Sraffa’s Hidden Treatment of Money – A Wages Fund

The common assumption is Sraffa had no treatment of money, that any commodity could act as one in his system.  This is an error, it is there but hidden.

I came across this reference in Sraffa’s unpublished notes in an article by Gehrke and Kurz – in the form of a note on von Bortkiewicz, in 1943, when Sraffa had reached a crucial theoretical turn

The transformation of wages [into value – in contrast to von Bortkiewicz]  has been done by introducing (in all but in name) money; and taking the Annual Revenue as unit of money (hence the “proportion” = money wage).(D3/12/35: 9(1-3)

Here we are talking about a specific system of production and what Sraffa terms (in reference to Ricardo) as ‘proportional wages’ that is the w (wage share) in his famous formula r=R(1-w) where r is the rate of profit, and R is the maximum amount of profit (a flow value) over the turnover period (the revenue).

In Ricardo however there is a very simple relationship between proportional wages (the wages share) and the nominal value of an individual workers wage.  This was that capital advanced as wages/population=the wage.  Capital advanced is R(1-w), the wages fund, and in early classical dogma the higher were wages the smaller investment, and increases in wages by one set of workers simply depleted the wages fund for others. Here we can see a close relationship with Kalecki’s profit formula as capital advanced is simply profits minus consumption (including a contribution to a depreciation fund).

You might think that no economic concept has been more discredited than the wages fund.  However none of the theoretical core ideas of classical economics underwent such thoroughgoing evolution as the wages fund doctrine, even surviving in a modified form in Austrian Economics – as first the ‘subsistence fund’ and then the ‘pool of funding’, though picking up a few fallacies on the way, such as the ‘creation of money out of thin air’ depletes this fund.

At the core of the ‘fund’ concept is an important physical relationship that has been completely lost in neoclassical economics. That is the relationship between the physical output (surplus) and the labour force – the land/labour relationship we find in Petty, Cantillon, the Physiocrats , Torrens and Ricardo, where a fund of corn grows, is depleted by consumption, and reinvested for the next turnover period.  Sraffa was of course seeking to restore economics to this objective physical foundation.

The Wages Fund approach was greatly refined over the period of classical economics dominance.  It grew beyond the rigid and false approach of an iron law of wages to embrace that it is is a ‘fund’ which can grow or be depleted through in and out flows over time.  Hence if wages grew this would add to demand which would grow the fund.  It was in this revised form that JS Mill modified the concept in 1869 (it was not a recantation), and FW Taussig  in Wages and Capital: An Examination of the Wages Fund Doctrine  1896,and Frances Amasa Walker in the Wages Question 187, conceptualized it in more stock-flow consistent terms. In particular rather than population as a permanent divisor diluting teh fund labour was treated as the source of wealth and demand.  Though as Marshall commented in such a radically reconceptulised form it lost a lot of its original political economy vigour (or rather from the capitalist side of the argument).

In Böhm-Bawerk’s reconception of the ‘english’ theory it becomes a a stock of consumption goods that sustained a worker until the capital service was on stream.  In his famous Crusoe economy example Crusoe hoarded coconuts for a few days to sustain him through a few days constructing a stick to reach more coconuts.  The fund is fairly easy to model in a world of a single good which is also a consumption good.  When conceived in monetary terms however complications ensued.  Both Wicksell and Blaug have stressed the similarity on the wages fund idea.  Rather than a fixed stock of population and a fixed period of production there now was a fixed stock of population and a fixed stock of capital advanced which sustained a period of production – or as Wicksell more correctly termed it a period of investment.

Some defenders of Sraffa see wages and interest as essentially undetermined in his system – and so should be treated as purely social forces.  Sraffa however, though stressing that both had social components, was more inclined to treat interest as the exogenous variable, and of course the rate of profit has a crucial regulating role for the rate of interest.

Various attempts have been made to graft a monetary basis onto Sraffa, and as a result describe production in monetary term making his theories compatible with Sraffas.  I don’t regard any of these theories as fully satisfactory. One potentially fruitful approach is to regard money as a commodity like any other [ I take the Circuitist approach as implying that money must be a different commodity than those being exchanged not a commodity at all]  which is produced at a profit by holders of money.  Such an approach chimes well with the endogenous theory of money and the business model of banking.  It produces a problem though a it treats interest as a cost of money which capitalists will employ through debt if it produces more revenue at or above the average rate of profit, for the bank then the cost of producing the loan will be less than the revenue hence a profit.  But this requires the rate of interest to be known at the beginning of the period of investment.  In his lectures on value theory Sraffa called this ‘circular reasoning’ requiring value to explain vale.  For this reason I think Sraffa treated interest as exogenous as he was keen for an explanation of value which was invariant through time, but because production takes time there is also the need to fund the goods sustaining labour through time, so Sraffa was also forced to make labour endogenous.  Indeed modern interpretations like that of Sinha see  he approach as  frozen moment in time rather than a process in time gravitating towards any kind of ‘equilibrium’ .

Let us deal briefly with own rates of interest.  Sraffa in his critique of Hayek suggested that each commodity would have its own rate of interest.  So to give an example if over a year maize would produced twice its own seed and wheat three times its own seed then maize would earn a higher own rate of interest than wheat.  This is I think to confuse Agio – productivity – with interest – which I treat as a purely monetary phenomenon – agio on money.  A holder of a company which owns land suitable for growing maize would have higher stock prices than one which holds land suitable for growing wheat.  The equity markets would even out the rates of profit.  So if I borrowed money to buy stock it would be at the average agio.

If money (at interest) is required to sustain labour throughout the period of investment then the cost element of labour is not the sum of labour costs over the period of investment but the discounted cost at the prevailing rate of interest.  Here we assume that this is debt financed rather than through retained profits, but if the rate of profit is low in that industry than these retained profits will rationally be interested in another industry at a higher rate of profit.  If labour is homogeneous for a given production technique across the period of investment then the cost of the last employed unit of labour will be the marginal cost.  But here marginal cost is the residual o0f the avlue process and not the cause of value.  This shows that at the margin the marginal and the cost of production theories are equivalent, however the cost of production approach is more enlighting of the total circular flow of production.

Wicksell Lectures on Political Economy (1901) reconceptualised the concept as a ‘Wages Flow’ It is the flow of capital into investment not a fixed fund of capital, that hires workers and creates incomes. When capital advanced capital turns over faster, through increased demand for example,an originally  fixed fund of capital can generate more investing whenever a surplus of labor seeks jobs.

If one is solely concerned with simple interest then a fall in the rate of interest increases the period of investment, Bohm-Bawerk and Hayeck seem vindicated, however once interest is compounded through retained profits and reinvestment that this simple relationship does not hold – we get Wicksell effects.  So back to Sraffa, it is not simply the case  of reswitching of choice of technique that occurs at higher interest rate, because at a given productivity a technique will take a given period of time which at different interest rates will have have different costs.  Hence at higher interest rates you might get switching back to a technique that takes a longer period of time depending on the period of investment of the goods of which the capital good is composed.

Therefore there is a treatment of money in Sraffa, which can be conceptualised by a ‘wages flow’ like process, but which needs to be modelled in a flow input flow output model of surplus, retained profits and investment.  The challenge is to do so in a manner which avoids the ‘circular logic’ trap.  This will be followed up in a future post.