classical theory of value, and not based on demand and supply analysis. We can know many teachings from his lonely adventure in an attempt to find a true theory of value. In this period of crisis of economics (sic), the history of economic thought has a big, particular significance in search for a new paradigm.

Teachings we can get from this adventure can be positive as well as negative. Sraffa did not walked straight for a goal but strayed, wondered and at times failed. Gehrke and Kurz do not talk much about Sraffa's failures. This may be necessary as this type of paper which must avoid to fall in Whig interpretation of the history. We have to know, however, what kind of limits Sraffa faced and how can we go beyond those limits now.

In the following, I will discuss some important subjects in several posts in order to avoid each of my comments become too long.

I do not repeat many points that I agree with the authors. The text is well written and there is no need that I explain again with my poor prose. As a result, what I post in the following are restricted to the points that I have an opinion different from them. My position is rather theoretical and not historical and concentrated on what we should consider from now on. Gehrke and Kurz must have remained ascetic with these arguments because of the fact finding and elucidating character of their paper. (to be continued)

Article Sraffa on von Bortkiewicz: Reconstructing the Classical Theo...

Three tasks that Sraffa confronted with

The most wonderful and inspiring observation in this paper is the list of three tasks that the authors claim Sraffa confronted with as early as November 1927. (p.12)

Three tasks are

• (1) Identify the 'essence of the classical theories of value' by going back to the writings of Petty, Cantillon, the Physiocrats and the English classical political economists.
•  (2) Reconstruct this 'essence' in terms of a theory which sheds the weaknesses and elaborates on the strengths of its earlier formulations.
•  (3) Find out what is the difference with the later theories and why the classical theory had been abandoned. (See, in particular, D3/12/4: 12)

These three tasks are extremely important. They are important not only for Sraffa, but also for us who are searching a new paradigm. We want to know how Sraffa confronted with each of these and we want to know at what state he stopped. Unfortunately, Gehrke and Kurz's description do not answer these questions completely.

We read a rather long explanation on task (1) (§2.2 and partly in §5 Conclusion (a)) and task (2) in some details (§2.4 and dispersed in §3 and 4), and Sraffa’s criticism on marginal economics (§3 and 4). Arguments on marginalism may compose the first part of task (3), but I could find no explanations on the last part of task (3).  The second point in §2.1 may be an exception. The authors write as follows:

• Secondly, what went wrong – why had demand and supply theory which Sraffa considered to be inherently flawed managed to prevail over classical theory? (p.6)

But it seems that there is no corresponding explanation that answers to this question.

The paper has a long conclusion but the authors do not explain much about the position that Sraffa arrived. If authors return to these tasks at the end of their paper, it would be a wonderful and influential one. How Sraffa solved or failed in his confrontation with these tasks would explain what Sraffa achieved and what could not in 1960.

The last part of task (3) is particularly interesting. It is from this point of view that I discussed the fail of Ricardian revolution. (See my presentation data: Why did Ricardian Revolution fail?

https://www.researchgate.net/publication/299339677_Why_did_Ricardian_Revolution_fail?ev=prf_pub)

My paper on Mill's reversion

https://www.researchgate.net/publication/305810200_Mill%27s_Reversion_and_an_Origin_of_Neoclassical_Revolution

traced how a counter-revolution occurred inside of the Ricardian school and how it was inherited to form the English neoclassical school. This is the very different course from what occurred in the European Continent. We can briefly say that Ricardian revolution never took place in France and Germany. This explains partly why we can observe mathematical maximization of utility two or three decades earlier in Germany than in the U.K.

(to be continued)

Presentation Why did Ricardian Revolution fail?

Working Paper An Origin of the Neoclassical Revolution: Mill's "Reversion"...

Fundamentally different approach to the theory of value

Gehrke and Kurz tells much about what are characteristic in classical economics. They treats many subjects: objectivist view,  circular flow, physical real cost and social surplus, simultaneous equations, holist view with compared to the defect of individualist view, etc. They are of course what we can detect as general tendencies in classical economics in comparison to neoclassical economics. As a description of Sraffa’s thought at around 1927, it is all right. Even Sraffa could not know the essence of classical theory of value from the start. However, these characteristics are in my opinion rather circumstantial points. I believe it is necessary to make a shaper focus. If not, we do not arrive at the essential difference between classical and neoclassical economics.

What is the crucial difference which divides the two economics? In my opinion, it is the denial of law of demand and supply, or the recognition that common-sense supported law of demand and supply is flawed. A very few economists recognized this, even in the time of classical economics period. Ricardo and Marx had the clear idea, but it is doubtful if Smith had this recognition. As Gehrke and Kurz (2001) Say and Ricardo on value and distribution in European Journal of History of Economic Thought 8(4): 449–486 shows, Say never understand this.

According to Gehrke and Kurz (2006), Sraffa came to confirm this on reading Marx’s Histoire (or Theorien über den Mehrwert, 1924-25). Let me cite the relevant part:

• Edwin Cannan's lectures at the LSE and Marshall's Principles had exposed him to the conventional interpretation of the classical authors as early and crude demand and supply theorists. In 1927 he read the freshly published French edition of Karl Marx's Theorien über den Mehrwert, the Histoire (Marx, 1924-25), which contains a radically different perspective on the classical authors. He had already encountered versions of this perspective in the early 1920s while consulting the available Italian literature devoted to the theory of value (e.g. books by A. Graziani and A. Labriola). Reading the Histoire appears to have contributed a fair measure of confidence to Sraffa's growing conviction that there must have been a fundamentally different approach to the theory of value and distribution which had been 'submerged and forgotten since the advent of the "marginal" method' (Sraffa, 1960, p. v)  (Gehrke and Kurz, 2006, p.12).

Important point here is Sraffa came to know that “there must have been a fundamentally different approach to the theory of value and distribution.” It had been submerged and forgotten. Gehrke and Kurz (2006) describe that this oblivion occurred “since the advent of the ‘marginal’ methods.” If this describes Sraffa’s thought, they must be right. But as an interpretation of history of economic thought, we must be more careful on this point. Was “fundamentally different approach” widely recognized by classical economists? I believe they did not. At the top of the above citation, we read the name of Cannan. Is he influenced so much by the arrival of marginalism? The oblivion started much earlier. Or, it may be better to say that the possibility of the “fundamentally different approach” was not understood by most of classical economists. A few exceptions are Ricardo, John Stuart Mill and Marx.

The true opposition between classical theory of value and neoclassical economics is not the opposition that one rejects marginal analysis and the other one accepts it as major tool of analysis. The true opposition is that one denies the demand and supply analysis, whereas the other accepts it. If we focus to this point, the opposition is not between marginalism and its opponents. Many classical economists accepted demand and supply as rudimentary tool of analysis. What Ricardo, Marx and Sraffa had to fight was this demand and supply analysis. This point is not very clear (or sufficiently emphasized) in Gehrke and Kurz (2006).

Another point I remarked in Gehrke and Kurz (2006) is that there is no Sraffa’s own consideration on this “fundamentally different approach”. All remarks made in this regard are based on Marks. Until 1960, Sraffa must have arrived to establish his opinion on this point and we want to know it. Sraffa ousted demand and supply concepts in his book (1960), but he talked little about his book and the reasons of his construction. He may be confident that he will be understood without any particular explanations. If he has left any notes or comments with this regard, we want to know them. Of course, I know severe limits of materials. Even though this is the most important subject, it is possible that Sraffa left nothing behind. If the authors or others have already written on it, please let me know.

If we admit the existence of a fundamentally different approach to the theory of value, we have two derived questions. (1) How is the different approach formulated? (2) How is the different approach more relevant than the demand and supply analysis?

As for the first question, we know the answer given by Sraffa. It is his 1960 book Production of commodities by means of commodities. We know that a system of cost equations determines uniquely relative prices if given the profit rate or a level of wage rate.

The second question remains more obscure. If the values (or prices) are determined without any reference to demand and supply, we know that marginal analyses that study the equilibrium of demand and supply functions are wrong. However, what happens when the demand and supply do not coincide? Sraffa and his followers did not answer to this question. At least in Gehrke and Kurz (2006), we have no such suggestions.

Most detailed comment in this regard is the following:

•  It is interesting to note that such otherwise diverse authors as Marx and Böhm-Bawerk held similar views as to the explanatory power of demand and supply in equilibrium. Marx had pointed out that in classical economics demand and supply were seen to regulate only 'market prices', not 'natural prices' or 'prices of production'. He had added: 'If demand and supply balance, the oscillation of prices ceases, all other conditions remaining the same. But then demand and supply also cease to explain anything.' (Marx, 1954, p. 503; emphasis added) Similarly Böhm-Bawerk, who had maintained that demand and supply 'offers a husk for a kernel' (Böhm-Bawerk, 1959, p. 42; emphasis added). The authors mentioned, we might say, were interested in analysing the kernel, not the husk. (Gehrke and Kurz, 2006, p.48, note 38)

 This is the footnote that is added to this sentence:

•  In this context Sraffa sided with Marx, who had argued that in equilibrium demand and supply do not act anymore and therefore cannot explain value.38

 Sraffa was not wrong in supporting Marx. But this argument is not sufficient. Marx and Sraffa tell nothing what happens in the short period. Kurz has a custom to explain that classical theory of value explains the long-period price system (See for example, Kurz and Salvadori 1997 Theory of Production: a Long-Period Analysis). This is true but a half truth. This interpretation leaves short-period analysis vacant. The long-period interpretation lacks short-period analysis, but economic process is a continuation of short-periods. It is evident that we lack (at least) one important principle.

 What is it? In my opinion, the answer is simple. It is what I call Sraffa’s principle.

(to be continued)

Sraffa’s principle or quantity adjustment principle

In the previous post I have argued that what is lacking is the Sraffa’s principle. We may call it the principle of quantity adjustment (of production firms). As this is rather new concept let me explain how economy works according to Sraffa’s principle.

Suppose firms fix their product prices, the consumers or demand side persons have no other choice to choose how much they will buy the products at the given prices. These demands are expressed through time. In average they form a flow of demand which changes from time to time. If they are expressed, firms adjust their productions according to the sales volume of their products. Sraffa’s principle dictates firms that they will produce and sell as much as product is demanded at the predetermined price.

In the time of Ricardo, this kind of adjustment was not conspicuous, because, in the beginning of the 19th century, major commodities are still agricultural commodities (grains and agricultural products such as cotton flowers) and many of them are harvested once a year. In that time, the price adjustment must be predominant, because most of ingredients are periodically given and its volumes are subjected to annual fluctuations. During the 19th century, the weight of such commodities decreased but economists continued to think in an old model. However, an industrialized economy has a different adjustment principle. The prices are fixed by cost plus normal profit, or markup pricing. At a fixed price, producers sell as much as the product is demanded. In the industrial production, majorities of products are quantitatively adjusted in a short period, for example a day or a week. Discrepancies between production and sale are adjusted by inventories. Of course there are products that demand longer time to produce such as machine tools. Their specifications are precise and varied. Those products are produced according to the “production to order” system. Even in these cases, principle is the same. Makers produce their products as much as they are demanded at a predetermined price.

I call this adjustment rule Sraffa’s principle. In Sraffa (1926), after examining laws of decreasing and increasing returns, Sraffa observes in which position businessmen are situated:

• Business men, who regard themselves as being subject to competitive conditions, would consider absurd the assertion that the limit to their production is to be found in the internal conditions of production in their firm, which do not permit of the production of a greater quantity without an increase in cost. The chief obstacle against which they have to contend when they want gradually to increase their production does not lie in the cost of production which, indeed, generally favours them in that direction-but in the difficulty of selling the larger quantity of goods without reducing the price, or without having to face increased marketing expenses. (Sraffa, 1926, p.543)

 The chief obstacle to increase the production (and therefore the profit) does not lie in the increase of cost of production. It is the difficulty to of selling the larger quantity of goods at the predetermined price. Entrepreneurs may have a choice between price reduction and efforts to sell more quantity. In fact, even if they reduce their prices, they always face the same limits. They cannot sell as much as they want. Thus, what limits their production is the sales volume. Firms are obliged to adjust their production to the extent that their products are sold. At the seam time, businessmen’s major effort is to extend the sale volume by various means: advertising, sales promotion, dispatching salespersons, extend their sales network and so on.

It is evident that neoclassical economics excludes in principle these efforts, because it presupposes that firms are selling as much as they want under competitive conditions. This behavior is only compatible with the strongly decreasing returns conditions, but majority of industrialized firm are working under the constant or increasing returns to scale conditions. Any management science recognizes this fact (to sell more at the given price), but neoclassical economics keeps its peculiar standpoint, because it thinks in a fictive abstract world, isolated from the business and the production.

Sraffa observed that the major obstacle is the difficulty of increasing the sales volume. If we take the contrapositive of this proposition, we have the Sraffa’s principle. Under the competitive conditions, normal firms that are under increasing or constant returns to scale conditions are obliged limit their production as much as their products are sold.

In relation to this, this is one of the biggest enigmas in Sraffa, Cambridge and British economics in 1930’s. Oxford Economic Research Group’s Survey started to be reported in late 1930’s and Sraffa had 20 years before his book. He paid no attention to the full-cost pricing principle and to the principle that are in a sense conjugate to the full-cost principle and that he came very close to grasp. Keynes’s effective demand is better expressed in this predetermined price and production behaviors of firms framework. No such amalgamation occurred and Sraffa remained isolated. What happened in these days? Isn’t it really enigmatic?

I argued briefly these points in my paper The Revival of Classical Theory of Value:

https://www.researchgate.net/publication/269393496_The_Revival_of_Classical_Theory_of_Values

but there would be much more to investigate around this enigma.

(to be continued)

Conference Paper The Revival of Classical Theory of Values

Questions of inactive methods of production

Gehrke and Kurz (2006) raise a question that is not often referred to in post-Sraffian strand but includes important implications to the theory of value. Borrowing Sraffa’s expression, the authors refers to this by the term Borkiewicz’s dictum or dogma.

We have seen that the most fundamental question in theory of value is:

•  What are the conditions that determine the conditions of exchange?

We have seen that demand and supply analysis played a predominant role through out the history of economics. A few exceptional economists, comprising Ricardo, Marx and Sraffa recognized that conditions of productions are the prime movers of prices. The question that I discuss here is one of derived questions when we admit this position.

Gehrke and Kurz (2006) repeatedly refer to the question in different occasions. Let me cite all the relevant parts here:

• {Sraffa’s note} Now my opinion is that in general the value of goods can only depend upon such technical knowledge as is applied in practice. But the value of goods remains unaffected by knowledge which, on whatever grounds, is not utilized. (D1/91:7?) (p.26)
•  {Sraffa’s note} The result thus obtained can be summed up in the following brief formula: for [the determination of] the value of goods there come into consideration only actual methods of production (Verwendungsarten), and not merely potential ones. (D1/91:7) (p.26)
•  In Sraffa's papers Bortkiewicz's insistence on the exclusive relevance in the theory of value of methods that are actually used recurs repeatedly as 'Bortkiewicz's dictum' (see, for example, D3/12/18: 9). p.26
•  {Sraffa’s note} [H]e {Bortkiewcz} did not realize the implications of his rule on "methods which are not used have no effect on interest": he applies it strictly only to Bohm {sic} and Clark. He does not see it applies to all these things, demand etc. (D1/91: 32)  (p.47)
•  In Sraffa's view, Marx had instead made exactly the same point as Bortkiewicz himself: in a long-period equilibrium, and given one of the distributive variables, prices and the other distributive variable are fully determined by the methods of production and consumption in use, whereas methods that are not used play no role whatsoever (see D1/91: 33). (p.48)
• Sraffa fully endorsed Bortkiewicz's principle that methods of production (and consumption) that are not actually used can have no effect on the rate of profits and relative prices.( p.54)

Sraffa named this principle Bortkiewicz’s “dictum” or “dogma” (.p3 and p.49). Gehrke and Kurz (2006) ends by emphasizing that Sraffa was thinking this dictum or dogma so important that he meant to include the dictum in the Preface of Sraffa (1960).

Gehrke and Kurz (2006) discusses Bortkiewicz’s “dictum” mainly in relation to the origin of the rate of interest or profit. The authors examine how Sraffa read Bortkiewicz who criticized Böhm-Bawerk’ s theory of interest. This is interesting by itself, but Bortkiewicz’s dictum has much wider topic than interest rate. It concerns every situation where some methods of production are active or used whereas some others are not. In other word, it concerns all situations where choice of production techniques intervenes.

Bortkiewicz and Sraffa observed that prices are fully determined by methods of production which are actually used. Let a production process τ = (l, a, b) be such a method, where l is labor input coefficient, a and b material input and output coefficient vectors. If w and p are wage rate and price vectors respectively, a half part of Bortkiewicz’s dictum is that we have an equation like

　　(1+m){ w l +〈a, p〉} =〈b, p〉.          (1)

In other words, production by method τ is profitable. Whether a method is profitable or not depends on the judgment of top managers of the firm. If we can assume a standard rate of margins m over the unit direct production cost, the above equation expresses such a judgment.

Another half of the Bortkiewicz’s dictum concerns the converse of the contraposition of the above equation. At a given wage and price system {w, p}, a production process (l, a, b) may not be profitable for the management. In this situation, we must have inequality

　　(1+m){ w l +〈a, p〉} >〈b, p〉.          (2)

Now suppose that we are given a set Γ of different production processes. Which processes are selected as profitable and which are not profitable? It depends on the wage-price system {w, p}. Then, the selection of profitable processes and the determination of wage-price system are correlated. The general question is to “determine” wage-price system that satisfies a system of inequalities

　　(1+m){ w l(τ) +〈a(τ), p〉} ≧〈b(τ), p〉.          (3)

in such a way that total production can supply the demand of the economy..

 In the case of a single nation where we can assume that workforce is uniform, the question is easy, because we have the minimal price theorem (the theorem that Samuelson named non-substitution theorem and the proof of which was given by Koopmans and Arrow). If we have no such theorem, we could not say that prices are totally independent of demand conditions. In the time of Ricardo, he did not know this theorem but he could advance a position that conditions of production alone determine prices. This is really amazing.

The economy which comprises two or more countries is more difficult. Generally, the work forces may not be assumed uniform and may have different wage rates. The sets of production techniques may be different according to countries. Ricardo was clever enough to restrict himself to announce this:

• The same rule which regulates the relative value of commodities in one country, does not regulate the relative value of commodities exchanged between two or more countries. (Ricardo, 1951[Sraffa edition], p.133)

Ricardo left the problem to construct theory of international values to the next generations. However, an unfortunate event happened. Young John Stuart Mill tried to dare to solve this difficult question. Mill thought that he had solved the problem but, by some peculiar circumstances, he was lead to turn economics of production to the economics of exchange. This was the origin of British neoclassical revolution. See for the details my working paper Mill’s retreat and an origin of the neoclassical revolution.

https://www.researchgate.net/publication/305810200_Mill%27s_Reversion_and_an_Origin_of_Neoclassical_Revolution

Please compare two solutions: (1) Mill’s solution often called reciprocal demand theory and (2) the new theory of international trade. For the latter, you may get an overview by my paper: New Theory of International Values: a General Introduction

https://www.researchgate.net/publication/304717720_New_Theory_of_International_Values_A_General_Introduction

You can see how the theory of international trade played a crucial or critical role in the development of economic theories. When I speak, after J. R. Hicks, of a change from economics of production to economics of exchange, I am referring to this great turn of the point of view. It was a reversion from economics of production that Ricardo established to the economics of exchange of J.S. Mill, Jevons, Marshall and Edgeworth. In England, this event came cover the "fundamentally different approach in the theory of value"  and made to revert old convention of law of demand and supply. 

Heinz Kurz, in his post to this question page (post #11), refers to Mill’s reversion. Let me cite it here:

• John Stuart Mill interestingly stated that due to Ricardo's achievement the theory of value was complete. However, when dealing with the problem of joint production he abandoned this view and claimed that demand plays an important role.

In my opinion, this observation is not very exact. It is true that Mill proposed to “revert to a law of value anterior to the cost of production, and more fundamental, the law of demand and supply” in 5th paragraph, chapter 16, Book 3, of his Principles (1848), but we have to recognize that Mill is simply repeating here what he had written as a conclusion of his examination on the question of undermined terms of trade. The book Essays on Some Unsettled Questions of Political Economy was published in 1844, but John Stuart Mill wrote these essays between 1829 and 1830 and it is well known that his study on terms of trade went back to early 1820s. I believe that Mill put his conclusion in the chapter named Some Peculiar Cases of Value in doer to attenuate his astonishing conversion to the conventional wisdom.

(End of my comments on Gehrke and Kurz (2006) )

Working Paper An Origin of the Neoclassical Revolution: Mill's "Reversion"...

Working Paper The New Theory of International Values: An Overview

Let me return to my original question.　  

To (re-)define the nature and characteristics of neoclassical revolution requires a re-definition of  classical economics. Economics in the age of classical political economy is so diversified and it is not wise to make comparison between all the classical economists in one part and the neoclassical economists in another. In my opinion, it is necessary to distinguish among classical political economy at least two different and opposing theory frameworks.

One is subjectivist theory of value and the other objectivist one. Jean Baptist Say belongs to the first and Ricardo to the second. Although they are contemporaries, their theories of value are so different and it is difficult to classify two in the same category.

In this regard, D. P. O'Brien (2004) The Classical Economists Revisited is clear. He detects in the theories of value in classical period two strands: subjective value theory and "cost of production" theory of value. From this point of view, he dissects Adam Smith. Let me cite the first part of his explanation:

• Adam Smith laid the foundations for Classical value theory. What he did, and the way he did it, were to prove extremely important because he seems deliberately and consciously to have rejected the value theory which he inherited. He inherited subjective value theory and, instead of developing this, he largely substituted for it a "cost of production" theory of value. A developed subjective value theory was available in the works of Pufendorf, Smith's teacher Hutcheson, and Hutcheson's teacher Carmichael. (O'Brien, 2004, p.91)

Obrien's structural interpretation help us better to understand the classical political economy and reorganize or restructure the real role of marginal revolution. It was a simple introduction of mathematical tool of analysis but inherited the subjectivist theory of value  that is older than Adam Smith and continued to survive as an overt and hidden current . In this point f view, marginal revolution was reactionary in its characteristic because it is a restoration of  old theory. (Please remind that I am not arguing from political point of view.)

This understanding also explains why British economics retarded in adopting demand and supply theory and the theory of demand based on utility analysis. This understanding also reveals that marginal revolution is a minor and rather supplementary change inside of a greater revolution in economics.

It has become clearer what happened in the marginal revolution. Jevons, Walras and Menger did not make a subjective revolution like Lall B. Ramrattan imagined (post #4). They have restored an old tradition that was once received a severe body blow by Ricardo's cost-of-production theory of value. It is a restoration and not a revolution.

Of course, any restoration has some aspects of revolution. The turn from Edo period to Meiji period was called Meiji Restoration but implied drastic change of the society. What we can say in the case of marginal revolution, the introduction of mathematical tools was not so revolutionary as the history of economics in France and Germany testifies. Return to subjective theory of value was not as revolutionary as Jevons thought it to be. Subjective understanding of those founding fathers of neoclassical economics may not reveal the real nature of the neoclassical revolution.

Do you know any good paper or papers that treated marginal or neoclassical revolution in economics from the viewpoint of Thomas Kuhn's Scientific Revolution?   

To understand the real nature of the neoclassical revolution in economics, Thomas Kuhn's The Structure of Scientific Revolutions is a key work. 

Many economists mentioned this book and Kuhn's notion of paradigm. The chapter 11 has a title The Invisibility of Revolutions.  Let me cite the a part of the first paragraph of Chapter 11.

• I suggest that there are excellent reasons why revolutions have proved to be so neatly invisible. Both scientists and laymen take much of their image of creative scientific activity from authoritative source that systematically disguises --- partly for important functional reasons --- the existence and significance of scientific revolutions. Only when the nature of that authority is recognized and analyzed can one hope to make historical example fully effective. (Kuhn, 2012, Chap. 11, p.135)

A normal science (a science with an established paradigm) has a strong tendency to deny the revolutions in theory. It s necessary to keep coherence of a paradigm. However, there are some cases that we should admit revolutions. In that case, a force of self defense works in the opposite direction. A revolution is now glorified to give reasons to justify the present  paradigm.  When we consider revolutions in economics we should keep in mid that these two opposing forces are always working.

We are now in the age of neoclassical economics. It does not want to recognize real revolutions  except two: one is Adam Smith and the other is marginal revolution. In the case of  marginal revolution, we can observe two forces: One is to strength the greatness of the revolution. The other is to minimize the various developments before the revolution. We are trapped in these two forces.  

I don't have the answer but by posting this link to the last work ( later published as a book 'Transformation of capitalist society')  by one of the most humble founding members of modern linguistics, the late Zellig Harris,  we may all learn something more about what economics can aim at improving human life more towards common good ?

I also must thank  RG autonomous researcher Bruce Nevin for many of his writings about important work by Z. Harris. 

http://zelligharris.org/The.Dir.of.Social.Change.draft.pdf

https://www.researchgate.net/profile/Bruce_Nevin2/contributions

I find it oddly interesting that Mr. Nevin, a linguist and student of Harris, works for Cisco System Inc at some point? But I hope this publication 'Frame of Reference for Social Change' is relevant of our discussion here.

https://www.researchgate.net/publication/268872763_Foreword_The_Legacy_of_Zellig_Harris_vol_1

Well, the only immediate relevance after my 1st reading of this paper to economics field of study is this remark about Z. Harris profound respect towards the reality of human languages.  That is his legacy, in contrast of Noam Chomsky's main contribution of sipping out 'context-free' language data ... if context-free can be used to construct liability-free utterances of social contracts, it is good training data for legality, yes?  

Chapter Foreword [The Legacy of Zellig Harris, vol. 1]

Let me talk by a metaphor. Thomas Kuhn talks much about a kind of gravitational field that works in order to to keep and re-enforce the coherence of a paradigm. We are in a field of discourses which works in two levels; one is the description of facts and theories, another is persuasive forces which increases internal coherence both in theory and in sentiments. Zellig Harris may have been interested in the latter aspect of scientific discourses. 

Hans G Despain is Professor of Economics and Department Chair at Nichols College, Massachusetts. He encourages your correspondence: [email protected]

http://marxandphilosophy.org.uk/reviewofbooks/reviews/2014/942