The long-period theory of demand-led output: synthesising Keynes’ theory of output with Sraffa’s theory of value

Without the acceptance of the marginalist methods of thought, The General Theory would not have had the enormous and relative quick impact that it had on the thinking of mainstream economists.

HERBERT A. SIMON

In revisiting the Sraffa-Keynes synthesis, this essay proffers a hitherto unexplored avenue through which a long-period theory of demand-led output can be fashioned. The main proposition is that Keynes’ theory of output is incomplete insofar as it does not fully account for three issues in value and distribution: investment, competition, and gravitation. It is held that, taken together, these themes are underpinned by the Lakatosian ‘core’ of the Keynesian programme, namely, effective demand and underemployment equilibrium. Sraffa’s pricing theory, it is argued, situates these themes in a broader context that complements the General Theory’s determination of output by completing it. In exploring investment and the interdependence it fosters between capital, demand and uncertainty, the paper demonstrates how the Sraffian interpretation of the surplus approach allows the General Theory to incorporate asset and price transformation without it having to rely on the marginal efficiency of capital or Tobin’s q-theory. The relationship between competition and accumulation in Keynes’ General Theory is then discussed, before turning to the long-period method of gravitation. The paper concludes with a consideration of how Sraffa’s conception of distribution underlies an important resonance with Keynes’ policy prescriptions and helps clarify them, before offering an appraisal of the Sraffa-Keynes synthesis and directions forward.

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Pierro Sraffa (left), Keynes (seated, centre), Dennis Robertson (right); location Tilton, ca. 1927. Reproduced by permission of Dr Milo Keynes. Source: https://doi.org/10.1093/oxfordjournals.cje.a035051

Its prominently open-ended style of analysis granted, it remains a well-known fact of the history of economic thought that J.M. Keynes’ General Theory is incomplete, and conspicuously so. While this opens Keynes’ system to attack, it also affords us the opportunity to draw out some useful connections with the classical political economists which even Keynes may not have perhaps given thought to, had he completed his theory of the political economy definitively and alone. The purpose of this essay is to contribute to the literature by showing how the Sraffian variation of the surplus approach complements Keynes’ determination of output with respect to three important themes: investment (encompassing capitalism’s inherent instability), competition (entailing a theory of accumulation), and gravitation (involving a long-period theory of natural prices). The main proposition is that Keynes’ presentation of these ideas is incomplete and requires complementation. The paper considers how Sraffa’s conception of distribution underlies an important resonance with Keynes’ policy prescriptions and helps clarify them, before concluding with an appraisal of the Sraffa-Keynes synthesis and directions forward.

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