Well, as I pointed out yesterday the Capital Controversies have come up once more. Now, again, there were a number of important issues in the controversies — the measurement of capital being one as this leads to some very salient criticisms of using production functions in empirical work — but I want to follow up on the same theme I discussed yesterday; namely, income distribution.
The mainstream economists have a very difficult time figuring out why Post-Keynesians and Sraffians get fired up on this point. After all, they insist, you can account for various aspects of income inequality in their marginalist models. What’s more you can do this without assuming that capital and labour receive a share of the national income in line with their marginal productivities. This is, as I pointed out yesterday, quite true.
A semi-regular commenter on here, ivansml, made this point over at Vernengo’s blog. He wrote,
Competitive equilibrium is just one kind of a market structure. In markets with monopsony or bargaining, wage doesn’t have to equal marginal product of labor... I’m aware that Sraffian authors reject marginalism (well, the basic idea, at least). Aware and unconvinced. I don’t see any evidence that disaggregated general equilibrium models suffer from logical inconsistency, just because Sraffa wrote down a model where prices are indeterminate – if you ignore demand and preferences, then of course you’ll find you have more unknowns than equations, and Sraffian models can be recast as special cases of GE anyway (Hahn, Cambridge J. Econ. 1982; Mandler, Rev. Econ. Stud. 1999). But I guess that as a rhetorical strategy for those already convinced, a blanket dismissal of neoclassical theory as a way to avoid engaging any arguments of substance, it works quite well.
I don’t want to address some of the technical points here in detail — but in passing I will note that it is well-recognised that General Equilibrium models suffer from logical problems as was shown in the Sonnechein-Mantel-Debreu theorem — rather I want to deal with the overarching theme.
The theme of ivansml’s comment is that the Sraffians are saying the same thing as the General Equilibrium theorists, just in special case form. This is mistake often made by the mainstream — and sometimes, but less often, by heterodox authors — and it makes them myopic, insular and arrogantly blind to any need for academic pluralism. Basically it is a mistake of misrecognising what an economic model is and what it does.
An economic model is a sort of parable. Intuitively, every economist should know this. You lay out assumptions — that is, a framework for a logical narrative — and then you follow these assumptions through to the narrative endpoint. But the assumptions are not arbitrary. Indeed, I would argue that they are key to the whole model and to what it conveys.
Think of this like a film script. The assumptions give the story a narrative structure. Thus they determine whether the model is Sraffian or Marxist or marginalist, in the case of economics, and whether the film is a horror, a comedy or a romance, in the case of a film script. The different narrative structures — or genres, if you like — convey different things to the people who use them.
There are many features that makes, in this case, Sraffian models different to marginalist models. But I want to focus on how the two view prices and distribution. In doing so I will lay out two short parables. These are not themselves true Sraffian or marginalist models but they capture the differences in the narrative structures.
Parable 1 — In the Beginning There Were Prices
On Marginalist Island lots of men and women live in peaceful coexistence. They have established for themselves a system of property rights and they use either money, barter or a numéraire to engage in trade with one another. There are a given number of goods and services in the economy. These include labour services and previously accumulated capital. The capital is an accumulation of past savings — people putting aside consumption at one point in time for consumption at another point in time. People have set preferences and want to maximise their utility in line with these. Everyone meets at a given instant in time and exchanges their goods and services — including labour services — with one another. Prices are set through a bartering process ruled over by an auctioneer and profits are equalised through competition. People give up their labour in line with their desire to earn a given wage offset by their desire for leisure. While owners of capital get compensated for the use of their machines (or whatever) by the income they generate.
Parable 2 — In the Beginning There Was Distribution
On Ricardo Island lots of men and women live in a far from peaceful coexistence. Property rights are in place and people use either money, barter or a numéraire to engage in trade with one another. Again, there are a given number of goods and services in the economy — including labour services and previously accumulated capital. This capital is an accumulation of past labour inputs — it is a result of people having worked in the past to produce goods that would increase their productivity in the future. People have no set preferences and care little about utility — the manner in which they consume is either arbitrary or subject to rules of thumb and so does not concern us. Everyone meets at a given moment in time and exchanges their goods and services, including their labour services. But the meeting is not between people bargaining and bartering. Rather, some of the community have power over other parts of the community and try to use this to negotiate how high their share of the total income will be. Some of the community own more of the capital than others and they try to keep down wages in order to maximise their profits, although the profits of the capital owners as a whole will be equalised through competition. The prices that the system ultimately generates will be completely based on the distribution of resources among different groups.
Back Down to Earth
Do you see the difference in the narrative structure between these two scenarios? I hope you do because if you don’t you are likely a dogmatist who will try to reduce one narrative to the other — that is, you are likely a person who does not tolerate difference of perspectives and tries to reduce everything to your own perspective and pretend that it is the only one. In this case I suggest that you seek advice from family and friends.
To everyone else it should be clear that the narrative structure of the two parables is different. In very boiled down form: in the marginalist stories prices are set by preferences and distribution follows while in the Sraffian story prices are set by distribution. Yes, we could add in more elements to either story. In the marginalist story, for example, we could introduce trade unions and monopolists. But that does not change the narrative structure. And the narrative structure is what is interesting. Why?
Because, as we have said, these are just parables, stories, fictions. So too are the actual models that economists in either tradition work with. There is no inherent truth to these stories, they are just stories. But they are stories that colour how we view the world. If we view the world in line with Parable 1 we will have a very different approach to it than if we view the world in line with Parable 2. Different perspectives will mean that we will view different real world events in different ways.
When we start doing economics we inevitably adopt a narrative structure. This will have an enormous power over how we think about the world. To the less self-conscious among us — and, sadly, economists are generally less self-conscious than people in other social sciences — they will even shape our world in ways that we do not recognise.
The problem today is that students of economics are offered only one narrative structure. They are not given a choice. By the time they have encountered others they cannot tell the difference between the two and try to reduce everything to their own point-of-view (well, not all of them, but most). Indeed, most of the students who would have been inclined to greater narrative choice — that is, greater pluralism — have already been driven out of the discipline. Even those who did encounter different narratives early on find it very difficult to get work because they live in a world where others have closed their minds to everything but their own narrative structures.
At the end of the day, we can have different schools of thought attack each others models all they want. That’s fine. All in good fun. But if they ever become convinced that their’s is the only way of looking at the world that is when things start to get dangerous. That is when dogma sets in and academic pluralism is closed off.
The Sraffian view in economics got a far later institutional start in academia and that, largely, accounts for its marginalisation now. Whether it can begin to make its way onto the curriculum is an open question. Whether it will or not has to do with institutional structures. Privileged academics who insist that only their view is Truth will always move to defend their privilege. Such people will likely be so convinced that their’s is the only way that they will not even realise that they are marginalising others — these are the zealots. They need to be overcome by people who want to see more choice for students and a more open discourse in economics.
Fixing the Economists 
This reminds me of a presentation Amartya Sen made in 2003 at the Cambridge Realist Workshop, where he argued that the neoclassical theory and Sraffa’s revival of classical theory could be seen as two Wittgensteinian language games, and the Sraffian language game enables us to make important political arguments on distribution that the neoclassical language game does not (also, the Sraffian approach is a more consistent language game).
I would also say that, looking at history, the Sraffian game or narrative is more convincing as to how economic systems — and not just capitalism — develop.
I certainly agree with that, in fact I argue that the Sraffian perspective enables you to capture the underlying mechanisms of the socio-economic realm (while neoclassical theory hides them) in that book I think I told you about in a previous comment on another post. I focus on capitalism on that book, but you are right, surplus theory can be used to study previous societies, there are also archeologists who use a surplus approach to study pre-historical societies.
Yeah. You’d be hard-pressed to find anyone outside economics using marginalism! Haha! No one would fall for that stuff that doesn’t have a vested interest.
Even in our justice system there are two points of view presented on the same set of evidence.
I’m sure that there are some people that would have a case tried entirely on the case for the prosecution, but not those interested in achieving justice.
And a successful prosecution or defence involves “following the evidence” to construct a narrative of what actually happened and the motives lying behind the events. Similarly in economics it would seem rational to “follow the money” to observe how it flows and accumulates and the reasons for the particular patterns this takes and yet few economists bother to do this so, for example, the use of Sectoral Balance Accounting has few adherents.
Glad to see you understand that are models are really parables, not meant to be taken literally.
Reading your two stories, I think they’re not *that* much different – both are highly stylized models of the same environment, with the main difference being whether prices are determined by marginal products or some exogenously given bargaining power. Whether people’s decision rules come from maximizing utility or from somewhere else is rather immaterial for this discussion.
But yeah, the narrative in both cases is different, which I’m not denying. My point was that one side (you, Vernengo, Syll, Keen, etc.) often rejects the neoclassical parable not due to any particular empirical evidence, but solely because it’s supposedly “logically inconsistent”. Well if Sraffian model can be shown to be formally equivalent to neoclassical one, then this critique must be false, even if such equivalence doesn’t say much about differing interpretations and narratives.
I don’t recall where I have EVER indicated to the contrary. I regularly rail against modelling as such on this blog. Even in this piece I say that heterodox authors make this mistake.
in the above I was trying to be nice and diplomatic to make a case why one model/parable should not be vulgarly reduced to another. But once we’ve established that we’re talking about inherently different models with different assumptions the question becomes which is more realistic and closer to the real world. That is where I start saying that the marginalist models are grossly unrealistic. The idea of rational agents and flex-price markets is completely at odds with the real world and any attempt to base a model/parable on this is completely doomed from the perspective of realism.
The Sraffian approach, on the other hand, is much more down to earth. It takes a simple input-output approach. It is not, like the marginalist models, teleological (which is their biggest failing in my opinion — marginalist economics is the last teleological doctrine in social science, the rest were thrown out in the mid-20th century). Sraffian models rest on taking the least number of assumptions and then building a framework out of this. Von Neumann did something similar. As did Ricardo. That is the right approach. Rather than making grossly unrealistic assumptions and then proceeding from there.
i thought you were arguing for pluralism. in this comment it sounds more like you want marginalism out. if so just say so. Sen’s pluralism is sincere. (i say this as someone whose sympathies are with Sraffa, and who suspects that marginalism really does rest on hocus pocus).
I think marginalism is garbage. But I think that students should be allowed to make up their own minds in this regard.
Here’s Amartya Sen on neoclassical economics:
“It was argued by development economists that neoclassical economics did not
apply terribly well to underdeveloped countries. This need not have caused
great astonishment, since neoclassical economics did not apply terribly well
anywhere else.” (Sen, 1984, p. 487)
Sen, A.K. (1984) Resources, Values and Development (Cambridge, MA: Harvard University Press).
Sraffa shows the inconsistencies of the neoclassical production function, Sen shows the inconsistencies of the neoclassical utility function.
Sraffa shows that distribution is an exogenous aspect (rather than determined by marginal productivities), open to ethical and political discussion, which is where Sen’s capability approach can join into the debate.