Piero Sraffa: “Production Of Commodities By Means Of Commodities”

A graduate student of economics should find it rewarding – intellectually, monetarily, and prestigewise – to present to the economic community an analysis of how Piero Sraffa’s work influenced Lonergan’s insistence on understanding the structure of the economic process before treating the two dependent topics of exchange and finance. (See “Why Analyze The Rhythmic Pattern of the Productive Process First”)


The “Editors Introduction” to Lonergan’s Macroeconomic Dynamics: An Essay In Circulation Analysis notifies us that “Lonergan alone” and “only Lonergan” has scientifically formulated the functional relations which explain the dynamic economic process.

Lonergan pointed out that this differentiation of economic activities into the production of consumer goods in the standard of living and the production of producer goods that transform the possibilities for future consumer-goods production is discussed by traditional economists such as S. M. Longfield (1802-1884), John Rae (1796-1872), Nassau Senior (1790-1864), Eugen von Bohm-Bawerk (1851-1914), and in the heavily disputed “Ricardo effect.” But Lonergan credits Piero Sraffa (1898-1983) as having clarified it most thoroughly in his famous essay, “Production of Commodities by Means of Commodities” (1960).  Yet even Sraffa does not use his sophisticated explanation of the “Ricardo effect” and the “roundabout” or “concertina”-like phenomena associated with it in the way Lonergan does. Lonergan is alone in using this difference in economic activities to specify the significant variables in his dynamic analysis… no one else considers the functional distinctions between different kinds of productive rhythms prior to, and more fundamental than, wealth, value, supply and demand, price levels and patterns, capital and labor, interest and profits, wages, and so forth….only Lonergan analyzes booms and slumps in terms of how their (explanatory) velocities, accelerations, and decelerations are or are not equilibrated in relation to the events, movements, and changes in two (or more) distinct monetary circuits of production and exchange as considered both in themselves (with circulatory, sequential dependence) and in relation to each other by means of crossover payments. [CWL 15, Editors’ Introduction, lxii] 

The analysis of money’s uses and of monetary flows requires prior analysis of the velocitous flows of what money buys

real analysis (is) identifying money with what money buys. … And that is the source of the problem in real analysis.  If you want to treat money that doesn’t make a difference, you can have a beautiful liberal monetary theory.  But it doesn’t say the way the thing works. [CWL 21, Editor’s Introduction, xxviii]

The point-to-line and higher correspondences are based on the indeterminacy of the relation between certain products and the ultimate products that enter into the standard of living. … The analysis that insists on the indeterminacy is the analysis that insists on the present fact: estimates and expectations are proofs of the present indeterminacy and attempts to get round it; and, to come to the main point, an analysis based on such estimates and expectations can never arrive at a criticism of them; it would move in a vicious circle.  It is to avoid that circle that we have divided the process in terms of indeterminate point-to-line and point-to-surface and higher correspondences. [CWL 15, 27-28]

The graduate student must develop expertise in interpreting and using Lonergan’s Diagram of Rates of Flow.  Note the word “Rates” denoting the interdependent, mutually-defining, functional flows as velocities in the unitary dynamic system.


Lonergan insisted that

Money is an instrument invented to fulfill a definite task; it is not the ultimate master of the situation.  One has to place first human society which is served by the economic process, and second the economic process which is to be served by money.  Accordingly money has to conform to the objective exigencies of the economic process, and not vice versa. (CWL 21, 101)

Money must flow in both quantity and velocity in a normative concomitance with flows of goods and services.

(We) state the necessary and sufficient condition of constancy or variation in the exchange value of the dummy.  To this end we compare two flows of the circulation: the real flow of property, goods, and services, and the dummy flow being given and taken in exchange for the real flow….Accordingly, the necessary and sufficient condition of constant value in the dummy lies in its concomitant variation with the real flow….More briefly, if there is concomitance between the two flows, then the proportion in which dummies and goods exchange remains the same.  If there is lack of concomitance, then this proportion changes.  But exchange value is a proportion. Therefore, the concomitance of the two flows is the condition of constant exchange value. [CWL 21, 37-39]

The alternative to constant value in the dummy is the alternative of inflation and deflation.  Of these famous twins, inflation swindles those with cash to enrich those with property or debts, while deflation swindles those with property or debts to enrich those with cash; in addition to the swindle each of these twins has his own way of torturing the dynamic flows; deflation gives producers a steady stream of losses; inflation yields a steady stream of gains to give production a drug-like stimulus. [CWL 21, 37-38]

Further, because the productive process expands in phases, the quantity of money and the distribution of money must be in concomitance with and in conformity to the requirements of the shifting normative relations between savings and incomes. And, by the way, the Fed’s manipulation of interest rates does not provide the solution.

The purpose of this section is to inquire into the manner in which the rate of saving W is adjusted to the phases of the pure cycle of the productive process.  Traditional theory looked to shifting interest rates to provide suitable adjustment.  In the main we shall be concerned with factors that are prior to changing interest rates and more effective.  [CWL 15, 133]

Just as the surplus expansion is anti-egalitarian in tendency, postulating an increasing rate of saving, and attaining this effectively by increasing, in the main, the income of those who already spend as much as they care to on basic products, so the basic expansion is egalitarian in tendency; it postulates a continuously decreasing rate of saving, a continuously decreasing proportion of surplus income in total income; and it achieves this result effectively by increasing, in the main, the income of those who have a maximum latent demand for consumer goods and services. [CWL 15, 139]

The significance of the table (on CWL 15, p. 114) is that it makes possible a distinction between different types of cycle. … The contention of the present analysis is that there is a pure cycle at the root of the trade cycle.  By a pure cycle is meant a movement across the table with no implication of a movement up or down the table.  Thus the succession of surplus expansion, basic expansion, proportionate expansion, repeated as often as you please, would give a pure cycle. Of itself, it would not involve any contraction. … [CWL 15, 115]

The difficulty emerges in the second step, the basic expansion.  In equity (the basic expansion following the surplus expansion) should be directed to raising the standard of living of the whole society.  It does not.  And the reason why it does not is not the reason on which simple-minded moralists insist.  They blame greed.  But the prime cause is ignorance.  The dynamics of surplus and basic expansion, surplus and basic incomes are not understood, not formulated, not taught. When people do not understand what is happening and why, they cannot be expected to act intelligently.  When intelligence is a blank, the first law of nature takes over: self-preservation.  It is not primarily greed but frantic efforts at self-preservation that turn the recession into a depression, and the depression into a crash. [CWL 15, 82]

The ability of governments and investors to delude themselves, giving rise to periodic bouts of euphoria that usually end in tears, seems to have remained a constant. … all too often, periods of heavy borrowing can take place in a bubble and last for a surprisingly long time. … Encouragingly, history does point to warning signs that policy makers can look at to assess risk – if only they do not become too drunk with their credit bubble-fueled success and say, as their predecessors have for centuries, “This time is different.” [Rogoff and Reinhart, 292]

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