On the Inconsistence between the Long-period

A

Prospectus

beyond

Long-Period

Interpretation: A Short Comment on D’Orlando and Sergio Nisticó (2009): October 9, 2016 Yoshinori Shiozawa This is a comment on D’Orlando and Sergio Nisticó’s paper: On the Inconsistence between the Long-period Method and the Assumption of Given Quantities by Fabio D’Orlando and Sergio Nisticó. Appeared in SSRN Electronic Journal, July 2009. https://www.researchgate.net/publication/228308054_On_the_Incon sistence_between_the_Long-Period_Method_and_the_Assumption_of _Given_Quantities You are raising an extremely important question. The future of post-Sraffa economics depends on it. Although I am a Sraffian, I am not one of those “fundamental” Sraffians who do not want to change or develop what Sraffa wrote in his thin book. I also believe that long-period interpretation of Sraffa’s system has a serious weakness as an economic theory. We can easily depict two major weaknesses: (1) It does not have a good relevance with real economic process as you have persuasively argued. For example, Sraffa system in the long-period interpretation cannot be used to analyze business cycle, if the values have meanings only by average through a cycle. (2) Technological conditions changes quite rapidly. Production techniques generally change less than a period that the long-period interpretation normally assumes then to be constant. I agree with you that the log-period interpretation should be abandoned,

1

at least as a main part of our theory. As one of you writes in the abstract of a paper: [E]ven if we drop some of the building blocks of Sraffian theory, it is still possible to build a coherent alternative to neoclassical theory using (some of) the ideas of the classical economists. (D’Orlando “Will the classical-type approach survive Sraffian theory?”) We should be more bold and creative. What is most important is to construct an alternative economics (i.e. an alternative system of theories) that can replace the neoclassical economics. Sraffa played an immeasurable contribution for that construction, there rest many points to develop. We must go beyond him. As for concrete proposals that you are presenting in this paper, I have some reservations. They are concerned how we make our research program in developing alternative economics. We have to examine various possibilities. I admit that your proposals are one of them, but I believe a better line is conceivable. Your paper is composed of three parts if we set aside introduction and conclusions. First two parts (II and III) are (1) depictions of inconsistence of long-period method and (2) criticism against preceding works in the Sraffian tradition. Only the third part (IV) is positive and most creative part of your paper. Almost all observations you made in the first two parts are, I admit, right. Therefore I will discuss only the last part and the conclusion. My objections have several gradations. The most important point would be your adoption of equilibrium framework. Even if it is in Hicks’s week scheme, it contains a deep problem. I will come back to this question later, because it is necessary to explain many theoretical “components.” There are several points to make clear. I think you have already similar ideas, although they are not expressed explicitly. They need their names, explicit propositions and a total image on how those

2

“components” are related. The most important principle or acknowledgement is the primary separation of price and quantity determination. We may call this separation principle of price and quantity. The separation principle is one of consequences or teachings that Sraffa have shown. Prices or values can have independent significance without explicit relations to quantities. This is also one of main contents of Ricardian economics. Of course, in some extreme cases, a quantity can influence prices but in normal situation prices are determined by technological production conditions. This is the meaning of “primary” separation. (If someone has a better term than “primary,” please teach me.) As we have this separation principle, we can argue the cost-plus prices. This is often called full cost principle or markup pricing principle. There is no detailed explanation on how you understand this principle, but I think we have a firm common ground. A reflection on the separation principle teaches us the necessity of another principle. Even if we know the prices, how are exchanges made? First admit that we are in a monetary economy. Then there is an asymmetry between buying and selling. This is what Sraffa (1926) remarked when he started his destructive examination of Marshallian system. In a normal state of affairs, or in a most often cases, it is sellers who set prices. Because exchange is made by a mutual agreement of sellers and buyers, the price setting does not determine how much a product will be sold. It is the buyers (consumers and industrial procurers) who decide how much they buy at the given price (which product from whom). The sellers will sell their products and services as much as the demand is expressed. This attitude of sellers is the back side of full cost pricing. In this case also, I am describing a normal situation. If the demand suddenly changes enormously and jumps up, the producers cannot

3

afford all the demand and some other mechanisms intervene. Price adjustment is one of them. If possible, sellers ask their clients to wait until they can produce the necessary quantity. Another possible case is to ask their competitors to transfer some quantity of the product to them in order to sell it to their own clients. But, most important thing is to know and establish the firm principle that is valid and ubiquitous in a normal situation. For the details, see my paper The Revival of Classical Theory of Value (2016). It is already published but you can read the working paper in RG. I call the principle that describes the supply attitude of sellers (practically producers) “Sraffa’s principle.” Sraffa did not pronounced this principle affirmatively but he has explicitly written that it is the restraint of sales that prevent entrepreneurs to expand their production (the same place that Sergio Nisticó is citing in his paper on bridging two Sraffa: “Sraffa 1926 and Sraffa 1960: A Attempt to Bridge the Gap” p.114). The contraposition of the Sraffa’s principle is the principle of effective demand at the firm level. The production is determined by the effective demand expressed for the firm’s product. (This is also explained in the same paper of mine.) If we admit these principles, there is no necessity to appeal to Hicks’s temporary equilibrium. Hicks’s main defect is that he is still influenced by the price adjustment idea. You are citing Hicks’s text in p.13. In the second paragraph, he talks about the divergence between expected and realized prices. Divergence occurs not in prices but in quantities. For a firm to responds (instantaneously) to the demand expressed by the buyer, it has to keep some amount of product inventories. This produces a quite complex sequences but it is analyzable. For a single firm, the question is that of optimal inventory control, which was investigated in detail in 1950’s. A simple rule of sum is (S, s) method or two bin method. More difficult question is this: does this process for a whole economy

4

follow the slow change of exogenous demand flows without diverging? We know it does if the firms take an average of past demands for more than several terms (days or weeks). This is the result of Taniguchi and Morioka. Taniguchi examined this by numerical experiments and Morioka proved this mathematically. Taniguchi’s method can treat non-linear control process, whereas Morioka’s result is restricted to linear adjustment case. In this sense their results are independent. These are in fact rather old results for a Japanese speaking people, because Taniguchi’s book dates 1997 and Morioka’s 2005. We are preparing a new book in English under the title Microfoundation of Evolutionary Economics. It is part of my project. In fact, I am preparing first two chapters of this book. The first chapter has the same title as the book itself. I am now struggling to write the second chapter. In this chapter, I am planning to write something similar to this short comment, but in a more systematic way. At the head of my comment, I wrote that I oppose to your adoption of equilibrium framework. I do this because this is the most important framework that binds our imagination. It is a yoke which binded all economists for these one and half centuries toward neoclassical economics. Instead of equilibrium analysis, I propose process analysis. In 1930’s, this was also called sequence methods, period analysis, step by step method, and others. A modern form of process analysis must have started in Swedish school. Wicksell and Myrdal are famous examples. It had spread to the UK: Hawtrey, Keynes (in his Treatise on Money), and Robertson, all employed process analysis. Robertson called this step by step method. Austrians are another strand which adopted this method, comprising Menger and Hayek. Schumpeter was enchanted by the beauty of general equilibrium and could not understand the importance of process analysis. A third but oldest group is Marxists. According to Louis Althusser, Marx’s greatest contribution to the social sciences is this conscious introduction of the process analysis. We have to distinguish equilibrium and stationarity. See my paper The Primacy of Stionarity: a Case against General Equilibrium Theory (Available in RG). Economy is ordinarily almost stationary. It always

5

contains small fluctuations, tendencies and slow changes of tendencies. This almost stationary character is the very basis of effective human actions. Human agents are myopic in their sight and bounded in their rationality. If the economy is not almost stationary, it does not function efficiently. Recall what happened just after the Lehman Collapse, or the case of Oil Shock of 1970’s. It is important to know that economy is normally in a stationary state but not in equilibrium. To make this subtle difference, we need a parable comparable to equilibrium. Fortunately for economics, we have such a parable. It is dissipative structure. This concept was introduced by I. Prigogine. A dissipative structure is a stable structure (it keeps it macroscopic structural form) but exists only far from (thermal) equilibrium. Economy is not an equilibrium system but a dissipative structure. Of course, these are only a parable for economics, but this parable is a good leading guide for economics. See my conference paper: Economy as a Dissipative Structure (Shiozawa 1996, Available in my contribution page in RG. See also discussions in the following question page: https://www.researchgate.net/post/Can_dissipative_structure_conce pt_usefully_take_place_of_equilibrium_framework_in_economic_anal ysis?_tpcectx=profile_questions ) Keynes introduced principle of effective demand in his General Theory. Unfortunately the concept and the principle were not well defined. As this new principle was grafted to neoclassical equilibrium framework, Keynes’s revolution was doomed to fail. This explains why New Keynesians have first dropped the concept of effective demand. The principle of effective demand should be reconstructed on the basis of the principle at the firm level. The key principle is what Sraffa remarked in his 1926 paper (We have mentioned it already). Keynes’s principle of effective demand can be reconstructed on the basis of Sraffa’s principle at the firm level. A simple consequence of this fact is that we need no separation between microeconomic and macroeconomics. Unemployment and lack of effective demand problems can be examined in the firm and family level framework.

6

As you have discussed scrupulously the question of stability, the questions of stationarity and convergence are important subjects in order that the alterative economics is to be provided a theory of economic changes. Taniguchi (1997) and Morioka’s (2005) works are two of such trials. An economic process must have stationarity and show convergent tendency when exogenous conditions stay constant. If not, such a process does not represent a real economic process, because economy stays roughly stable even if there are always internally and externally generated fluctuations. The perverse character of equilibrium theory lies in the fact that it imposes stationarity conditions to economic system by the single work of human agents. It imposes all kind of equations so that the system stays invariable. No human agents (or organizations) have such capability. It is the complex economic mechanism like the autonomic nervous system that assures stationarity of the system. Human judgment and acts contain errors and mistakes. Despite of all these errors and mistakes, economic system works. Why and how does it work? To explain and explore this is the main task of economics. Simply stated, the mains task of economics is to elucidate the dissipative structure by means of process analysis. Parable of dissipative structure is indicative also for economic catastrophes. A dissipative structure continues to exist stably under certain external and internal conditions. A dissipative structure is an open system which takes in per unit of time certain amount of energy of low entropy from outside and throws away to outside the same amount of energy of high entropy. If this constant flow of energy is disrupted, the structure collapses. In the same vein, an economy functions only when certain balances of various parts are conserved within a certain range of bands. Economy is highly vulnerable from outside shocks. What is worse is that in some cases economy builds inside of itself a positive feedback mechanism. In such a case, economy disintegrates quite rapidly. An important task of economics is to find rules and institutions which prevent this kind of auto-destruction.

7

A corollary to reject equilibrium framework is simple but drastic. Economy is full of disequilibrium. Ubiquitous nature of disequilibrium is the reality of our economy. Economic agents are working in this condition. They never succeed in establishing equilibrium. This recognition is indicative. It is impossible to predict exactly the sales of their products for even a short period like a day. If it is impossible to predict any variable exactly, we should observe how each agent behaves in such a situation. In the case of consumer purchase, retailers keep product inventories. In the case of the producer firms, they keep material and completed product inventories and regulate their volume by regulating production and procurement volumes per day. We have to pursue how these adjustments produce the total process of an economy. If I employ another terminology, almost all constraints are not binding. Economy is a loosely connected system. It means there are many slack variables. The error of equilibrium analysis lies in the fact that these slack variables (such as inventories in the above example) are neglected. An implication of this recognition is this: economic system is not described by systems of equations, but of inequalities. Morishima emphasized that von Neumann’s greatest contribution to economics is that he introduced systems of inequalities. It is true, but a half truth. Morishima could not leave equilibrium analysis even with his systems of inequalities. Systems of inequalities are important tools but more important is to have a good vision of economic system. Such a vision cannot be the general equilibrium from which Morishima could not leave for all his life. A necessity to view an economy as an expression of a system of inequalities appears even in price theory. Your paper did not argue this point anywhere. If we admit that production techniques change, we face choice of production techniques problem. This is no simple problem but lies in the center of classical theory of value. Suppose an economy where there is only one homogeneous labor

8

power and many kinds of commodities. Some commodities may have only one method of production, but in general there are several number of production process for a product. If we distinguish those methods which have different input coefficients as different production techniques, plurality of production techniques for a single product is a normal situation. Then, the entrepreneurs or managers of firms have to choose a good production technique. How is this possible? If there is no difference in the quality of product, the remaining criterion is the cheapness of costs. However, we have a trouble. The cost depends on prices and the choice of techniques depends on costs and prices. Here is a kind of vicious cycle. The solution to this problem was given by Paul Samuelson’s non-substitution theorem. I prefer to call it the minimal value theorem, because what is questioned here is not the question of substitution of inputs (this is neoclassical view point), but choice of production techniques and values. If production techniques are simple product type, the minimal value system v = (v1, v2, … , vN) exists for a given wage rate w and a set of (normally N-) production techniques S and by these production techniques you can produce all products at the minimal cost. If you take a production techniques which are not in the set of S, the full cost by this production technique (with the given value v and wage rate w) is higher than the value of the product. Even if there exist two or more labor powers and wage rates are different for each of them, the same minimum theorem holds as far as relative rate of wages are conserved. The same kind of observation is possible in the case of international trade. For this points please see my working paper A New Theory of International Values: A General Introduction. The relation between domestic value and international value is also explained partly in Mill’s Reversion and an Origin of the Neoclassical Revolution. Positive markup rates are another kind of inequalities. In the normal equilibrium theory, if firms are operating at constant returns to scale, it cannot have positive profit. It assumes that firms are operating at no

9

profits. Cost-plus pricing is a way for firms to take security margins. If the sales volume exceeds the break-even point, the firm can retain positive profit at any sales volume. Behavioral principle of firms is very different from that supposed in the neoclassical theory of firms. As I have wrote above, the minimal value theorem is an essential part of the core of classical theory of value. It was not discovered in the classical Political Economy time. But without this theorem, we cannot claim that values of products are independent of the composition of demands. By his deep insight (or perhaps by his sharp instinct) Ricardo must have known this fact. Christian Gehrke and Heinz Kurz have written an interesting paper in this relation. In the paper with a title Sraffa on von Bortkiewicz: Reconstructing the Classical Theory of Value and Distribution, https://www.researchgate.net/publication/31405061_Sraffa_on_von_ Bortkiewicz_Reconstructing_the_Classical_Theory_of_Value_and_Dist ribution they give light on what Sraffa called Borkiewicz’s dictum. This term is used in the context of criticizing marginal theory of interest. Sraffa remarks this “dictum” in order to confirm that prices (or values) are determined by the actually used production techniques. In his own expression 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, Gerhke and Kurz 2006 p.26) In this case, we have to observe two sides of things: (1) The full cost is equal to the price in the case of active production techniques. (2) The full cost is greater than (or equal to) the price in the case of inactive production techniques.

10

In an algebraic expression, this can be written like (I+M) (w・a0 + A p) ≧ p. As I have given detailed explanations on these formulae in the papers cited above, I do not explain the same thing further. Technological evolution takes place in this framework. If a more efficient new process appears, the new process replaces the older one. A production technique is estimated as more efficient when its total cost is smaller at the present wage-price system. The new production technique’s input coefficient vector normally comprises some greater coefficients and some smaller coefficients. It is the total sum of necessary costs that determines if the new process is better than the present process. If the new process becomes common, the price changes because cost changes. Is it possible by the change of prices that an old production technique comes back? Yes and no. It is possible that old production technique becomes more efficient than the new production technique if an introduction of a third production technique reduces the price of one of input of the old production technique. However, this is a pure possibility. It is not very common to have such a return of old techniques, because an introduction of new production techniques seldom changes relative prices drastically. If the technological evolution is complex and difficult to predict what happens, there is one firm fact. Introduction of production techniques normally increases the set of all production techniques. In some cases old techniques would be forgotten. In some other cases, some production techniques become inapplicable by some reasons. For example one of them may turn out to be too polluting and it is not permissible for the economy. Except those cases, the set of all production techniques increases as time passes by. In this case, if markup rates do not change or decrease, the prices become cheaper than before with respect to wage rate. Markup rates are principally determined by the conditions of competition for a group of products. By

11

the accumulation of capital, competition is normally increased. So the “if clause” is normally valid. Then, we can conclude that worker’s wage level normally increases as the technological evolution proceeds. The real wage rate in England increased after the industrial revolution, namely after 1860’s. The above story explains what happened in 19th century England. This explanation is in contradiction with the standard neoclassical explanation. The latter often explains that the real wage increase occurred because capital labor ratio increased. In our theory, capital labor ratio does not increase beyond the range that the state of technology requires. A question to ask is why the real wage rate did not increase during the first British industrial revolution. Some may draw on the Lewis’s unlimited supply of labor theory. But the real problem is not the nominal increase of wage rates but the movement of prices. Why did prices go down with the increase of productivity? We have to investigate what really happened during that time. A last point on your paper: Hicks’s week parable is quite useful if we consciously exclude the equilibrium logic. Adjustment by human agents is organized by different levels of time spans. Everyday adjustment of production volume may be done day to day basis. More important decision like production capacity investment is done perhaps year to year basis. Time spans that are in the perspective of the decision maker(s) are different. It is important to pay due attentions on these layered strata of decisions and perspectives. Our analysis should be placed in this time framework. Hicks’s week scheme must be a simple start point for process analysis. On a behavioral level, exclusion of equilibrium means that all decisions and behaviors should be done based on known facts to those decision makers and actors. We cannot assume that a price or anything is determined without an explicit intervention of human action. Economics processes are principally supported by human actions. (More details are given in my working paper: Microfoundations of Evolutionary Economics)

12

Negotiation is possible in an exchange but it is necessary to note that it takes time and is avoided if possible. This gives a cue why almost all exchanges take an asymmetric form. As I have observed above, a widely observed forms of “negotiation” is the division of roles: sellers decides prices and buyers decides how much they buy. Double auction so much favored by behavioral economics and mechanism design is in fact an exceptional case. To study exchange rates or value, Léon Walras assumed perfectly organized markets (Walras 1878 Éléments d’ Économie Politique Pure p.49. Section II, 9e Leçon 10, 41.) He enumerated Bourses de fonds publics, Bourses de commerce, marchés aux grains, marchés aux poisoon as exemples. General equilibrium theory is build from these models but they are rather exceptional forms of exchange. A perfectly organized market is possible only when the commodity has a great sum of traded values and the transaction costs can be covered by a small fraction of total traded values. Another popular inspiration for economics of exchange is higgling and haggling. However, for a majority of products, asymmetric trade without negotiation has smaller transaction costs than a symmetric organized auction or higgling and haggling. We have to know that price setting by the producer or seller is in general more efficient in cost performance and by consequence more “rational.” Economics of exchange à la Walras succeeds many old legacies before the emergence of commercial economy. It is known that Mitsui Takatoshi, the founder of Mitsui group, made two of his policies public in 1673. One is “payment by cash and with no overcharge” (Gengin kakene nashi). It is normally interpreted that this is a first public announcement of one-price policy. Far before the arrival of the industrial revolution, commercial customs came to be more efficient and rational than those imagined by Walras and most of all neoclassical economists. (See the question page which I cannot say is very active: Who and when first announced fixed one-price system? https://www.researchgate.net/post/Who_and_when_first_announced _fixed_one-price_system )

13