Piero Sraffa FBA (5 August 1898 – 3 September 1983) was an influential Italian political economist who served as lecturer of economics at the University of Cambridge. His book Production of Commodities by Means of Commodities is taken as founding the neo-Ricardian school of economics.
Early life Sraffa was born in Turin, Kingdom of Italy, to Angelo Sraffa (1865–1937) and Irma Sraffa (née Tivoli) (1873–1949), a wealthy Italian Jewish couple. His father was a professor in commercial law and later dean at the Bocconi University in Milan. Despite being raised as a practising Jew, Sraffa later became an agnostic.
Early career
Due to his father's activity, the young Piero followed him during his academic wanderings (University of Parma, University of Milan and University of Turin), where he met Antonio Gramsci (leader of Communist Party of Italy). They became close friends, partly due to their shared political views. Sraffa was also in contact with Filippo Turati, perhaps the most important leader of the Italian Socialist Party, whom he allegedly met and frequently visited in Rapallo, where his family had a holiday villa. At the age of 18, in the spring of 1917, he began military service as an officer of the Military Engineer Corps, under the command of the First Army as rear-guard. From the end of World War I (November 1918) until March 1920 he was a member of the Royal Commission of Inquiry into the violations of the right of the people committed by the enemy. The military period corresponded to the "university" one; some anecdotes tell of exams done effortlessly wearing the officer uniform. He graduated in November 1920 with a thesis on inflation in Italy during the period of the Great War. His tutor was Luigi Einaudi, one of the most important Italian economists and later a president of the Italian Republic.
From 1921 to 1922, he studied at the London School of Economics. During this period, at Cambridge, he met twice John Maynard Keynes, who invited him to a collaboration. This request led Sraffa to write two articles about the Italian banking system published in 1922, the first (The Bank Crisis in Italy) in The Economic Journal (edited by Keynes) and the second (The current situation of Italian banks) in the supplement of the newspaper Manchester Guardian (now The Guardian). Keynes also entrusted Sraffa with the Italian edition of his A Tract on Monetary Reform. The meeting with Keynes was undoubtedly a fundamental turning point in Sraffa's career.
In 1922 Sraffa was appointed director of the provincial labour department in Milan, where he frequented socialist circles. In this period he made friends with Carlo Rosselli and Raffaele Mattioli, both assistants of Luigi Einaudi at the time.
The march on Rome, with the consequent seizure of power by Mussolini, was an event destined to affect deeply his future. His father Angelo was the target of aggression by a fascist squad and received two very threatening telegrams by Mussolini himself who required a public retraction by Piero on the content of the second article published in the Manchester Guardian. Piero did not write a retraction. In May 1924 his friend Antonio Gramsci, who found himself stuck firstly in Moscow and then in Vienna due to the advent to power of fascism, returned to Rome on his election to Parliament. From now on the relations between the two intellectuals intensified. On 26 November 1926 Italian Parliament approved the law "defence of the state", thus giving rise to the totalitarian state. On 8 November 1926, Antonio Gramsci was arrested. During Gramsci's incarceration, Sraffa supplied books and the material, literally pens and paper, with which Gramsci would write his Prison Notebooks.
Major works
The laws of productivity under competitive conditions
In 1925, Sraffa wrote about returns to scale and perfect competition. In the 1926 article, "The Laws of Returns under Competitive Conditions", published in The Economic Journal, Sraffa resumes and develops his work of 1925 to show the inconsistency of the Marshallian theory of partial equilibrium, according to which, in competition for each good:
The equilibrium price is determined by the intersection of the demand curve and that of the supply. The supply curve is symmetrical to that of the demand. As the quantity produced by the firm increases, there are initially increasing returns and, beyond a certain point, decreasing returns.The marginal cost curve has a "U" shape: first, it decreases, then it grows until it first meets the average cost curve, then the straight line (which is given, in conditions of competition); the different points of intersection between the growing part of the marginal cost curve (beyond the intersection with the average cost curve) and the various possible price lines constitute the supply curve for the individual firm.
Sraffa notes that the law of decreasing returns and that of increasing returns have different origins and areas of application (and therefore cannot explain the shape of the same supply curve): the law of diminishing returns was originally applied to the entire economy and resulted from the scarcity of the agricultural land as a mean of production (the rent theory of David Ricardo); while the law of increasing returns applied to the individual firm and resulted from the benefits of division of labour. The first one allowed for the study of the laws of distribution, and the second those of production.
"Nobody, until comparatively recently – Sraffa writes – had thought of unifying these two tendencies in one single law of non-proportional productivity, and considering this as one of the bases of the theory of price"Caloca Osorio, Oscar Rogelio; Cárdenas Almagro, Antonio; Octavio Ortiz Mendoza, Enrique, La frontera Sraffa-Ricardo entre salario y cuota de ganancia, un modelo de asimetría/The Sraffa-Ricardo Boundary Between Salary and Profit Rate, an Asymmetric Model, Análisis Económico. 2014, Vol. 28 Issue 70, pp. 73–93. 21p. Sraffa observes that the idea of considering the law of non-proportional returns as a basis for the price theory arose, for analogy, only after the study of decreasing utility had drawn attention to the relationship between the price and the quantity consumed. In fact, "if the cost of production of every unit of the commodity under consideration did not vary with variations in quantity produced the symmetry would be broken, the price would be determined exclusively by the expenses of production and demand would be unable to have any influence on it at all".Sraffa (1925 in 1998, p. 324).
The difficulties of the system that could, in short, be defined as the cross of the supply and demand curves firstly depend on the heterogeneity of the assumptions on which these two different tendencies are based. Decreasing returns and increasing costs are caused by the limited availability of some input which prevents all inputs from varying in optimal proportion. In other words, if an input is limited in quantity, a rise in production levels brings about a less efficient proportion among inputs with a fall in productivity. By contrast, the tendency toward decreasing costs stems from variations in the quantity of all inputs, and therefore they may occur only when there are no constant factors.Sraffa (1926, p. 539); cf. Morroni (1998a, p. 209; 1998b, p. 402).
A second difficulty stems from the fact that, as Sraffa notes, in the neoclassical theory of prices the equilibrium of the individual firm is determined on the basis of cost variations deriving from small increases in its production (marginalist theory) and taking the situation unchanged in other companies of the same industry and the entire economy, following the hypothesis of ceteris paribus, i.e. other conditions being equal.Sraffa (1925 in 1998, pp. 358–59; 1926, pp. 538–39); Morroni (1998a, p. 210).
Sraffa highlights that the possibility of applying the hypothesis of increasing costs to the supply curve is limited to the rare cases in which a considerable part of the supply of input is employed for the production of only one commodity. However, in general, each input is employed by a certain number of industries that produce different goods.Sraffa (1926, p. 540); Morroni (1998a, p. 221).
As for increasing returns and decreasing costs, Marshall himself notes that external economies can hardly be attributed clearly to a specific industry, but they are of considerable interest to groups, often of a large size, in related industries; consequently, it is not possible to hypothesize an increase in returns in just one company.Sraffa (1925 in 1998, pp. 361–62; 1926, p. 540); cf. Morroni (1985, p. 109; 1998b, pp. 402–03).
If in the partial equilibrium system of competitive prices, it is not possible to consider decreasing or increasing costs without contradicting the nature of the system, it follows, from this point of view, that production costs of goods produced in competition must be regarded as constant in respect of small variations in the quantity produced"Sraffa (1926, p. 541). and that the long-run supply curve of an industry is horizontal. As a consequence, the price and the quantity of a good do not derive from the simultaneous action of the supply and demand curves: the price is determined by production costs, while the quantity produced is determined by the demand. The neoclassical symmetry between demand and supply is broken. The old theory that, in competition, "makes the value of commodities dependent on the cost of production alone appears to hold its ground as the best available" (1926b:540–41).Sraffa (1925 in 1998, p. 363).
Finally, Sraffa remarks that "everyday experience shows that the majority of which produce manufactured consumers' goods operate in conditions of individual diminishing costs. If the limit to the firm's expansion does not arise from increasing costs, then it may arise from the difficulty in expanding the market share without changing any of these three aspects: improving the quality of the output, reducing its price, or increasing marketing expenses. These considerations were developed, in the 1930s, by the theory of imperfect competition.
Cambridge years
In 1927, Sraffa's yet undiscussed theory of value, but also his friendship with Antonio Gramsci—a risky and compromising endeavour in the context of the Italian fascist regime—brought John Maynard Keynes to invite Sraffa to the University of Cambridge, where the Italian economist was initially assigned a lectureship.
Sraffa arrived in July 1927 and remained there for life. In the shelter of the English city, he held courses about advanced value theory in his first three years. Then, again with the help of Keynes, he held a librarian position and could devote himself to study, intertwining relationships with a series of intellectuals destined to leave remarkable and lasting tracks.
Together with Frank P. Ramsey and Ludwig Wittgenstein, Sraffa joined the so-called cafeteria group, an informal club that discussed Keynes's theory of probability and Friedrich Hayek's theory of business cycles (see Sraffa–Hayek debate).
The economists that should at least be remembered are Michał Kalecki (1899–1970), Maurice Dobb (1900–1976), Joan Robinson (1903–1983) and Nicholas Kaldor (1908–1986). Among the philosophers, Frank Plumpton Ramsey (1903–1930) was helpful during the initial elaboration of the equations, datable in 1928, of the book Production of Commodities by Means of Commodities, which was published in 1960.