Editing Piero Sraffa (section)

=== The laws of productivity under competitive conditions ===
{{More sources|date=September 2024}}
In 1925, Sraffa wrote about [[returns to scale]] and [[perfect competition]]. In the 1926 article, "The Laws of Returns under Competitive Conditions", published in ''The Economic Journal'', Sraffa resumes and develops his work of 1925 to show the inconsistency of the [[Alfred Marshall|Marshallian]] theory of [[partial equilibrium]], according to which, in competition for each good:

# The equilibrium price is determined by the intersection of the demand curve and that of the supply. The supply curve is symmetrical to that of the demand.
# As the quantity produced by the firm increases, there are initially increasing returns and, beyond a certain point, decreasing returns.<ref>The [[marginal cost]] curve has a "U" shape: first, it decreases, then it grows until it first meets the [[average cost]] curve, then the straight line (which is given, in conditions of competition); the different points of intersection between the growing part of the marginal cost curve (beyond the intersection with the average cost curve) and the various possible price lines constitute the supply curve for the individual firm.</ref>

Sraffa notes that the [[Diminishing returns|law of decreasing returns]] and that of increasing returns have different origins and areas of application (and therefore cannot explain the shape of the same supply curve): the law of diminishing returns was originally applied to the entire economy and resulted from the scarcity of the agricultural land as a mean of production (the rent theory of [[David Ricardo]]); while the law of increasing returns applied to the individual firm and resulted from the benefits of division of labour. The first one allowed for the study of the laws of distribution, and the second those of production.

"Nobody, until comparatively recently - Sraffa writes - had thought of unifying these two tendencies in one single law of non-proportional productivity, and considering this as one of the bases of the theory of price"<ref>Caloca Osorio, Oscar Rogelio; Cárdenas Almagro, Antonio; Octavio Ortiz Mendoza, Enrique, ''La frontera Sraffa-Ricardo entre salario y cuota de ganancia, un modelo de asimetría/The Sraffa-Ricardo Boundary Between Salary and Profit Rate, an Asymmetric Model'', Análisis Económico. 2014, Vol. 28 Issue 70, p73-93. 21p.</ref> Sraffa observes that the idea of considering the law of non-proportional returns as a basis for the price theory arose, for analogy, only after the study of decreasing utility had drawn attention to the relationship between the price and the quantity consumed. In fact, "if the cost of production of every unit of the commodity under consideration did not vary with variations in quantity produced the symmetry would be broken, the price would be determined exclusively by the expenses of production and demand would be unable to have any influence on it at all".<ref>Sraffa (1925 in 1998, p. 324).</ref>

The difficulties of the system that could, in short, be defined as the cross of the supply and demand curves firstly depend on the heterogeneity of the assumptions on which these two different tendencies are based. Decreasing returns and increasing costs are caused by the limited availability of some input which prevents all inputs from varying in optimal proportion. In other words, if an input is limited in quantity, a rise in production levels brings about a less efficient proportion among inputs with a fall in productivity. By contrast, the tendency toward decreasing costs stems from variations in the quantity of all inputs, and therefore they may occur only when there are no constant factors.<ref>Sraffa (1926, p. 539); cf. Morroni (1998a, p. 209; 1998b, p.  402).</ref>

A second difficulty stems from the fact that, as Sraffa notes, in the neoclassical theory of prices the equilibrium of the individual firm is determined on the basis of cost variations deriving from small increases in its production (marginalist theory) and taking the situation unchanged in other companies of the same industry and the entire economy, following the hypothesis of ''ceteris paribus'', i.e. other conditions being equal.<ref>Sraffa (1925 in 1998, pp. 358-359; 1926, pp. 538-539); Morroni (1998a, p. 210).</ref>

Sraffa highlights that the possibility of applying the hypothesis of increasing costs to the supply curve is limited to the rare cases in which a considerable part of the supply of input is employed for the production of only one commodity. However, in general, each input is employed by a certain number of industries that produce different goods.<ref>Sraffa (1926, p. 540); Morroni (1998a, p. 221).</ref>

As for increasing returns and decreasing costs, Marshall himself notes that external economies can hardly be attributed clearly to a specific industry, but they are of considerable interest to groups, often of a large size, in related industries; consequently, it is not possible to hypothesize an increase in returns in just one company.<ref>Sraffa (1925 in 1998, pp. 361-362; 1926, p. 540); cf. Morroni (1985, p. 109; 1998b, pp. 402-403).</ref>

If in the partial equilibrium system of competitive prices, it is not possible to consider decreasing or increasing costs without contradicting the nature of the system, it follows, from this point of view, that production costs of goods produced in competition must be regarded as constant in respect of small variations in the quantity produced"<ref>Sraffa (1926, p. 541).</ref> and that the long-run supply curve of an industry is horizontal. As a consequence, the price and the quantity of a good do not derive from the simultaneous action of the supply and demand curves: the price is determined by production costs, while the quantity produced is determined by the demand. The neoclassical symmetry between demand and supply is broken. The old theory that, in competition, "makes the value of commodities dependent on the cost of production alone appears to hold its ground as the best available" (1926b:540-1).<ref>Sraffa (1925 in 1998, p. 363).</ref>

Finally, Sraffa remarks that "everyday experience shows that the majority of which produce manufactured consumers' goods operate in conditions of individual diminishing costs. If the limit to the firm's expansion does not arise from increasing costs, then it may arise from the difficulty in expanding the market share without changing any of these three aspects: improving the quality of the output, reducing its price, or increasing marketing expenses. These considerations were developed, in the 1930s, by the theory of [[imperfect competition]].