Economics, Neoricardian

DIFFERENCES BETWEEN NEORICARDIAN AND NEOCLASSICAL APPROACHES

NEW LINES OF RESEARCH FOR NEO-RICARDIANISM

BIBLIOGRAPHY

Neo-Ricardian economics is a school of thought that aims to revive classical economics, which flourished during the eighteenth and nineteenth centuries, by reformulating it analytically and extending its approach to economic theorizing. As discussed below, neo-Ricardians focus on the classical theory of value and distribution originally elaborated by Adam Smith and subsequently amended, reformulated, and systematized by David Ricardo.

The earliest use of the term neo-Ricardian can be traced to the eminent neoclassical economist Dennis Holme Robertson. Bob Rowthorn (1974) was the first to identify a school with this term. The contributions of Piero Sraffa—in particular, the editing of and the introduction to Volume I of The Collected Works and Correspondence of David Ricardo (1951) and the short but dense book Production of Commodities by Means of Commodities (1960)—played a crucial role in the development of the neo-Ricardian or (after him) Sraffian approach. Sraffa’s objectives, as revealed in a small number of published works and an enormous archive of unpublished manuscripts, were: (1) to revive and clarify the tradition of the classical economists from Adam Smith to David Ricardo, including Karl Marx; (2) to expose the weaknesses besetting the neoclassical theory of value and distribution; (3) to construct a coherent approach to economic theorizing that maintains the classical methodology and perspective.

Neo-Ricardian economics had a prominent position in the literature in the 1960s and early 1970s, during the “Cambridge capital controversy” between neoclassical economists centered mainly at MIT (the “Cambridge” of America) and neo-Ricardian economists at Cambridge University in England (for a detailed account see Harcourt 1972). The central theme of the debates was the questioning of the very notion of aggregate capital as a physical, measurable quantity and of the validity of the neoclassical theory of distribution based on such a concept. Even though the neo-Ricardian critique was correct, following the early 1970s the interest of the profession drifted away from the “paradoxes” of capital theory. By the 1980s, there was little attention to the difficulties inherent in the aggregation of capital in the formulation of economic models. As suggested by Luigi Pasinetti (2000), the suppression of the contradictions in the neoclassical theory of capital is evidence of the Kuhnian mechanism by which a dominant paradigm is defended against apparent anomalies.

In the following years, neo-Ricardian scholars applied increasing effort to building up their approach. A short list of journals that publish their contributions includes The Cambridge Journal of Economics, The Review of Political Economy, Metroeconomica, and Contributions to Political Economy. Today, neo-Ricardian economics is well grounded, yet still much in need of theoretical development.

The core of the neo-Ricardian approach to value and distribution is the determination of the size of the social surplus (Garegnani 1984), that is, what is left of the social product after subtracting the inputs necessary to restart the production cycle (the used-up means of production and subsistence wages). Analysis involves the following independent variables:

1. the set of techniques available to producers;
2. the size and composition of the social product;
3. one of the distributive variables—either the wage rate or the rate of profit;
4. the existing stock of natural resources.

These givens are sufficient to identify the “normal” or “long-period” position of an economy, which corresponds to a set of values for the relevant variables: relative prices (derived by using the cost-minimizing technique, which minimizes the cost of production), the social surplus, and—excluding, for simplicity, land rentals—the other distributive variable, the rate of profit or the wage rate. Under conditions of free competition, the long-period position is characterized by the equalization of the profit rate throughout the economy. The economy does not necessarily settle into a long-run position, due to changing economic circumstances that cause shifts. However, there is a presumption that “current” or “market” values continuously gravitate toward the corresponding natural or normal values. The underlying dynamic process is based on the idea that capital-owners move capital between sectors in search of the highest remuneration (for a review of modern analytical formulations of the gravitational process, see Kubin 1991).

The important features of the above analysis are: (1) deductive reasoning; (2) objectivism, that is, the use of data that are directly observable, measurable, or calculable; and (3) the asymmetric treatment of the distributive variables—that is, the treatment of one as an independent variable.

DIFFERENCES BETWEEN NEORICARDIAN AND NEOCLASSICAL APPROACHES

The objectivism of neo-Ricardian economics contrasts with neoclassical subjectivism, which allows for variables that are not directly observable within the initial set of data. The neoclassical data set consists of: (1) the set of techniques available to producers; (2) the preferences of consumers; and (3) the initial endowments of individual agents, including all the means of production, both produced (i.e., capital) and non-produced (i.e., land and labor). In neoclassical theory, all factors of production are treated symmetrically in terms of their scarcity. For each of them there are analogous demand and supply functions for their productive services. Equilibrium quantities and prices correspond to the intersection of these functions. This approach requires quantities of labor and capital that are unambiguously measurable and independent of their remunerations.

However, as the Cambridge controversies highlighted, capital cannot be treated in the same way as the other factors of production. In fact, though we may envisage a long-run equilibrium (the neoclassical equivalent of a long-period position) involving different types of labor with different remunerations, an equilibrium with heterogeneous capital goods and many rates of profit cannot exist. The existence of a tendency toward a uniform rate of profit, enforced by free competition, makes the determination of a unique equilibrium impossible if capital is treated in kind. Only after capital is expressed in “value” terms is it possible to construct a coherent aggregate production function (the basic tool of neoclassical macroeconomic analyses) in which all factors of production play the same role and from which demand functions for factor services can be derived through differentiation.

However, a measure of capital in value terms is affected by changes in the rate of profit (and in relative prices) giving rise to the possible occurrence of the phenomena known as reverse capital deepening and reswitching of techniques. The latter can be described taking the simplest case of only two techniques of production α and β with different capital intensities. Suppose that α, which is more profitable at lower rates of profit, is the technique in use. As the profit rate increases, producers may find β more profitable and switch from α to β. However, as the profit rate increases further, α could become the more profitable technique, so producers are induced to switch back to it. Reswitching is a sufficient but not necessary condition for capital reversing (Garegnani 1970). The latter phenomenon is a change in direction (from negative to positive) of the relationship between the capital/labor ratio (or the capital/output ratio) and the profit rate.

The occurrence of capital reversing (and a fortiori of reswitching of techniques), which excludes smooth production functions (both at the industry and the economy levels), does not rule out the possibility of constructing more “irregular” but logically coherent technological relationships between capital and the rate of profit (for an application, see Kurz and Salvadori 1995).

NEW LINES OF RESEARCH FOR NEO-RICARDIANISM

A clear weakness of neo-Ricardian economics is the lack of a comprehensive perspective on all the relevant aspects of economic enquiry; much remains to be investigated outside the core theory of value and distribution. Indeed, some suggest that as yet no well-defined neo-Ricardian school can be identified (see Roncaglia 1991). Tony Aspromourgos (2004) provides a detailed review of current neo-Ricardian developments and research projects, some of which include:

1. The identification of a “Classical” theory of endogenous growth in which different types of technology are taken into account (Kurz and Salvadori 1998)
2. The Sraffa-Keynes synthesis, whereby the social product (or, in its long-period version, its growth rate) is determined by the autonomous components of demand (or their growth rates). This synthesis requires some form of harmonization between effective demand and the notions of normal prices (corresponding to the uniform rate of profit) and normal productive-capacity utilization (Garegnani 1978, 1979, and 1992)
3. An explanation of changes in the composition of demand with a Classical flavor, but employing modern analytical tools (Schefold 1985)
4. A monetary theory of distribution—elaborated by Panico (1988) and Pivetti (1991) following Sraffa’s suggestion (Production of Commodities, p. 33)— according to which the rate of profit can be determined by the monetary rate of interest, fixed exogenously by the monetary authority
5. The incorporation of renewable and exhaustible resources (Bidard 2004)

SEE ALSO Cambridge Capital Controversy; Capital; Competition; Economics, Classical; Income Distribution; Kuhn, Thomas; Lakatos, Imre; Long Period; Pasinetti, Luigi; Ricardo, David; Sraffa, Piero; Surplus; Value; Value, Objective

BIBLIOGRAPHY

Aspromourgos, Tony. 2004. “Sraffian Research Programmes and Unorthodox Economics.” Review of Political Economy 16 (2): 179-206.

Bidard, Christian. 2004. Prices, Reproduction, Scarcity. Cambridge, U.K.: Cambridge University Press.

De Vivo, Giancarlo. 2003. Sraffa’s Path to Production of Commodities by Means of Commodities: An Interpretation. Contributions to Political Economy 22 (1): 1–25.

Garegnani, Pierangelo. 1970. Heterogeneous Capital: The Production Function and the Theory of Distribution. Review of Economic Studies 37 (3): 407–436.

Garegnani, Pierangelo. 1978. Notes on Consumption, Investment, and Effective Demand: I. Cambridge Journal of Economics 2 (4): 335–353.

Garegnani, Pierangelo. 1979. Notes on Consumption, Investment, and Effective Demand: II. Cambridge Journal of Economics 3 (1): 181–187.

Garegnani, Pierangelo. 1984. Value and Distribution in the Classical Economists and Marx. Oxford Economic Papers 36 (2): 291–325.

Garegnani, Pierangelo. 1992. Some Notes for an Analysis of Accumulation. In Beyond the Steady State: A Revival of Growth Theory, eds. Joseph Halevi, David Laibman, and Edward J. Nell, 47–71. New York: St Martin’s Press.

Harcourt, Geoff C. 1972. Some Cambridge Controversies in the Theory of Capital. Cambridge, U.K.: Cambridge University Press.

Kubin, Ingrid. Market Prices and Natural Prices: A Study in the Theory of the Classical Process of Gravitation. 1991. Frankfurt: Peter Lang.

Kurz, Heinz D., and Neri Salvadori. 1995. Theory of Production: A Long-Period Analysis. Cambridge, U.K.: Cambridge University Press.

Kurz, Heinz D., and Neri Salvadori. 1998. “Endogenous” Growth Models and the “Classical” Tradition. In Understanding “Classical” Economics: Studies in Long-Period Theory, eds. Heinz D. Kurz and Neri Salvadori, 66–89. London: Routledge.

Panico, Carlo. 1988. Interest and Profit in the Theories of Value and Distribution. London: Macmillan.

Pasinetti, Luigi Lodovico. 2000. Critique of the Neoclassical Theory of Growth and Distribution. Banca Nazionale del Lavoro Quarterly Review 53 (215): 383–431.

Pivetti, Massimo. 1991. An Essay on Money and Distribution. New York: St. Martin’s Press.

Roncaglia, Alessandro. 1991. The Sraffian Schools. Review of Political Economy 3 (2): 187–219.

Rowthorn, Robert Eric. 1974. Neo–Classicism, Neo-Ricardianism, and Marxism. New Left Review 86 (July/August): 63–87.

Schefold, Bertram. 1985. On Changes in the Composition of Output. Political Economy: Studies in the Surplus Approach 1 (2): 105–142.

Sraffa, Piero. 1951. Introduction. In On the Principles of Political Economy and Taxation, vol. 1 of The Collected Works and Correspondence of David Ricardo, ed. Piero Sraffa, with Maurice H. Dobb, xiii–lxii. Cambridge, U.K.: Cambridge University Press.

Sraffa, Piero. 1960. Production of Commodities by Means of Commodities: Prelude to a Critique of Economic Theory. Cambridge, U.K.: Cambridge University Press.

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