Economic Theory and its History

Giuseppe Freni, Heinz D. Kurz, Andrea Mario Lavezzi, Rodolfo Signorino, Giuseppe Freni, Heinz D. Kurz, Andrea Mario Lavezzi, Rodolfo Signorino

• Publisher: Routledge
• Year: 2016
• ISBN:
  9781317286950
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

This collection brings together leading economists from around the world to explore key issues in economic analysis and the history of economic thought. This book deals with important themes in economics in terms of an approach that has its roots in the works of the classical economists from Adam Smith to David Ricardo. The chapters have been inspired by the work of Neri Salvadori, who has made key contributions in various areas including the theory of production, the theory of value and distribution, the theory of economic growth, as well as the theory of renewable and deplorable natural resources.

The main themes in this book include production, value and distribution; endogenous economic growth; renewable and exhaustible natural resources; capital and profits; oligopolistic competition; effective demand and capacity utilization; financial regulation; and themes in the history of economic analysis. Several of the contributions are closely related to the works of Neri Salvadori. This is demonstrated with respect to important contemporary topics including the sources of economic growth, the role of exhaustible resources in economic development, the reduction and disposal of waste, the redistribution of income and wealth, and the regulation of an inherently unstable financial sector.

All contributions are brand new, original and concise, written by leading exponents in their field of expertise. Together this volume represents an invaluable contribution to economic analysis and the history of economic thought. This book is suitable for those who study economic theory and its history, political economy as well as philosophy.

1
Introduction

Giuseppe Freni, Heinz D. Kurz, Andrea Mario Lavezzi and Rodolfo Signorino

This collection of essays is a tribute to Neri Salvadori, the man and scholar, teacher and friend, whom the scientific community owes important works in the tradition of Piero Sraffa’s revival of the classical economists’ approach to the problems of value, income distribution, capital accumulation, technical progress, scarce natural resources, economic development and growth. The essays in this book have all been freshly written and contain original work with novel ideas in the areas mentioned.

In this introduction we first summarize briefly Neri Salvadori’s academic career, his work and his intellectual and organizational activities, and then provide a short overview of the essays collected in this volume.

Academic career and work

Neri Salvadori was born on 3 February 1951 in Naples, Italy, where he studied economics at the Facoltà di Economia e Commercio of the University of Naples and graduated in 1976 with the highest marks. He received two study grants, one from the Fondazione Einaudi for the academic year 1976/77 the other from the Banca d’Italia for 1977/78, which he used to study at the University of Manchester with Ian Steedman and then at the University of Cambridge. In 1978 he became a research assistant for the chair of Financial Mathematics at the University of Naples and then a researcher at the Institute of Finance. In 1979 he joined the Faculty of Political Science of the University of Catania, Sicily, as a lecturer of economic analysis; in 1985 he was promoted to the position of associate professor. In 1987 he moved to the Istituto Navale di Napoli, where in 1990 he was appointed to the chair of Political Economy. In 1991 he joined the University of Pisa, where he teaches and researches.

Early on in his career Neri Salvadori became deeply fascinated with the writings of the classical economists from Adam Smith to David Ricardo, and with Piero Sraffa’s revival of the classical approach to the theory of value and distribution. Sraffa’s work has was a major source of inspiration for virtually all his research activities ever since. With regard to various problems studied, Neri Salvadori elaborated new solutions and moved the frontier of research outward. These concern, in particular, the problem of the choice of technique, the determination of long-period prices and income distribution, the role of the quantities of commodities in effectual demand in the case of joint production, fixed capital and scarce natural resources, and the problem of renewable and exhaustible resources. The upshot of his respective endeavour and intellectual achievements is his book (co-authored by Heinz D. Kurz), Theory of Production: A Long-Period Analysis. The book is now widely considered a locus classicus of the respective literature of classical orientation. However, Neri Salvadori also contributed novel insights to several other fields of research. He studied the problem of price formation in the short period in a Kaleckian framework. He extended the Sraffian approach to deal with the problem of economic growth and development. He thereby did not limit the analysis to one-good models, as is typically the case in much of growth economics, whether old or new, but tackled the intricate case of economies with many industries. A major focus of his work was on neo-Keynesian contributions in the tradition of Nicholas Kaldor and Joan Robinson to the theory of economic growth and functional income distribution. Several of his contributions deal with what is known as ‘new’ or ‘endogenous’ growth theory. He showed that some of the new growth models, while couched in neoclassical terms, contain an analytical structure that is ‘classical’ in spirit. In all these works Neri Salvadori made effective use of his remarkable mathematical skills and analytical sharpness, and demonstrated an amazing knowledge of the economics literature, both modern and ancient. In more recent times he got interested in the theory of oligopoly and has produced a number of papers with new results.

His interest and expertise in the history of economic analysis materialized in a number of essays dealing with major economists, such as Adam Smith, David Ricardo, Léon Walras, Knut Wicksell, John von Neumann, Wassily Leontief, Kenneth Arrow and Gérard Debreu, and especially Piero Sraffa. A characteristic feature of his respective contributions is his analytical grip on their works, which allows him to put into sharp relief similarities and differences and to elaborate on aspects these authors left undeveloped. His interest in past authors is not antiquarian; he rather wishes to know in which way economic theory has developed, and why, and what can still be learned from the masters of our discipline. Involved in editing the unpublished papers and correspondence of Piero Sraffa, Neri Salvadori has managed to solve a number of puzzles concerning the interpretation of Sraffa’s analysis and has explored the latter’s collaboration with his ‘mathematical friends’, Frank P. Ramsey, Abram S. Besicovitch and Alister Watson. In addition he has published on questions of methodology in the context under consideration.

Neri Salvadori’s publication record is outstanding. He has published and edited numerous books, several hundred papers (well over a hundred of them in peer-reviewed journals), many entries in dictionaries, book reviews etc. (See the list of his publications at the end of this book.) His work has been widely appreciated in the literature, reflected in numerous citations and references to it and by translations of his works into other languages. His excellent standing in the profession is also documented by several prizes he received, including the Premio Linceo (a lifetime achievement award given by the Accademia dei Lincei, the Italian Academy of Science) in 2004, several visiting professorships in many countries, numerous invitations to give keynote lectures, talks and seminars all over the world, several participations as lecturer in international summer schools, and highly appreciated work as referee by leading economic journals and publishing houses. Neri Salvadori also organized highly successful serial annual lectures in economic growth and development published by Cambridge University Press. Since 2004 Neri Salvadori has served as general editor (together with Heinz D. Kurz) of Metroeconomica; in addition he is a member of several editorial boards of economic journals, including The European Journal of the History of Economic Thought.

Neri Salvadori has earned himself not only the respect of his peers and colleagues, but also of his students because of the care with which he looked after them and the support he gave them. An inspiring academic teacher, he attracted numerous bright young people and interested them in promising approaches and themes, irrespective of whether they were fashionable in the profession or not. He was able to instil into them his standards of rigour, meticulousness and dedication; several of them made an academic career. His social competence is reflected in many joint papers with former students of his.

The contents of this book

Chapter 2 contains ‘personal reminiscences’ of one of us, who had the privilege of collaborating with Neri Salvadori over more than thirty years (and expects to continue to do so) and whose intellectual life is closely interrelated with his.

The thematic essays are subdivided in four parts that reflect well Neri Salvadori’s main areas of interest and research. Part 1 is dedicated to ‘economic growth and income distribution’ and has four chapters. Chapter 3, by Pasquale Commendatore, Ingrid Kubin and Carmelo Petraglia, elaborates on the standard footloose capital model by Martin and Rogers and allows for two groups of capital owners (workers and capitalist rentiers). Following the insights of Pasinetti and Kaldor, the authors assume that capital ownership is more diffused at home than abroad and that the two groups exhibit different consumption patterns. On the basis of these assumptions new results on the impact of free trade on the long-run international distribution of capital and welfare are derived. Chapter 4, by Andrea Mario Lavezzi, argues that Adam Smith’s theory of the division and labour and economic growth, and its development by Alfred Marshall, Allyn Young and Nicholas Kaldor, exhibits characteristics that allow one to classify it as belonging to complexity economics. This claim is supported by a historical reconstruction of Smith’s growth theory against the background of complex systems analysis. This novel perspective is confronted with the traditional one, rooted, as it is, in general equilibrium economics, and a simple alternative model is proposed. Chapter 5 is by Sergio Parrinello and deals with attempts to extend Keynes’s theory of effective demand from the short- to the long-run and to the theory of economic growth. A useful description of a normal state of a growing capitalist economy, the author insists, must not be confined to a pure steady growth, despite the fact that such a state can be used as an ideal configuration for some preliminary analytical purpose. The main analytical result derived is that in the presence of obsolete machines, the margins of changes in capacity utilization, driven by changes in effective demand, are wider if prices and distribution are allowed to deviate from their long-period values associated with free competition and a given conventional wage rate. Chapter 6, by Stefan Schubert and Stephen Turnovsky, proposes a model in which search unemployment and wage bargaining are introduced into an endogenous growth model to analyse the effects of a permanent and a temporary negative total factor productivity (TFP) shock on growth, unemployment and public debt. Motivated by the recent Italian experience following the global financial crisis, the model is calibrated to approximate that economy, showing that both the permanent and the temporary TFP shocks have long-lasting effects on unemployment and on growth and debt dynamics. The model describes well the Italian economy’s performance in the immediate aftermath of the crisis and is particularly successful in tracking the time path of the unemployment rate.

Part 2 turns to ‘resource economics’ and has three chapters. Chapter 7, by Silvia Faggian and Giuseppe Freni, has a new look at the famous forestry problem. It uses the tools of the modern literature on optimal forest management to provide a continuous time ‘Ricardian’ model of forestry. It is assumed that the land on which timber is produced is not uniform in quality and it is shown that in response to an increase in timber demand forest cultivation is progressively intensified on the most fertile lands and/or extended to less fertile lands. At a given level of the rate of interest, a set of ‘breakthrough timber prices’ gives the order of fertility – the order in which the different qualities of land are taken into cultivation – while a set of ‘threshold timber prices’ gives the order in which timber contained in the old trees standing on the different lands is extracted. It turns out that for each land the breakthrough price is higher than the threshold price. The properties of the model are used to discuss a claim of Ricardo’s that the compensations received by the owners of marginal forestlands in Norway following the rise of timber demand (and hence of timber price) in southern countries of Europe were not rents. Chapter 8, by Eiji Hosoda, explores the choice of technique problem for an economic system confronted with a problem of post-consumption waste disposal. If households are supposed to pay for the waste disposal at post-consumption stage and there is no constraint on waste generation, then waste is discharged as much as possible. In this case, without any environmental restriction, the existence of a gap between the wage–profit and consumption–growth frontiers implies that per capita consumption is not maximized. To cut an excessive amount of waste discharge, authorities in many countries have introduced an upstream policy represented by extended producer responsibility (EPR). A proper EPR policy can make the gap between the two frontiers disappear, internalizing the waste disposal cost in the price of the consumption commodity which generates waste at the post-consumption stage. Chapter 9, by Alessandro Roncaglia, looks at the oil market as a test in order to assess alternative interpretations of prices of production (‘long-period method’ and ‘photograph’). The story of the oil sector is sketched, stressing the role of technical change on both the production and the utilization side, and the complex and changing nature of the market forms prevailing in the sector (including the influence of antitrust policies). The (marginalist) interpretation of oil as a scarce natural resource is criticized. Although oil should better be treated as a produced and reproducible commodity rather than as a non-reproducible natural resource, the Ricardo–Sraffa approach presupposes free competition, and the oil sector is far from that. The conclusion is that this kind of approach is useful for a critique of the mainstream (scarcity) approach, but is not directly applicable to the oil market.

Part 3 is devoted to ‘capital theory and marginalism’ and has six chapters. Chapter 10, by Christian Bidard, introduces so-called ‘ghost goods’ in the analysis; that is, goods that do not appear on markets, but are positively priced. Various cases of ghost goods are discussed: from Sraffa’s ‘beans’ to intermediate goods which are specific to non-operated processes of production, from ‘tractors’ (intermediate goods in neo-Austrian models) to intermediate goods in two-period Austrian models. It is shown that while the price of a ghost good may generally vary within a certain interval, the price of some intermediate ghost goods in Austrian models can be calculated exactly. Chapter 11 was not been written for this book, but has been included upon the recommendation of Edwin Burmeister, who knows how much the late Paul A. Samuelson appreciated Neri Salvadori’s work. It can be surmised, would Samuelson still be with us and in good health, that he would have written a piece for this volume. In this unfinished handwritten Samuelson manuscript kindly transcribed by Edwin Burmeister, Samuelson sketches a non-neoclassical model in which output (corn) is producible by a finite number of alternative known techniques, each involving, along with labour and corn seed, non-reproducible land (and where possibly each category of inputs could involve heterogeneous varieties: male and female labours; more fertile and less fertile acreages; coal, iron, and durable produced machines). It is suggested that for the case of homogeneous one-quality land, homogeneous one-quality labour, and homogeneous one-quality corn seed, the corn–labour–land–capital competitive factor pricing can be reduced down to a primal and dual linear programming problem. It is stated that as the interest rate falls from one steady state to another, as soon as there are joint products and/or multiple heterogeneous capital goods, there need not be an induced rise in the plateau of permanently consumable output. In Chapter 12, by Edward J. Nell, it is pointed out that since the classical approach represents the total labour used by society during any period of production as a single, homogenous quantity, we are faced with a fundamental epistemological question: to what common measure are the various grades and kinds of labour reducible? In the chapter it is argued that the only possible common denominator is exchange value. But if this is correct, it requires a reconsideration of Sraffa’s construction of the ‘invariant measure of value’ because his standard system cannot be shown to exhibit the linear inverse relation between wages and the rate of profit if the ‘quantity of labour’ is expressed in terms of value and not as a homogenous and given quantity that is independent of value and capable of being set equal to unity as a numéraire. Sraffa’s derivation of the standard system is therefore said to fail. Chapter 13, by Arrigo Opocher, examines some preliminary aspects of long-period duality in the simple case of an individual, isolated industry. It is shown that firms earning maximum profits of zero can be characterized not by strict constant returns to scale, but by local constant returns, at the bottom of u-shaped average cost curves. If all inputs are ‘primary’ and the generating technology is perfectly smooth, only a lower dimensional region of the ‘true’ production function can ever be active, however variable primary input prices can be. If an industry’s own output is an input and the rate of interest is zero, then an isoquant cannot be inferred from any number of real primary input prices even under strictly constant returns. A positive and variable rate of interest gives more information on the generating technology and, in the case of a Leontief unit isoquant, the generating technique can be inferred from knowledge of a sufficient number of different real primary input price – rate of interest combinations. Chapter 14, by Ian Steedman, examines corn/tractor, Wicksellian and simple input–output models of production. Varying the rate of interest to yield alternative long-period positions, the relationship between capital per unit of output and labour per unit of output are traced out in the consumer good industry. Reswitching is strictly excluded. Remarkably enough, it is found repeatedly that the consumer good isoquant need not be downward sloping and convex from above; it need not even be monotonic. This spells trouble for conventional assumptions in production theory. In Chapter 15, Takashi Yagi studies income distribution in a system with fixed capital and depreciation and introduces a new surplus approach in the theory of distribution and capital. The ratio of the rate of profit and the wage rate, called the surplus rate, is distinguished from the rate of profit for capital. The properties of the standard system introduced by Sraffa are then used to analyse the shares in distribution and the measurement of the aggregate value of capital in an actual system with fixed capital.

‘Sraffian themes’ are dealt with in Part 4, which has four chapters. Chapter 16, by Enrico Bellino, starts from Pasinetti’s 1960 mathematical formulation of the Ricardian system, which is reformulated in such a way as to provide a mathematical formulation of the income distribution theory contained in Ricardo’s early writings. This analytical formulation of Ricardo’s early writings has the pedagogical function of fully appreciating the final objective that Sraffa was pursuing with his standard commodity: that of studying the relation concerning income distribution independently of prices. In simpler terms, Sraffa sought to depict the economy as a system where the division of the social product, or ‘cake’, does not affect the magnitude of the cake. In Chapter 17 Christian Gehrke investigates whether Sraffa’s unpublished manuscripts provide some hints for interpreting his reaction to Joan Robinson’s objections to the use of the concept of ‘subsistence-cum-surplus wages’. It is shown that Sraffa regarded the problem emphasized by Robinson of specifying the amounts of commodities consumed for subsistence independently of the consumption out of surplus wages as non-existent, because he conceived of subsistence requirements as notional parts of the commodities actually consumed. Chapter 18, by Carlo Panico, Antonio Pinto, Martín Puchet Anyul and Marta Vazquez Suarez, presents a Sraffian interpretation of the evolution of the US financial regulation after the Second World War, in which it is emphasized that the formation of monetary policy and legislation is affected by the conflicts over the distribution of income. This approach has been widely overlooked in the literature. The chapter argues that during the period considered, financial regulation evolved from a ‘discretionary’ to a ‘rules-based’ regime. That conversion was gradual and reflected the strengthening position of the financial industry. It is also stressed that the ability of the financial industry to affect political life has influenced the reforms p...

Table of contents

• Cover
• Title
• Copyright
• Contents
• List of figures
• List of tables
• List of contributors
• 1 Introduction
• 2 Personal reminiscences of a close friend and colleague
• PART 1 Economic growth and income distribution
• PART 2 Resource economics
• PART 3 Capital theory and marginalism
• PART 4 Sraffian themes
• PART 5 Imperfect competition
• PART 6 History of economic analysis
• Publications by Neri Salvadori
• Author Index
• Subject Index