Luigi Pasinetti
Encyclopedia
Luigi L. Pasinetti is an Italian
economist
of the Post-Keynesians
school. Pasinetti is considered the heir of the "Cambridge Keynesians
" and a student of Piero Sraffa
and Richard Kahn
. Along with them, as well as Joan Robinson
, he was one of the prominent members on the "Cambridge, UK" side of the Cambridge capital controversy
. His contributions to economics
include developing the analytical foundations of Neo-Ricardian economics
, including the theory of value
and distribution
, as well as work in the line of Kaldorian theory of growth
and income distribution. He has also developed the theory of structural change
and economic growth, structural economic dynamics and uneven sectoral development.
, near Bergamo
, in the north of Italy
. He began his economics studies at the Universitá Cattolica S.C. of Milan
, where he obtained his “laurea
” degree in 1954. The thesis that he presented dealt with econometric models
applied to the analysis of the trade cycle
. As a brilliant student, he won several scholarships for graduate studies which gained him access to Cambridge
, England (1956 and 1958), Harvard
, U.S.A. (1957) and Oxford
, England (1959) for his graduate studies. In 1960 Nuffield College
(Oxford
) granted him a Research Fellowship that he enjoyed until 1962, the year in which he left Oxford
for Cambridge
, UK, called there by the prestigious economist Lord Richard Kahn
.
In those years,
Years later, Pasinetti, remembering Kahn
in a Memorial Service held at King's College
Chapel, Cambridge
on 21 October 1989, recalled that:
Richard Goodwin
was also part of this brilliant group of Cambridge
economists, and exerted the first important influence on Pasinetti. In conveying the intellectual debt he owed him, Pasinetti writes:
In 1960-1961 Pasinetti became a Fellow
of King's College
. Twelve years later in 1973, he was appointed Reader at the Cambridge
, a post that he kept until his return to the Università Cattolica del Sacro Cuore in 1976. In March 1963 he was awarded his doctorate degree from Cambridge University
with a Ph. Dissertation on "A Multi-sector Model of Economic Growth." This thesis was the core of what came to be in 1981 one of his most complete books, Structural Change and Economic Growth. In 1964 he was appointed Professor of Econometrics
at the Università Cattolica del Sacro Cuore and in 1981 full Professor of Economic Analysis. Trips between Cambridge
and Milan
were very frequent during this period. In 1971 and 1975 he was appointed Visiting Research Professor at Columbia University
as well as in 1979 at the Indian Statistical Institute
in Calcutta and the Delhi School of Economics
.
Back at his Alma Mater, the Catholic University of Milan
, he was appointed Chairman of the Faculty of Economics from 1980 to 1983, Director of the Department of Economics (1983–1986) and later Director of the Joint Economics Doctoral Program (comprising three Milanese Universities: Cattolica
, Bocconi
and Statale
) from 1984–86 and again from 1995-98.
The list of academic distinctions and honours he has received till now is long. The most prominent ones are: St. Vincent prize for economics (1979), President of the Società Italiana degli Economisti (1986–89), President of the European Society for the History of Economic Thought (1995–1997), Member of the Executive Committee of the International Economic Association, Member of the Accademia Nazionale dei Lincei, Doctor Honoris Causa at the University of Friburg (1986), Invernizzi Prize for Economics (1997). At present Pasinetti is also Honorary President of: the International Economic Association, the European Society for the History of Economic Thought, the International Economic Association, the European Association for Evolutionary Political Economy, the Italian Association for the History of Political Economy and the Italian Association for the History of Economic Thought.
He has also provided valuable contributions to several major economic journals such as editorial advisor to: the Cambridge Journal of Economics (since 1977), the Journal of Post Keynesian Economics (since its founding in 1978), Kyklos (1981), Structural Change and Economic Dynamics (since 1989), and PSL Quarterly Review (2009) to name a few.
Pasinetti is currently Emeritus
Professor at the Catholic University of Milan
.
was probably "the mathematical formulation of the Ricardian system", published in 1960 in a paper now considered classical. In such work Pasinetti presented a very concise and elegant (and pedagogically effective) analysis of the basic aspects of classical economics
.
At that time, Piero Sraffa
had just published The Works and Correspondence of David Ricardo, one of the most masterful editorial works ever to be published in economics; and scholars were wondering how Sraffa’s remarkable work could clarify and enrich the interpretation of Classical economics. Pasinetti’s mathematical formulation provided a rigorous and clear answer to that question, in particular with reference to two major Classical problems: the theory of value and the theory of income distribution.
On this subject, a major stimulus came from a famous paper written by Nicholas Kaldor
, in 1956, where Kaldor
presented a review of the history of several theories of distribution
, covering the period from Ricardo
to Keynes. Although Ricardo's theory (in Kaldor's paper) was without equations, it was the starting point after which economists began to explicitly see the Ricardian model as a coherent whole, susceptible to mathematical formalization.
Another influence came directly from Sraffa
and concerned the relative prices of goods produced in the economic system made to depend only on the amount of labour embodied in them – the well known labour theory of value
. In fact, an early draft of Pasinetti’s paper was read by Sraffa
, who gave his approval to almost the entire paper:
Pasinetti explains that“the more constructive approach is taken of stating explicitly the assumptions needed in order to eliminate the ambiguities” in the Ricardian model, hence, the reason for the mathematical formulation.
In this view, the most straightforward mathematical Ricardian model that can be formulated, with minimal economic complications, is the one in which only one commodity is produced (‘corn’ for instance), and where there are three social classes: capitalists who earn profits
, workers who earn wages and landowners whose income
comes from the rent of land
. This is the way to express Kaldor’s model mentioned above. Although the Pasinetti model is more general and comprises two sectors (agriculture and manufacturing), it is illuminating to start with the simplest version –a one-commodity model expressed by the following equations:
Equation (1.1) shows that output, Y, depends only on the number of workers, N, engaged to work on the land. Three conditions (1.1a) are necessary and help to restrict the meaning of (1.1). Specifically, the first displays that land, when workers are not employed, can produce something or nothing at all. The second condition shows that the marginal product to kick start the cultivation of land must be greater than μ, the subsistence wage
; otherwise the system will never start working. The third condition shows the diminishing returns
of labour. The following equations show the determination of the quantities of different categories of income
:
where W are the total wages, x is the wage
per worker, K is the capital
of the economy, R is the total rents
perceived by landowners and B are the total profits
that go into the hands of capitalists. The latter are represented as a residual income
once the rents
and wages have been paid. In these models all the capital
is working capital
; it is assumed to be composed entirely of advances to workers as wages. Notice, moreover, that expression (1.4), supplemented by technical conditions (1.1a), expresses what still today is called the Ricardian theory of rent.
Hitherto we need two more equations to close the model. They are:
Equation (1.6) shows that long-term wages tend to subsistence level. Equation (1.7) shows the stock of capital
at the beginning of the year. Throughout the construction of his model, Pasinetti insists that he is interested in "natural solutions" of the Ricardian model, i.e., those to which the system tends to in the long term.
Thus, equation (1.6) does not preclude short-termwage
deviations with respect to its natural level. Eventually, note that μ is the only magnitude which is determined from outside the system: it is an amount set by customs and habits of society. This means that the number of workers employed (proportional to population), is determined by the system itself, unlike what happens in modern theories of economic growth
, where the rate of population growth
is taken as exogenously given.
The previous model allows us to see the basic features of Ricardo’s distribution theory. However, no reference can be made to anything about the theory of value
, since all the magnitudes are measured in terms of ‘corn’. As Pasinetti says: “where any question of evaluation has not yet arisen, corn being the single commodity produced”. However, by enlarging the model to a two-sector model, more remarkable features of Ricardian economics emerge. The two sectors include: the basic goods sector (wage goods called ‘corn’) and a luxury goods sector (called ‘gold’). The whole new model appears as:
Equations (2.1) to (2.7) are identical to those of the single sector model, but now they bear added subscripts to differentiate the production of ‘corn’ from that of ‘gold’. Equation (2.8) presents the gold production function which, unlike the ‘corn’ production function, exhibits constant returns to scale. The parameter is the physical amount of ‘gold’ produced by a worker in a year. The next two equations show in monetary (nominal terms) the wage rate (‘corn’) per worker and the rate of profit:
where p1 and p2 represent the price
of ‘corn’ and the price
of ‘gold’ respectively. Pasinetti supposes that the wage rate and the rate of profit
are identical in both sectors thanks to free market competition. Note also from (2.10) that only p1 (the price of corn) enters wage
determination, since it is assumed that workers in both sectors only receive only 'corn' as wages; in a terminology later developed by Sraffa
, ‘corn’ is the only basic commodity produced in the system. The same consideration can be made, from the opposite view, looking at (2.11), since the only capital
involved is represented by advances in the form of ‘corn’. Hence K appears as multiplied by p1. The following two equations are Ricardo's
implicit assumptions -that the "natural price" of any good is given by its cost of production:
Equation (2.12) allows the determination of the total monetary profits
of the gold industry. Equation (2.13) is much more important. It shows that on balance, the value of output per worker is the same in both sectors. It should be noted that the product of sector 1 (agriculture) is considered free of rents
. To achieve this result, both the wage rate and the rate of profit
have been considered homogeneous in both sectors, and the capital/labour ratio must also be considered as identical.
Pasinetti closes the model with two further equations:
Relationship (2.14) simply adopts the amount of ‘gold’ as numeràire; hence, it is equal to unity. Relation (2.15) displays the income distribution
between the different social classes. Ricardo
supposes that workers spend their entire wages to buy 'corn', capitalists reinvest their profits
in capital accumulation
, and landowners spend all their rents
on luxury goods. The simplicity of this argument about consumption functions for each social class enables Pasinetti to close the whole circuit of income distribution
with a single equation. Specifically, (2.15) shows that landowners spend all their income received as rents
, p1R, in the buying of luxury goods, p2X2. There is no need for more equations, since “the determination of the demand for one of the two commodities (gold in our example) also determines, implicitly, the demand for the other commodity (corn), since total output is already functionally determined”.
The system presented above (15 equations with 15 unknowns) displays the natural solutions of the Ricardian economic system, i.e. those solutions attained in the long term and corrected for market distortion
s and imbalances in the short term. Ricardo
did not deny the existence of such deviations, but for his analysis, they were not the relevant issues. These solutions, furthermore, as demonstrated mathematically by Pasinetti exist, they are unique, and, moreover, their steady state solutions are stable. On the other hand, it can be demonstrated that if we take the partial derivatives of all variables with respect to K, (because the process of capital
accumulation is what matters for the dynamics of the model) the evolution of the variables is consistent with the conclusions which Ricardo
reached; especially with the tendency of the whole economic system in the long run towards a stationary state.
The above model has several outstanding aspects. The foremost of which is a theory of income distribution
entirely independent of the theory of value
. The inclusion of a new sector -and consequently the whole structure of relative prices- have not even slightly changed the way income is distributed among landowners, workers and capitalists. At the same time, prices though of course not equal to, are exactly proportional to the quantity of labour embodied in each commodity. This is a perfectly clear labour theory of value.
The attentive reader may notice that the two major results (on income distribution
and on value respectively) depend on two assumptions that are implicit in the formulation of the model, i.e. of the above set of equations, namely: 1) that capitalists appropriate the whole surplus
of the economic system, after paying rents
to landowners, and conventional wages to workers; and 2) that the proportion of labour to capital
is exactly the same in all sectors. These two assumptions have given rise to endless discussions on value and distribution ever since.
Further work undertaken by Pasinetti’s has been concerned with reversing the causal chain of the first assumption and in rendering the second assumption superfluous.
from Ricardo
to the Marginalists and even to Kalecki. But then, he added a theory which he named the Keynesian theory of income distribution
. This was a surprise because these issues were never treated by Keynes in an explicit way. Kaldor baptized his theory as ‘Keynesian’ because it succeeded in catching a few important concepts both from Keynes’s Treatise’s widow's cruse allegory and from Kalecki’s profits equation.
In any case, in this paper Kaldor reached remarkable results. Starting from a closed economic system, without government
, and in which there are capitalists and workers, starting from the saving-investment identity, Kaldor came to the following identity between investments and savings:
where Y is the national income, P is the volume of total profits
, sw is the workers propensity to save, sc is the capitalists propensity to save and I is investment
. If we suppose that workers do not save (sw=0), divide both members by K and remember that in dynamic equilibrium I/K = gn, we get:
where gn is the natural rate of growth and κ is the capital/output ratio. Finally, note that these two expressions only have economic significance in the range:
This interval excludes equilibrium with negative shares, either by the workers (first inequality) or by the capitalists (second inequality).
The expressions (3.1) and (3.2) are those that have subsequently formed the core of the post-Keynesian
distribution theory; but only after an extremely hard-fought debate. Equation (3.1) shows that the share of profits
in total output depends positively on the natural rate of growth and the capital/output ratio and negatively on the propensity to save of the capitalist class. The second of these relations, (3.2), better known as the “Cambridge equation”, shows that the profit rate
is solely determined by the ratio of the natural rate of growth and the propensity to save of capitalists.
The importance of these expressions became clear only after an intense debate. These expressions were achieved with an additional assumption that was heavily criticized. Kaldor’s assumption was that the workers propensity to save was zero.
Specifically, if you eliminate this assumption, the above formulas lose their conciseness, depending on the propensity to save of workers. This assumption was explicitly criticized because, whatever justification it might have had in the early days of industrialization, it appeared to have no sense in contemporary times. If you eliminate this assumption, the above formulas lose not only their conciseness, but also their applicability to the industrial systems of our own days.
Pasinetti went into this debate with his 1962 paper. With his now famous Pasinetti Theorem, he achieved the result of re-stating Kaldor’s original equations without the need to rely on Kaldor’s much criticized assumptions. It is worth quoting the first time that Pasinetti presented his views about these issues to an audience:
In his 1962 paper, Pasinetti showed that Kaldor had fallen into a "logical slip". He implicitly assumed that the total profits
only came from the capitalists and he neglected the workers. In other words, "By attributing all profits to the capitalists it has inadvertently but necessarily implied that worker's savings are always totally transferred as a gift to the capitalists". That is to say the saving function of Kaldor's model ought to be modified so as to include both workers profits and capitalist profits, i.e.:
Under this assumption the Investment = Savings identity becomes:
If this expression is cleared as before, we see that formal results are similar to (3.1) and (3.2), but now they only refer to that part of profits
that accrue to the capitalists. Specifically, the modified Cambridge equation would take this peculiar form:
Note that the preceding equation now shows not the profit rate
of the economy, P/K, but a ratio, Pc /K,, which has no economic significance if taken as such. To fix this anomaly, Pasinetti added Pw /K, to both sides of the equality:
To complete the formulation, Pasinetti simply assumes that, in the long-term, the variable i, representing the interest rate
earned by workers when they lend their savings to capitalists, is equal to the profit rate
, P/K. Taking that into account and simplifying, we obtain:
i.e., exactly the preceding (3.2) equation. In other words, we obtain the “Cambridge equation” again, but this time without the assumption sw = 0. By a similar procedure Pasinetti shows that the share of total profits
in total income
again emerges the same as (3.1); i.e., the Pasinetti Theorem proves that in the long run, the propensity to save of the workers has no effect on the determination of the overall profit rate
of the economy, and also has no effect on the determination of the share of the total profits
in the national income. At the same time, however, the propensity to save of the workers determines the distribution of profits
between workers and capitalists.
With these outcomes, the truly important point is that Kaldor’s original formulae are much more general than was previously believed. As Pasinetti says, “the irrelevance of worker’s propensity to save gives the model a much wider generality than was hitherto believed. Since the rate of profit
and the income distribution
between profits
and wages are determined independently of sw, there is no need for any hypothesis whatever on the aggregate savings behaviour of the workers."
The conclusions obtained from Pasinetti’s Theorem led to a huge number of scientific works and papers, with the purpose of clarifying the nature of the Theorem and its more important implications. Specifically, in 1966, Paul A. Samuelson and Franco Modigliani
, the MIT
economists, wrote a detailed and widely quoted paper where they tried to minimize the consequences of the Pasinetti Theorem and to lessen the generality of its conclusions.
The argument centred on the inequality shown above, crucial to the solution of the Cambridge equation, namely on:
Samuelson and Modigliani proposed that the following inequality (which they called anti-Pasinetti’s inequality) was also reasonable, and claimed that it would endow the model with greater generality:
Such inequality, however, requires that the workers' propensity to save becomes so high as to allow them to accumulate capital
at a greater speed than capitalists. If this were to happen, in the end the total capital
of the economy would entirely be owned by the workers, while the capitalists would disappear.
The formulation of the anti-Pasinetti range and all theoretical justification (and some empirical exercises) proposed by Samuelson
and Modigliani
was challenged by Pasinetti and in a much more critical way by Kaldor and Joan Robinson
.
Kaldor founded his criticism on the lack of realism of the assumptions made by Samuelson
and Modigliani
, while performing a remarkable study on the empirical values of the saving propensities of workers and capitalists (based on data from National Accounts for United States and United Kingdom). Kaldor concluded that, “unless they make a more imaginative effort to reconcile their theoretical framework with the known facts of experience, their economic theory is bound to remain a barren exercise.”
Pasinetti preferred, with his reply to Samuelson and Modigliani, to remain at a higher level of analysis – by pointing out the weaknesses of the logical analysis of the two MIT economists. Nonetheless Pasinetti joined Kaldor’s critique concerning the highly restrictive assumptions made by the neoclassical economists:
For Pasinetti, the principal issue of the debate is the way in which technology is defined. If swnK/Y the Cambridge equation would still stand, regardless of which assumption is made about the technology (i.e., whatever the form of the production function
), while if sw>gnK/Y, the shape of technology does play a crucial role, so that “The Meade
-Samuelson
-Modigliani
’s marginal productivity results only follow on particular and unacceptable assumptions on technology.”
Pasinetti went on to argue that, even with the particular and unacceptable assumptions on technology, the Samuelson
-Modigliani
range of applicability would hardly have any practical significance. In fact, even though the Cambridge equation might not exactly determine the rate of profits
, it would nevertheless determine its upper limit. First, the rate of profit
(whatever way it is determined) cannot be higher than gn/sc. Secondly, the rate of profit
cannot be lower than gn (for, if it were, that would mean that individuals would contribute more to economic growth than they receive in exchange for profits
, which is patently an absurdity).
So, even if in the range of Samuelson
and Modigliani
the rate of profit
were to be determined by the marginal productivities (and not by the Cambridge equation as in the general case), its scope would be extremely limited, being confined to a quasi knife-edge range:
-Modigliani
's interval, took a turning point, by reaching a second phase in which “many authors proceeded to relax assumptions, trying out new hypotheses and introducing complications of all sorts”. Indeed, already in the 60s some economists, inspired by Kaldor
's paper of 1966, began to introduce in the Cambridge model some issues related to financial assets, interest rates and the functioning of financial markets and big corporations. All these contributions, as well as those which were made later in the 1970s and 1980s, were made in order to give the Cambridge model a wider applicability and more explicit realism.
It was in 1972, thanks to a remarkable paper by Steedman
, that the public sector was explicitly included in the Cambridge equation. Though 16 years had elapsed since the original paper by Kaldor, no formal attempt had been made in that period to introduce the government sector and its ensuing complications. The case is more striking if one considers that Kaldor was an expert adviser on tax issues, tax theory
and public finance
. This is due to the aforementioned fact that throughout that period the economists were mainly concerned about the analytical properties of the outcome of the Pasinetti Theorem.
In fact, Steedman's 1972 paper was an original and very constructive way to resolve the theoretical dispute between Pasinetti and Samuelson
-Modigliani
. Steedman
showed that if the public sector was considered, under the assumption of budget equilibrium, the long run solutions were consistent with Pasinetti’s solutions, and never with the "dual" solutions of Samuelson
-Modigliani
. This means that the introduction of the public sector meant that the profit rate
remained independent of the workers propensity to save and of the capital-output ratio (technology).
The "enlarged Cambridge equation", which Steedman
arrived at was:
where tp is the tax rate (average and marginal) on profits
. In the case that tp=0 (there are no taxes on profits), we obtain the original Cambridge equation. As it can be easily seen, neither the workers' propensity to save, nor technology, nor even the tax rate on wages affect to the rate of profit
of the economy, and hence they do not affect to the distribution between wages and profits
.
Pasinetti entered the debate again in 1989 showing that -whether the government’s budget was in deficit or surplus- the main results of the Cambridge equation hold. If the government budget
was not balanced, the Cambridge equation would take the following form:
where s’c is a “propensity to save of capitalists corrected”, meaning that it takes into account both the direct taxation on profits and the indirect taxation, ti (on capitalists' consumption) as well as the government propensity to save, sT, i.e.:
Although the expression of the capitalists’ propensity to save is not as simple as the original, the truly remarkable thing is that no matter what hypothesis are adopted about the government budget
, the Cambridge equation continues to hold, by depending on the natural rate of growth divided by the capitalists' propensity to save, independently of workers' propensity to save and the technology.
Equation (4.1) - and (4.2) - can be viewed from another point of view: they can be expressed in terms of profit after taxes
:
The long-run
rate of profits
is given by the natural growth rate divided by the capitalists’ propensity to save, independently of anything else. That is to say, the original Cambridge equation can be said to refer to the rate of profit net of taxes, not to the rate of profit before taxes.
The most important conclusion to be drawn from this analysis is that if we consider two identical economies (with the same natural rate of growth and saving propensities), if the first has a higher tax rate on profits, the second economy will enjoy a higher rate of profits before taxes
(and also a higher share of profits in total income
). That is to say, the presence of government has a redistributive effect per se in favour of profits
and against wages. This important and surprising conclusion should not sound new, for, as stated by Pasinetti:
: i.e., Cambridge
(United Kingdom), whose most prominent scholars were Joan Robinson
, Luigi Pasinetti, Piero Sraffa
and Nicholas Kaldor
and Cambridge, Massachusetts
(U.S.A) whose members were Paul Samuelson
, Robert Solow
, David Levhari and Edwin Burmeister.
Controversies over the nature and importance of capital
were not new. In the early 20th century, the economist John Bates Clark
, in an effort to refute Marx’s surplus theory, suggested that wages and profits
(or rather interest, as they were called by Neoclassical economists, owing to their assumption that rate of profit
and rate of interest coincide) were simply considered as prices, obtained from the marginal productivity of the factors of production; a theory synthesized by J.B. Clark’s famous statement, that "what a social class gets is, under natural law, what it contributes to the general output of industry". In this debate, Veblen
and Böhm-Bawerk were also involved, proposing slightly different, but basically similar, theories to that of J. B. Clark
.
In 1930 Hayek
re-opened the debate by linking lower interest rates with more indirect methods of production, i.e., with higher capital/labor ratios. Since the interest rate
was for Hayek
the price
of capital
, it was clear that Hayek
(as all Neoclassical economists) thought that lower interest rates would lead to more capital-intensive production methods. With the outbreak of the Great Depression
, the debates around capital theory
were abandoned, and it was not until 1953, due to a paper by Joan Robinson
, that the topic was again given prominence.
Robinson
opened the controversy with a now famous statement, with which she exposes the main problems of the traditional concept of capital
as follows:
Although initially the debate was focused on the measurement of capital
, more basic questions quickly began to emerge concerning the validity of the neoclassical production functions
. If capital
could be measured in some way, and if one assumed constant returns to scale, diminishing marginal productivities, given technology, competitive equilibrium and the production of a single good, the production function
allowed getting three noteworthy conclusions:
The assumption of the production of a single good was crucial, as it allowed the measurement of capital in physical units while no valuation problem arose. However, in a model with many goods (heterogeneous capital), the possibility of aggregation could not be avoided and always remained very problematic.
In 1962 Paul Samuelson
wrote an important paper, which preceded and in fact provoked the subsequent debate. He proposed to solve the problem of the aggregation of capital through a new concept, the surrogate production function. “What I propose to do here is to show that a new concept, the ‘surrogate production function’, can provide some rationalization for the validity of the simple J. B. Clark parables which pretend there is a single thing called ‘capital’ that can be put into a single production function and along with labor will produce total output.”
The problem is that in this way, in order to add capital and put it into an aggregate production function
, one must assess the capital as a stream of discounted monetary flows to be produced in the future; which implies an interest rate
. The possibly adverse effects of changes in interest rate
s on capital value are basically two: the re-adoption of earlier discarded techniques (reswitching) and capital reversing.
Reswitching is basically the possibility that the same method of production may became most profitable one at more than one rate of profit, i.e., a production method may become the most profitable one both at low and at high rates of return
, even when in the medium range it is dominated by other methods.
Capital-reversing occurs when moving from one technique to another, the technique chosen at a lower level of the rate of profit
requires less capital value while earlier it required more capital value.
Pasinetti published a famous article in the Symposium of the Quarterly Journal of Economics
in 1966, which was actually an adaptation and expansion of an article that was presented to the First World Congress of the Econometric Society in Rome one year earlier. Pasinetti set out to show that the theorem stated a year earlier by David Levhari and Paul Samuelson
, which was supposed to demonstrate the impossibility of reswitching at the aggregate level, was false. Although in 1960 Sraffa
had shown that reswitching was a possibility, no one had considered in depth such contribution. As Pasinetti said at the beginning of his 1966 article:
Later he adds: “This result, owing to its theoretical implications, has been rather worrying; and there has been a general reluctance to consider it.”
The paper begins by setting a numerical example that shows -by constructing two alternative techniques- that even satisfying all Levhari and Samuelson
hypotheses, reswitching is a possibility at the aggregate level. Then Pasinetti set up a theoretical analysis to find out where the error was in Levhari's proof. Clearly, if the numerical example above refuted the theorem –as it did-, “It means that their logical arguments must have gone wrong at some stage”.
The conclusions of the article were truly remarkable, for if a monotonic relationship between profit rate
and capital-labour ratio could not hold, the production function
concept was meaningless. Therefore he concluded that:
The other major contribution of Pasinetti to the debate on capital theory
was a 1969 paper titled “Switches of Technique and the ‘Rate of Return’ in Capital Theory”. In this paper, Pasinetti showed that the concept of the rate of return
on capital, introduced by Irving Fisher
, and resumed and used by Solow
in 1967 as a means of rescuing the neoclassical capital theory, had no economic significance.
Whichever of the two definitions given by Fisher on the rate of return was accepted, one of them was an accounting expression and in the other (in order to say anything on interest) would entail accepting a rather unobtrusive postulate in order to avoid the problem of reswitching. That is, the concept of “rate of return”, which Solow
thought was the central concept of the theory of capital, had no autonomous theoretical content. The conclusion of the article is an illuminating summary of the results concerning the debate on the theory of capital
:
This is the main reason why the Lectures on the Theory of Production turned out to be the most successful of his publications didactically (translated in French, Spanish, German and Japanese). The English version, appeared two years later, in 1977 and maintained the character and the structure of the Italian version, although Pasinetti added some enlargements, in the form of more sections and new appendices.
At a theoretical level, Lectures on the Theory of Production is a book dedicated to the analysis of the theory of production
, that is, the way in which societies produce wealth
and then how it is distributed. It is curious to notice the unusual way in which Pasinetti introduced his Theory of Production. He begins Chapter I by contrasting two possible definitions of wealth
:
In fact, the understanding of wealth
as a stock
can be useful for investigations at the level of single individuals; but at the macroeconomic
level, it is wealth
as a flow that is the most relevant concept. Therefore, Pasinetti considers it as a great contribution – made already by the Physiocratic school of 18th century France – to have concentrated on the concepts of surplus
and economic activity presented as a circular flow in the Tableau Economique
, devised by François Quesnay
. The Physiocratic ideas were developed by the Classical economists in Scotland and England and then by Marx. All of them saw the importance of production
and wealth
as a flow concept and further developed the Physiocratic ideas. Curiously enough, the Marginalist revolution of the late 19th century preferred to go back to study the concept of wealth
as a stock
, thus largely de-emphasizing the problems of production
and distribution
, and to focus on models of "pure exchange".
From this point onwards, Pasinetti develops and presents, in a terse way, a truly Classical theory of production. This book became a book from which a whole generation of Italian students (and in some Universities also non-Italian students) have learnt the theoretical scheme of Piero Sraffa
, expressed in matrix notation (with a mathematical appendix devoted to the basic elements of matrix algebra
) and the Input-Output analysis of Wassily Leontief
.
In chapters 4, 5, and in an Appendix to Chapter 5, Pasinetti respectively deals with the Leontief model, with the Sraffa system, and Marx's transformation problem. He shows how, although the Leontief model and the Sraffa system were designed for different purposes, the former as an empirical tool and the latter as a theoretical framework, both have their basis in Physiocracy and Classical economics
. The greatest theoretical achievement of the Sraffa system, Pasinetti says at the end of chapter 5, is that:
The last two chapters are useful summaries of problems Pasinetti has dealt with extensively throughout his career. Chapter 6 explains some of the controversies on capital theory
, the problem about reswitching and its implications for traditional economic analysis. In an appendix to chapter 6, Pasinetti also touches on linear programming. He points out that “unfortunately, linear programming was all too quickly constrained within the limits of traditional marginal analysis and lost its driving force”.
Chapter 7 is an introduction to dynamic production models and their implications for the theory of distribution
. Pasinetti exposits his own contributions to this field as a summary of the Von Neumann model, showing both its merits and limitations. For the sake of brevity Pasinetti does not present here his contributions to the field of structural change
. But, this last chapter can be considered a proper introduction to his book Structural Change and Economic Growth, where all the problems of structural dynamics are widely discussed.
This book is a theoretical investigation on the long-term evolution of industrial systems. According to Pasinetti, such work surged from:
Leaving aside for a moment the technical aspects, we can say that overall the book is completely new for three reasons. To begin with, this was the first book to offer a unifying framework and a consistent alternative to that proposed by the Neoclassical theory
. The latter strand of theory, which began in 1870, tried to explain the economic reality from a simpler view (exchange) under assumptions and analytical tools that were very restrictive, although its authors had the advantage that, “they have always clearly presented their arguments around a unifying problem (optimum allocation or scarce resources) and a unifying principle (the rational process of maximization under constraints).
It was therefore natural that contributions made in isolation and apart from Neoclassical economics
were either discarded or transformed, doctored to fit into the neoclassical model. Pasinetti's purpose is therefore to offer an alternative paradigm and unify these theories in a new and solid set, which incorporates the contributions of Keynes, Kalecki
, Sraffa, Leontief, the macrodynamics models of Harrod and Domar and the distribution theory of the post-Keynesian economists in Cambridge: the whole lit and dotted with some of the theories, ideas and concerns of the classical economists.
The second important point is that it is the first work in which Pasinetti does not solve a specific problem in isolation, but tries to offer a global vision of the economic process and integrates all the contributions he had made before. In this book we can find his ideas about Classical economics
, income distribution
, capital theory
and the theory of joint production
, all of them sorted out and assembled in order to explain the dynamics of industrial societies.
The third point is of a methodological nature, and is probably the most important of all. Following the Classical economists, Pasinetti thinks that it is possible to frame the study of natural economic systems, i.e., economic systems free of institutions. In these natural systems it is possible to deduce a series of characteristics, principles and general laws, which are independent of the institutions that have to be introduced in later stages of investigation. These institutions are the ones that shape the features of real economic systems: for instance, a capitalist system or a socialist system. As he says, “is a distinctive feature of the present theoretical scheme to begin by carrying out the whole analysis at a level of investigation which the Classical economists called ‘natural’, that is to say, at a level of investigation which is so fundamental as to be independent of the institutional set-up of society”.
Despite the high degree of abstraction of analysis, this method can provide answers to many real-world practical problems:
The six first chapters of the book provide the analytical core of the work. In them, Pasinetti sets the conditions for an economy with neither unemployment nor idle production capacity. Pasinetti's analysis always runs from the simple to the more general models. Thus - after studying the equilibrium conditions in the short run in chapter 2 - in chapter 3 he analyzes the most simplest of all growth models: population
grows at a steady percentage rate, while technical, and demand
coefficients (i.e., consumer preferences) remain constant over time.
With these assumptions, two types of conditions are necessary to reach the full employment of resources: the first one is a macroeconomic
condition: total expenditure must be equal to total income; and the second is a set of sectoral conditions: each sector must have a rate of accumulation of capital sufficient to cover demand
growth. Roughly, this is a series of ‘Harrod- Domar equations’: a specific Harrod- Domar equation must be satisfied in each particular sector.
The most important outcome of this analysis is that Pasinetti shows that, under such assumptions, it does not matter whether the analysis is carried out in macroeconomic
terms or -in a more disaggregated way- in sectorial terms. As the system expands, while its proportions remain constant, the analysis does not lose any generality if carried out in aggregate terms. So, this is the case to which macroeconomic models of growth can be correctly applied. “If the whole structure of the economic system were really to remain constant through time, any disaggregated formulation would not provided us with particularly useful insights, besides those that are provided already by the corresponding, much simpler, macroeconomic
formulations.”
Chapters 4 and 5 are devoted to the elaboration of a really relevant general multi-sector dynamic model. While chapter 5 is devoted to the exposition of such a model, in chapter 4 Pasinetti displays one of the most important ideas of the whole book: not only does technical progress
affect the production methods of the economy, it also generates changes in the composition of demand. The way in which Pasinetti introduces the dynamic behaviour of demand over time is an up-dated resumption of Engel's Law
, which when generalized states that higher and higher levels of income
lead to constantly changing consumption patterns
.
This way of looking at the demand side allows Pasinetti to reach three notable findings. The first is that learning is an individual characteristic which is more basic and more realistic than the rational behaviour postulated by traditional economics. If income
changes over time -and thus consumer preferences also change- consumers must continually be learning about new goods to consume. This implies that, “we can never expect each consumer to make the best possible consumption decisions”.
The second finding is that because of changing consumer preferences over time, it is inevitable that (short term) sectorial imbalances will arise due to the changing structure of the demands for goods. Therefore, this will be a permanent source of disequilibrium in the system.
The third finding is that demand
is going to play a major role in determining the structure of the main macroeconomic
variables over time. Even through the formation of long-term prices, demand
has a vital role to play in shaping the production quantities:
The second part of the book, from chapters 7 to 11, develops all the consequences derived from the dynamic model of chapters 4 and 5. The long term evolution of the major variables is explained in its composition: employment
, wages, profits
and capital/output and capital/labour ratios. Chapter 8 also provides a drastic distinction between the interest rate
and the profit rate
; and this closes the theoretical framework of the entire book and makes it particularly complete and compact.
The last chapter (11) takes the conclusions and the scheme of the model in chapter 5 and applies them to international economic relations. This chapter appears as slightly different from the rest of the book, because it is devoted to analyzing economic systems with international trade
and economic relations in general. It is a chapter that deals with open economies that not only trade with other economies, but try to import knowledge and know-how. Pasinetti argues that the main benefits of international relations are in fact not so much those that derive from trade as those that derive from the international learning process between countries. Developing countries can strongly benefit from international relations if they succeed in imitating production methods from the developed countries. This is an encouraging possibility but has its limitations. Developing countries may not always be prepared to absorb all the technical methods of the developed countries because their lower levels of per capita income cause (according to Engel's law
) the goods demanded in these countries to be different from those that are demanded in developed countries. The latter generally are not only much more sophisticated, but such as to require facilities that are not yet available in developing countries. In addition, Engel's law
may require a strict order in consumption decisions.
The last paragraph of the book gives an excellent summary of the contents and the tone of Pasinetti’s book:
In 1993, Pasinetti returned to the problems of structural dynamics with a beautifully compact book (Structural economic dynamics – a theory of the economic consequences of human learning). Scant attention has been paid thus far to this book. The book explores the complex inter-relations between the structural change
of production, of prices and of employment
as a necessary consequence of human learning, by carrying out the whole analysis in terms of a “pure labour model”, i.e., a model in which labour, to be intended as human activity in general, is the only factor of production. This book has (incorrectly) been interpreted as an extreme simplification of the process of structural dynamics
, and this may explain why it has been neglected so far. But in fact, it goes to the very heart of the complex movements that are taking place in post-industrial societies as an effect of the accumulation and diffusion of knowledge. When these aspects will be fully understood, it may well emerge as containing the most fundamental of all the theoretical concepts thus far conceived by Pasinetti to interpret the basic economic features of the newly shaped world in which we live.
In fact, in the 1965 paper, from which Structural Change was later developed, the notion of vertically integrated sector was already present, though more as a simplifying assumption than as a really important analytical concept. The publication of Sraffa's book Production of commodities by means of commodities in 1960 motivated Pasinetti to reflect on the importance of such a concept. As pointed out by Pasinetti:
In 1973 Pasinetti published a paper, "The Notion of Vertical Integration in Economic Analysis", which would be a milestone for the development of all the analytical implications of the concept and its relation to the inter-industry theoretical schemes of Input-Output
type.
The concept of vertically integrated sector is implicitly contained in the work of many economists. Most macroeconomic models, in order to avoid the analysis of intermediate goods, use that notion. The question then is why the use of the concept of a vertically integrated sector is much more advantageous for the dynamic analysis that, for instance, the classic Input-Output model
s.
A vertically integrated sector is, above all, a purely theoretical construction. Each of these sectors is constructed behind each of the final goods production processes, so that these can be decomposed into two clearly distinguishable elements: an amount of labour and a quantity of capital goods. “In a vertically integrated model, the criterion is the process of production of a final commodity, and the problem is to build conceptually behind each final commodity a vertically integrated sector which, by passing through all the intermediate commodities, goes right back to the original inputs”.
The great advantage of this abstract construction is that, besides being much more relevant to the dynamic analysis, it can be easily converted by algebraic operations into an Input-Output scheme
. The coefficients of production of a vertically integrated model are basically a linear combination of the coefficients of production of an Input-Output model
. This means that it is possible to obtain empirical values of the vertically integrated coefficients for an economy. We need only to obtain the values of the production coefficients on each industry
(as it is commonly done by the different national account agencies) as well as the capital
data at current prices; then we take the transposed inverse matrix of the estimated coefficients and we multiplied it by the vector of capital stocks. This allows us to obtain the vector of vertically integrated capital stock of an industry
, a vector that can be seen as a kind of composite good involved in the production of the final commodity considered, which Pasinetti calls unit of vertically integrated productive capacity. A similar procedure is applied with respect to the coefficients of labour. Thus, each final good is summarized in a vertically integrated labour coefficient and a unit of vertically integrated productive capacity.
The importance of this algebraic manipulation is notable because it allows linking a measurable and observable magnitudes (corresponding to the Input-Output analysis
) with more compact magnitudes which have a deeper economic significance for the dynamic analysis. Thus, both methods (Input-Output
and vertical integration
) are essentially different points of view to perceive the same thing.
Nonetheless, this relationship between the contribution of Pasinetti and Input-Output models
, valid for a static analysis, vanishes in a dynamic analysis. The matrix of technical coefficients, i.e., the link between the two methods of analysis, evolves over time due to technical change
and change of production methods in the economy. That is, we would require an Input-Output
table at each point in time for the dynamic analysis of an economy. However, the movement of vertically integrated coefficients can be analyzed over time, as these relationships include the expressions of technical change
. This is the reason why the analysis in terms of vertically integrated coefficients is most appropriate for dynamic analysis. We can go back, however, to an inter-sectoral analysis (Input-Output
) with reference to any given point in time when we are interested in it.
As Pasinetti says:
The result that the vertically integrated technical coefficients can be set up independently of the vagaries of technical change is a result of such importance that it could lead us to reconsider much of the work on structural economic dynamics:
Keynes and the Cambridge Keynesians (2007) is the latest book published by Pasinetti. Therein, Pasinetti proposes to consider Keynesian economics
as an alternative paradigm to Neoclassical economics
, emphasizing the contributions of the Cambridge Keynesians
as well as future development lines on these issues.
Probably, Pasinetti -recognized as the heir of the Cambridge economists-, is the most suitable economist to talk about that ambience, because, as he himself acknowledges:
The gestation period of the book, as is usual for Pasinetti's books, was long: about 15 years. In fact, with the notable exception of part three, the book is a collection of writings that Pasinetti had prepared years ago. Part three, on the other hand, is new and presumably the most important part of the book. That is, Keynes and the Cambridge Keynesians is composed of three parts or, more properly, of three Books.
Book I is a summary of what has been known as the "Keynesian Revolution
". It is taken from set of lectures delivered by Pasinetti in memory of the Italian economist Federico Caffé, in October 1994 at La Sapienza University, Rome. In this Book, Pasinetti makes a chronological overview of the outbreak of the "Keynesian Revolution
", from the first attempts of Keynes in the early 1930s, to the evolution of Keynesian thinking
and the subsequent misinterpretation of his theory by the economists of the “Neoclassical synthesis
”. Book I also contains some reflections on the progress of knowledge in economics
and the rise and fall of scientific paradigms based on the work of the famous epistemologist Thomas Kuhn
. The conclusions of Book I also advocate the revival of Keynesian economics
with a touch of hope for future generations of economists:
Book II, entitled The Cambridge School of Keynesian Economics is by far the longest part of the book. It is composed of, in this order, by the biographies of Richard Kahn
, Joan Robinson
, Nicholas Kaldor
, Piero Sraffa
and Richard Goodwin
. All of them had already appeared in various places several years earlier, although for this book Pasinetti re-arranged them. The chapter on Kaldor, for example, is a synthesis of two articles written on different occasions. In terms of space, Sraffa is the economist treated in greatest detail by Pasinetti, dedicating to him three, quite independent biographical essays.
Besides the importance of each one of the biographies, the purpose of all of them is:
Book II ends with some suggestions, nine in total, which according to Pasinetti are at the heart of the "Keynesian Revolution
". The issues involved are:
Finally, Book III is a conclusion, not only of the previous chapters of this volume, but also of the whole conception of how Pasinetti would like economic analysis to be carried out. He asserts the need to rise above and go beyond Neoclassical economics
through a genuine resurgence of a Classical
-Keynesian
paradigm, which can be rescued and strengthened and developed by the methodology that Pasinetti has pursued during the whole of his life, made explicit for the first time in his Structural Change and Economic Growth. Basically, he argues for the possibility of formulating, at a first level of investigation, a pure economic theory, independently from the institutional framework of society, and then, at a second level of investigation, of developing an analysis of the relevant institutions, thus achieving a theoretical framework that may allow us to understand the basic features of the monetary production economies in which we live today.
Italy
Italy , officially the Italian Republic languages]] under the European Charter for Regional or Minority Languages. In each of these, Italy's official name is as follows:;;;;;;;;), is a unitary parliamentary republic in South-Central Europe. To the north it borders France, Switzerland, Austria and...
economist
Economist
An economist is a professional in the social science discipline of economics. The individual may also study, develop, and apply theories and concepts from economics and write about economic policy...
of the Post-Keynesians
Post-Keynesian economics
Post Keynesian economics is a school of economic thought with its origins in The General Theory of John Maynard Keynes, although its subsequent development was influenced to a large degree by Michał Kalecki, Joan Robinson, Nicholas Kaldor and Paul Davidson...
school. Pasinetti is considered the heir of the "Cambridge Keynesians
University of Cambridge
The University of Cambridge is a public research university located in Cambridge, United Kingdom. It is the second-oldest university in both the United Kingdom and the English-speaking world , and the seventh-oldest globally...
" and a student of Piero Sraffa
Piero Sraffa
Piero Sraffa was an influential Italian economist whose book Production of Commodities by Means of Commodities is taken as founding the Neo-Ricardian school of Economics.- Early life :...
and Richard Kahn
Richard Kahn, Baron Kahn
Richard Ferdinand Kahn, Baron Kahn, CBE, FBA was a British economist.Kahn was born in Hampstead to Augustus Kahn, a German schoolmaster and an orthodox Jew, and Regina Schoyer. He raised in England and was educated on St Paul's School, London...
. Along with them, as well as Joan Robinson
Joan Robinson
Joan Violet Robinson FBA was a post-Keynesian economist who was well known for her knowledge of monetary economics and wide-ranging contributions to economic theory...
, he was one of the prominent members on the "Cambridge, UK" side of the Cambridge capital controversy
Cambridge capital controversy
The Cambridge capital controversy – sometimes simply called "the capital controversy" – refers to a theoretical and mathematical debate during the 1960s among economists concerning the nature and role of capital goods and the critique of the dominant neoclassical vision of aggregate...
. His contributions to economics
Economics
Economics is the social science that analyzes the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek from + , hence "rules of the house"...
include developing the analytical foundations of Neo-Ricardian economics
Neo-Ricardianism
The neo-Ricardian school is an economic schoolthat derives from the close reading and interpretation of David Ricardo by Piero Sraffa, and from Sraffa's critique of Neoclassical economics as presented in his The Production of Commodities by Means of Commodities, and further developed by the...
, including the theory of value
Theory of value (economics)
"Theory of value" is a generic term which encompasses all the theories within economics that attempt to explain the exchange value or price of goods and services...
and distribution
Distribution (economics)
Distribution in economics refers to the way total output, income, or wealth is distributed among individuals or among the factors of production .. In general theory and the national income and product accounts, each unit of output corresponds to a unit of income...
, as well as work in the line of Kaldorian theory of growth
Kaldor's growth laws
Kaldor's growth laws are a series of three laws relating to the causation of economic growth.Looking at the countries of the world now and through time Nicholas Kaldor noted the a high correlation between living standards and the share of resources devoted to industrial activity, at least up to...
and income distribution. He has also developed the theory of structural change
Structural change
Structural change of an economy refers to a long-term widespread change of the fundamental structure, rather than microscale or short-term output and employment. For example, a subsistence economy is transformed into a manufacturing economy, or a regulated mixed economy is liberalized...
and economic growth, structural economic dynamics and uneven sectoral development.
Biography
Luigi Lodovico Pasinetti was born on September 12, 1930, in ZanicaZanica
Zanica is a comune in the Province of Bergamo in the Italian region of Lombardy, located about 45 km northeast of Milan and about 8 km south of Bergamo...
, near Bergamo
Bergamo
Bergamo is a town and comune in Lombardy, Italy, about 40 km northeast of Milan. The comune is home to over 120,000 inhabitants. It is served by the Orio al Serio Airport, which also serves the Province of Bergamo, and to a lesser extent the metropolitan area of Milan...
, in the north of Italy
Italy
Italy , officially the Italian Republic languages]] under the European Charter for Regional or Minority Languages. In each of these, Italy's official name is as follows:;;;;;;;;), is a unitary parliamentary republic in South-Central Europe. To the north it borders France, Switzerland, Austria and...
. He began his economics studies at the Universitá Cattolica S.C. of Milan
Università Cattolica del Sacro Cuore
Università Cattolica del Sacro Cuore is a privately-owned Catholic university founded in 1921 by Agostino Gemelli. Its main campus is located in Milan, Italy with satellite campuses in Brescia, Piacenza, Cremona, Rome, and Campobasso...
, where he obtained his “laurea
Laurea
In Italy, the laurea is the main post-secondary academic degree.-Reforms due to the Bologna process:Spurred by the Bologna process, a major reform was instituted in 1999 to introduce easier university degrees comparable to the bachelors...
” degree in 1954. The thesis that he presented dealt with econometric models
Econometrics
Econometrics has been defined as "the application of mathematics and statistical methods to economic data" and described as the branch of economics "that aims to give empirical content to economic relations." More precisely, it is "the quantitative analysis of actual economic phenomena based on...
applied to the analysis of the trade cycle
Business cycle
The term business cycle refers to economy-wide fluctuations in production or economic activity over several months or years...
. As a brilliant student, he won several scholarships for graduate studies which gained him access to Cambridge
University of Cambridge
The University of Cambridge is a public research university located in Cambridge, United Kingdom. It is the second-oldest university in both the United Kingdom and the English-speaking world , and the seventh-oldest globally...
, England (1956 and 1958), Harvard
Harvard University
Harvard University is a private Ivy League university located in Cambridge, Massachusetts, United States, established in 1636 by the Massachusetts legislature. Harvard is the oldest institution of higher learning in the United States and the first corporation chartered in the country...
, U.S.A. (1957) and Oxford
University of Oxford
The University of Oxford is a university located in Oxford, United Kingdom. It is the second-oldest surviving university in the world and the oldest in the English-speaking world. Although its exact date of foundation is unclear, there is evidence of teaching as far back as 1096...
, England (1959) for his graduate studies. In 1960 Nuffield College
Nuffield College, Oxford
Nuffield College is one of the constituent colleges of the University of Oxford in England. It is an all-graduate college and primarily a research establishment, specialising in the social sciences, particularly economics, politics and sociology. It is a research centre in the social sciences...
(Oxford
University of Oxford
The University of Oxford is a university located in Oxford, United Kingdom. It is the second-oldest surviving university in the world and the oldest in the English-speaking world. Although its exact date of foundation is unclear, there is evidence of teaching as far back as 1096...
) granted him a Research Fellowship that he enjoyed until 1962, the year in which he left Oxford
University of Oxford
The University of Oxford is a university located in Oxford, United Kingdom. It is the second-oldest surviving university in the world and the oldest in the English-speaking world. Although its exact date of foundation is unclear, there is evidence of teaching as far back as 1096...
for Cambridge
University of Cambridge
The University of Cambridge is a public research university located in Cambridge, United Kingdom. It is the second-oldest university in both the United Kingdom and the English-speaking world , and the seventh-oldest globally...
, UK, called there by the prestigious economist Lord Richard Kahn
Richard Kahn, Baron Kahn
Richard Ferdinand Kahn, Baron Kahn, CBE, FBA was a British economist.Kahn was born in Hampstead to Augustus Kahn, a German schoolmaster and an orthodox Jew, and Regina Schoyer. He raised in England and was educated on St Paul's School, London...
.
In those years,
Years later, Pasinetti, remembering Kahn
Richard Kahn, Baron Kahn
Richard Ferdinand Kahn, Baron Kahn, CBE, FBA was a British economist.Kahn was born in Hampstead to Augustus Kahn, a German schoolmaster and an orthodox Jew, and Regina Schoyer. He raised in England and was educated on St Paul's School, London...
in a Memorial Service held at King's College
King's College, Cambridge
King's College is a constituent college of the University of Cambridge, England. The college's full name is "The King's College of our Lady and Saint Nicholas in Cambridge", but it is usually referred to simply as "King's" within the University....
Chapel, Cambridge
University of Cambridge
The University of Cambridge is a public research university located in Cambridge, United Kingdom. It is the second-oldest university in both the United Kingdom and the English-speaking world , and the seventh-oldest globally...
on 21 October 1989, recalled that:
Richard Goodwin
Richard M. Goodwin
Richard M. Goodwin was an American mathematician and economist. He was born in Indiana.Goodwin received his BA and PhD at Harvard, and he taught there from 1942 until 1950. He taught at the University of Cambridge until 1979 and the University of Siena until 1984.Goodwin worked on the interaction...
was also part of this brilliant group of Cambridge
University of Cambridge
The University of Cambridge is a public research university located in Cambridge, United Kingdom. It is the second-oldest university in both the United Kingdom and the English-speaking world , and the seventh-oldest globally...
economists, and exerted the first important influence on Pasinetti. In conveying the intellectual debt he owed him, Pasinetti writes:
In 1960-1961 Pasinetti became a Fellow
Fellow
A fellow in the broadest sense is someone who is an equal or a comrade. The term fellow is also used to describe a person, particularly by those in the upper social classes. It is most often used in an academic context: a fellow is often part of an elite group of learned people who are awarded...
of King's College
King's College, Cambridge
King's College is a constituent college of the University of Cambridge, England. The college's full name is "The King's College of our Lady and Saint Nicholas in Cambridge", but it is usually referred to simply as "King's" within the University....
. Twelve years later in 1973, he was appointed Reader at the Cambridge
University of Cambridge
The University of Cambridge is a public research university located in Cambridge, United Kingdom. It is the second-oldest university in both the United Kingdom and the English-speaking world , and the seventh-oldest globally...
, a post that he kept until his return to the Università Cattolica del Sacro Cuore in 1976. In March 1963 he was awarded his doctorate degree from Cambridge University
University of Cambridge
The University of Cambridge is a public research university located in Cambridge, United Kingdom. It is the second-oldest university in both the United Kingdom and the English-speaking world , and the seventh-oldest globally...
with a Ph. Dissertation on "A Multi-sector Model of Economic Growth." This thesis was the core of what came to be in 1981 one of his most complete books, Structural Change and Economic Growth. In 1964 he was appointed Professor of Econometrics
Econometrics
Econometrics has been defined as "the application of mathematics and statistical methods to economic data" and described as the branch of economics "that aims to give empirical content to economic relations." More precisely, it is "the quantitative analysis of actual economic phenomena based on...
at the Università Cattolica del Sacro Cuore and in 1981 full Professor of Economic Analysis. Trips between Cambridge
Cambridge
The city of Cambridge is a university town and the administrative centre of the county of Cambridgeshire, England. It lies in East Anglia about north of London. Cambridge is at the heart of the high-technology centre known as Silicon Fen – a play on Silicon Valley and the fens surrounding the...
and Milan
Milan
Milan is the second-largest city in Italy and the capital city of the region of Lombardy and of the province of Milan. The city proper has a population of about 1.3 million, while its urban area, roughly coinciding with its administrative province and the bordering Province of Monza and Brianza ,...
were very frequent during this period. In 1971 and 1975 he was appointed Visiting Research Professor at Columbia University
Columbia University
Columbia University in the City of New York is a private, Ivy League university in Manhattan, New York City. Columbia is the oldest institution of higher learning in the state of New York, the fifth oldest in the United States, and one of the country's nine Colonial Colleges founded before the...
as well as in 1979 at the Indian Statistical Institute
Indian Statistical Institute
Indian Statistical Institute is a public research institute and university in Kolkata's northern outskirt of Baranagar, India founded by Prasanta Chandra Mahalanobis in 1931...
in Calcutta and the Delhi School of Economics
Delhi School of Economics
Delhi School of Economics , commonly referred to as DSE or D School, is a centre of post graduate learning of the University of Delhi. The centre is situated in the university's North Campus in Maurice Nagar, and is surrounded by a host of other prestigious academic institutions of the country...
.
Università Cattolica del Sacro Cuore
Università Cattolica del Sacro Cuore is a privately-owned Catholic university founded in 1921 by Agostino Gemelli. Its main campus is located in Milan, Italy with satellite campuses in Brescia, Piacenza, Cremona, Rome, and Campobasso...
, he was appointed Chairman of the Faculty of Economics from 1980 to 1983, Director of the Department of Economics (1983–1986) and later Director of the Joint Economics Doctoral Program (comprising three Milanese Universities: Cattolica
Università Cattolica del Sacro Cuore
Università Cattolica del Sacro Cuore is a privately-owned Catholic university founded in 1921 by Agostino Gemelli. Its main campus is located in Milan, Italy with satellite campuses in Brescia, Piacenza, Cremona, Rome, and Campobasso...
, Bocconi
Bocconi University
Bocconi University is a private university located in central Milan, beside Parco Ravizza. Bocconi provides undergraduate, graduate and post-graduate education, in addition to a range of double degree programs, in the fields of economics, management, finance and law. According to many university...
and Statale
University of Milan
The University of Milan is a higher education institution in Milan, Italy. It is one of the largest universities in Europe, with about 62,801 students, a teaching and research staff of 2,455 and a non-teaching staff of 2,200....
) from 1984–86 and again from 1995-98.
The list of academic distinctions and honours he has received till now is long. The most prominent ones are: St. Vincent prize for economics (1979), President of the Società Italiana degli Economisti (1986–89), President of the European Society for the History of Economic Thought (1995–1997), Member of the Executive Committee of the International Economic Association, Member of the Accademia Nazionale dei Lincei, Doctor Honoris Causa at the University of Friburg (1986), Invernizzi Prize for Economics (1997). At present Pasinetti is also Honorary President of: the International Economic Association, the European Society for the History of Economic Thought, the International Economic Association, the European Association for Evolutionary Political Economy, the Italian Association for the History of Political Economy and the Italian Association for the History of Economic Thought.
He has also provided valuable contributions to several major economic journals such as editorial advisor to: the Cambridge Journal of Economics (since 1977), the Journal of Post Keynesian Economics (since its founding in 1978), Kyklos (1981), Structural Change and Economic Dynamics (since 1989), and PSL Quarterly Review (2009) to name a few.
Pasinetti is currently Emeritus
Emeritus
Emeritus is a post-positive adjective that is used to designate a retired professor, bishop, or other professional or as a title. The female equivalent emerita is also sometimes used.-History:...
Professor at the Catholic University of Milan
Università Cattolica del Sacro Cuore
Università Cattolica del Sacro Cuore is a privately-owned Catholic university founded in 1921 by Agostino Gemelli. Its main campus is located in Milan, Italy with satellite campuses in Brescia, Piacenza, Cremona, Rome, and Campobasso...
.
A mathematical formulation of the Ricardian system
Pasinetti’s first major contribution to economicsEconomics
Economics is the social science that analyzes the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek from + , hence "rules of the house"...
was probably "the mathematical formulation of the Ricardian system", published in 1960 in a paper now considered classical. In such work Pasinetti presented a very concise and elegant (and pedagogically effective) analysis of the basic aspects of classical economics
Classical economics
Classical economics is widely regarded as the first modern school of economic thought. Its major developers include Adam Smith, Jean-Baptiste Say, David Ricardo, Thomas Malthus and John Stuart Mill....
.
Piero Sraffa
Piero Sraffa was an influential Italian economist whose book Production of Commodities by Means of Commodities is taken as founding the Neo-Ricardian school of Economics.- Early life :...
had just published The Works and Correspondence of David Ricardo, one of the most masterful editorial works ever to be published in economics; and scholars were wondering how Sraffa’s remarkable work could clarify and enrich the interpretation of Classical economics. Pasinetti’s mathematical formulation provided a rigorous and clear answer to that question, in particular with reference to two major Classical problems: the theory of value and the theory of income distribution.
On this subject, a major stimulus came from a famous paper written by Nicholas Kaldor
Nicholas Kaldor
Nicholas Kaldor, Baron Kaldor was one of the foremost Cambridge economists in the post-war period...
, in 1956, where Kaldor
Nicholas Kaldor
Nicholas Kaldor, Baron Kaldor was one of the foremost Cambridge economists in the post-war period...
presented a review of the history of several theories of distribution
Distribution of wealth
The distribution of wealth is a comparison of the wealth of various members or groups in a society. It differs from the distribution of income in that it looks at the distribution of ownership of the assets in a society, rather than the current income of members of that society.-Definition of...
, covering the period from Ricardo
David Ricardo
David Ricardo was an English political economist, often credited with systematising economics, and was one of the most influential of the classical economists, along with Thomas Malthus, Adam Smith, and John Stuart Mill. He was also a member of Parliament, businessman, financier and speculator,...
to Keynes. Although Ricardo's theory (in Kaldor's paper) was without equations, it was the starting point after which economists began to explicitly see the Ricardian model as a coherent whole, susceptible to mathematical formalization.
Another influence came directly from Sraffa
Piero Sraffa
Piero Sraffa was an influential Italian economist whose book Production of Commodities by Means of Commodities is taken as founding the Neo-Ricardian school of Economics.- Early life :...
and concerned the relative prices of goods produced in the economic system made to depend only on the amount of labour embodied in them – the well known labour theory of value
Labor theory of value
The labor theories of value are heterodox economic theories of value which argue that the value of a commodity is related to the labor needed to produce or obtain that commodity. The concept is most often associated with Marxian economics...
. In fact, an early draft of Pasinetti’s paper was read by Sraffa
Piero Sraffa
Piero Sraffa was an influential Italian economist whose book Production of Commodities by Means of Commodities is taken as founding the Neo-Ricardian school of Economics.- Early life :...
, who gave his approval to almost the entire paper:
Pasinetti explains that“the more constructive approach is taken of stating explicitly the assumptions needed in order to eliminate the ambiguities” in the Ricardian model, hence, the reason for the mathematical formulation.
In this view, the most straightforward mathematical Ricardian model that can be formulated, with minimal economic complications, is the one in which only one commodity is produced (‘corn’ for instance), and where there are three social classes: capitalists who earn profits
Profit (economics)
In economics, the term profit has two related but distinct meanings. Normal profit represents the total opportunity costs of a venture to an entrepreneur or investor, whilst economic profit In economics, the term profit has two related but distinct meanings. Normal profit represents the total...
, workers who earn wages and landowners whose income
Income
Income is the consumption and savings opportunity gained by an entity within a specified time frame, which is generally expressed in monetary terms. However, for households and individuals, "income is the sum of all the wages, salaries, profits, interests payments, rents and other forms of earnings...
comes from the rent of land
Economic rent
Economic rent is typically defined by economists as payment for goods and services beyond the amount needed to bring the required factors of production into a production process and sustain supply. A recipient of economic rent is a rentier....
. This is the way to express Kaldor’s model mentioned above. Although the Pasinetti model is more general and comprises two sectors (agriculture and manufacturing), it is illuminating to start with the simplest version –a one-commodity model expressed by the following equations:
Equation (1.1) shows that output, Y, depends only on the number of workers, N, engaged to work on the land. Three conditions (1.1a) are necessary and help to restrict the meaning of (1.1). Specifically, the first displays that land, when workers are not employed, can produce something or nothing at all. The second condition shows that the marginal product to kick start the cultivation of land must be greater than μ, the subsistence wage
Wage
A wage is a compensation, usually financial, received by workers in exchange for their labor.Compensation in terms of wages is given to workers and compensation in terms of salary is given to employees...
; otherwise the system will never start working. The third condition shows the diminishing returns
Diminishing returns
In economics, diminishing returns is the decrease in the marginal output of a production process as the amount of a single factor of production is increased, while the amounts of all other factors of production stay constant.The law of diminishing returns In economics, diminishing returns (also...
of labour. The following equations show the determination of the quantities of different categories of income
Income
Income is the consumption and savings opportunity gained by an entity within a specified time frame, which is generally expressed in monetary terms. However, for households and individuals, "income is the sum of all the wages, salaries, profits, interests payments, rents and other forms of earnings...
:
where W are the total wages, x is the wage
Wage
A wage is a compensation, usually financial, received by workers in exchange for their labor.Compensation in terms of wages is given to workers and compensation in terms of salary is given to employees...
per worker, K is the capital
Capital (economics)
In economics, capital, capital goods, or real capital refers to already-produced durable goods used in production of goods or services. The capital goods are not significantly consumed, though they may depreciate in the production process...
of the economy, R is the total rents
Economic rent
Economic rent is typically defined by economists as payment for goods and services beyond the amount needed to bring the required factors of production into a production process and sustain supply. A recipient of economic rent is a rentier....
perceived by landowners and B are the total profits
Profit (economics)
In economics, the term profit has two related but distinct meanings. Normal profit represents the total opportunity costs of a venture to an entrepreneur or investor, whilst economic profit In economics, the term profit has two related but distinct meanings. Normal profit represents the total...
that go into the hands of capitalists. The latter are represented as a residual income
Income
Income is the consumption and savings opportunity gained by an entity within a specified time frame, which is generally expressed in monetary terms. However, for households and individuals, "income is the sum of all the wages, salaries, profits, interests payments, rents and other forms of earnings...
once the rents
Economic rent
Economic rent is typically defined by economists as payment for goods and services beyond the amount needed to bring the required factors of production into a production process and sustain supply. A recipient of economic rent is a rentier....
and wages have been paid. In these models all the capital
Capital (economics)
In economics, capital, capital goods, or real capital refers to already-produced durable goods used in production of goods or services. The capital goods are not significantly consumed, though they may depreciate in the production process...
is working capital
Working capital
Working capital is a financial metric which represents operating liquidity available to a business, organization or other entity, including governmental entity. Along with fixed assets such as plant and equipment, working capital is considered a part of operating capital. Net working capital is...
; it is assumed to be composed entirely of advances to workers as wages. Notice, moreover, that expression (1.4), supplemented by technical conditions (1.1a), expresses what still today is called the Ricardian theory of rent.
Hitherto we need two more equations to close the model. They are:
Equation (1.6) shows that long-term wages tend to subsistence level. Equation (1.7) shows the stock of capital
Capital (economics)
In economics, capital, capital goods, or real capital refers to already-produced durable goods used in production of goods or services. The capital goods are not significantly consumed, though they may depreciate in the production process...
at the beginning of the year. Throughout the construction of his model, Pasinetti insists that he is interested in "natural solutions" of the Ricardian model, i.e., those to which the system tends to in the long term.
Thus, equation (1.6) does not preclude short-termwage
Wage
A wage is a compensation, usually financial, received by workers in exchange for their labor.Compensation in terms of wages is given to workers and compensation in terms of salary is given to employees...
deviations with respect to its natural level. Eventually, note that μ is the only magnitude which is determined from outside the system: it is an amount set by customs and habits of society. This means that the number of workers employed (proportional to population), is determined by the system itself, unlike what happens in modern theories of economic growth
Economic growth
In economics, economic growth is defined as the increasing capacity of the economy to satisfy the wants of goods and services of the members of society. Economic growth is enabled by increases in productivity, which lowers the inputs for a given amount of output. Lowered costs increase demand...
, where the rate of population growth
Population growth
Population growth is the change in a population over time, and can be quantified as the change in the number of individuals of any species in a population using "per unit time" for measurement....
is taken as exogenously given.
The previous model allows us to see the basic features of Ricardo’s distribution theory. However, no reference can be made to anything about the theory of value
Theory of value (economics)
"Theory of value" is a generic term which encompasses all the theories within economics that attempt to explain the exchange value or price of goods and services...
, since all the magnitudes are measured in terms of ‘corn’. As Pasinetti says: “where any question of evaluation has not yet arisen, corn being the single commodity produced”. However, by enlarging the model to a two-sector model, more remarkable features of Ricardian economics emerge. The two sectors include: the basic goods sector (wage goods called ‘corn’) and a luxury goods sector (called ‘gold’). The whole new model appears as:
Equations (2.1) to (2.7) are identical to those of the single sector model, but now they bear added subscripts to differentiate the production of ‘corn’ from that of ‘gold’. Equation (2.8) presents the gold production function which, unlike the ‘corn’ production function, exhibits constant returns to scale. The parameter is the physical amount of ‘gold’ produced by a worker in a year. The next two equations show in monetary (nominal terms) the wage rate (‘corn’) per worker and the rate of profit:
where p1 and p2 represent the price
Price
-Definition:In ordinary usage, price is the quantity of payment or compensation given by one party to another in return for goods or services.In modern economies, prices are generally expressed in units of some form of currency...
of ‘corn’ and the price
Price
-Definition:In ordinary usage, price is the quantity of payment or compensation given by one party to another in return for goods or services.In modern economies, prices are generally expressed in units of some form of currency...
of ‘gold’ respectively. Pasinetti supposes that the wage rate and the rate of profit
Rate of profit
In economics and finance, the profit rate is the relative profitability of an investment project, of a capitalist enterprise, or of the capitalist economy as a whole...
are identical in both sectors thanks to free market competition. Note also from (2.10) that only p1 (the price of corn) enters wage
Wage
A wage is a compensation, usually financial, received by workers in exchange for their labor.Compensation in terms of wages is given to workers and compensation in terms of salary is given to employees...
determination, since it is assumed that workers in both sectors only receive only 'corn' as wages; in a terminology later developed by Sraffa
Piero Sraffa
Piero Sraffa was an influential Italian economist whose book Production of Commodities by Means of Commodities is taken as founding the Neo-Ricardian school of Economics.- Early life :...
, ‘corn’ is the only basic commodity produced in the system. The same consideration can be made, from the opposite view, looking at (2.11), since the only capital
Capital (economics)
In economics, capital, capital goods, or real capital refers to already-produced durable goods used in production of goods or services. The capital goods are not significantly consumed, though they may depreciate in the production process...
involved is represented by advances in the form of ‘corn’. Hence K appears as multiplied by p1. The following two equations are Ricardo's
David Ricardo
David Ricardo was an English political economist, often credited with systematising economics, and was one of the most influential of the classical economists, along with Thomas Malthus, Adam Smith, and John Stuart Mill. He was also a member of Parliament, businessman, financier and speculator,...
implicit assumptions -that the "natural price" of any good is given by its cost of production:
Equation (2.12) allows the determination of the total monetary profits
Profit (economics)
In economics, the term profit has two related but distinct meanings. Normal profit represents the total opportunity costs of a venture to an entrepreneur or investor, whilst economic profit In economics, the term profit has two related but distinct meanings. Normal profit represents the total...
of the gold industry. Equation (2.13) is much more important. It shows that on balance, the value of output per worker is the same in both sectors. It should be noted that the product of sector 1 (agriculture) is considered free of rents
Economic rent
Economic rent is typically defined by economists as payment for goods and services beyond the amount needed to bring the required factors of production into a production process and sustain supply. A recipient of economic rent is a rentier....
. To achieve this result, both the wage rate and the rate of profit
Rate of profit
In economics and finance, the profit rate is the relative profitability of an investment project, of a capitalist enterprise, or of the capitalist economy as a whole...
have been considered homogeneous in both sectors, and the capital/labour ratio must also be considered as identical.
Pasinetti closes the model with two further equations:
Relationship (2.14) simply adopts the amount of ‘gold’ as numeràire; hence, it is equal to unity. Relation (2.15) displays the income distribution
Income distribution
In economics, income distribution is how a nation’s total economy is distributed amongst its population.Income distribution has always been a central concern of economic theory and economic policy...
between the different social classes. Ricardo
David Ricardo
David Ricardo was an English political economist, often credited with systematising economics, and was one of the most influential of the classical economists, along with Thomas Malthus, Adam Smith, and John Stuart Mill. He was also a member of Parliament, businessman, financier and speculator,...
supposes that workers spend their entire wages to buy 'corn', capitalists reinvest their profits
Profit (economics)
In economics, the term profit has two related but distinct meanings. Normal profit represents the total opportunity costs of a venture to an entrepreneur or investor, whilst economic profit In economics, the term profit has two related but distinct meanings. Normal profit represents the total...
in capital accumulation
Capital accumulation
The accumulation of capital refers to the gathering or amassing of objects of value; the increase in wealth through concentration; or the creation of wealth. Capital is money or a financial asset invested for the purpose of making more money...
, and landowners spend all their rents
Economic rent
Economic rent is typically defined by economists as payment for goods and services beyond the amount needed to bring the required factors of production into a production process and sustain supply. A recipient of economic rent is a rentier....
on luxury goods. The simplicity of this argument about consumption functions for each social class enables Pasinetti to close the whole circuit of income distribution
Income distribution
In economics, income distribution is how a nation’s total economy is distributed amongst its population.Income distribution has always been a central concern of economic theory and economic policy...
with a single equation. Specifically, (2.15) shows that landowners spend all their income received as rents
Economic rent
Economic rent is typically defined by economists as payment for goods and services beyond the amount needed to bring the required factors of production into a production process and sustain supply. A recipient of economic rent is a rentier....
, p1R, in the buying of luxury goods, p2X2. There is no need for more equations, since “the determination of the demand for one of the two commodities (gold in our example) also determines, implicitly, the demand for the other commodity (corn), since total output is already functionally determined”.
The system presented above (15 equations with 15 unknowns) displays the natural solutions of the Ricardian economic system, i.e. those solutions attained in the long term and corrected for market distortion
Market distortion
In neoclassical economics, a market distortion is any event in which a market reaches a market clearing price for an item that is substantially different from the price that a market would achieve while operating under conditions of perfect competition and state enforcement of legal contracts and...
s and imbalances in the short term. Ricardo
David Ricardo
David Ricardo was an English political economist, often credited with systematising economics, and was one of the most influential of the classical economists, along with Thomas Malthus, Adam Smith, and John Stuart Mill. He was also a member of Parliament, businessman, financier and speculator,...
did not deny the existence of such deviations, but for his analysis, they were not the relevant issues. These solutions, furthermore, as demonstrated mathematically by Pasinetti exist, they are unique, and, moreover, their steady state solutions are stable. On the other hand, it can be demonstrated that if we take the partial derivatives of all variables with respect to K, (because the process of capital
Capital (economics)
In economics, capital, capital goods, or real capital refers to already-produced durable goods used in production of goods or services. The capital goods are not significantly consumed, though they may depreciate in the production process...
accumulation is what matters for the dynamics of the model) the evolution of the variables is consistent with the conclusions which Ricardo
David Ricardo
David Ricardo was an English political economist, often credited with systematising economics, and was one of the most influential of the classical economists, along with Thomas Malthus, Adam Smith, and John Stuart Mill. He was also a member of Parliament, businessman, financier and speculator,...
reached; especially with the tendency of the whole economic system in the long run towards a stationary state.
The above model has several outstanding aspects. The foremost of which is a theory of income distribution
Income distribution
In economics, income distribution is how a nation’s total economy is distributed amongst its population.Income distribution has always been a central concern of economic theory and economic policy...
entirely independent of the theory of value
Theory of value (economics)
"Theory of value" is a generic term which encompasses all the theories within economics that attempt to explain the exchange value or price of goods and services...
. The inclusion of a new sector -and consequently the whole structure of relative prices- have not even slightly changed the way income is distributed among landowners, workers and capitalists. At the same time, prices though of course not equal to, are exactly proportional to the quantity of labour embodied in each commodity. This is a perfectly clear labour theory of value.
The attentive reader may notice that the two major results (on income distribution
Income distribution
In economics, income distribution is how a nation’s total economy is distributed amongst its population.Income distribution has always been a central concern of economic theory and economic policy...
and on value respectively) depend on two assumptions that are implicit in the formulation of the model, i.e. of the above set of equations, namely: 1) that capitalists appropriate the whole surplus
Economic surplus
In mainstream economics, economic surplus refers to two related quantities. Consumer surplus or consumers' surplus is the monetary gain obtained by consumers because they are able to purchase a product for a price that is less than the highest price that they would be willing to pay...
of the economic system, after paying rents
Economic rent
Economic rent is typically defined by economists as payment for goods and services beyond the amount needed to bring the required factors of production into a production process and sustain supply. A recipient of economic rent is a rentier....
to landowners, and conventional wages to workers; and 2) that the proportion of labour to capital
Capital (economics)
In economics, capital, capital goods, or real capital refers to already-produced durable goods used in production of goods or services. The capital goods are not significantly consumed, though they may depreciate in the production process...
is exactly the same in all sectors. These two assumptions have given rise to endless discussions on value and distribution ever since.
Further work undertaken by Pasinetti’s has been concerned with reversing the causal chain of the first assumption and in rendering the second assumption superfluous.
The Cambridge equation and the Pasinetti’s Theorem
Kaldor´s 1956 article already mentioned above (“Alternative Theories of Distribution”) was at the origin of another ‘seminal’ paper written by Pasinetti. Kaldor had reviewed the major theories of distribution throughout the history of economicsHistory of economic thought
The history of economic thought deals with different thinkers and theories in the subject that became political economy and economics from the ancient world to the present day...
from Ricardo
David Ricardo
David Ricardo was an English political economist, often credited with systematising economics, and was one of the most influential of the classical economists, along with Thomas Malthus, Adam Smith, and John Stuart Mill. He was also a member of Parliament, businessman, financier and speculator,...
to the Marginalists and even to Kalecki. But then, he added a theory which he named the Keynesian theory of income distribution
Income distribution
In economics, income distribution is how a nation’s total economy is distributed amongst its population.Income distribution has always been a central concern of economic theory and economic policy...
. This was a surprise because these issues were never treated by Keynes in an explicit way. Kaldor baptized his theory as ‘Keynesian’ because it succeeded in catching a few important concepts both from Keynes’s Treatise’s widow's cruse allegory and from Kalecki’s profits equation.
In any case, in this paper Kaldor reached remarkable results. Starting from a closed economic system, without government
Government
Government refers to the legislators, administrators, and arbitrators in the administrative bureaucracy who control a state at a given time, and to the system of government by which they are organized...
, and in which there are capitalists and workers, starting from the saving-investment identity, Kaldor came to the following identity between investments and savings:
where Y is the national income, P is the volume of total profits
Profit (economics)
In economics, the term profit has two related but distinct meanings. Normal profit represents the total opportunity costs of a venture to an entrepreneur or investor, whilst economic profit In economics, the term profit has two related but distinct meanings. Normal profit represents the total...
, sw is the workers propensity to save, sc is the capitalists propensity to save and I is investment
Investment
Investment has different meanings in finance and economics. Finance investment is putting money into something with the expectation of gain, that upon thorough analysis, has a high degree of security for the principal amount, as well as security of return, within an expected period of time...
. If we suppose that workers do not save (sw=0), divide both members by K and remember that in dynamic equilibrium I/K = gn, we get:
where gn is the natural rate of growth and κ is the capital/output ratio. Finally, note that these two expressions only have economic significance in the range:
This interval excludes equilibrium with negative shares, either by the workers (first inequality) or by the capitalists (second inequality).
The expressions (3.1) and (3.2) are those that have subsequently formed the core of the post-Keynesian
Post-Keynesian economics
Post Keynesian economics is a school of economic thought with its origins in The General Theory of John Maynard Keynes, although its subsequent development was influenced to a large degree by Michał Kalecki, Joan Robinson, Nicholas Kaldor and Paul Davidson...
distribution theory; but only after an extremely hard-fought debate. Equation (3.1) shows that the share of profits
Profit (economics)
In economics, the term profit has two related but distinct meanings. Normal profit represents the total opportunity costs of a venture to an entrepreneur or investor, whilst economic profit In economics, the term profit has two related but distinct meanings. Normal profit represents the total...
in total output depends positively on the natural rate of growth and the capital/output ratio and negatively on the propensity to save of the capitalist class. The second of these relations, (3.2), better known as the “Cambridge equation”, shows that the profit rate
Rate of return
In finance, rate of return , also known as return on investment , rate of profit or sometimes just return, is the ratio of money gained or lost on an investment relative to the amount of money invested. The amount of money gained or lost may be referred to as interest, profit/loss, gain/loss, or...
is solely determined by the ratio of the natural rate of growth and the propensity to save of capitalists.
The importance of these expressions became clear only after an intense debate. These expressions were achieved with an additional assumption that was heavily criticized. Kaldor’s assumption was that the workers propensity to save was zero.
Pasinetti went into this debate with his 1962 paper. With his now famous Pasinetti Theorem, he achieved the result of re-stating Kaldor’s original equations without the need to rely on Kaldor’s much criticized assumptions. It is worth quoting the first time that Pasinetti presented his views about these issues to an audience:
In his 1962 paper, Pasinetti showed that Kaldor had fallen into a "logical slip". He implicitly assumed that the total profits
Profit (economics)
In economics, the term profit has two related but distinct meanings. Normal profit represents the total opportunity costs of a venture to an entrepreneur or investor, whilst economic profit In economics, the term profit has two related but distinct meanings. Normal profit represents the total...
only came from the capitalists and he neglected the workers. In other words, "By attributing all profits to the capitalists it has inadvertently but necessarily implied that worker's savings are always totally transferred as a gift to the capitalists". That is to say the saving function of Kaldor's model ought to be modified so as to include both workers profits and capitalist profits, i.e.:
Under this assumption the Investment = Savings identity becomes:
If this expression is cleared as before, we see that formal results are similar to (3.1) and (3.2), but now they only refer to that part of profits
Profit (economics)
In economics, the term profit has two related but distinct meanings. Normal profit represents the total opportunity costs of a venture to an entrepreneur or investor, whilst economic profit In economics, the term profit has two related but distinct meanings. Normal profit represents the total...
that accrue to the capitalists. Specifically, the modified Cambridge equation would take this peculiar form:
Note that the preceding equation now shows not the profit rate
Rate of return
In finance, rate of return , also known as return on investment , rate of profit or sometimes just return, is the ratio of money gained or lost on an investment relative to the amount of money invested. The amount of money gained or lost may be referred to as interest, profit/loss, gain/loss, or...
of the economy, P/K, but a ratio, Pc /K,, which has no economic significance if taken as such. To fix this anomaly, Pasinetti added Pw /K, to both sides of the equality:
To complete the formulation, Pasinetti simply assumes that, in the long-term, the variable i, representing the interest rate
Interest rate
An interest rate is the rate at which interest is paid by a borrower for the use of money that they borrow from a lender. For example, a small company borrows capital from a bank to buy new assets for their business, and in return the lender receives interest at a predetermined interest rate for...
earned by workers when they lend their savings to capitalists, is equal to the profit rate
Rate of return
In finance, rate of return , also known as return on investment , rate of profit or sometimes just return, is the ratio of money gained or lost on an investment relative to the amount of money invested. The amount of money gained or lost may be referred to as interest, profit/loss, gain/loss, or...
, P/K. Taking that into account and simplifying, we obtain:
i.e., exactly the preceding (3.2) equation. In other words, we obtain the “Cambridge equation” again, but this time without the assumption sw = 0. By a similar procedure Pasinetti shows that the share of total profits
Profit (economics)
In economics, the term profit has two related but distinct meanings. Normal profit represents the total opportunity costs of a venture to an entrepreneur or investor, whilst economic profit In economics, the term profit has two related but distinct meanings. Normal profit represents the total...
in total income
Income
Income is the consumption and savings opportunity gained by an entity within a specified time frame, which is generally expressed in monetary terms. However, for households and individuals, "income is the sum of all the wages, salaries, profits, interests payments, rents and other forms of earnings...
again emerges the same as (3.1); i.e., the Pasinetti Theorem proves that in the long run, the propensity to save of the workers has no effect on the determination of the overall profit rate
Rate of return
In finance, rate of return , also known as return on investment , rate of profit or sometimes just return, is the ratio of money gained or lost on an investment relative to the amount of money invested. The amount of money gained or lost may be referred to as interest, profit/loss, gain/loss, or...
of the economy, and also has no effect on the determination of the share of the total profits
Profit (economics)
In economics, the term profit has two related but distinct meanings. Normal profit represents the total opportunity costs of a venture to an entrepreneur or investor, whilst economic profit In economics, the term profit has two related but distinct meanings. Normal profit represents the total...
in the national income. At the same time, however, the propensity to save of the workers determines the distribution of profits
Profit (economics)
In economics, the term profit has two related but distinct meanings. Normal profit represents the total opportunity costs of a venture to an entrepreneur or investor, whilst economic profit In economics, the term profit has two related but distinct meanings. Normal profit represents the total...
between workers and capitalists.
With these outcomes, the truly important point is that Kaldor’s original formulae are much more general than was previously believed. As Pasinetti says, “the irrelevance of worker’s propensity to save gives the model a much wider generality than was hitherto believed. Since the rate of profit
Rate of return
In finance, rate of return , also known as return on investment , rate of profit or sometimes just return, is the ratio of money gained or lost on an investment relative to the amount of money invested. The amount of money gained or lost may be referred to as interest, profit/loss, gain/loss, or...
and the income distribution
Income distribution
In economics, income distribution is how a nation’s total economy is distributed amongst its population.Income distribution has always been a central concern of economic theory and economic policy...
between profits
Profit (economics)
In economics, the term profit has two related but distinct meanings. Normal profit represents the total opportunity costs of a venture to an entrepreneur or investor, whilst economic profit In economics, the term profit has two related but distinct meanings. Normal profit represents the total...
and wages are determined independently of sw, there is no need for any hypothesis whatever on the aggregate savings behaviour of the workers."
The conclusions obtained from Pasinetti’s Theorem led to a huge number of scientific works and papers, with the purpose of clarifying the nature of the Theorem and its more important implications. Specifically, in 1966, Paul A. Samuelson and Franco Modigliani
Franco Modigliani
Franco Modigliani was an Italian economist at the MIT Sloan School of Management and MIT Department of Economics, and winner of the Nobel Memorial Prize in Economics in 1985.-Life and career:...
, the MIT
Massachusetts Institute of Technology
The Massachusetts Institute of Technology is a private research university located in Cambridge, Massachusetts. MIT has five schools and one college, containing a total of 32 academic departments, with a strong emphasis on scientific and technological education and research.Founded in 1861 in...
economists, wrote a detailed and widely quoted paper where they tried to minimize the consequences of the Pasinetti Theorem and to lessen the generality of its conclusions.
The argument centred on the inequality shown above, crucial to the solution of the Cambridge equation, namely on:
Samuelson and Modigliani proposed that the following inequality (which they called anti-Pasinetti’s inequality) was also reasonable, and claimed that it would endow the model with greater generality:
Such inequality, however, requires that the workers' propensity to save becomes so high as to allow them to accumulate capital
Capital (economics)
In economics, capital, capital goods, or real capital refers to already-produced durable goods used in production of goods or services. The capital goods are not significantly consumed, though they may depreciate in the production process...
at a greater speed than capitalists. If this were to happen, in the end the total capital
Capital (economics)
In economics, capital, capital goods, or real capital refers to already-produced durable goods used in production of goods or services. The capital goods are not significantly consumed, though they may depreciate in the production process...
of the economy would entirely be owned by the workers, while the capitalists would disappear.
The formulation of the anti-Pasinetti range and all theoretical justification (and some empirical exercises) proposed by Samuelson
Paul Samuelson
Paul Anthony Samuelson was an American economist, and the first American to win the Nobel Memorial Prize in Economic Sciences. The Swedish Royal Academies stated, when awarding the prize, that he "has done more than any other contemporary economist to raise the level of scientific analysis in...
and Modigliani
Franco Modigliani
Franco Modigliani was an Italian economist at the MIT Sloan School of Management and MIT Department of Economics, and winner of the Nobel Memorial Prize in Economics in 1985.-Life and career:...
was challenged by Pasinetti and in a much more critical way by Kaldor and Joan Robinson
Joan Robinson
Joan Violet Robinson FBA was a post-Keynesian economist who was well known for her knowledge of monetary economics and wide-ranging contributions to economic theory...
.
Paul Samuelson
Paul Anthony Samuelson was an American economist, and the first American to win the Nobel Memorial Prize in Economic Sciences. The Swedish Royal Academies stated, when awarding the prize, that he "has done more than any other contemporary economist to raise the level of scientific analysis in...
and Modigliani
Franco Modigliani
Franco Modigliani was an Italian economist at the MIT Sloan School of Management and MIT Department of Economics, and winner of the Nobel Memorial Prize in Economics in 1985.-Life and career:...
, while performing a remarkable study on the empirical values of the saving propensities of workers and capitalists (based on data from National Accounts for United States and United Kingdom). Kaldor concluded that, “unless they make a more imaginative effort to reconcile their theoretical framework with the known facts of experience, their economic theory is bound to remain a barren exercise.”
Pasinetti preferred, with his reply to Samuelson and Modigliani, to remain at a higher level of analysis – by pointing out the weaknesses of the logical analysis of the two MIT economists. Nonetheless Pasinetti joined Kaldor’s critique concerning the highly restrictive assumptions made by the neoclassical economists:
For Pasinetti, the principal issue of the debate is the way in which technology is defined. If sw
Production function
In microeconomics and macroeconomics, a production function is a function that specifies the output of a firm, an industry, or an entire economy for all combinations of inputs...
), while if sw>gnK/Y, the shape of technology does play a crucial role, so that “The Meade
James Meade
James Edward Meade CB, FBA was a British economist and winner of the 1977 Nobel Memorial Prize in Economic Sciences jointly with the Swedish economist Bertil Ohlin for their "Pathbreaking contribution to the theory of international trade and international capital movements."Meade was born in...
-Samuelson
Paul Samuelson
Paul Anthony Samuelson was an American economist, and the first American to win the Nobel Memorial Prize in Economic Sciences. The Swedish Royal Academies stated, when awarding the prize, that he "has done more than any other contemporary economist to raise the level of scientific analysis in...
-Modigliani
Franco Modigliani
Franco Modigliani was an Italian economist at the MIT Sloan School of Management and MIT Department of Economics, and winner of the Nobel Memorial Prize in Economics in 1985.-Life and career:...
’s marginal productivity results only follow on particular and unacceptable assumptions on technology.”
Pasinetti went on to argue that, even with the particular and unacceptable assumptions on technology, the Samuelson
Paul Samuelson
Paul Anthony Samuelson was an American economist, and the first American to win the Nobel Memorial Prize in Economic Sciences. The Swedish Royal Academies stated, when awarding the prize, that he "has done more than any other contemporary economist to raise the level of scientific analysis in...
-Modigliani
Franco Modigliani
Franco Modigliani was an Italian economist at the MIT Sloan School of Management and MIT Department of Economics, and winner of the Nobel Memorial Prize in Economics in 1985.-Life and career:...
range of applicability would hardly have any practical significance. In fact, even though the Cambridge equation might not exactly determine the rate of profits
Rate of return
In finance, rate of return , also known as return on investment , rate of profit or sometimes just return, is the ratio of money gained or lost on an investment relative to the amount of money invested. The amount of money gained or lost may be referred to as interest, profit/loss, gain/loss, or...
, it would nevertheless determine its upper limit. First, the rate of profit
Rate of return
In finance, rate of return , also known as return on investment , rate of profit or sometimes just return, is the ratio of money gained or lost on an investment relative to the amount of money invested. The amount of money gained or lost may be referred to as interest, profit/loss, gain/loss, or...
(whatever way it is determined) cannot be higher than gn/sc. Secondly, the rate of profit
Rate of return
In finance, rate of return , also known as return on investment , rate of profit or sometimes just return, is the ratio of money gained or lost on an investment relative to the amount of money invested. The amount of money gained or lost may be referred to as interest, profit/loss, gain/loss, or...
cannot be lower than gn (for, if it were, that would mean that individuals would contribute more to economic growth than they receive in exchange for profits
Profit (economics)
In economics, the term profit has two related but distinct meanings. Normal profit represents the total opportunity costs of a venture to an entrepreneur or investor, whilst economic profit In economics, the term profit has two related but distinct meanings. Normal profit represents the total...
, which is patently an absurdity).
So, even if in the range of Samuelson
Paul Samuelson
Paul Anthony Samuelson was an American economist, and the first American to win the Nobel Memorial Prize in Economic Sciences. The Swedish Royal Academies stated, when awarding the prize, that he "has done more than any other contemporary economist to raise the level of scientific analysis in...
and Modigliani
Franco Modigliani
Franco Modigliani was an Italian economist at the MIT Sloan School of Management and MIT Department of Economics, and winner of the Nobel Memorial Prize in Economics in 1985.-Life and career:...
the rate of profit
Rate of return
In finance, rate of return , also known as return on investment , rate of profit or sometimes just return, is the ratio of money gained or lost on an investment relative to the amount of money invested. The amount of money gained or lost may be referred to as interest, profit/loss, gain/loss, or...
were to be determined by the marginal productivities (and not by the Cambridge equation as in the general case), its scope would be extremely limited, being confined to a quasi knife-edge range:
The Cambridge equation with the public sector
Already in the 70's the debate of the original Pasinetti Theorem, and hence the SamuelsonPaul Samuelson
Paul Anthony Samuelson was an American economist, and the first American to win the Nobel Memorial Prize in Economic Sciences. The Swedish Royal Academies stated, when awarding the prize, that he "has done more than any other contemporary economist to raise the level of scientific analysis in...
-Modigliani
Franco Modigliani
Franco Modigliani was an Italian economist at the MIT Sloan School of Management and MIT Department of Economics, and winner of the Nobel Memorial Prize in Economics in 1985.-Life and career:...
's interval, took a turning point, by reaching a second phase in which “many authors proceeded to relax assumptions, trying out new hypotheses and introducing complications of all sorts”. Indeed, already in the 60s some economists, inspired by Kaldor
Nicholas Kaldor
Nicholas Kaldor, Baron Kaldor was one of the foremost Cambridge economists in the post-war period...
's paper of 1966, began to introduce in the Cambridge model some issues related to financial assets, interest rates and the functioning of financial markets and big corporations. All these contributions, as well as those which were made later in the 1970s and 1980s, were made in order to give the Cambridge model a wider applicability and more explicit realism.
It was in 1972, thanks to a remarkable paper by Steedman
Ian Steedman
Ian Steedman was for many years a Professor of economics at the University of Manchester before moving down the road to Manchester Metropolitan University...
, that the public sector was explicitly included in the Cambridge equation. Though 16 years had elapsed since the original paper by Kaldor, no formal attempt had been made in that period to introduce the government sector and its ensuing complications. The case is more striking if one considers that Kaldor was an expert adviser on tax issues, tax theory
Tax
To tax is to impose a financial charge or other levy upon a taxpayer by a state or the functional equivalent of a state such that failure to pay is punishable by law. Taxes are also imposed by many subnational entities...
and public finance
Public finance
Public finance is the revenue and expenditure of public authoritiesThe purview of public finance is considered to be threefold: governmental effects on efficient allocation of resources, distribution of income, and macroeconomic stabilization.-Overview:The proper role of government provides a...
. This is due to the aforementioned fact that throughout that period the economists were mainly concerned about the analytical properties of the outcome of the Pasinetti Theorem.
In fact, Steedman's 1972 paper was an original and very constructive way to resolve the theoretical dispute between Pasinetti and Samuelson
Paul Samuelson
Paul Anthony Samuelson was an American economist, and the first American to win the Nobel Memorial Prize in Economic Sciences. The Swedish Royal Academies stated, when awarding the prize, that he "has done more than any other contemporary economist to raise the level of scientific analysis in...
-Modigliani
Franco Modigliani
Franco Modigliani was an Italian economist at the MIT Sloan School of Management and MIT Department of Economics, and winner of the Nobel Memorial Prize in Economics in 1985.-Life and career:...
. Steedman
Ian Steedman
Ian Steedman was for many years a Professor of economics at the University of Manchester before moving down the road to Manchester Metropolitan University...
showed that if the public sector was considered, under the assumption of budget equilibrium, the long run solutions were consistent with Pasinetti’s solutions, and never with the "dual" solutions of Samuelson
Paul Samuelson
Paul Anthony Samuelson was an American economist, and the first American to win the Nobel Memorial Prize in Economic Sciences. The Swedish Royal Academies stated, when awarding the prize, that he "has done more than any other contemporary economist to raise the level of scientific analysis in...
-Modigliani
Franco Modigliani
Franco Modigliani was an Italian economist at the MIT Sloan School of Management and MIT Department of Economics, and winner of the Nobel Memorial Prize in Economics in 1985.-Life and career:...
. This means that the introduction of the public sector meant that the profit rate
Rate of return
In finance, rate of return , also known as return on investment , rate of profit or sometimes just return, is the ratio of money gained or lost on an investment relative to the amount of money invested. The amount of money gained or lost may be referred to as interest, profit/loss, gain/loss, or...
remained independent of the workers propensity to save and of the capital-output ratio (technology).
The "enlarged Cambridge equation", which Steedman
Ian Steedman
Ian Steedman was for many years a Professor of economics at the University of Manchester before moving down the road to Manchester Metropolitan University...
arrived at was:
where tp is the tax rate (average and marginal) on profits
Profit (economics)
In economics, the term profit has two related but distinct meanings. Normal profit represents the total opportunity costs of a venture to an entrepreneur or investor, whilst economic profit In economics, the term profit has two related but distinct meanings. Normal profit represents the total...
. In the case that tp=0 (there are no taxes on profits), we obtain the original Cambridge equation. As it can be easily seen, neither the workers' propensity to save, nor technology, nor even the tax rate on wages affect to the rate of profit
Rate of return
In finance, rate of return , also known as return on investment , rate of profit or sometimes just return, is the ratio of money gained or lost on an investment relative to the amount of money invested. The amount of money gained or lost may be referred to as interest, profit/loss, gain/loss, or...
of the economy, and hence they do not affect to the distribution between wages and profits
Profit (economics)
In economics, the term profit has two related but distinct meanings. Normal profit represents the total opportunity costs of a venture to an entrepreneur or investor, whilst economic profit In economics, the term profit has two related but distinct meanings. Normal profit represents the total...
.
Pasinetti entered the debate again in 1989 showing that -whether the government’s budget was in deficit or surplus- the main results of the Cambridge equation hold. If the government budget
Government budget
A government budget is a legal document that is often passed by the legislature, and approved by the chief executive-or president. For example, only certain types of revenue may be imposed and collected...
was not balanced, the Cambridge equation would take the following form:
where s’c is a “propensity to save of capitalists corrected”, meaning that it takes into account both the direct taxation on profits and the indirect taxation, ti (on capitalists' consumption) as well as the government propensity to save, sT, i.e.:
Although the expression of the capitalists’ propensity to save is not as simple as the original, the truly remarkable thing is that no matter what hypothesis are adopted about the government budget
Government budget
A government budget is a legal document that is often passed by the legislature, and approved by the chief executive-or president. For example, only certain types of revenue may be imposed and collected...
, the Cambridge equation continues to hold, by depending on the natural rate of growth divided by the capitalists' propensity to save, independently of workers' propensity to save and the technology.
Equation (4.1) - and (4.2) - can be viewed from another point of view: they can be expressed in terms of profit after taxes
Profit (accounting)
In accounting, profit can be considered to be the difference between the purchase price and the costs of bringing to market whatever it is that is accounted as an enterprise in terms of the component costs of delivered goods and/or services and any operating or other expenses.-Definition:There are...
:
The long-run
Long-run
In macroeconomics, the long run is the conceptual time period in which there are no fixed factors of production as to changing the output level by changing the capital stock or by entering or leaving an industry. The long run contrasts with the short run, in which some factors are variable and...
rate of profits
Rate of return
In finance, rate of return , also known as return on investment , rate of profit or sometimes just return, is the ratio of money gained or lost on an investment relative to the amount of money invested. The amount of money gained or lost may be referred to as interest, profit/loss, gain/loss, or...
is given by the natural growth rate divided by the capitalists’ propensity to save, independently of anything else. That is to say, the original Cambridge equation can be said to refer to the rate of profit net of taxes, not to the rate of profit before taxes.
The most important conclusion to be drawn from this analysis is that if we consider two identical economies (with the same natural rate of growth and saving propensities), if the first has a higher tax rate on profits, the second economy will enjoy a higher rate of profits before taxes
Profit (accounting)
In accounting, profit can be considered to be the difference between the purchase price and the costs of bringing to market whatever it is that is accounted as an enterprise in terms of the component costs of delivered goods and/or services and any operating or other expenses.-Definition:There are...
(and also a higher share of profits in total income
Income
Income is the consumption and savings opportunity gained by an entity within a specified time frame, which is generally expressed in monetary terms. However, for households and individuals, "income is the sum of all the wages, salaries, profits, interests payments, rents and other forms of earnings...
). That is to say, the presence of government has a redistributive effect per se in favour of profits
Profit (economics)
In economics, the term profit has two related but distinct meanings. Normal profit represents the total opportunity costs of a venture to an entrepreneur or investor, whilst economic profit In economics, the term profit has two related but distinct meanings. Normal profit represents the total...
and against wages. This important and surprising conclusion should not sound new, for, as stated by Pasinetti:
The Controversy on the theory of Capital
Alongside the contributions made to the Cambridge model of growth and income distribution, in the 1960s, Pasinetti joined what has become known in economic literature as the controversy on capital theory between the two CambridgesCambridge capital controversy
The Cambridge capital controversy – sometimes simply called "the capital controversy" – refers to a theoretical and mathematical debate during the 1960s among economists concerning the nature and role of capital goods and the critique of the dominant neoclassical vision of aggregate...
: i.e., Cambridge
University of Cambridge
The University of Cambridge is a public research university located in Cambridge, United Kingdom. It is the second-oldest university in both the United Kingdom and the English-speaking world , and the seventh-oldest globally...
(United Kingdom), whose most prominent scholars were Joan Robinson
Joan Robinson
Joan Violet Robinson FBA was a post-Keynesian economist who was well known for her knowledge of monetary economics and wide-ranging contributions to economic theory...
, Luigi Pasinetti, Piero Sraffa
Piero Sraffa
Piero Sraffa was an influential Italian economist whose book Production of Commodities by Means of Commodities is taken as founding the Neo-Ricardian school of Economics.- Early life :...
and Nicholas Kaldor
Nicholas Kaldor
Nicholas Kaldor, Baron Kaldor was one of the foremost Cambridge economists in the post-war period...
and Cambridge, Massachusetts
Cambridge, Massachusetts
Cambridge is a city in Middlesex County, Massachusetts, United States, in the Greater Boston area. It was named in honor of the University of Cambridge in England, an important center of the Puritan theology embraced by the town's founders. Cambridge is home to two of the world's most prominent...
(U.S.A) whose members were Paul Samuelson
Paul Samuelson
Paul Anthony Samuelson was an American economist, and the first American to win the Nobel Memorial Prize in Economic Sciences. The Swedish Royal Academies stated, when awarding the prize, that he "has done more than any other contemporary economist to raise the level of scientific analysis in...
, Robert Solow
Robert Solow
Robert Merton Solow is an American economist particularly known for his work on the theory of economic growth that culminated in the exogenous growth model named after him...
, David Levhari and Edwin Burmeister.
Controversies over the nature and importance of capital
Capital (economics)
In economics, capital, capital goods, or real capital refers to already-produced durable goods used in production of goods or services. The capital goods are not significantly consumed, though they may depreciate in the production process...
were not new. In the early 20th century, the economist John Bates Clark
John Bates Clark
John Bates Clark was an American neoclassical economist. He was one of the pioneers of the marginalist revolution and opponent to the Institutionalist school of economics, and spent most of his career teaching at Columbia University.-Biography:Clark was born and raised in Providence, Rhode...
, in an effort to refute Marx’s surplus theory, suggested that wages and profits
Profit (economics)
In economics, the term profit has two related but distinct meanings. Normal profit represents the total opportunity costs of a venture to an entrepreneur or investor, whilst economic profit In economics, the term profit has two related but distinct meanings. Normal profit represents the total...
(or rather interest, as they were called by Neoclassical economists, owing to their assumption that rate of profit
Rate of profit
In economics and finance, the profit rate is the relative profitability of an investment project, of a capitalist enterprise, or of the capitalist economy as a whole...
and rate of interest coincide) were simply considered as prices, obtained from the marginal productivity of the factors of production; a theory synthesized by J.B. Clark’s famous statement, that "what a social class gets is, under natural law, what it contributes to the general output of industry". In this debate, Veblen
Thorstein Veblen
Thorstein Bunde Veblen, born Torsten Bunde Veblen was an American economist and sociologist, and a leader of the so-called institutional economics movement...
and Böhm-Bawerk were also involved, proposing slightly different, but basically similar, theories to that of J. B. Clark
John Bates Clark
John Bates Clark was an American neoclassical economist. He was one of the pioneers of the marginalist revolution and opponent to the Institutionalist school of economics, and spent most of his career teaching at Columbia University.-Biography:Clark was born and raised in Providence, Rhode...
.
In 1930 Hayek
Hayek
Hayek is a surname, and may refer to:* August von Hayek , Austrian botanist, father of economist Friedrich Hayek* Dina Hayek , popular Lebanese singer...
re-opened the debate by linking lower interest rates with more indirect methods of production, i.e., with higher capital/labor ratios. Since the interest rate
Interest rate
An interest rate is the rate at which interest is paid by a borrower for the use of money that they borrow from a lender. For example, a small company borrows capital from a bank to buy new assets for their business, and in return the lender receives interest at a predetermined interest rate for...
was for Hayek
Hayek
Hayek is a surname, and may refer to:* August von Hayek , Austrian botanist, father of economist Friedrich Hayek* Dina Hayek , popular Lebanese singer...
the price
Price
-Definition:In ordinary usage, price is the quantity of payment or compensation given by one party to another in return for goods or services.In modern economies, prices are generally expressed in units of some form of currency...
of capital
Capital (economics)
In economics, capital, capital goods, or real capital refers to already-produced durable goods used in production of goods or services. The capital goods are not significantly consumed, though they may depreciate in the production process...
, it was clear that Hayek
Hayek
Hayek is a surname, and may refer to:* August von Hayek , Austrian botanist, father of economist Friedrich Hayek* Dina Hayek , popular Lebanese singer...
(as all Neoclassical economists) thought that lower interest rates would lead to more capital-intensive production methods. With the outbreak of the Great Depression
Great Depression
The Great Depression was a severe worldwide economic depression in the decade preceding World War II. The timing of the Great Depression varied across nations, but in most countries it started in about 1929 and lasted until the late 1930s or early 1940s...
, the debates around capital theory
Capital (economics)
In economics, capital, capital goods, or real capital refers to already-produced durable goods used in production of goods or services. The capital goods are not significantly consumed, though they may depreciate in the production process...
were abandoned, and it was not until 1953, due to a paper by Joan Robinson
Joan Robinson
Joan Violet Robinson FBA was a post-Keynesian economist who was well known for her knowledge of monetary economics and wide-ranging contributions to economic theory...
, that the topic was again given prominence.
Robinson
Joan Robinson
Joan Violet Robinson FBA was a post-Keynesian economist who was well known for her knowledge of monetary economics and wide-ranging contributions to economic theory...
opened the controversy with a now famous statement, with which she exposes the main problems of the traditional concept of capital
Capital (economics)
In economics, capital, capital goods, or real capital refers to already-produced durable goods used in production of goods or services. The capital goods are not significantly consumed, though they may depreciate in the production process...
as follows:
Although initially the debate was focused on the measurement of capital
Capital (economics)
In economics, capital, capital goods, or real capital refers to already-produced durable goods used in production of goods or services. The capital goods are not significantly consumed, though they may depreciate in the production process...
, more basic questions quickly began to emerge concerning the validity of the neoclassical production functions
Production function
In microeconomics and macroeconomics, a production function is a function that specifies the output of a firm, an industry, or an entire economy for all combinations of inputs...
. If capital
Capital (economics)
In economics, capital, capital goods, or real capital refers to already-produced durable goods used in production of goods or services. The capital goods are not significantly consumed, though they may depreciate in the production process...
could be measured in some way, and if one assumed constant returns to scale, diminishing marginal productivities, given technology, competitive equilibrium and the production of a single good, the production function
Production function
In microeconomics and macroeconomics, a production function is a function that specifies the output of a firm, an industry, or an entire economy for all combinations of inputs...
allowed getting three noteworthy conclusions:
- A rate of interest determined by the marginal productivity of capital.
- A monotonic inverse relationship between the rate of profitRate of returnIn finance, rate of return , also known as return on investment , rate of profit or sometimes just return, is the ratio of money gained or lost on an investment relative to the amount of money invested. The amount of money gained or lost may be referred to as interest, profit/loss, gain/loss, or...
and the capital-labor ratio, namely the possibility of relating the rate of profitRate of returnIn finance, rate of return , also known as return on investment , rate of profit or sometimes just return, is the ratio of money gained or lost on an investment relative to the amount of money invested. The amount of money gained or lost may be referred to as interest, profit/loss, gain/loss, or...
to the listing of a set of monotonically ordered production techniques. - A distribution of income between wages and profitsProfit (economics)In economics, the term profit has two related but distinct meanings. Normal profit represents the total opportunity costs of a venture to an entrepreneur or investor, whilst economic profit In economics, the term profit has two related but distinct meanings. Normal profit represents the total...
explained by the marginal productivities of the factors of productionFactors of productionIn economics, factors of production means inputs and finished goods means output. Input determines the quantity of output i.e. output depends upon input. Input is the starting point and output is the end point of production process and such input-output relationship is called a production function...
, as related to their scarcity.
The assumption of the production of a single good was crucial, as it allowed the measurement of capital in physical units while no valuation problem arose. However, in a model with many goods (heterogeneous capital), the possibility of aggregation could not be avoided and always remained very problematic.
In 1962 Paul Samuelson
Paul Samuelson
Paul Anthony Samuelson was an American economist, and the first American to win the Nobel Memorial Prize in Economic Sciences. The Swedish Royal Academies stated, when awarding the prize, that he "has done more than any other contemporary economist to raise the level of scientific analysis in...
wrote an important paper, which preceded and in fact provoked the subsequent debate. He proposed to solve the problem of the aggregation of capital through a new concept, the surrogate production function. “What I propose to do here is to show that a new concept, the ‘surrogate production function’, can provide some rationalization for the validity of the simple J. B. Clark parables which pretend there is a single thing called ‘capital’ that can be put into a single production function and along with labor will produce total output.”
Production function
In microeconomics and macroeconomics, a production function is a function that specifies the output of a firm, an industry, or an entire economy for all combinations of inputs...
, one must assess the capital as a stream of discounted monetary flows to be produced in the future; which implies an interest rate
Interest rate
An interest rate is the rate at which interest is paid by a borrower for the use of money that they borrow from a lender. For example, a small company borrows capital from a bank to buy new assets for their business, and in return the lender receives interest at a predetermined interest rate for...
. The possibly adverse effects of changes in interest rate
Interest rate
An interest rate is the rate at which interest is paid by a borrower for the use of money that they borrow from a lender. For example, a small company borrows capital from a bank to buy new assets for their business, and in return the lender receives interest at a predetermined interest rate for...
s on capital value are basically two: the re-adoption of earlier discarded techniques (reswitching) and capital reversing.
Reswitching is basically the possibility that the same method of production may became most profitable one at more than one rate of profit, i.e., a production method may become the most profitable one both at low and at high rates of return
Rate of return
In finance, rate of return , also known as return on investment , rate of profit or sometimes just return, is the ratio of money gained or lost on an investment relative to the amount of money invested. The amount of money gained or lost may be referred to as interest, profit/loss, gain/loss, or...
, even when in the medium range it is dominated by other methods.
Capital-reversing occurs when moving from one technique to another, the technique chosen at a lower level of the rate of profit
Rate of return
In finance, rate of return , also known as return on investment , rate of profit or sometimes just return, is the ratio of money gained or lost on an investment relative to the amount of money invested. The amount of money gained or lost may be referred to as interest, profit/loss, gain/loss, or...
requires less capital value while earlier it required more capital value.
Pasinetti published a famous article in the Symposium of the Quarterly Journal of Economics
Quarterly Journal of Economics
The Quarterly Journal of Economics, or QJE, is a peer-reviewed academic journal published by the Oxford University Press and edited at Harvard University's Department of Economics. Its current editors are Robert J. Barro, Elhanan Helpman and Lawrence F. Katz...
in 1966, which was actually an adaptation and expansion of an article that was presented to the First World Congress of the Econometric Society in Rome one year earlier. Pasinetti set out to show that the theorem stated a year earlier by David Levhari and Paul Samuelson
Paul Samuelson
Paul Anthony Samuelson was an American economist, and the first American to win the Nobel Memorial Prize in Economic Sciences. The Swedish Royal Academies stated, when awarding the prize, that he "has done more than any other contemporary economist to raise the level of scientific analysis in...
, which was supposed to demonstrate the impossibility of reswitching at the aggregate level, was false. Although in 1960 Sraffa
Piero Sraffa
Piero Sraffa was an influential Italian economist whose book Production of Commodities by Means of Commodities is taken as founding the Neo-Ricardian school of Economics.- Early life :...
had shown that reswitching was a possibility, no one had considered in depth such contribution. As Pasinetti said at the beginning of his 1966 article:
Later he adds: “This result, owing to its theoretical implications, has been rather worrying; and there has been a general reluctance to consider it.”
The paper begins by setting a numerical example that shows -by constructing two alternative techniques- that even satisfying all Levhari and Samuelson
Paul Samuelson
Paul Anthony Samuelson was an American economist, and the first American to win the Nobel Memorial Prize in Economic Sciences. The Swedish Royal Academies stated, when awarding the prize, that he "has done more than any other contemporary economist to raise the level of scientific analysis in...
hypotheses, reswitching is a possibility at the aggregate level. Then Pasinetti set up a theoretical analysis to find out where the error was in Levhari's proof. Clearly, if the numerical example above refuted the theorem –as it did-, “It means that their logical arguments must have gone wrong at some stage”.
The conclusions of the article were truly remarkable, for if a monotonic relationship between profit rate
Rate of return
In finance, rate of return , also known as return on investment , rate of profit or sometimes just return, is the ratio of money gained or lost on an investment relative to the amount of money invested. The amount of money gained or lost may be referred to as interest, profit/loss, gain/loss, or...
and capital-labour ratio could not hold, the production function
Production function
In microeconomics and macroeconomics, a production function is a function that specifies the output of a firm, an industry, or an entire economy for all combinations of inputs...
concept was meaningless. Therefore he concluded that:
The other major contribution of Pasinetti to the debate on capital theory
Cambridge capital controversy
The Cambridge capital controversy – sometimes simply called "the capital controversy" – refers to a theoretical and mathematical debate during the 1960s among economists concerning the nature and role of capital goods and the critique of the dominant neoclassical vision of aggregate...
was a 1969 paper titled “Switches of Technique and the ‘Rate of Return’ in Capital Theory”. In this paper, Pasinetti showed that the concept of the rate of return
Rate of return
In finance, rate of return , also known as return on investment , rate of profit or sometimes just return, is the ratio of money gained or lost on an investment relative to the amount of money invested. The amount of money gained or lost may be referred to as interest, profit/loss, gain/loss, or...
on capital, introduced by Irving Fisher
Irving Fisher
Irving Fisher was an American economist, inventor, and health campaigner, and one of the earliest American neoclassical economists, though his later work on debt deflation often regarded as belonging instead to the Post-Keynesian school.Fisher made important contributions to utility theory and...
, and resumed and used by Solow
Robert Solow
Robert Merton Solow is an American economist particularly known for his work on the theory of economic growth that culminated in the exogenous growth model named after him...
in 1967 as a means of rescuing the neoclassical capital theory, had no economic significance.
Whichever of the two definitions given by Fisher on the rate of return was accepted, one of them was an accounting expression and in the other (in order to say anything on interest) would entail accepting a rather unobtrusive postulate in order to avoid the problem of reswitching. That is, the concept of “rate of return”, which Solow
Robert Solow
Robert Merton Solow is an American economist particularly known for his work on the theory of economic growth that culminated in the exogenous growth model named after him...
thought was the central concept of the theory of capital, had no autonomous theoretical content. The conclusion of the article is an illuminating summary of the results concerning the debate on the theory of capital
Cambridge capital controversy
The Cambridge capital controversy – sometimes simply called "the capital controversy" – refers to a theoretical and mathematical debate during the 1960s among economists concerning the nature and role of capital goods and the critique of the dominant neoclassical vision of aggregate...
:
Lectures on the Theory of Production
Lectures on the Theory of Production first appeared in Italian in 1975. Already in 1956 some parts of the book circulated in the form of lecture notes in several Italian universities. The insistence of students to give these notes a more structured and compact form prompted Pasinetti to compile these lectures, enlarging them and then bringing them to the form in which the book appeared.This is the main reason why the Lectures on the Theory of Production turned out to be the most successful of his publications didactically (translated in French, Spanish, German and Japanese). The English version, appeared two years later, in 1977 and maintained the character and the structure of the Italian version, although Pasinetti added some enlargements, in the form of more sections and new appendices.
At a theoretical level, Lectures on the Theory of Production is a book dedicated to the analysis of the theory of production
Production, costs, and pricing
The following outline is provided as an overview of and topical guide to industrial organization:Industrial organization – describes the behavior of firms in the marketplace with regard to production, pricing, employment and other decisions...
, that is, the way in which societies produce wealth
Wealth
Wealth is the abundance of valuable resources or material possessions. The word wealth is derived from the old English wela, which is from an Indo-European word stem...
and then how it is distributed. It is curious to notice the unusual way in which Pasinetti introduced his Theory of Production. He begins Chapter I by contrasting two possible definitions of wealth
Wealth
Wealth is the abundance of valuable resources or material possessions. The word wealth is derived from the old English wela, which is from an Indo-European word stem...
:
Wealth
Wealth is the abundance of valuable resources or material possessions. The word wealth is derived from the old English wela, which is from an Indo-European word stem...
as a stock
Stock
The capital stock of a business entity represents the original capital paid into or invested in the business by its founders. It serves as a security for the creditors of a business since it cannot be withdrawn to the detriment of the creditors...
can be useful for investigations at the level of single individuals; but at the macroeconomic
Macroeconomics
Macroeconomics is a branch of economics dealing with the performance, structure, behavior, and decision-making of the whole economy. This includes a national, regional, or global economy...
level, it is wealth
Wealth
Wealth is the abundance of valuable resources or material possessions. The word wealth is derived from the old English wela, which is from an Indo-European word stem...
as a flow that is the most relevant concept. Therefore, Pasinetti considers it as a great contribution – made already by the Physiocratic school of 18th century France – to have concentrated on the concepts of surplus
Surplus
Surplus means when there is more supply than demand, as in extra resources.Surplus may refer to: dumd* "The Surplus", an episode of The Office* Surplus: Terrorized into Being Consumers, a documentary film...
and economic activity presented as a circular flow in the Tableau Economique
Tableau économique
The Tableau économique or Economic Table is an economic model first described in François Quesnay in 1759, which lay the foundation of the Physiocrats’ economic theories....
, devised by François Quesnay
François Quesnay
François Quesnay was a French economist of the Physiocratic school. He is known for publishing the "Tableau économique" in 1758, which provided the foundations of the ideas of the Physiocrats...
. The Physiocratic ideas were developed by the Classical economists in Scotland and England and then by Marx. All of them saw the importance of production
Production, costs, and pricing
The following outline is provided as an overview of and topical guide to industrial organization:Industrial organization – describes the behavior of firms in the marketplace with regard to production, pricing, employment and other decisions...
and wealth
Wealth
Wealth is the abundance of valuable resources or material possessions. The word wealth is derived from the old English wela, which is from an Indo-European word stem...
as a flow concept and further developed the Physiocratic ideas. Curiously enough, the Marginalist revolution of the late 19th century preferred to go back to study the concept of wealth
Wealth
Wealth is the abundance of valuable resources or material possessions. The word wealth is derived from the old English wela, which is from an Indo-European word stem...
as a stock
Stock
The capital stock of a business entity represents the original capital paid into or invested in the business by its founders. It serves as a security for the creditors of a business since it cannot be withdrawn to the detriment of the creditors...
, thus largely de-emphasizing the problems of production
Production, costs, and pricing
The following outline is provided as an overview of and topical guide to industrial organization:Industrial organization – describes the behavior of firms in the marketplace with regard to production, pricing, employment and other decisions...
and distribution
Distribution (economics)
Distribution in economics refers to the way total output, income, or wealth is distributed among individuals or among the factors of production .. In general theory and the national income and product accounts, each unit of output corresponds to a unit of income...
, and to focus on models of "pure exchange".
From this point onwards, Pasinetti develops and presents, in a terse way, a truly Classical theory of production. This book became a book from which a whole generation of Italian students (and in some Universities also non-Italian students) have learnt the theoretical scheme of Piero Sraffa
Piero Sraffa
Piero Sraffa was an influential Italian economist whose book Production of Commodities by Means of Commodities is taken as founding the Neo-Ricardian school of Economics.- Early life :...
, expressed in matrix notation (with a mathematical appendix devoted to the basic elements of matrix algebra
Matrix algebra
Matrix algebra may refer to:*Matrix theory, is the branch of mathematics that studies matrices*Matrix ring, thought of as an algebra over a field or a commutative ring...
) and the Input-Output analysis of Wassily Leontief
Wassily Leontief
Wassily Wassilyovich Leontief , was a Russian-American economist notable for his research on how changes in one economic sector may have an effect on other sectors. Leontief won the Nobel Committee's Nobel Memorial Prize in Economic Sciences in 1973, and three of his doctoral students have also...
.
In chapters 4, 5, and in an Appendix to Chapter 5, Pasinetti respectively deals with the Leontief model, with the Sraffa system, and Marx's transformation problem. He shows how, although the Leontief model and the Sraffa system were designed for different purposes, the former as an empirical tool and the latter as a theoretical framework, both have their basis in Physiocracy and Classical economics
Classical economics
Classical economics is widely regarded as the first modern school of economic thought. Its major developers include Adam Smith, Jean-Baptiste Say, David Ricardo, Thomas Malthus and John Stuart Mill....
. The greatest theoretical achievement of the Sraffa system, Pasinetti says at the end of chapter 5, is that:
The last two chapters are useful summaries of problems Pasinetti has dealt with extensively throughout his career. Chapter 6 explains some of the controversies on capital theory
Cambridge capital controversy
The Cambridge capital controversy – sometimes simply called "the capital controversy" – refers to a theoretical and mathematical debate during the 1960s among economists concerning the nature and role of capital goods and the critique of the dominant neoclassical vision of aggregate...
, the problem about reswitching and its implications for traditional economic analysis. In an appendix to chapter 6, Pasinetti also touches on linear programming. He points out that “unfortunately, linear programming was all too quickly constrained within the limits of traditional marginal analysis and lost its driving force”.
Chapter 7 is an introduction to dynamic production models and their implications for the theory of distribution
Distribution (economics)
Distribution in economics refers to the way total output, income, or wealth is distributed among individuals or among the factors of production .. In general theory and the national income and product accounts, each unit of output corresponds to a unit of income...
. Pasinetti exposits his own contributions to this field as a summary of the Von Neumann model, showing both its merits and limitations. For the sake of brevity Pasinetti does not present here his contributions to the field of structural change
Structural change
Structural change of an economy refers to a long-term widespread change of the fundamental structure, rather than microscale or short-term output and employment. For example, a subsistence economy is transformed into a manufacturing economy, or a regulated mixed economy is liberalized...
. But, this last chapter can be considered a proper introduction to his book Structural Change and Economic Growth, where all the problems of structural dynamics are widely discussed.
Structural Change and Economic Growth
In 1981 “Structural Change and Economic Growth” appeared. It was a book that had been in gestation since 1963, when Pasinetti presented his PhD thesis at Cambridge on "A Multi-Sector Model of Economic Growth". Five of the nine chapters of the thesis had earlier been published in a long article in 1965. Afterward, Pasinetti rewrote and added some chapters to reach the total of 11 chapters with which the book appeared.This book is a theoretical investigation on the long-term evolution of industrial systems. According to Pasinetti, such work surged from:
Leaving aside for a moment the technical aspects, we can say that overall the book is completely new for three reasons. To begin with, this was the first book to offer a unifying framework and a consistent alternative to that proposed by the Neoclassical theory
Neoclassical economics
Neoclassical economics is a term variously used for approaches to economics focusing on the determination of prices, outputs, and income distributions in markets through supply and demand, often mediated through a hypothesized maximization of utility by income-constrained individuals and of profits...
. The latter strand of theory, which began in 1870, tried to explain the economic reality from a simpler view (exchange) under assumptions and analytical tools that were very restrictive, although its authors had the advantage that, “they have always clearly presented their arguments around a unifying problem (optimum allocation or scarce resources) and a unifying principle (the rational process of maximization under constraints).
It was therefore natural that contributions made in isolation and apart from Neoclassical economics
Neoclassical economics
Neoclassical economics is a term variously used for approaches to economics focusing on the determination of prices, outputs, and income distributions in markets through supply and demand, often mediated through a hypothesized maximization of utility by income-constrained individuals and of profits...
were either discarded or transformed, doctored to fit into the neoclassical model. Pasinetti's purpose is therefore to offer an alternative paradigm and unify these theories in a new and solid set, which incorporates the contributions of Keynes, Kalecki
Michal Kalecki
Michał Kalecki was a Polish economist who specialized in macroeconomics of a broadly-defined Keynesian sort...
, Sraffa, Leontief, the macrodynamics models of Harrod and Domar and the distribution theory of the post-Keynesian economists in Cambridge: the whole lit and dotted with some of the theories, ideas and concerns of the classical economists.
The second important point is that it is the first work in which Pasinetti does not solve a specific problem in isolation, but tries to offer a global vision of the economic process and integrates all the contributions he had made before. In this book we can find his ideas about Classical economics
Classical economics
Classical economics is widely regarded as the first modern school of economic thought. Its major developers include Adam Smith, Jean-Baptiste Say, David Ricardo, Thomas Malthus and John Stuart Mill....
, income distribution
Income distribution
In economics, income distribution is how a nation’s total economy is distributed amongst its population.Income distribution has always been a central concern of economic theory and economic policy...
, capital theory
Capital (economics)
In economics, capital, capital goods, or real capital refers to already-produced durable goods used in production of goods or services. The capital goods are not significantly consumed, though they may depreciate in the production process...
and the theory of joint production
Production, costs, and pricing
The following outline is provided as an overview of and topical guide to industrial organization:Industrial organization – describes the behavior of firms in the marketplace with regard to production, pricing, employment and other decisions...
, all of them sorted out and assembled in order to explain the dynamics of industrial societies.
The third point is of a methodological nature, and is probably the most important of all. Following the Classical economists, Pasinetti thinks that it is possible to frame the study of natural economic systems, i.e., economic systems free of institutions. In these natural systems it is possible to deduce a series of characteristics, principles and general laws, which are independent of the institutions that have to be introduced in later stages of investigation. These institutions are the ones that shape the features of real economic systems: for instance, a capitalist system or a socialist system. As he says, “is a distinctive feature of the present theoretical scheme to begin by carrying out the whole analysis at a level of investigation which the Classical economists called ‘natural’, that is to say, at a level of investigation which is so fundamental as to be independent of the institutional set-up of society”.
Despite the high degree of abstraction of analysis, this method can provide answers to many real-world practical problems:
The six first chapters of the book provide the analytical core of the work. In them, Pasinetti sets the conditions for an economy with neither unemployment nor idle production capacity. Pasinetti's analysis always runs from the simple to the more general models. Thus - after studying the equilibrium conditions in the short run in chapter 2 - in chapter 3 he analyzes the most simplest of all growth models: population
Population growth
Population growth is the change in a population over time, and can be quantified as the change in the number of individuals of any species in a population using "per unit time" for measurement....
grows at a steady percentage rate, while technical, and demand
Demand
- Economics :*Demand , the desire to own something and the ability to pay for it*Demand curve, a graphic representation of a demand schedule*Demand deposit, the money in checking accounts...
coefficients (i.e., consumer preferences) remain constant over time.
With these assumptions, two types of conditions are necessary to reach the full employment of resources: the first one is a macroeconomic
Macroeconomics
Macroeconomics is a branch of economics dealing with the performance, structure, behavior, and decision-making of the whole economy. This includes a national, regional, or global economy...
condition: total expenditure must be equal to total income; and the second is a set of sectoral conditions: each sector must have a rate of accumulation of capital sufficient to cover demand
Demand
- Economics :*Demand , the desire to own something and the ability to pay for it*Demand curve, a graphic representation of a demand schedule*Demand deposit, the money in checking accounts...
growth. Roughly, this is a series of ‘Harrod- Domar equations’: a specific Harrod- Domar equation must be satisfied in each particular sector.
The most important outcome of this analysis is that Pasinetti shows that, under such assumptions, it does not matter whether the analysis is carried out in macroeconomic
Macroeconomics
Macroeconomics is a branch of economics dealing with the performance, structure, behavior, and decision-making of the whole economy. This includes a national, regional, or global economy...
terms or -in a more disaggregated way- in sectorial terms. As the system expands, while its proportions remain constant, the analysis does not lose any generality if carried out in aggregate terms. So, this is the case to which macroeconomic models of growth can be correctly applied. “If the whole structure of the economic system were really to remain constant through time, any disaggregated formulation would not provided us with particularly useful insights, besides those that are provided already by the corresponding, much simpler, macroeconomic
Macroeconomics
Macroeconomics is a branch of economics dealing with the performance, structure, behavior, and decision-making of the whole economy. This includes a national, regional, or global economy...
formulations.”
Chapters 4 and 5 are devoted to the elaboration of a really relevant general multi-sector dynamic model. While chapter 5 is devoted to the exposition of such a model, in chapter 4 Pasinetti displays one of the most important ideas of the whole book: not only does technical progress
Technical change
A technical change is a term used in economics to describe a change in the amount of output produced from the same amount of inputs. A technical change is not necessarily technological as it might be organizational, or due to a change in a constraint such as regulation, input prices, or quantities...
affect the production methods of the economy, it also generates changes in the composition of demand. The way in which Pasinetti introduces the dynamic behaviour of demand over time is an up-dated resumption of Engel's Law
Engel's law
Engel's law is an observation in economics stating that as income rises, the proportion of income spent on food falls, even if actual expenditure on food rises...
, which when generalized states that higher and higher levels of income
Income
Income is the consumption and savings opportunity gained by an entity within a specified time frame, which is generally expressed in monetary terms. However, for households and individuals, "income is the sum of all the wages, salaries, profits, interests payments, rents and other forms of earnings...
lead to constantly changing consumption patterns
Consumption (economics)
Consumption is a common concept in economics, and gives rise to derived concepts such as consumer debt. Generally, consumption is defined in part by comparison to production. But the precise definition can vary because different schools of economists define production quite differently...
.
This way of looking at the demand side allows Pasinetti to reach three notable findings. The first is that learning is an individual characteristic which is more basic and more realistic than the rational behaviour postulated by traditional economics. If income
Income
Income is the consumption and savings opportunity gained by an entity within a specified time frame, which is generally expressed in monetary terms. However, for households and individuals, "income is the sum of all the wages, salaries, profits, interests payments, rents and other forms of earnings...
changes over time -and thus consumer preferences also change- consumers must continually be learning about new goods to consume. This implies that, “we can never expect each consumer to make the best possible consumption decisions”.
The second finding is that because of changing consumer preferences over time, it is inevitable that (short term) sectorial imbalances will arise due to the changing structure of the demands for goods. Therefore, this will be a permanent source of disequilibrium in the system.
The third finding is that demand
Demand
- Economics :*Demand , the desire to own something and the ability to pay for it*Demand curve, a graphic representation of a demand schedule*Demand deposit, the money in checking accounts...
is going to play a major role in determining the structure of the main macroeconomic
Macroeconomics
Macroeconomics is a branch of economics dealing with the performance, structure, behavior, and decision-making of the whole economy. This includes a national, regional, or global economy...
variables over time. Even through the formation of long-term prices, demand
Demand
- Economics :*Demand , the desire to own something and the ability to pay for it*Demand curve, a graphic representation of a demand schedule*Demand deposit, the money in checking accounts...
has a vital role to play in shaping the production quantities:
The second part of the book, from chapters 7 to 11, develops all the consequences derived from the dynamic model of chapters 4 and 5. The long term evolution of the major variables is explained in its composition: employment
Employment
Employment is a contract between two parties, one being the employer and the other being the employee. An employee may be defined as:- Employee :...
, wages, profits
Profit (economics)
In economics, the term profit has two related but distinct meanings. Normal profit represents the total opportunity costs of a venture to an entrepreneur or investor, whilst economic profit In economics, the term profit has two related but distinct meanings. Normal profit represents the total...
and capital/output and capital/labour ratios. Chapter 8 also provides a drastic distinction between the interest rate
Interest rate
An interest rate is the rate at which interest is paid by a borrower for the use of money that they borrow from a lender. For example, a small company borrows capital from a bank to buy new assets for their business, and in return the lender receives interest at a predetermined interest rate for...
and the profit rate
Rate of return
In finance, rate of return , also known as return on investment , rate of profit or sometimes just return, is the ratio of money gained or lost on an investment relative to the amount of money invested. The amount of money gained or lost may be referred to as interest, profit/loss, gain/loss, or...
; and this closes the theoretical framework of the entire book and makes it particularly complete and compact.
The last chapter (11) takes the conclusions and the scheme of the model in chapter 5 and applies them to international economic relations. This chapter appears as slightly different from the rest of the book, because it is devoted to analyzing economic systems with international trade
International trade
International trade is the exchange of capital, goods, and services across international borders or territories. In most countries, such trade represents a significant share of gross domestic product...
and economic relations in general. It is a chapter that deals with open economies that not only trade with other economies, but try to import knowledge and know-how. Pasinetti argues that the main benefits of international relations are in fact not so much those that derive from trade as those that derive from the international learning process between countries. Developing countries can strongly benefit from international relations if they succeed in imitating production methods from the developed countries. This is an encouraging possibility but has its limitations. Developing countries may not always be prepared to absorb all the technical methods of the developed countries because their lower levels of per capita income cause (according to Engel's law
Engel's law
Engel's law is an observation in economics stating that as income rises, the proportion of income spent on food falls, even if actual expenditure on food rises...
) the goods demanded in these countries to be different from those that are demanded in developed countries. The latter generally are not only much more sophisticated, but such as to require facilities that are not yet available in developing countries. In addition, Engel's law
Engel's law
Engel's law is an observation in economics stating that as income rises, the proportion of income spent on food falls, even if actual expenditure on food rises...
may require a strict order in consumption decisions.
The last paragraph of the book gives an excellent summary of the contents and the tone of Pasinetti’s book:
In 1993, Pasinetti returned to the problems of structural dynamics with a beautifully compact book (Structural economic dynamics – a theory of the economic consequences of human learning). Scant attention has been paid thus far to this book. The book explores the complex inter-relations between the structural change
Structural change
Structural change of an economy refers to a long-term widespread change of the fundamental structure, rather than microscale or short-term output and employment. For example, a subsistence economy is transformed into a manufacturing economy, or a regulated mixed economy is liberalized...
of production, of prices and of employment
Employment
Employment is a contract between two parties, one being the employer and the other being the employee. An employee may be defined as:- Employee :...
as a necessary consequence of human learning, by carrying out the whole analysis in terms of a “pure labour model”, i.e., a model in which labour, to be intended as human activity in general, is the only factor of production. This book has (incorrectly) been interpreted as an extreme simplification of the process of structural dynamics
Structural Dynamics
Structural dynamics is a subset of structural analysis which covers the behaviour of structures subjected to dynamic loading. Dynamic loads include people, wind, waves, traffic, earthquakes, and blasts. Any structure can be subject to dynamic loading. Dynamic analysis can be used to find dynamic...
, and this may explain why it has been neglected so far. But in fact, it goes to the very heart of the complex movements that are taking place in post-industrial societies as an effect of the accumulation and diffusion of knowledge. When these aspects will be fully understood, it may well emerge as containing the most fundamental of all the theoretical concepts thus far conceived by Pasinetti to interpret the basic economic features of the newly shaped world in which we live.
Vertically integrated sectors and their importance for the dynamic analysis
The deep study developed by Pasinetti in Structural Change and Economic Growth on the dynamics of growth of industrial systems led to the development of an entirely new analytical tool: the concept of vertically integrated sectors.In fact, in the 1965 paper, from which Structural Change was later developed, the notion of vertically integrated sector was already present, though more as a simplifying assumption than as a really important analytical concept. The publication of Sraffa's book Production of commodities by means of commodities in 1960 motivated Pasinetti to reflect on the importance of such a concept. As pointed out by Pasinetti:
In 1973 Pasinetti published a paper, "The Notion of Vertical Integration in Economic Analysis", which would be a milestone for the development of all the analytical implications of the concept and its relation to the inter-industry theoretical schemes of Input-Output
Input-output model
In economics, an input-output model is a quantitative economic technique that represents the interdependencies between different branches of national economy or between branches of different, even competing economies. Wassily Leontief developed this type of analysis and took the Nobel Memorial...
type.
The concept of vertically integrated sector is implicitly contained in the work of many economists. Most macroeconomic models, in order to avoid the analysis of intermediate goods, use that notion. The question then is why the use of the concept of a vertically integrated sector is much more advantageous for the dynamic analysis that, for instance, the classic Input-Output model
Input-output model
In economics, an input-output model is a quantitative economic technique that represents the interdependencies between different branches of national economy or between branches of different, even competing economies. Wassily Leontief developed this type of analysis and took the Nobel Memorial...
s.
A vertically integrated sector is, above all, a purely theoretical construction. Each of these sectors is constructed behind each of the final goods production processes, so that these can be decomposed into two clearly distinguishable elements: an amount of labour and a quantity of capital goods. “In a vertically integrated model, the criterion is the process of production of a final commodity, and the problem is to build conceptually behind each final commodity a vertically integrated sector which, by passing through all the intermediate commodities, goes right back to the original inputs”.
The great advantage of this abstract construction is that, besides being much more relevant to the dynamic analysis, it can be easily converted by algebraic operations into an Input-Output scheme
Input-output model
In economics, an input-output model is a quantitative economic technique that represents the interdependencies between different branches of national economy or between branches of different, even competing economies. Wassily Leontief developed this type of analysis and took the Nobel Memorial...
. The coefficients of production of a vertically integrated model are basically a linear combination of the coefficients of production of an Input-Output model
Input-output model
In economics, an input-output model is a quantitative economic technique that represents the interdependencies between different branches of national economy or between branches of different, even competing economies. Wassily Leontief developed this type of analysis and took the Nobel Memorial...
. This means that it is possible to obtain empirical values of the vertically integrated coefficients for an economy. We need only to obtain the values of the production coefficients on each industry
Industry
Industry refers to the production of an economic good or service within an economy.-Industrial sectors:There are four key industrial economic sectors: the primary sector, largely raw material extraction industries such as mining and farming; the secondary sector, involving refining, construction,...
(as it is commonly done by the different national account agencies) as well as the capital
Capital (economics)
In economics, capital, capital goods, or real capital refers to already-produced durable goods used in production of goods or services. The capital goods are not significantly consumed, though they may depreciate in the production process...
data at current prices; then we take the transposed inverse matrix of the estimated coefficients and we multiplied it by the vector of capital stocks. This allows us to obtain the vector of vertically integrated capital stock of an industry
Industry
Industry refers to the production of an economic good or service within an economy.-Industrial sectors:There are four key industrial economic sectors: the primary sector, largely raw material extraction industries such as mining and farming; the secondary sector, involving refining, construction,...
, a vector that can be seen as a kind of composite good involved in the production of the final commodity considered, which Pasinetti calls unit of vertically integrated productive capacity. A similar procedure is applied with respect to the coefficients of labour. Thus, each final good is summarized in a vertically integrated labour coefficient and a unit of vertically integrated productive capacity.
The importance of this algebraic manipulation is notable because it allows linking a measurable and observable magnitudes (corresponding to the Input-Output analysis
Input-output model
In economics, an input-output model is a quantitative economic technique that represents the interdependencies between different branches of national economy or between branches of different, even competing economies. Wassily Leontief developed this type of analysis and took the Nobel Memorial...
) with more compact magnitudes which have a deeper economic significance for the dynamic analysis. Thus, both methods (Input-Output
Input-output model
In economics, an input-output model is a quantitative economic technique that represents the interdependencies between different branches of national economy or between branches of different, even competing economies. Wassily Leontief developed this type of analysis and took the Nobel Memorial...
and vertical integration
Vertical integration
In microeconomics and management, the term vertical integration describes a style of management control. Vertically integrated companies in a supply chain are united through a common owner. Usually each member of the supply chain produces a different product or service, and the products combine to...
) are essentially different points of view to perceive the same thing.
Nonetheless, this relationship between the contribution of Pasinetti and Input-Output models
Input-output model
In economics, an input-output model is a quantitative economic technique that represents the interdependencies between different branches of national economy or between branches of different, even competing economies. Wassily Leontief developed this type of analysis and took the Nobel Memorial...
, valid for a static analysis, vanishes in a dynamic analysis. The matrix of technical coefficients, i.e., the link between the two methods of analysis, evolves over time due to technical change
Technical change
A technical change is a term used in economics to describe a change in the amount of output produced from the same amount of inputs. A technical change is not necessarily technological as it might be organizational, or due to a change in a constraint such as regulation, input prices, or quantities...
and change of production methods in the economy. That is, we would require an Input-Output
Input-output model
In economics, an input-output model is a quantitative economic technique that represents the interdependencies between different branches of national economy or between branches of different, even competing economies. Wassily Leontief developed this type of analysis and took the Nobel Memorial...
table at each point in time for the dynamic analysis of an economy. However, the movement of vertically integrated coefficients can be analyzed over time, as these relationships include the expressions of technical change
Technical change
A technical change is a term used in economics to describe a change in the amount of output produced from the same amount of inputs. A technical change is not necessarily technological as it might be organizational, or due to a change in a constraint such as regulation, input prices, or quantities...
. This is the reason why the analysis in terms of vertically integrated coefficients is most appropriate for dynamic analysis. We can go back, however, to an inter-sectoral analysis (Input-Output
Input-output model
In economics, an input-output model is a quantitative economic technique that represents the interdependencies between different branches of national economy or between branches of different, even competing economies. Wassily Leontief developed this type of analysis and took the Nobel Memorial...
) with reference to any given point in time when we are interested in it.
As Pasinetti says:
The result that the vertically integrated technical coefficients can be set up independently of the vagaries of technical change is a result of such importance that it could lead us to reconsider much of the work on structural economic dynamics:
Keynes and the Cambridge Keynesians
Keynesian economics
Keynesian economics is a school of macroeconomic thought based on the ideas of 20th-century English economist John Maynard Keynes.Keynesian economics argues that private sector decisions sometimes lead to inefficient macroeconomic outcomes and, therefore, advocates active policy responses by the...
as an alternative paradigm to Neoclassical economics
Neoclassical economics
Neoclassical economics is a term variously used for approaches to economics focusing on the determination of prices, outputs, and income distributions in markets through supply and demand, often mediated through a hypothesized maximization of utility by income-constrained individuals and of profits...
, emphasizing the contributions of the Cambridge Keynesians
Post-Keynesian economics
Post Keynesian economics is a school of economic thought with its origins in The General Theory of John Maynard Keynes, although its subsequent development was influenced to a large degree by Michał Kalecki, Joan Robinson, Nicholas Kaldor and Paul Davidson...
as well as future development lines on these issues.
Probably, Pasinetti -recognized as the heir of the Cambridge economists-, is the most suitable economist to talk about that ambience, because, as he himself acknowledges:
The gestation period of the book, as is usual for Pasinetti's books, was long: about 15 years. In fact, with the notable exception of part three, the book is a collection of writings that Pasinetti had prepared years ago. Part three, on the other hand, is new and presumably the most important part of the book. That is, Keynes and the Cambridge Keynesians is composed of three parts or, more properly, of three Books.
Book I is a summary of what has been known as the "Keynesian Revolution
Keynesian Revolution
The Keynesian Revolution was a fundamental reworking of economic theory concerning the factors determining employment levels in the overall economy. The revolution was set against the then orthodox economic framework: neoclassical economics....
". It is taken from set of lectures delivered by Pasinetti in memory of the Italian economist Federico Caffé, in October 1994 at La Sapienza University, Rome. In this Book, Pasinetti makes a chronological overview of the outbreak of the "Keynesian Revolution
Keynesian Revolution
The Keynesian Revolution was a fundamental reworking of economic theory concerning the factors determining employment levels in the overall economy. The revolution was set against the then orthodox economic framework: neoclassical economics....
", from the first attempts of Keynes in the early 1930s, to the evolution of Keynesian thinking
Keynesian economics
Keynesian economics is a school of macroeconomic thought based on the ideas of 20th-century English economist John Maynard Keynes.Keynesian economics argues that private sector decisions sometimes lead to inefficient macroeconomic outcomes and, therefore, advocates active policy responses by the...
and the subsequent misinterpretation of his theory by the economists of the “Neoclassical synthesis
Neoclassical synthesis
Neoclassical synthesis is a postwar academic movement in economics that attempts to absorb the macroeconomic thought of John Maynard Keynes into the thought of neoclassical economics...
”. Book I also contains some reflections on the progress of knowledge in economics
Economics
Economics is the social science that analyzes the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek from + , hence "rules of the house"...
and the rise and fall of scientific paradigms based on the work of the famous epistemologist Thomas Kuhn
Thomas Kuhn
Thomas Samuel Kuhn was an American historian and philosopher of science whose controversial 1962 book The Structure of Scientific Revolutions was deeply influential in both academic and popular circles, introducing the term "paradigm shift," which has since become an English-language staple.Kuhn...
. The conclusions of Book I also advocate the revival of Keynesian economics
Keynesian economics
Keynesian economics is a school of macroeconomic thought based on the ideas of 20th-century English economist John Maynard Keynes.Keynesian economics argues that private sector decisions sometimes lead to inefficient macroeconomic outcomes and, therefore, advocates active policy responses by the...
with a touch of hope for future generations of economists:
Book II, entitled The Cambridge School of Keynesian Economics is by far the longest part of the book. It is composed of, in this order, by the biographies of Richard Kahn
Richard Kahn, Baron Kahn
Richard Ferdinand Kahn, Baron Kahn, CBE, FBA was a British economist.Kahn was born in Hampstead to Augustus Kahn, a German schoolmaster and an orthodox Jew, and Regina Schoyer. He raised in England and was educated on St Paul's School, London...
, Joan Robinson
Joan Robinson
Joan Violet Robinson FBA was a post-Keynesian economist who was well known for her knowledge of monetary economics and wide-ranging contributions to economic theory...
, Nicholas Kaldor
Nicholas Kaldor
Nicholas Kaldor, Baron Kaldor was one of the foremost Cambridge economists in the post-war period...
, Piero Sraffa
Piero Sraffa
Piero Sraffa was an influential Italian economist whose book Production of Commodities by Means of Commodities is taken as founding the Neo-Ricardian school of Economics.- Early life :...
and Richard Goodwin
Richard M. Goodwin
Richard M. Goodwin was an American mathematician and economist. He was born in Indiana.Goodwin received his BA and PhD at Harvard, and he taught there from 1942 until 1950. He taught at the University of Cambridge until 1979 and the University of Siena until 1984.Goodwin worked on the interaction...
. All of them had already appeared in various places several years earlier, although for this book Pasinetti re-arranged them. The chapter on Kaldor, for example, is a synthesis of two articles written on different occasions. In terms of space, Sraffa is the economist treated in greatest detail by Pasinetti, dedicating to him three, quite independent biographical essays.
Besides the importance of each one of the biographies, the purpose of all of them is:
Book II ends with some suggestions, nine in total, which according to Pasinetti are at the heart of the "Keynesian Revolution
Keynesian Revolution
The Keynesian Revolution was a fundamental reworking of economic theory concerning the factors determining employment levels in the overall economy. The revolution was set against the then orthodox economic framework: neoclassical economics....
". The issues involved are:
- Reality (and not simply abstract rationality) as the starting point of economic theory.
- Economic logic with internal consistency (and not only formal rigour).
- Malthus and the Classics (not Walras and the Marginalists) as the major inspiring source in the history of economic thought.
- Non-ergodic (in place of stationary, timeless) economic systems.
- Causality versus interdependence.
- MacroeconomicsMacroeconomicsMacroeconomics is a branch of economics dealing with the performance, structure, behavior, and decision-making of the whole economy. This includes a national, regional, or global economy...
before microeconomicsMicroeconomicsMicroeconomics is a branch of economics that studies the behavior of how the individual modern household and firms make decisions to allocate limited resources. Typically, it applies to markets where goods or services are being bought and sold...
. - DIsequilibrium and instability (not equilibrium) as the normal state of the industrial economies.
- Necessity of finding an appropriate analytical framework for dealing with technical change and economic growth.
- A strong, deeply felt social concern.
Finally, Book III is a conclusion, not only of the previous chapters of this volume, but also of the whole conception of how Pasinetti would like economic analysis to be carried out. He asserts the need to rise above and go beyond Neoclassical economics
Neoclassical economics
Neoclassical economics is a term variously used for approaches to economics focusing on the determination of prices, outputs, and income distributions in markets through supply and demand, often mediated through a hypothesized maximization of utility by income-constrained individuals and of profits...
through a genuine resurgence of a Classical
Classical economics
Classical economics is widely regarded as the first modern school of economic thought. Its major developers include Adam Smith, Jean-Baptiste Say, David Ricardo, Thomas Malthus and John Stuart Mill....
-Keynesian
Post-Keynesian economics
Post Keynesian economics is a school of economic thought with its origins in The General Theory of John Maynard Keynes, although its subsequent development was influenced to a large degree by Michał Kalecki, Joan Robinson, Nicholas Kaldor and Paul Davidson...
paradigm, which can be rescued and strengthened and developed by the methodology that Pasinetti has pursued during the whole of his life, made explicit for the first time in his Structural Change and Economic Growth. Basically, he argues for the possibility of formulating, at a first level of investigation, a pure economic theory, independently from the institutional framework of society, and then, at a second level of investigation, of developing an analysis of the relevant institutions, thus achieving a theoretical framework that may allow us to understand the basic features of the monetary production economies in which we live today.
See also
- Post-Keynesian economicsPost-Keynesian economicsPost Keynesian economics is a school of economic thought with its origins in The General Theory of John Maynard Keynes, although its subsequent development was influenced to a large degree by Michał Kalecki, Joan Robinson, Nicholas Kaldor and Paul Davidson...
- Cambridge capital controversyCambridge capital controversyThe Cambridge capital controversy – sometimes simply called "the capital controversy" – refers to a theoretical and mathematical debate during the 1960s among economists concerning the nature and role of capital goods and the critique of the dominant neoclassical vision of aggregate...
- Neo-RicardianismNeo-RicardianismThe neo-Ricardian school is an economic schoolthat derives from the close reading and interpretation of David Ricardo by Piero Sraffa, and from Sraffa's critique of Neoclassical economics as presented in his The Production of Commodities by Means of Commodities, and further developed by the...
- Classical economicsClassical economicsClassical economics is widely regarded as the first modern school of economic thought. Its major developers include Adam Smith, Jean-Baptiste Say, David Ricardo, Thomas Malthus and John Stuart Mill....
- Ricardian economicsRicardian economicsDavid Ricardo was born in 1772 and made a fortune as a stockbroker and loan broker. At the age of 27, he read An Inquiry into the Nature and Causes of Wealth of Nations by Adam Smith and was energized by the theories of economics. His main economic ideas are contained in Principles of Political...
- David RicardoDavid RicardoDavid Ricardo was an English political economist, often credited with systematising economics, and was one of the most influential of the classical economists, along with Thomas Malthus, Adam Smith, and John Stuart Mill. He was also a member of Parliament, businessman, financier and speculator,...
- John Maynard KeynesJohn Maynard KeynesJohn Maynard Keynes, Baron Keynes of Tilton, CB FBA , was a British economist whose ideas have profoundly affected the theory and practice of modern macroeconomics, as well as the economic policies of governments...
- Michal KaleckiMichal KaleckiMichał Kalecki was a Polish economist who specialized in macroeconomics of a broadly-defined Keynesian sort...
- Richard KahnRichard Kahn, Baron KahnRichard Ferdinand Kahn, Baron Kahn, CBE, FBA was a British economist.Kahn was born in Hampstead to Augustus Kahn, a German schoolmaster and an orthodox Jew, and Regina Schoyer. He raised in England and was educated on St Paul's School, London...
- Joan RobinsonJoan RobinsonJoan Violet Robinson FBA was a post-Keynesian economist who was well known for her knowledge of monetary economics and wide-ranging contributions to economic theory...
- Nicholas KaldorNicholas KaldorNicholas Kaldor, Baron Kaldor was one of the foremost Cambridge economists in the post-war period...
- Piero SraffaPiero SraffaPiero Sraffa was an influential Italian economist whose book Production of Commodities by Means of Commodities is taken as founding the Neo-Ricardian school of Economics.- Early life :...
- Richard GoodwinRichard M. GoodwinRichard M. Goodwin was an American mathematician and economist. He was born in Indiana.Goodwin received his BA and PhD at Harvard, and he taught there from 1942 until 1950. He taught at the University of Cambridge until 1979 and the University of Siena until 1984.Goodwin worked on the interaction...
- Wassily LeontiefWassily LeontiefWassily Wassilyovich Leontief , was a Russian-American economist notable for his research on how changes in one economic sector may have an effect on other sectors. Leontief won the Nobel Committee's Nobel Memorial Prize in Economic Sciences in 1973, and three of his doctoral students have also...
- Input-Output models
- MacroeconomicsMacroeconomicsMacroeconomics is a branch of economics dealing with the performance, structure, behavior, and decision-making of the whole economy. This includes a national, regional, or global economy...
- Engel's LawEngel's lawEngel's law is an observation in economics stating that as income rises, the proportion of income spent on food falls, even if actual expenditure on food rises...
- University of CambridgeUniversity of CambridgeThe University of Cambridge is a public research university located in Cambridge, United Kingdom. It is the second-oldest university in both the United Kingdom and the English-speaking world , and the seventh-oldest globally...
- Università Cattolica del Sacro CuoreUniversità Cattolica del Sacro CuoreUniversità Cattolica del Sacro Cuore is a privately-owned Catholic university founded in 1921 by Agostino Gemelli. Its main campus is located in Milan, Italy with satellite campuses in Brescia, Piacenza, Cremona, Rome, and Campobasso...
Works of Luigi Pasinetti
- Pasinetti, L. [1960], "A Mathematical Formulation of the Ricardian System", in The Review of Economic Studies, 1959–60, vol.27, pp. 78–98.
- Pasinetti, L. [1962], ‘Rate of profit and Income Distribution in Relation to the Rate of Economic Growth’, Review of Economic Studies, XXIX (4), October, 267-279.
- Pasinetti, L. [1965], "Causalità e interdipendenza nell'analisi econometrica e nella teoria economica", in: Annuario dell'Università Cattolica del S. Cuore, 1964–65, Milan: Vita e Pensiero, pp. 233–250.
- Pasinetti, L. [1965], "A New Theoretical Approach to the Problems of Economic Growth", in: Pontificiæ Academiæ Scientiarum Scripta Varia, n.28; Proceedings of a Study Week on “The Econometric Approach to Development Planning”, Vatican City, 1963. Reprinted by: North Holland Publ. Co, 1965: Amsterdam, pp. 572–696.
- Pasinetti, L. [1966], "New Results in an Old Framework: Comment on Samuelson and Modigliani", in The Review of Economic Studies, vol.33, n.4, pp. 303–306.
- Pasinetti, L. [1966], "Changes in the Rate of Profit and Switches of Techniques" (leading article of "Paradoxes in Capital Theory: A Symposium"), in The Quarterly Journal of Economics, vol.80, pp. 503–517.
- Pasinetti, L. [1969], "Switches of Techniques and the “Rate of Return” in Capital Theory", in The Economic Journal, vol.79, pp. 508–531.
- Pasinetti, L. [1973], "The Notion of Vertical Integration in Economic Analysis", in: Metroeconomica, vol.25, pp. 1–29. Reprinted in: L. Pasinetti (ed.), Essays on the Theory of Joint Production, London: Macmillan; and New York: Columbia University Press, 1980, pp. 16–43.
- Pasinetti, L. [1974], Growth and Income Distribution - Essays in Economic Theory, Cambridge: Cambridge University Press. Translations: Italian: Sviluppo Economico e Distribuzione del Reddito, Bologna: Il Mulino, 1977; Spanish: Crecimiento económico y distribución de la renta - Ensayos de teoría económica, Madrid: Alianza Editorial, 1978; Portuguese: Rio de Janeiro, 1979; Japanese: Tokyo, 1985.
- Pasinetti, L. [1977],"On 'Non-substitution' in Production Models", in Cambridge Journal of Economics, vol.1, pp. 389–394.
- Pasinetti, L. [1977], Lectures on the theory of production, MacMillan. Italian version: Contributi alla teoria della produzione congiunta, Il Mulino Bologna, 1974, Translations: Spanish: Aportaciones a la teoría de la producción conjunta, México City, Mexico: Fondo de Cultura Económica/Serie de Economía, 1986; Japanese: Tokyo, 1989.
- Pasinetti, L. [1980], Essays on the Theory of Joint Production, London: Macmillan, and New York: Columbia University Press.
- Pasinetti, L. [1981], "On the Ricardian Theory of Value: A Note", in: The Review of Economic Studies, vol.48, pp. 673–675.
- Pasinetti, L. [1981], Structural Change and Economic Growth: a Theoretical essay on the dynamics of the wealth of nations, Cambridge University Press. Italian version: Dinamica strutturale e sviluppo economico - Un' indagine teorica sui mutamenti nella ricchezza delle nazioni, Turin: U.T.E.T., 1984. Translations: Spanish: Cambio estructural y crecimiento económico, Madrid: Ediciones Pirámide, S.A., 1985; Japanese: Tokyo, 1983.
- Pasinetti, L. [1986], "Theory of Value - A Source of Alternative Paradigms in Economic Analysis", in: Mauro Baranzini and Roberto Scazzieri eds., Foundations of Economics - Structures of Inquiry and Economic Theory, Oxford: Basil Blackwell, pp. 409–431
- Pasinetti, L. [1988], "Growing Sub-systems, Vertically Hyper-integrated Sectors and the Labour Theory of Value", in Cambridge Journal of Economics, vol.12, pp. 125–134.
- Pasinetti, L. [1988], "Technical Progress and International Trade", in Empirica, vol.15, pp. 139–147.
- Pasinetti, L. [1989], "Ricardian Debt/Taxation Equivalence in the Kaldor Theory of Profits and Income Distribution", Cambridge Journal of Economics, vol.13, pp. 25–36.
- Pasinetti, L. [1993], Structural Economic Dynamics - A theory of the economic consequences of human learning, Cambridge: Cambridge University Press. Italian version: Dinamica economica strutturale. - Un' indagine teorica sulle conseguenze economiche dell'apprendimento umano, Bologna: Il Mulino, 1993; Japanese translation: Tokyo, 1998.
- Pasinetti, L. [1998], “The myth (or folly) of the 3% deficit-GDP Maastricht ‘parameter’”, in Cambridge Journal of Economics, vol.22, pp.103-116.
- Pasinetti, L. [2003], Letter to the Editor, in: "Comments – Cambridge Capital Controversies", in Journal of Economic Perspectives, Fall 2003, vol. 17, n. 4, pp. 227–8. (A comment on Avi J. Cohen and Geoffrey Harcourt's "Cambridge Capital Theory Controversies" in Journal of Economic Perspectives, Winter 2003, vol. 17, n. 1, pp. 199–214).
- Pasinetti, L. [2007], Keynes and the Cambridge Keynesians: A ‘Revolution in Economics’ to be Accomplished, Cambridge University Press. Italian version: Keynes e i Keynesiani di Cambridge. Una ‘rivoluzione in economia’ da portare a compimento, Laterza, 2010.
Other sources
- Arestis, P. and Sawyer, M. (eds.) [2000], A Biographical Dictionary of Dissenting Economists, Edward Elgar, second edition.
- Baranzini Mauro and Harcourt Geoffrey C. [1993], The Dynamics of the Wealth of Nations, Macmillan, London.
- Blaug, M. [1985], Great Economists since Keynes, Wheatseaf Books.
- Blaug, M. (1999), Who’s who in economics, Edward Elgar, third edition.
- Cohen A. and Harcourt G. [2003], “Whatever Happened to the Cambridge Capital Theory controversies?”, The Journal of Economic Perspectives, vol.17, no.1, pp. 199–214.
- Fleck, F. H. and Domenghino, C. M. [1987], “Cambridge (UK) versus Cambridge (Mass.): a Keynesian solution of the ‘Pasinetti Paradox’, Journal of Post-Keynesian Economics, vol. X, pp. 22–36.
- Kaldor, N. [1956], Alternative Theories of Distribution, Review of Economic Studies, vol. 23, pp. 83–100.
- Kaldor, N. [1966], “Marginal Productivity and the Macroeconomic Theories of Distribution: Comment on Samuelson and Modigliani”, Review of Economic Studies, XXXIII, October, pp. 309–19.
- Harcourt, G. and Laing N. (eds.) [1971], Capital and Growth, Penguin Modern Economics Readings.
- Harcourt, N [1975], Some Cambridge Controversies in the Theory of Capital, Cambridge University Press.
- Leijonhuvfud, A. [2007], Between Keynes and Sraffa: Pasinetti on the Cambridge School.
- Meade, J. E. [1966], “The Outcome of the Pasinetti-process”: A Note”, Economic Journal, vol.76, 1966, pp. 161–165.
- Panico, C. and Salvadori, N. (eds.) [1993], Post Keynesian Theory of Growth and Distribution, Edward Elgar.
- Robinson, J. [1953-1954], “The Production Function and the Theory of Capital”, Review of Economic Studies, vol.21, pp. 81–106.
- Samuelson, P. A. and Modigliani, F. [1966], “The Pasinetti Paradox in Neoclassical and More General Models”, The Review of Economic Studies, pp. 269–301.
- Scazzieri, R. [1983], “Economic dynamics and Structural Change: A Comment on Pasinetti”, Rivista Internazionale di Scienze Economiche e Commerciali, 30, pp. 597–611.
- Steedman, I. [1972], “The State and the Outcome of the Pasinetti Process, Economic Journal, 82, December, pp.1387-95.
- Teixeira, J.R., [1998], ‘Luigi L. Pasinetti’ in: Ferdinando Meacci (ed.), Italian Economists of the 20th Century, Edward Elgar, Cheltenham, UK, pp. 272–294.