GREAT GRANDFATHER MARX,

UNCLE SRAFFA,
AND RADICAL POLITICAL
ECONOMY
Economics Department
Seminar
PSU November 18, 2016
[email protected]

The Argument in Brief

For too long those dis-enamored with the economics of
competition and greed have had only two choices:
1. Continue to use a formal model based on the labor theory of
value in a Hegelian philosophical framework as Marx developed
it in Capital to justify ones opposition to capitalism. Or
2. Abandon the Marxian framework as outdated and risk losing
a critical evaluation of capitalism.
My next book is dedicated to providing the next generation
fighting against the destructive effects of financialized,
neoliberal, environmentally destructive capitalism a third
choice: A modern, profoundly radical version of Sraffian
economics that is also suited to analyzing environmental
sustainability.

Radical Political Economy for NonExperts

There are many books and readers which cull wisdom from different
heterodox schools: Early attempts, with many subsequent editions over
the years, include Edwards, Reich, and Weisskopf, The Capitalist System
(Prentice Hall 1972), and Hunt and Sherman, Economics: An Introduction
to Traditional and Radical Views (Cotler 1972). More recently is my The
ABCs of Political Economy, (Pluto, 2st edition 2002, 2nd edition 2014).
Marxian economics: There are many abbreviated, accessible
presentations of Das Capital by authors who present the formal logic with
their own particular twist: Paul Sweezy, Ernst Mandel, Duncan Foley, Ben
Fine, John Weeks, David Harvey, Charles Barone to name only a few.
Im just finishing a book that compares a radical version of Sraffian
economics with formal Marxian economics that is accessible to
undergraduates and a general audience. It makes the case for replacing
popular versions of formal Marxian theory with a popular version of
Sraffian theory that is every bit as radical and critical of capitalism.

Why Great Grandfather Marx?

Marx was not the first, but remains the
greatest critic of capitalism, and richly
deserves his place in history.
Marx opened our eyes to how the economic
sphere of social life exerts a powerful
influence over the political, cultural, and
reproductive spheres of social life.
Marx gave intellectual support to workers
instinct that capitalism systematically
exploits them.
And Marx reminded us that life beyond
capitalism, where workers manage and
coordinate their economic activities

Why Great Grandfather

Marx?
However a great deal has happened since Marx died in 1883. There
are 133 years of world history -- some of which, such as the Soviet
perversion of the socialist vision, and capitalisms recovery from
the Great Depression, would have come as great surprises to Marx.
And there have been new intellectual discoveries as well, some of
which, such as proof of the Frobenius-Perron theorem in
mathematics, and modern, egalitarian, philosophical theories of
distributive justice, provide us with intellectual tools unavailable to
Marx.
It is time to acknowledge that Marxs attempt to fashion a formal
economic theory of price and income determination in capitalism
based on a labor theory of value, and elaborate a Hegelian
critique of capitalism can now be surpassed while
acknowledging our unpayable debt to Great Grandfather Marx as
our greatest pioneer.

Why Uncle Sraffa?

Sraffa provided a theory of income distribution and prices in the
classical tradition based on an analysis of production of an
economic surplus that is superior to formal Marxian theory.
But Sraffa published as little, on as few subjects, as Marx
published volumes on a great many subjects!
So Sraffa will always remain a minor intellectual figure compared
to Marx. However, in the one area Sraffa addressed price and
income determination in capitalism -- Sraffa did surpass Marx.

Moreover, since 1960 when Production of Commodities by

Means of Commodities was published, a number of distinguished
Sraffian economists have used modern mathematical tools to
elaborate an intellectually rigorous version of Sraffian theory
which surpasses formal Marxian economic theory in every
regard.

How Is Sraffian Theory Better?

Sraffian theory is devoid of embarrassing inconsistencies

which plague Marxian formal theory, which apologists for
capitalism exploit.
Because it uses familiar economic and philosophical
concepts -- rather than a conceptual apparatus abandoned
long ago by all except Marxists Sraffian theory is more
intelligible to economists, philosophers, and lay audiences
today.
Sraffian theory and the Fundamental Sraffian Theorem
show more clearly why capitalists are parasites living off
the work of others than does Marxian theory and the
Fundamental Marxist Theorem.
Marxian theory misleads us to search for non-existent
crises which distracts us from focusing attention on actual
sources of crisis in capitalism.
Unlike the Marxian labor theory of value which is ill-suited
to incorporating inputs from nature into our formal
analysis, the Sraffian framework easily accommodates
natural resources and rents.
Finally, recent developments extend Sraffian theory to

Marx or Sraffa? Prices 1

Marxian theory starts with technology, derives labor values, and then
must transform these labor values into what Marxists call prices of
production which are consistent with equal rates of profit in all
industries. In other words the process is: {A, L, w s} V P where ws
stands for a subsistence wage rate.
Sraffian theory derives prices consistent with equal rates of profit in all
industries directly from technologies and a given real wage: {A, L, w a} P
where wa stands for any wage rate workers manage to achieve.
Of course it is possible to go from V P. Since P is a relative price vector
while V is a vector of absolute values, there is one degree of freedom
when performing the transformation. This has given rise to different
solutions to the transformation problem depending on choice of a
numeraire. And much ink has been spilled among Marxist economists
debating over which choice of a numeraire is more consistent with
Marxs argument, or intent, which choice better illustrates some
valuable lesson about how capitalism functions, etc.
But the question is: Why bother? If we can derive prices of production
directly from technologies for any real wage -- as Sraffian theory
demonstrates we can -- why bother first to calculate labor values, only to
have to go to the trouble of deriving a correct set of prices starting from
labor values?

Marx or Sraffa? Prices 2

Before citing Occams razor and declaring discussion closed

because prices under capitalism can be explained without
referring to labor values, and are not equal to labor values in any
case, we should consider if there is any reason why beginning with
labor values on our way to explaining prices might be insightful.

Rationale 1: In capitalist economies values originate first, and

subsequently become transformed into prices, i.e. our intellectual
transformation reveals something about the actual process of
price formation in capitalist economies.

Rebuttal: This rationale requires that financial capital must

constantly flow from capital intensive industries to labor intensive
industries in order to equalize rates of profit in all industries.
There is no evidence that this happens. If anything the exact
opposite happens, and only over much longer periods of time.
Moreover, the only reason we need to conjure up such a nonexistent flow is that we started from the obviously incorrect
assumption that goods initially tend to sell according to their labor
values under capitalism.

Marx or Sraffa? Prices 3

Rationale 2: A transformation from value prices to prices
of production occurs when a pre-capitalist economy Marx
called simple commodity production is transformed into
a capitalist economy, i.e. our intellectual transformation
mirrors a hypothetical or historical transformation from
one economic system to another.
Rebuttal: This argument has much more to recommend it.
One important thing to understand about different economic
systems is why they generate different price signals even if
their technologies, endowments, and preferences are the
same. So as long as we do not attempt to use labor values to
explain prices in capitalist economies, there is no reason
they may not be helpful in explaining price formation in some
other pre-capitalist economic system.

Marx or Sraffa? Prices 4

Rationale 3: Labor values are necessary because

otherwise the origin of profits will remain a mystery.
Rebuttal: Values are not necessary to explain the
origins of profit because the Fundamental Sraffian
Theorem (FST) explains the origins of profits as well
or better than Morishimas Fundamental Marxian
Theorem (FMT) without reference to values. (More
on this in a moment)
Rationale 4: Capitalism is best understood by
studying production first and exchange second, and
values are best suited to understanding the former,
while prices of production are only necessary to
understand the latter.
Rebuttal: Sraffian theory analyzes production, and
the economic surplus without recourse to values
which are not only redundant, but misleading.
Dom(A) < 1 is a rigorous measure of the extent to

Marx or Sraffa? Profits 1

Marx believed he had discovered the answer to the mystery of where
profits come from even when capitalists must pay for all inputs
according to their labor values and sell their outputs according to their
labor values.
Marx argued that the answer lies in one special commodity capitalists
buy, labor power, which has the unique ability to produce more value
when used than the number of hours it takes to produce it, and
therefore capitalists have to pay for it.
Michio Morishima (1974) provided a formal representation of this
explanation of the origin of profits in what became known as the
fundamental Marxian theorem (FMT): Iff the rate of exploitation (of
labor) is positive will the profit rate be positive.
There is no problem with Morishimas proof of the FMT. However, there
are three problems with the Marxian explanation of profits as deriving
from the exploitation of one input to production, labor power.

Marx or Sraffa? Profits 2

1. As in the case of prices, it turns out that labor values are
not necessary to explain profits, i.e. they are redundant.
2. It also turns out that the choice of labor power as the
input capitalists exploit is arbitrary since any other basic
input can be used to tell the same story. The implication
that only one input to production, labor, is exploitable is
also misleading. In fact capitalists price by marking-up over
the cost of every input they buy, not only labor.
3. And finally, the Marxian explanation of profits can be
misleading with regards to predicting the effects of
technological change on the rate of profit in the economy.
(More on this later)

Marx or Sraffa? Profits 3

The Fundamental Sraffian Theorem (FST) explains the origins of
profit without resort to the LTofV: Iff workers are denied all of
the surplus goods they produce will the profit rate be positive.
One can prove that the rate of profit is positive iff every basic
input is exploited when we choose to define values embodied
in terms of that input, i.e. the choice of the input labor power is
arbitrary.
If you believe profits come from exploiting only one input,
labor, you can easily be deceived into believing there must be a
TRPF as capitalists engage in capital deepening -- whereas
the Okishio theorem proves this cannot be the case.
For the curious: Yes: FMT FST (See theorem 22 in Hahnel
2017). This is because dom(A+bL) < 1 is both necessary and
sufficient for both the FST and the FMT to be true.

Marx or Sraffa? Profits 4

Instead of searching for an input which is magically capable of
expanding value during production, it turns out that reality is
much simpler: It is the productivity of the economy after wages are
paid that allows for positive profits.
It is because workers are denied part of the surplus goods they
produce that profits are positive.
There is no need to elaborate a labor theory of value to make this
point; no need to define a complicated technical ratio defined in
terms of labor values, (1 Vb)/Vb; and no misleading identification
of one input in particular that holds the key to the origins of profit,
when in fact every input could be used to tell the same story.
Sraffian theory identifies the actual surplus of goods workers
produce which capitalists manage to expropriate, and establishes a
strong prima facie case that those who do no work, but
nonetheless consume part of the physical surplus others produce,
are parasites.

Marx or Sraffa? Technical

Change 1
Marxists and Sraffians agree that if and only if a new technology
reduces costs of production will profit maximizing capitalists
adopt it. And also agree that after a technical change is adopted
by all in an industry there will be a general adjustment in relative
prices to eliminate super profits in the innovating industry, and
once again yield a uniform rate of profit throughout the economy.
After which, there is a parting of the ways in the Sraffian and
Marxian analyses of technical change.
All Sraffians recognize the validity of the Okishio theorem, which
lays to rest any concerns that capital deepening will reduce the
rate of profit in the economy if the real wage is held constant.
Some Marxist economists persist in futile attempts to resuscitate
a tendency for the rate of profit to fall, which have all been
thoroughly rebutted.

Marx or Sraffa? Technical Change 2

Marxist economists have been willing to accept that Adam Smiths second
invisible hand does work, i.e that profit maximizing capitalists can be trusted
to always and only adopt technical changes which increase economic
productivity.

Whereas Sraffians have demonstrated that capitalists cannot be trusted to

always serve the social interest with regard to adopting and rejecting new
technologies.
The higher the rate of profit and lower the wage rate, the more likely it
becomes that capitalists will commit both sins of omission fail to adopt
capital-using, labor-saving technologies that are more productive and sins
of commission adopt labor-using, capital-saving technologies even though
they are less productive. (See Roemer 1981 Analytical Foundations)
And using a Sraffian framework it is possible to measure precisely how much
any technical change in any industry increases or decreases overall labor
productivity: (l), the percentage change in overall labor productivity in the
economy is equal to (1 - ) where is the dominant eigenvalue of the
matrix (A+L). (See Hahnel 2016 RRPE)

Marx or Sraffa? The

Environment 1
Lacking a formal framework that facilitates accounting for inputs from
the natural environment and focuses entirely on how much labor time it
takes to produce things, some ecological Marxists have scoured Marxs
voluminous writings to find a few passages where he conjectured that
capitalism would cause what they have labeled a metabolic rift
between humanity and nature, and treat environmental problems as one
of the crises that inevitably plague capitalist economies.
Citing the master himself -- Accumulate, accumulate! That is Moses and
the prophets! these ecological Marxists argue that because
capitalism is all about accelerating economic growth it must be
incompatible with environmental sustainability, as if this were obvious.
(David Harvey (1996), James OConnor (1998), Joel Kovel (2002), John
Bellamy Foster (1994, 2000, 2002, 2009), Paul Burkett (2006), and Jason
Moore (2015).
Unfortunately, the claim that a continual increase in the growth of
capitalist accumulation of surplus value (which is what Marx postulated)
is impossible on a finite planet does not survive the sniff test. Those who
make the claim fail to realize that value is not throughput, carelessly
applying reasoning to value as if it were throughput, and, in effect, are
guilty of assuming their conclusion.

Marx or Sraffa? The Environment 2

theory easily incorporates inputs from nature into

Sraffian
its explanation
of prices, wages, profits, and rents:
(1+r)pA + wL + uT = p. (See theorem 19 in Hahnel 2017)

Sraffian theory facilitates rigorously measuring what

ecological economists call environmental throughput: N =
H[I-A]-1 where N is the vector of nature values
analogous to the vector of labor values, and tells us how
many units of nature are used up both directly and
indirectly to produce a unit of each good.

Sraffian theory facilititates rigorously measuring the rate

of change of throughput efficiency stemming from any
technical change in any industry: (n), the percentage
change in throughput efficiency is equal to (1 ) where
= dom[A+ H]. (See theorem 20 in Hahnel 2017)

Marx or Sraffa? The Environment 3

And because we can rigorously measure both the percentage change
in labor productivity and the percentage change in throughput
efficiency in a Sraffian framework, it is possible to stipulate a
sufficient condition for environmental sustainability assuming the
number of hours worked in every industry remains the same:
As long as (l), the rate of growth of labor productivity, does not
exceed (n), the rate of growth of throughput efficiency,
environmental throughput will not increase.
A Sraffian treatment of the environment demonstrates that
environmental sustainability reduces to whether or not increases in
throughput efficiency keep pace with increases in labor productivity,
or, as environmental economists put it, on whether or not we can
sufficiently de-couple growth of output from growth of throughput.
Which allows us to sort out the sense from the nonsense in the
steady-state and de-growth literatures.

Marx or Sraffa? A Moral

Critique

In a different talk I would explain why I believe that neither

Marxist theory, nor Sraffian theory as it has been traditionally
presented, provides the most compelling and strongest moral
critique of capitalism. But we can compare what each theory
does provide to start with, which we might call the prima
facie case that profits are unjust and capitalists are parasites:
The FMT: (1-Vb)/Vb > 0 r > 0. In words, only when the
rate of exploitation is positive can profits be positive.
The FST: dom(A+bL) < 1 r > 0: In words, only when those
who do all the work receive less than the entire surplus of
goods they produced can profits be positive.
I submit that the implicit moral critique in the FST is at least
as powerful, if not more powerful. And because it does not
assume familiarity with a theory of pricing that is redundant,
misleading, and foreign to economists and lay audiences
today, pedagogically advantageous.