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/ 131
PRODUCTION OF COMMODITIES
BY MEANS OF COMMODITIES
PRELUDE TO A CRITIQUE OF
ECONOMIC THEORY
PIERO SRAFFA
VORA & CO., PUBLISHERS PVT. LTD.
3, Round Building, Bombay 2. ©
PIERO ‘SRAFFA
1960
Indian Edition
1963.
Price Rs. 4/-
Published by
K. K. Vora,
Vora & Co.
Publishers Pvt. Ltd,
3, Round Building,
Bombay 2.
Printed by
M. R. Sirut,
Sirur Printing Press,
Khetwadi 82th Lane,
Bombay 4, PREEACHY
Anyone accustomed to tink in terms of the equilibrium of
demand and supply may be inclined, on reading these pages, to
suppose that the argument rests on a tacit assumption of constant
returns in all industries. If such a supposition is found helpful,
there is no harm in the reader's adopting it as a temporary work-
ing hypothesis. In fact, however, n0 such assumption is made.
No changes in output and (at any rate in Parts I and II} no
changes in the proportions in which different means of produc-
tion are used by an industry are considered. so that no question
arises as to the variation or constancy of returns. The investi-
gation is concerned exclusively with such properties of an eco-
nomic system as do not depend on changes in the scale of pro-
duction or in the proportions of ‘factors’.
This standpoint, which is that of the old classical economists
from Adam Smith to Ricardo, has been submerged and forgotten
since the advent of the ‘marginal’ method. The reason is ob-
vious. The marginal approach requires attention to be focused
on change, for without change either in the scale ofan industry
or in the ‘proportions of the factors of production’ there can be
neither marginal product nor marginal cost. In a system in
which, day after day, production continued unchanged in those
respects, the marginal product of a factor (or alternatively the
marginal cost of a product) would not merely be hard to find—
it just would not be there to be found.
Caution is necessary, however, to avoid mistaking spurious
‘margins’ for the genuine article. Instances will be met in these
pages which at first sight may seem indistinguishable from exam-
ples of marginal production; but the sure sign of their spurious-
v PREFACE
ness is the absence of the requisite kind of change. The most
familiar case is that of the product of the ‘marginal land’ in
agriculture, when lands of different qualities ate cultivated side
by side: on this, one need only refer to P. H. Wicksteed, the
purist of marginal theory, who condemns such a use of the term
‘marginal’ as a source of ‘dire’ confusion’.!
The temptation to presuppose constant returns is not entirely
fanciful. It was expetienced by the author himself when he started
on these studies many years ago—and it led him in 1925 into
an attempt to argue that only the case of constant returns was
generally consistent with the premises of economic theory. And
what is more, when in 1928 Lord Keynes read a draft of the
opening propositions of this paper, he recommended that, if
constant returns were not to be assumed, an emphatic warning
to that effect should be given.
These allusions give incidentally some indication of the dis-
ptoportionate jength of time over which so short a work has
been in preparation. Whilst the central propositions had taken
shape in the late 1920's, particular points, such as the Standard
commodity, joint products and fixed capital, were worked out
in the “thirties and ecatly ‘forties. In the period since 1955, while
these pages were being put together out of a mass of old notes,
little was added, apart from filling gaps which had become
apparent in the process (such as the adapting of the distinction
between ‘basics’ and ‘non-basics’ to the case of joint products).
As was only natural during such a long period, others have
from time to time independently taken up points of view which are
similar to one or other of those adopted in this paper and have de-
1 ‘Political Economy in the Light of Marginal Theory’, in Economic
Journal xxiv (1914), pp. 18-20, reprinted as an appendix to his Common
Sense of Political Economy, ed. Lionel Robbins (1933), pp. 790-2.
vi PREFACE
veloped them further or in different directions from those pursued
here. It is, however, a peculiar feature of the set of propositions
now published that, although they do not enter into any dis-
cussion of the matginal theory of value and distribution, they
pave nevertheless been designed to serve as the basis for a cri-
tique of that theory. If the foundation holds, the critique may
be aitempted later, either by the writer or by someone younger
and better equipped for the task.
My greatest debt is to Professor A. §. Besicovitch for in-
valuable mathematical help over many years. I am also in-
debted for similar help at different periods to the late Mr. Frank
Ramsey and to Mr. Alister Watson, It will be only too obvious
that I have not always followed the expert advice that was given
to me—particularly with regard to the notation adopted, which
I have insisted on retaining (although admittedly open to objee-
lion in some respects) as being easy to follow for the non-
mathematical reader.
PS.
TRINITY COLLEGE
CAMBRIDGE
March 1959 CONTENTS
PART I
SINGLE-PRODUCT INDUSTRIES AND
CIRCULATING CAPITAL
1 PRODUCTION POR SUBSISTENCE Page 3
1 Two products
2 Three or more
3° General case
Ml PRODUCTION WITH A SURPLUS ~ 6
4° The rate of profits
5 Example of rate of profits
6 Basic and non-basic products
7 Terminological note
8 Subsistence-wage and surplus-wage
Wages paid out of the product
{0 Quantity and quality of labour
if Equations of production
12. The national income in a self-replacing system
©
If PROPORTIONS OF LABOUR TO MEANS OF PRODUCTION 13
13° Wages as a proportion of the national income
14 Values when the whole national income goes to wages
15 Variety in the proportions of labour to means of
production
16 ‘Deficit-industries’ and ‘surplus-industries’
17 A watershed proportion
18 Price-changes to redress balance
19 Price-ratios of product to means of production
20 Price-ratios between products
21.=«A recurrent proportion
22 Balancing ratio and Maximum rite of profits
ix IV THE
CONTENTS
STANDARD COMMODITY
‘An invariable measure of value’
The perfect composite commodity
Construction of such a commodity: example
Standard commodity defined
Equal percentage excess
Standard ratio (R) of net product to means of
production .
Standard ratio and rates of profits
Relation between wage and rate of profits in the
Standard system
Relation extended to any system
Example
Construction of the Standard commodity: the g-system
The Standard national income as unit
Non-basics excluded
V_ UNIQUENESS OF THE STANDARD SYSTEM
36
7
38
39
40
41
42
43
“4
Introductory
Transformation into a Standard system always possible
Why the question of uniqueness arises
Prices positive at all wage levels
Production equations with zero wages
Unique set of positive multipliers
Positive rauitipliers correspond to lowest value of R
Standard product replaced by equivalent quantity
of labour
- Wage or rate of profits as independent variable
VI REDUCTION TO DATED QUANTITIES OF LABOUR
$5
46
47
ae
49
Cost of production aspect
‘Reduction’ defined
Pattern of the movement of individual terms with
changes in distribution
Movement of an aggregate of terms
Rate of fall of prices cannot exceed rate of fais
of wages CONTENTS
PART It
MULTIPLE-PRODUCT INDUSTRIES AND
FIXED CAPITAL
VII JOINT PRODUCTION SL
50
51
2
Two methods of production for two joint products;
or, one method for producing them and two methods
for using them in the production of a third com-
modity.
A system of universal joint products
Complications in constructing the Standard system
VIL THE STANDARD SYSTEM WITH JOINT PRODUCTS 55
53
54
5S
56
37
Bs]
59
60
él
62
63
64
65
Negative multipliers: 1. Proportions of production incom-
patible with proportions of use
_ If. Basic and non-basic jointly pro-
duced.
_ IIL Special raw material
Interpretation of negative components of the Standard
commodity
Basics and non-basics, new definition required
Three types of non-basics
Example of the third type
Genera] definition
Elimination of non-basics
The system of Basic equations
Construction of the Standard system
Only the lowest value of R economically significant
‘Tax on non-basic product leaves rate of profits and
prices of other products unaffected
1X OTHER EFFECTS OF JOINT PRODUCTION 66
66
67
Quantity of Iabour embodied in two commoditics
jointly produced by two processes
Quantity of labour embodied in two commodities
jointly produced by only one process
xi 69
”
xX FIXED
TB
eA}
16
vil
9
80
81
32
83
84
85
86
88
89
CONTENTS
Reduction to dated quantities of labour not generally
possible
No certainty that all prices will remain positive as
the wage varies
Negative quantities of labour
" Rate of fall of prices no longer limited by rate of
fall of. wages
Implication of this
CAPITAL
Fixed capital as a kind of joint product
Machines of different ages regarded as different
products
Annual charge on a durable instrument calculated
by the annuity method
‘The same calculated by the joint-production equations
method
The equations method more general
Different depreciation of similar instruments in different
uses
Reduction to dated quantities of labour generally
impossible with fixed capital
How book-value of machine varies with age if r= 0
Quantity of labour ‘contained’ in a partly used-up
machine
How book-value varies with age if r>0
Variation of book-value of complete set of machines
‘of all ages with variation of r
Fixed capital in the Standard system
Similarity of rent-earmming natural resources with non-
basic products
Differential rent
Rent on land of a single quality
Relation of rent to ‘extensive’ and ‘intensive’ dimi-
nishing returns
Multiplicity of agricultural products
xii
5 CONTENTS
90 The distinction between ‘single-products system’ and
‘multiple-products system’, revised
9t Quasi-rents
PART Ill
SWITCH IN METHODS OF PRODUCTION
XH SWITCH IN METHODS OF PRODUCTION 9
92 Simple case, non-basic products
93 Basic products: both method and system switched
94 Condition for a rise in the rate of profits invariably
leading to a switch to a higher Standard ratio
95 Throughout a series of switches from system to system.
(provided they are single-products systems) to a higher
rate of profits corresponds a fall in the wage
96 Switch of methods in multiple-products systems
APPENDICES
A ON “SUB-SYSTEMS' 105
i NOTE ON SELF-REPRODUCING NON-BASICS 107
(© THE DEVICE OF A ‘BASIC SYSTEM’ 110
D REFERENCES TO THE LITERATURE 1
4 Preduction as a circular process in the Physiocrats
and Ricardo
2 Standard measure of valuc and ‘labour commanded’
3° The Maximum rate of profits
4 = Residual fixed capital as a joint product
Index 115
xiii PART I
SINGLE-PRODUCT INDUSTRIES AND
CIRCULATING CAPITAL CHAPTER I
PRODUCTION FOR SUBSISTENCE
I. Let us consider an extremely simple society which
produces just enough to maintain itself, Commodities are produced
by separate industries and are exchanged for one another at a
market held after the harvest.
Suppose at first that only two commodities are produced,
wheat and iron. Both are used, in part as sustenance for those
who work, and for the rest as means of production—wheat as
seed, and iron in the form of tools. Suppose that, all in all, and
including the necessaries for the workers, 280 quarters of wheat
and 12 tons of iron ate used to produce 400 quarters of wheat;
while 120 quarters of wheat and 8 tons of iron are used to
produce 20 tons of iron. A yeat’s operations can be tabulated as
follows:
280 gr. wheat+12 t. iron—> 400 qr. wheat
120 qr. wheat+ 8 t. iron—> 20 t. iron.
Nothing has been added by production to the possessions of
society as a whole: 400 qr. of wheat and 20 t. of iron have been
used up in the aggregate and the same quantities are produced.
But each commodity, which initially was distributed between
the industries according 1o their needs, is found at the end of the
year to be entirely concentrated in the hands of its producer.
(We shall call these relations ‘the methods of production and
productive consumption’, or, for short, the methods of produc
tion) SINGLE-PRODUCT INDUSTRIES
There is a unique set of exchange-values which if adopted
by the market restores the original distribution of the products
and makes it possible for the process to be repeated; such values
spring directly from the methods of production. In the particular
example we have taken, the exchange-value required is 10 qr.
of wheat for 1 t. of iron.
2. The same applies to three commodities, or indeed to
any number. Adding as a third product pigs:
240 qr. wheat+1!2 t. iron+18 pigs—>450 qr. wheat
90 ge. wheat+ 6 t. iron+12 pigs—> 21 t. iron
120 qr. wheat+ 3 t. iron+30 pigs— 60 pigs
The exchange-values which ensure replacement all round
are 10 qr. wheat = 1 t. iron = 2 pigs.
It may be acticed that, while in the two-industry system the
amount of iton used in wheat-growing was necessarily of the
same value as the amount of wheat used in iron-making, this,
when there are three or more products, is no longer necessarily
true of any pair of them. Thus in the last example there is no
such equality and replacement can only be effected through
triangular trade.
3. To restate the position in general terms, we have the
commodities ‘a’, “b’, ..,, ‘k’, each of which is produced by a
separate industry.
We call A the quantity annually produced of ‘a’; B the
similar quantity of ‘b’; and so on.
We also call A., B., .... Ka. the quantities of ‘a’, ‘b’, ..., ‘k’
annually used by the industry which produces A; and A;, Bp, ...,
K, the corresponding quantities used for producing B; and so on.
4 PRODUCTION FOR SUBSISTENCE
All these represent known quantities. The unknowns to be
determined are pz, Pu ---» Px tespectively the values of units of
the commodities ‘a’, ‘b’, .... ‘k’ which if adopted restore the
initial position.
The conditions of production now appear as follows:
Aapat Bopot...+Kope= Apa
APat Boprt...+Kipr= Boy
Appat Bipot... + Kips Kpe
where, since the system is assumed to be in a self-replacing state,
ActAgt... $424; Bot Bt... +Be=B3...5 and KetKet...
+K,=K. That is to say, the sum of the first column is equal to
the first line, that of the second column to the second line, and
so on.
It is not necessaty to suppose that every commodity enters
directly into the production of every other, accordingly some of
the quantities on the left-hand side, ie. on the side of the means
of production, may be zero.
One commodity is taken as standard of value and its price
made equal to unity. This leaves kK—1 unknowns. Since in the
aggregate of the equations the same quantities occur on both
sides, any one of the equations can be inferred from the sum of
the others! This leaves k-1 independent linear equations which
uniquely determine the k-1 prices.
1 This formulation presupposes the system’s being in a self-replacing
state; but every system of the type under consideration is capable of being
brought to such a state merely by changing the proportions in which the
individual equations enter it. (Systems which do so with a surplus are dis-
cussed in §4ff. Systems which are incapable of doing so under any pro-
portions and show a deficit in the production of some commodities over
their consumption even if none has a surplus do not represent viable
economic systems and are not considered.)
5 CHAPTER II
PRODUCTION WITH A SURPLUS
4. If the economy produces more than the minimum neces-
sary for replacement and there is a surplus to be distributed, the
system becomes self-contradictory. In effect, if we add up all the
equations, the right-hand side of the resulting sum-cquation (or
gross national product) will contain, besides all the quantities that
are found on the left-hand side (or means of production and sub-
sistence), some additional ones that are not. Reckoning as in § 3,
there are now k independent equations with only k - 1 unknowns.
The difficulty cannot be overcome by allotting the surplus
before the prices are determined, as is done with the replacement
of raw-materials, subsistence, etc. This is because the surplus (or
profit) must be distributed in proportion to the Means of produc-
tion (or capital) advanced in each industry; and such a proportion
between two aggregates of heterogeneous goods (in other words,
the rate of profits) cannot be determined before we know the
prices of the goods. On the other hand, we cannot defer the
allotment of the surplus till after the prices are known, for, as
we shall see, the prices cannot be determined before knowing the
rate of profits. The result is that the distribution of the surplus
must be determined through the same mechanism and at the same
time as are the prices of commodities.
Accordingly we add the rate of profits (which must be uni-
form for all industries) as an unknown which we call r and the
system becomes
(Aape+ BaPo+...+KaPy) (+7) = Apa
(Aope+ Bypot...+ Kop.) (14 = Bp,
(Arp. t+ Bapo +..0+ Kiri) G+) = Kp
6 PRODUCTION WITH A SURPLUS
where, since the system is assumed to be in a self-replacing state,
Ast As. Ar AIBA Bet... + BiB, GKot Kot... t Kick:
that is to say the quantity produced of each commodity is at least
equal to the quantity of it which is used up in all branches of pro-
duction together.
This system contains a number of k independent equations
which determine the k-1 prices and the rate of profits.
5. As an example we may in the two-commodity case (§ 1)
increase the output of wheat from 400 qr. to 575 qr. leaving all
the other quantities unchanged. This gives a socia) surplus of
175 qr. of wheat and the resulting position is:
280 qr. wheat+ 12 t. iron—>575 gr. wheat
120 qr. wheat+ 8+. iron—> 201. iron.
The exchange-ratio which enables the advances to be replaced
and the profits to be distributed to both industries in proportion
to their advances is 15 qr. of wheat for 1 t. of iron; and the cortes-
ponding rate of profits in each industry is 25%.
(Let us, as an illustration, do the arithmetic for the iron in-
dustry. Of the 20 t. produced, 8 go to replace the iron used and
12 are sold, at the price of 15 qr. wheat per ton, thereby obtaining
180 qr. wheat: of these, 120 qr. go to replace the wheat used and
60 qr. are profit at the rate of 25% on the 240 qr. wheat which is
the aggregate value of the wheat and iron used as means of pro-
duction and subsistence in the iron industry.)
6. One effect of the emergence of a surplus must be noticed.
Previously, all commodities ranked equally, each of them being
found both among the products and among the means of produc-
tion; as a result each, directly ot indirectly, entered the production
of all the others, and each played a part in the determination of
Prices. But now there is room for a new class of ‘luxury’ products
7 SINGLE-PRODUCT INDUSTRIES
which ate not used, whether as instruments of production or as
articles of subsistence, in the production of others.
These products have no part in the determination of the
system. Their role is purely passive. If an invention were to
teduce by half the quantity of each of the means of production
which are required to produce a unit of a ‘luxury’ commodity of
this type, the commodity itself would be halved in price, but there
would be no further consequences; the price-relations of the
other products and the rate of profits would remain unaffected.
But if such a change occurred in the production of a commodity
of the opposite type, which does enter the means of production.
all prices would be affected and the rate of profits would be
changed. This can be seen if we eliminate from the system the
equation representing the production of a ‘luxury’ good. Since
by the same act we eliminate an unknown (the price of that good)
which only appears in that equation, the remaining equations
will still form a determinate sysem which will be satisfied by the
solutions of the larger system. On the other hand, if we eliminated
one of the other, non-luxury, equations, the number of unknowns
would not thereby be diminished since the commodity in question
appears among the means of production in the other equations and
the: system would become indeterminate.
What has just been said of the passive tole of luxury goods
can readily be extended to such ‘luxuries’ as ate merely used in
their own reproduction, either directly (e.g. racehorses) or indirectly
(e.g. osttiches and ostrich-eggs) or merely for the production of
other luxuries (e.g. raw silk).
The criterion is whether a commodity enters (no matter
whether directly or indirectly) into the production of all commo-
dities. Those that do we shall call basic, and those that do not,
non-basic products. PRODUCTION WITH A SURPLUS
We shall assume throughout that any system contains at least
one basic product.
7. It is desirable at this stage to explain why the ratios
which satisfy the conditions of production have been called
‘values’ or ‘prices’ rather than, as might be thought more appro-
priate, ‘costs of production’.
The latter description would be adequate so far as non-basic
products were concerned, since, as it follows from what we have
seen in the preceding section, their exchange ratio is merely a
reflection of what must be paid for means of production, labour
and profits in order to produce them—there is no mutual
dependence.
But for a basic product there is another aspect to be consi-
dered. Its exchange-ratio depends as much on the use that is
made of it in the production of other basic commodities as on
the extent to which those commodities enter its own production.
(One might be tempted. but it would be misleading, to say that
‘it depends as much on the Demand side as on the Supply side’)
In other words, the price of a non-basic product depends on
the prices of its means of production, but these do not depend
on it, Whereas in the case of a basic product the prices of its
means of production depend on its own price no less than the
latter depends on them. ,
A less one-sided description than cost of production seems
therefore required. Such classical terms as ‘necessary price’,
‘natural price’ or ‘price of production’ would meet the case, but
value and price have been prefetred as being shorter and in the
present context (which contains no reference to market prices) no
more ambiguous.
It may be added that not only in this case but in general the
use of the term ‘cost of production’ has been avoided in this work.
9 SINGLE-PRODUCT INDUSTRIES
as well as the term ‘capital’ in its quantitative connotation, at the
cost of some tiresome circumlocution. This is because these terms
have come to be inseparably linked with the supposition that they
stand for quantities that can be measured independently of, and
prior to, the determination of the prices of the products. (Witness
the ‘real costs’ of Marshall and the ‘quantity of capital’ which is
implied in the marginal productivity theory.) Since to achieve
freedom from such presuppositions has been one of the aims of
this work, avoidance of the terms seemed the only way of not
prejudicing the issue.
8. We have up to this point regarded wages as consisting of
the necessary subsistence of the workers and thus entering the
system on the same footing as the fucl for the engines or the feed
for the cattle. We must now take into account the other aspect
of wages since, besides the ever-present element of subsistence,
they may include a share of the surplus product. In view of this
double character of the wage it would be appropriate, when we
come to consider the division of the surplus between capitalists
and workers, to separate the two component parts of the wage
and regard only the ‘surplus’ part as variable; whereas the goods
necessary for the subsistence of the workers would continue to
appear, with the fuel, etc., among the means of production.
We shall, nevertheless, refrain in this book from tampering
with the traditional wage concept and shall follow the usual
practice of treating the whole of the wage as variable.
The drawback of this course is that it involves relegating the
necessaries of consumption to the limbo of non-basic products.
‘This is due to their no longer appearing among the means of pro-
duction on the left-hand side of the equations: so that an im-
provement in the methods of production of necessaries of life will
no longer directly affect the rate of profits and the prices of other
10 PRODUCTION WITH A SURPLUS
products. Necessaries however are essentially basic and if they
are prevented from exerting their influence on prices and profits
under that label, they must do so in devious ways (¢.g. by setting
a limit below which the wage cannot fall; a limit which would
itself fall with any improvement in the methods of production of
necessaries, carrying with it a rise in the rate of profits and a
change in the prices of other products.)
In any case the discussion which follows can easily be adapted
to the more appropriate, if unconventional, interpretation of the
wape suggested above.
9. We shall also hereafter assume that the wage is paid
post factum as a share of the annual product, thus abandoning the
classical economists’ idea of a wage ‘advanced’ from capital. We
retain however the supposition of an annual cycle of production
with an annual market.
10. The quantity of labour employed in each industry has
now to be represented explicitly, taking the place of the corres-
ponding quantities of subsistence. We suppose labour to be uni-
form in quality or, what amounts to the same thing, we assume
any differences in quality to have been previously reduced to equi-
valent differences in quantity so that each unit of labour receives
the same wage.
We call L., L,, ..., L, the annual quantities of labour res-
pectively employed in the industries producing A, B,..., K and we
define them as fractions of the total annual labour of society,
which we take as unity, so that
Lt+Lyt..th. = 1.
We call w the wage per unit of labour, which like prices will
be expressed in terms of the chosen standard. (See further, on
the choice of a standard, § 12.)
il SINGLE-PRODUCT INDUSTRIES
11. On this basis the equations take the form:
(Apt Bapot...+Kap) U+7)+Liw = Ap,
(Aopat Bypo +... Kops) (1-+7)+ Lew = Bpy
(Aupa + Bepot..-+ Kxps) (+r) + Liw = Kpy
where, as in the earlicr cases, the system is assumed to be in a
self-replacing state, namely such that A,+A,t+...tAr.
