Sraffa's 1930 manuscripts on the representative firm and Marshall's theory of value and business profit

ABSTRACT Stirati EJHET 2013 The 1920s saw intense debate on Marshall’s analysis of increasing returns that culminated in 1930 with the publication of the Symposium on ‘Increasing Returns and the Representative Firm’ – consisting of articles and comments by Robertson and Shove and Sraffa in the Economic Journal. Apart from the thorny question of increasing returns, however, there was another and quite distinct side to this debate that concerned the usefulness and analytical role of the concept of the representative firm in the theory of business profit and the explanation of the supply price of a commodity for a given level of aggregate industry output, independently of any assumption regarding returns to scale at firm or industry level. This question occupies a large part of Robbins’s ‘The Representative Firm’ (1928), to which Robertson responded in his Symposium article. The first part of the latter is in fact entirely devoted to the question outlined above, which will be referred to for brevity as the role of the representative firm in Marshall’s theory of profit. The discussion of this issue, which all the participants kept quite separate from that of returns, revolved around the heterogeneity of actual firms in any industry owing to the diversity of entrepreneurial abilities and the fact that there are always some firms that are not in equilibrium. The question that gave rise to differences of opinion was whether it was necessary, in view of this heterogeneity, for the theory to refer to the concepts of normal business profit and the representative firm. The purpose of this article is to report on the content of some of Sraffa’s unpublished manuscripts regarding the questions outlined above. It will be shown that Sraffa had originally planned to write a longer comment on Robertson’s Symposium article in two parts, one dealing with the representative firm and Marshall’s theory of profits, the other with increasing returns. The manuscripts in question address the first of these issues, namely the “composition of a given supply price”. In examining Marshall’s views, Sraffa soon became aware of a peculiarity of his theory of business profits with respect to that held by other economists, Robbins included, which had gone unnoticed in the discussion between Robbins and Robertson. To a large extent, the manuscripts examined here are therefore devoted precisely to the critical discussion of this peculiarity, i.e. the view of business profits as a rate, as proportional to the size of the capital stock. The other major issue addressed is the analytical usefulness of the concept of the representative firm in Marshall’s theory of value in the sense, as explained above, of the determination of the supply price for any given level of aggregate industry output and thus independently of any assumptions concerning returns. In addition to the historical interest of the material, examination of the old debates on the idea of the representative firm and Marshall’s theory of profits might give rise to new questions and reflections on the foundations of the theory and on a concept considered “obsolete” by Sraffa (D3/7 56) back in the 1930s but still very much in use in contemporary economics and recently the object of some attention.