Panico 1991 Economic Journal

Some Notes on Marshallian Supply Functions
Author(s): Carlo Panico

Source: The Economic Journal, Vol. 101, No. 406 (May, 1991), pp. 557-569
Published by: Wiley on behalf of the Royal Economic Society
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The EconomicJournal,ioI (May I99I), 557-569
Printedin GreatBritain
SOME NOTES ON MARSHALLIAN SUPPLY

FUNCTIONS*
CarloPanico
This work deals with Samuelson's interpretation of Sraffa's critique of

Marshallian supply functions.' The interpretation is presented in two recent
papers, an entry on 'Sraffian Economics' in the New Palgrave Dictionary
(Samuelson, I987) and an essay comparing it with that by Eatwell and Panico
(I987) on the same topic (Samuelson, I989). They develop some views already
expressed by Samuelson (I967).
In I967, dealing with Sraffa's critique within the context of the 'cost
controversy' initiated by Clapham in I922, Samuelson stated that the
deficiencies of Marshall's work 'should have led Sraffa to a plea for
abandonment of Marshallian partial-equilibrium in favour of Walrasian
general-equilibrium models' (Samuelson, I967, p. i i6), rather than to its
development in terms of imperfect competition. In his recent papers, focusing
on the specific content of Sraffa's critique, Samuelson further points out that it
contains a 'fatal error', since it claims 'that constant-cost cases exhaust the
categories of admissible competitive price' (Samuelson, I987, p. 458). This
claim, according to Samuelson (i 987, pp. 458-9), was generated by an
ideological bias towards positions on price determination in which demand
plays no role, and was supported by rhetorical or false arguments, which misled
at the time a whole generation of thinkers. Some years later, however, the
existence of this mistake was recognised, giving to demand its proper role in the
determination of competitive prices.
The object of this paper is to contend Samuelson's interpretation, arguing
that it does not give a correct account of Sraffa's contribution to the 'cost
controversy' and of the content of his critique. A detailed description of
Samuelson's interpretation is given in Section I. In Section II, it is first argued,
in opposition to what Samuelson says, that after I926 Sraffa pleaded for
abandoning Marshall's approach in favour of an analysis of simultaneous
determination of all prices.2Subsequently, dealing with the content of Sraffa's
critique, it is argued that its aim was not to impose a view of price
determination in which demand plays no role, but to identify those Marshallian
supply functions lacking rigorous foundations and those based on sound
arguments. This work led Sraffa to some negative conclusions on the validity
* I thank M. Fernandez Grela, B. Jossi, A. Roncaglia, N. Salvadori and the participants in a seminar
held at the Departamento de Fundamentos del Analisis Economico of Santiago de Compostela (Spain) for
their comments. Financial support from the Italian Ministry of Public Education and from C.N.R. is
gratefully acknowledged.
1 These assume that the prices of all other goods and factors are given. They differ from Friedman's
Marshallian supply functions, who take as given only the prices of obvious substitutesand complements. (See
Friedman, I949; Bailey, 1954; Buchanan, I958; Yeager, 1960; Whitaker, I987.)
2 For a similar view, see Roncaglia (1978).
[ 557 ]
558 THE ECONOMIC JOURNAL [MAY
of competitive partial analysis, although he pointed out - contrary to what

Samuelson claims - the existence of some consistent non-constant cases,
reaching similar results to those achieved by Samuelson himself some years
later.3 Sraffa's main argument, it is also argued, was based on the analysis of
the conditions that make the ceterisparibusassumption legitimate when the
effects of increasing and decreasing returns cannot be neglectea, rather than on
the negligible size of these returns or on 'pure rhetoric', as Samuelson suggests.
His analysis of the problems posed by interdependence among industries and
his final conclusion on the limited validity of partial analysis have been scarcely
discussed by the economics profession.4They were soon either overlooked or
misinterpretedalong lines similar to those subsequentlyfollowed by Samuelson.
I
In I967 Samuelson gave an overall evaluation of the 'cost controversy'
initiated by Clapham in I922, judging it 'a sterile debate' (Samuelson, I967,
p. io6), which had failed to realise that 'a proper understanding of general
equilibrium [is necessary]... to attain... an understanding of partial equi-
librium' (Samuelson, I967, p. II3). The detour caused by this failure served
however the useful function of exposing the deficiencies of Marshall's partial
equilibrium, dumping the ballast it generated and pushing economics towards
the long overdue study of realistic market structures.5
Sraffa's contribution to moving the literature in this direction was
prominent.6 His work too failed 'to realise that the Walrasian model would
supply many of the deficiencies of Marshallian partial equilibrium' (Samuel-
son, I967, p. iI6). These deficiencies 'do not themselves create a need for
monopolistic competition theory' (Samuelson, I 967, p. I I 6). They plead for
abandoning Marshall's approach in favour of a simultaneous determination of
all prices, which shows the proper role of demand and the validity of the rising
supply case 'that Sraffa needlessly plays down' (Samuelson, I967, p. II 5).
In his recent papers, Samuelson develops this position by focusing on the
content of Sraffa's critique. He confirms that, in relation to increasing returns,
Sraffa correctly showed that a firm enjoying internal economies beyond certain
limits 'cannot find a maximum-profit equilibrium while still remaining a
perfect competitor' (Samuelson, I987, p. 458).? On the other hand, Samuelson
points out the existence of a 'fatal error' in Sraffa's treatment of decreasing
returns, which
was newly arguing that upward-sloping supply curves were also of
vacuous importance for Marshallian partial equilibrium. All that Sraffa
left his reader, then, was a horizontal constant-cost
competitive supply curve
(Samuelson, I987, p. 458).
3 For a similarview, see Schefold(i 989), Garegnani(i 989).
4 Among the recent works dealing with these parts of Sraffa's critique one can recall Ridolfi (I972),
Talamo (I976), Roncaglia (I978), Jossa (I982), Maneschi (I986), Steedman (I988), Schefold (I989),
Garegnani (i 989).
5 See Samuelson (I967), pp. io6-i6.
6 See Samuelson (i 967), pp. II 5-6.
7 According to Samuelson, this was not new, having been noticed by Cournot in the I830s.
I99I] MARSHALLIAN SUPPLY FUNCTIONS 559
This new thesis, Samuelson claims, attracted at the time a disproportionate
amount of interest. Yet, it was 'plain wrong' (Samuelson, I987, p. 458), as
shown by the generalequilibrium analysis ofJ. Robinson (I 94I ) and by Sraffa's
I960 book, demonstrating
that when primary factors other than a single homogeneo'uslabour exist,

rightward shifting Marshallian and Walrasian demand curves will
generally trace rising price intersections on the relevant supply curves
(Samuelson, I987, p. 458).
To support the view that Sraffa's new thesis was wrong, Samuelson also
recalled the partial equilibrium 'specific factor model' he presented in I97I.
The model, which shows that a concave production-possibilityfrontier can be
consistently derived under competitive conditions, represents, according to
him,
the one singular case in which the mutual interdependences are strictly
absent and in which partial-equilibrium schedules provide an exact
general-equilibrium model (Samuelson, I97I, p. I2).
In the model the supply and demand functions for the good produced by the
isolated industry do not depend on the quantities supplied and demanded for
other goods. The independence of demand functions is achieved by assuming
that all goods have independent additive utilities and that labour has strictly
constant marginal disutility. The independence of supply functions comes
instead from the assumption that each of the 'n' existing goods is produced by
a specialised land specific to that industry and by transferable labour.8
and linear
For Samuelson (I987, pp. 458-9), Sraffa's belief that constant-costs
production-possibility frontiers exhaust the cases admissible with competitive
equilibrium was generated by an ideological bias towards classical economics
and towards positions on price determination in which demand plays no role.
Besides, it was based, according to what he said in i987, only on rhetorical
arguments.
Students of rhetoric should be interested to analyze the elements of style
that enable the erudite author of a faulty thesis to persuade himself and
several generations of thinkers of its truth and importance. (Samuelson,
I987, p. 458).
This conclusion was strengthened in I989 by saying that 'Sraffa by pure

rhetoricconvinced himself and my generation of students of a simple error'
(Samuelson, I989, p. 269; italics added), and that 'Sraffa does not even
purport to provide a cogent proof of anything' (Samuelson, I989, p. 269). At
the same time, however, he referred to the possibility that Sraffa derived an
approximate flat production-possibility frontier by assuming that small
variations in the quantity produced lead to negligiblysmall changes in the
8 The same result is obtained if the isolated good is produced with labour and intermediate goods specific
to the isolated industry and produced with labour and other primary factors specific to themselves. See
Samuelson, I 97 I, p. I 3 fn. I2.
dependent variables (the rent return to the specific land and the cost of
production).' This argument, Samuelson said, is false.
The issue is not whether small changes in an independent variable induce
small changes in a dependent variable, but rather whether the
instantaneous derivative of the function is negligibly small (Samuelson,
1989, p. 269).1O e
After recognising the fallacy of Sraffa's critique, 'the economics pro-

fession... resolutely ignored its novel supply-curve findings' (Samuelson, I989,
p. 269) and its 'attempt to fob off on the twentieth century a value taxonomy
that was obsolete already in the early nineteenth' (Samuelson, I989, p. 269).
II
Sraffa contributed to the 'cost controversy' at three different stages. He first
published an article in Italian in I925, which analysed the deficiencies of
Marshall's competitive analysis. On invitation of Edgeworth and Keynes,1"
editors at the time of ECONOMICJOURNAL, he published in I926 a second article
in English. After giving a short summary'2 of that of I925, the article pointed
out two possible solutions to the deficiencies of Marshall's analysis, one in terms
of imperfect competition and the other in terms of general equilibrium,
focusing for pragmatic reasons on the former solution.
When we proceed to a further approximation, while keeping to the path
of free competition, the complications do not arise gradually, as would be
convenient ... If diminishing returns arising from a " constant factor" are
taken into consideration, it becomes necessary to extend the field of
investigation so as to examine the conditions of simultaneous equilibrium
in numerous industries: a well-known conception, whose complexity,
however, prevents it from bearing fruit, at least in the present state of our
knowledge, which does not permit of even much simpler schemata being
applied to the study of real conditions ... It is necessary, therefore, to
abandon the path of free competition and turn ... towards monopoly.
(Sraffa, I926, p. I87).'3
Finally, he published two short interventions in the I 930 ECONOMICJOURNAL
Symposium on 'Increasing returns and the representative firm'. There, he
9 Samuelson also admitted the existence of 'exceptions' (Samuelson, I 989, p. 269) in Sraffa'swork stating
that in it 'the cases where alterations in composition of demand alter competitive price ratios are minimized'
(Samuelson, I989, p. 269). On these exceptions, however, he only said that they 'cannot be discounted as
belonging to some "peculiar" concatenation of industry and firm externalities-internalities' (Samuelson,
I989, p. 259).-
10 In this, as in other cases, some similarity between Samuelson's and Pigou's position can be noticed. On
this argument, Pigou too claimed that 'what signifies... is not the absolute size of this increase. It is the ratio
between this increase, expressed as a proportion of previously existing cost, and the increase of output,
expressed as a proportion of previously existing output' (Pigou, I927, p. I95).
1 See Roncaglia (I978), Maneschi (I986), Panico (I988).
12 See Sraffa (I926), pp. I84-7.
13 This is also confirmed by the content of a letter sent by Sraffa to Keynes before the publication of the
I926 article. The letter, dated 6 July I926, is included within Keynes' Papers, which are collected in the
library of King's College in Cambridge (U.K.), and is partly reprinted in Roncaglia (I978, p. I2).
I99I] MARSHALLIAN SUPPLY FUNCTIONS 56I
completely ignored the imperfect competition solution.'4 Dealing with
Robertson's objections to his critique of Marshall's competitive analysis, he
stated:
I am trying to find what are the assumptions implicit in Marshall's theory;
if Mr. Robertson regards them as extremely unreal, I sympathise with
him. We seem to be agreed that the theory cannot be interpreted in a way
which makes it logically self-consistent and, at the same time, reconciles it
with the facts it sets out to explain. Mr. Robertson's remedy is to discard
mathematics, and he suggests that my remedy is to discard the facts;
perhaps I ought to have explained that, in the circumstances, I think it is
Marshall's theory that should be discarded (Sraffa, I930, p. 93).
Soon after I926, there was thus a shift in Sraffa's position, from a solution to
the deficiencies of Marshall's analysis in terms of imperfect competition to one
in terms of simultaneous determination of all prices. The occurrence of this shift
can be traced in the writings of Sraffa himself.'5 Its appreciation clarifies that
Samuelson's evaluation of the 'cost controversy', while correct in the
identification of the limits of that debate, is inaccurate on Sraffa's contribution.
This author did not fail to realise the importance of the analysis of simultaneous
determination of all prices and, after I926, directed his work along the lines
that, according to Samuelson, the debate should have followed.
The existence of imprecise elements can also be found in Samuelson's
discussion of the content of Sraffa's critique. The aim of this work, as Sraffa
himself points out,16 was to evaluate the consistency of different Marshallian
derivations of supply functions. In this analysis, Sraffa said at the beginning,
the really serious difficulties make their appearance when it is considered
to what extent the supply curves ... satisfy the conditions necessary to
enable them to be employed in the study of the equilibrium value of
single commodities produced under competitive conditions (Sraffa, I926,
p. I84).
According to him, mutual interdependence among industries is the source of
difficult problems in partial analysis. Since this deals with
only two variables, it is necessary to assume that, when the level of
production of a single commodity changes ... both consumers' demand
and the conditions of production of all other commodities do not change.
This amounts to saying: (i) the supply curve must be independent of both
the corresponding demand curve and the supply curves of all other
commodities; (2) the supply curve is valid only for small variations of the
quantity produced, and, if we move too far away from the initial
14 Most contemporary literature (e.g., Viner, I93I; Robbins, 1934; J. Robinson, 1934; Hicks, I935)
ignored Sraffa's 1930 interventions, focusing only on his 1926 claims on imperfect competition.
15 In the Preface of Sraffa's I960 book, it is stated that its 'central propositions had taken shape in the
late 1920S' (Sraffa, I960, p. vi) and that some early draft was shown to Keynes soon after Sraffa's arrival
in Cambridge for the academic year 1927-1928. This suggests that, at the time, Sraffa was already pursuing
the solution in terms of simultaneous determination of all prices. For a similar view, see Talamo, 1976,
Roncaglia, 1978, Maneschi, I986, Schefold, I989.
16 See Sraffa (I930, p. 93), quoted above, and his letter to Keynes dated 6 July 1926, previously recalled.
equilibrium position, it may be necessary to derive a completely new

curve, since a large variation is in general incompatible with the ceteris
paribuscondition (Sraffa, I925, p. 209; our translation).
Yet, Sraffa said, a perfect independence of the isolated industry can hardly be
achieved, and it is thus necessary to define a criterion to evaluate up to which
point mutual interdependence can be disregarded and the ceteris paribus
assumption legitimately made.'7
It is well known that such an assumption would not be illegitimate merely
because the independence may not be absolutely perfect, as, in fact, it
never can be; and a slight degree of interdependence may be overlooked
without disadvantage as it applies to quantities of the second order of
smallness ... But, of course, it is a very different matter, and the assumption
becomes illegitimate, when a variation in the quantity produced by the
industry under consideration sets up a force which acts directly, not
merely upon its own costs, but also upon the costs of other industries; in
such a case the conditions of the 'particular equilibrium' which it was
intended to isolate are upset, and it is no longer possible, without
contradiction, to neglect collateral effects (Sraffa, I926, p. I84).
The criterion adopted by Sraffa to evaluate the legitimacy of the ceteris
paribus assumption allowed the maintenance of some degree of mutual
interdependence.'8 It distinguishes two ways in which mutual interdependence
can operate when a change in the quantity produced by the isolated industry,
call it xn, occurs.
The first way implies that variations in xn bring about non-constant returns
operating directlyon the technical coefficients (call them aijs with some i * n) of
both the isolated and the other industries. This leads to variations in prices and
distribution and to further effects on the technical processes used and on
demand.
The second way implies that variations in xn bring about non-constant
returns operating directlyonly on the technical coefficients of the isolated sector,
call them anJs.This leads to variations in the price of the isolated good, which
17 The problems caused by interdependence among industries, though admitted, did not lead the 1930S
literature to the same evaluation of the compatibility between different returns and the ceterisparibus
assumptions. The latter were accepted for the belief that it only involves negligiblequantitative errors. 'All
partial equilibrium analysis ... rests on assumptionsof the ceterisparibusorder which posit independence where
in fact there is some degree of dependence. For such logically invalid assumptions, there is the pragmatic
defence that they permit of more detailed analysis of certain phases of economic interdependence than would
be possible in their absence, and that ...*it is reasonable to believe that the errors in the results obtained will
be almost invariably quantitative rather than qualitative in character, and will generally be even
quantitatively .of minor importance' (Viner, 193 1, pp. I 90-200).
18 A rule to define the limits of validity of the ceteris
paribusassumption was adopted by Pigou too. His rule,
which differed from that of Sraffa, focused on the 'negligible size' argument rather than on interdependence.
It stated that partial analysis must assume the constancy of the prices of materials, machinery etc. supplied
to the isolated industry. Variations in these prices are to be studied by general equilibrium (Pigou, 1927, pp.
190-I; 1928, p. 250). The constancy of these prices is obtained 'if the isolated [industry] does not employ
more than a very small proportion of the total supply of any factor' (Pigou, 1928, p. 251). Partial analysis
must thus be confined to the study of those 'commodities which individually employ so small a proportion
of each of the several factors of production that no practicable changes in the scale of their output could
sensibly affect the relative values of these factors.' (Pigou, 1927, p. 192.)
1991] MARSHALLIAN SUPPLY FUNCTIONS 563
in turn may feed-back on the price of other goods and cause changes in the
technical processes used and in demand.'9
This distinction was used by Sraffa to define the limits of validity of the ceteris
paribus assumption. According to him, mutual interdependence operating
directlyon the technical coefficientsof other industries too cannot be neglected.
On the contrary, that producing only indirector feed-back effects on other
industries can be disregarded.
The criterion adopted by Sraffa was less strict than that of Samuelson. It did
not identify conditions to be met by the utility functions and imposed on the
production functions of each sector less severe technological conditions than
those indicated by Samuelson.20
In spite of this lower degree of strictness, Sraffa's evaluation of Marshallian
supply functions led him to negative conclusions. On the basis of the results
achieved, which resemble those reached by Samuelson some years later, he
concluded that Marshallian non-constant supply curves can be derived only in
exceptional cases.
He identified two cases of non-constant supply curves consistent with his
criterion. The first, generated by diminishing marginal returns, resembles
Samuelson's specific-factor case.21The second was generated by economies of
scale 'external to the firm and internal to the industry', defined by Sraffa as
those due to a change in the output of the isolated industry and affecting
directly only ifs technical coefficients.22It resembles the case mentioned by
Samuelson not in his recent essays, but in his textbook,23where a decreasing
supply curve is derived by recalling Pigou's exposition, which does not make
the same distinction as Sraffa between different kinds of firm externalities.24
A consistent rising supply function can be obtained, according to Sraffa,25
when some primary factors, different from labour and available in a fixed and
limited amount, are employed onlyin the isolated industry.26In this case, an
19 There are cases (one is that pointed out by Samuelson in I 97 I) in which the further effects on technical
processes and on demand do not occur.
20 For further comparisons between the technological conditions imposed by the criteria adopted by the
two authors, see below, this section.
21 For a similar view, see Schefold (I989) and Garegnani (I989).
22 Economies of scale affecting directly the technical coefficients of other industries too are defined by
Sraffa 'external to both the firm and the industry'.

23 See Samuelson (I976), pp. 476-7 and 479.
24 Pigou named firm externalities 'special to particular industries' (Pigou, I927, p. I95) those generated
by 'variations in the scale of output of our commodity' (Pigou, I927, p. I89). This definition was broader
than Sraffa's firm externalities 'internal to the industry'. It does not require the absence of direct effects on
the technical coefficients of the other industries. Unlike Sraffa, then, Pigou ruled out from partial analysis
onlythose externalities coming 'spontaneously' from 'general developments in industrial technique, banking
and transport' (Pigou, I927, p. I89; see also I928, pp. 238-9). He admitted the use in partial analysis of firm
externalities due to higher specialisation and interrelation among industries, which were instead disallowed
by Sraffa. Indeed it was on the actual occurrence of these externalities, as also shown by Young (I 928), that
Pigou based his defence of Marshall's analysis (see Pigou, I927, p. I96 and I928, p. 252). The existence of
this different definition was not noticed by Pigou. It was largely disregarded in subsequent literature too.
Only Robertson (I930, p. 86), finding unsatisfactorythis defence of Marshall's analysis, noticed that Pigou
broadened the definitions of firm externalities proposed by Marshall.
25 See Sraffa (I925), p. 2I0 and (I926), p. I85.
26 Sraffa's reference to this case is in open contradiction with Samuelson's interpretation, which seems
again influenced by that of Pigou. This held a stricter position than Sraffa, claiming that in partial analysis,
increase in xn brings about a more intense use of these constant factors,

diminishing marginal returns, a worsening of the technical coefficients of the
isolated industry, and a rise in its marginal cost. Mutual interdependence,
however, may occur only indirectlythrough feed-back effects brought about by
changes in the price of the isolated good. No direct effects on the technical
coefficients of other industries occurs.27
On the contrary, no rising supply function can be consistently derived in
partial analysis if the constant primary factors are also employed in other
industries.28 The latter too would experience in this case the effects of the more
intense use of the constant factors, i.e. diminishing returns, rising technical
coefficients and marginal costs. Variations in x. would thus cause the same
direct effects on different a0s, with some i * n, contradicting the criterion
established to evaluate the consistency of partial analysis.
The substance of the argument is that the increase in production of a
commodity leads to an increase in the cost of both the same commodity
and of the other commodities of the group. The variations are of the same
order, and are consequently to be considered of the same importance:
either one takes account of them for all the industries of the group, and it
is thus necessary to move from the particular equilibrium of that
commodity to general equilibrium; or one neglects those variations for all
industries, considering the commodity as produced at constant costs.
What cannot be accepted is that equal effects of one cause are considered
at the same time negligible in one case, and of utmost importance in
another. (Sraffa, I925, p. 2II; our translation. See also p. 2I2.)
For Sraffa, then, apart from the specific factors case, to obtain consistent rising
supply functions it is necessary to move from 'partial' to 'general' equilibrium
analysis.
Decreasing supply functions, on the other hand, can be consistently derived
from increasing returns to scale external to the firm and internal to the
industry. In this case, variations in x. directly affect only the technical
coefficients of the isolated industry, as required by the criterion previously
defined.29 Other kinds of economies of scale are instead compatible with either
perfect competition or the ceterisparibus assumption.30
The occurrence beyond certain limits of economies of scale internal to the
'only the laws of constant or decreasing supply price, as so conceived, are admissible' (Pigou, I928, p. 256).
Owing to the fact that in partial analysis ' ex hypothesi,an increase in the scale of output involved no change
in the relative value of the several factors of production' (Pigou, I927, p. I93), Pigou did not make any
reference to the specific-factorscase. This conclusion, however, was attributed to Sraffa too. 'Hence, with
for production anywhere to take place under conditions of increasing
this class of commodity, it is impossible
costs. In this matter my conclusion agrees with that reached by ProfessorSraffa in his recent article' (Pigou,
I927, p. I93).
27 In this case, Sraffa's criterion imposes less strict technological conditions than those indicated by
Samuelson (197I, p. I3, fn. I2). For Sraffa, intermediate commodities must not be specific to the isolated
industry and must not be produced only with labour and lands specific to themselves.
28 See Sraffa (I925), pp. 2I0-2, and (I926), pp. I84-5.
29 On the basis of the criterion used by Samuelson in I97I, consistency requires that the isolated sector
is 'non-basic', in the sense defined by Sraffa (I960). This condition does not have to be imposed if Sraffa's
criterion is instead used.
30 Sraffa (I925), p. 2I2; and (I926), p. i86.
firm makes the maintenance of perfect competition impossible.3' Economies of
scale external to both the firm and the industry, on the other hand, affect in the
same directway the technical coefficientsof the isolated and of other industries,
making illegitimate the maintenance of the ceterisparibusassumption. The same
critique raised against the non-specific factors case mentionod above applies
here too.
Just as serious are the consequences of the mentioned conditions on the
supply curve with decreasing costs, since they also imply that variations of
the same order and proceeding from a same cause, are considered
negligible from one side and relevant from the other. (Sraffa, I925, p. 2I2;
our translation. See also (I 926), p. I 85.)
The existence of these two consistent cases of non-constant supply curve was
not considered by Sraffa a satisfactory result for Marshall's analysis. The fact
that a concave production-possibility frontier requires that the constant
primary factors are specific to the isolated industry reduces the validity of this
analysis. 32
In general, each factor is employed by a number of industries producing
different commodities, and in such a case only a supply curve of the whole
set of those commodities is admissible, a curve that is based on the
assumption that the group of industries employing that factor can be
considered as a single industry ... but an increasing supply curve of one of
those commodities cannot be admitted. (Sraffa, I925, p. 2 IO; our
translation. See also (I 926), p. I985.)
On the other hand, quoting Marshall's later work Industryand Trade,Sraffa
noticed that
those economies which are external from the point of view of the
individual firm, but internal as regards the industry in its aggregate,
constitute precisely the class which is most seldom to be met with. As
Marshall has said in the work in which he has intended to approach most
closely the actual conditions of industry, " the economies of production on
a large scale can seldom be allocated exactly to any one industry; they are
in great measure attached to groups, often large groups, of correlated
industries". (Sraffa, I926, p. I 86; see also (I925), pp. 2 I 2-3.)
For Sraffa, then, the fact that a consistent derivation of decreasing
Marshallian supply functions requires the occurrence of economies of scale
external to the firm and internal to the industry cannot be considered a
satisfactory result either, given the admittance by Marshall himself of the
exceptional occurrence of these kinds of economies.
The legitimate maintenance of the ceterisparibusassumption can thus be seen
as the crucial element of Sraffa's critique, which, according to what has been
presented up to now, does not rely on the assumption that the effects of
" p. I97 and (I926),
See Sraffa (I925), pp. I85-6.
3
There are cases in which the industry can be defined on the basis of the set of goods employing the same
primary factors (see Sraffa (I925), p. 208, and (I926), p. I85). This, however, cannot be considered,
according to Sraffa, the general rule.
variations in xn are negligible in size.33 Samuelson, instead, following Pigou's

representation of Sraffa's critique,34 considered the negligible size of these
effects the only analytical argument used by Sraffa to support his position.
In Sraffa's articles the 'negligible size' argument, though existing, plays a
secondary role, and can be eliminated without altering his final result. The
argument, probably introduced following Marshall's own presentation,35 was
used on two occasions.
First, it was used in relation to diminishing marginal returns.36 After noticing
that in partial analysis no consistent rising supply curve can be derived if the
constant primary factors are not specific to the isolated industry, Sraffa
considered the case of the isolated industry employing only a small part of the
constant factor. Under these circumstances, he said, the effect of variations in
xn may be seen as 'practically negligible', adding that 'anyhow it will still
operate in a like degree upon all industries of the group' (Sraffa, I926, p. I85).
Thus, if it cannot be neglected, the ceteris paribus assumption cannot be
legitimately made and 'general' equilibrium analysis has to be necessarily
developed.
Second, it was used in relation to economies of scale external to the firm and
internal to the industry.37 Here too, however, this argument plays a secondary
role. After quoting Marshall to argue the improbable actual occurrence of
these economies, Sraffa added:
In any case, in so far as external economies of the kind in question exist,
they are not likely to be called forth by small increases in production.
(Sraffa, I926, p. i86.)
To sum up, the content of Sraffa's critique of Marshallian supply curves is
incorrectly presented by Samuelson in three respects.
33 Following Viner most partial analysis still relies on this assumption. According to Lipsey, for
(I93I),
instance, 'it is a basicassumption of partial equilibriumanalysisthatsucheffectsare small enoughto be ignored.All
partial equilibrium analyses are based on the assumption of ceterisparibus.Strictly interpreted, the assumption
is that all other things in the economy are unaffected by any changes in the sector under consideration (sector
A). This assumption is always violated to some extent, for anything that happens in one sector must cause
changes in some other sectors. What matters is that the changes induced throughout the rest of the economy
are sufficiently small and diffuse so that the effect they in turn have on sector A can safely be ignored. There
is no simple rule telling us when partial analysis can safely be employed. The final test is whether or not the
predictions of partial theory are refuted by the facts. As a first approximation it is probably safe to say that
the smaller is the sector under consideration, the more likely is that its behaviour can be successfullypredicted
by partial analysis' (Lipsey, I963, p. 404).
34 Pigou's interpretation attributed to the 'negligible size' argument a more relevant role than that
envisaged by Sraffa. Besides stating that Sraffa eliminated, for the 'negligible size' argument, the possibility
of a concave production-possibility frontier (see footnote 26 above), Pigou overlooked Sraffa's main
argument on increasing returns, identifying his critique with the claim that smallvariations in the level of
production of the isolated industries are unable to generate these kinds of returns to scale. 'The question we
have to decide ... is whether [Sraffa] is right in denying that external economies special to particular
industries may be looked for in a measure adequate to establish conditions of decreasing costs. On the face
of things it appears, in accordance with his contention, very improbable that a smallincrease in the scale of
production of one industry should lead to any appreciable external economies, such as inventions, improved
technique, increased specialisation among the makers of the machines used and so no. This appearance is,
however, seen on closer reflection to be illusory' (Pigou, I927, p. I95).
35 See Sraffa (I925), p. 290 fn. The need to deal only with small variations around the equilibrium
position in partial analysis was at the time widely recognised. For a similar view, see Schefold (I989).
36 See Sraffa (I925), p. 2IO-I and (I926), pp. I84-5.
37 See Sraffa (I925), p. 2I3 and (I926), p. i86.
First, Sraffa did not base his critique on 'pure rhetoric' or on the negligible
size of the effects of variations in xn. On the contrary, it was based on the
analysis of the legitimacy of the ceterisparibus assumption in the face of the
interdependence existing among different industries. To evaluate the legit-
imacy of this assumption, he defined a criterion setting sorite limits to the
neglect of interdependence. This criterion allowed some degree of inter-
dependence and was thus less strict than that used by Samuelson.
Second, Sraffa did not claim 'that constant-cost cases exhaust the categories
of admissible competitive prices'. On the contrary, he pointed out the existence
of two cases in which Marshallian non-constant supply functions can be
consistently derived on the basis of the criterion previously recalled. These two
cases, which resemble those identified by Samuelson some years later, do not
attribute, according to Sraffa, general validity to Marshallian non-constant
supply functions, because of the restrictive character of the assumptions upon
which they are based.38 These assumptions become more restrictive on the basis
of Samuelson's I97I analysis, which can thus be used to strengthen Sraffa's
conclusion on the limited validity of Marshallian non-constant supply curves
under competitive conditions.
Third, Sraffa's conclusion that constant costs should in general be assumed
in competitive partial analysis of supply functions does not argue a denial that
economies of scale and diminishing marginal returns have a relevant role in the
actual working) of industrial production, or in general equilibrium analysis. Nor
does it imply an attempt to 'fob off on the twentieth century' a value taxonomy
in which demand plays no role. On the contrary, it implies that the connection
between costs and quantities, so relevantin reality, cannot be adequately treated
in Marshall's partial analysis.
This conclusion has been misunderstood and taken to imply that in actual
life constant returns prevail: although I believe that Ricardo's assumption
is the best available for a simple theory of competition (viz. a first
approximation) of course in reality the connection between cost and
quantity produced is obvious. It simply cannot be considered by means of
the system of particular equilibria for single commodities in a regime of
competition devised by Marshall. (From a letter by Sraffa to Keynes,
dated 6 July I926.) 3
CONCLUSIONS
Like a large part of the 'economics profession', Samuelson does not present a
correct account of Sraffa's contributions to the cost controversy and of the
content of his critique of Marshall's analysis. This leads to some false
evaluations of Sraffa's work, failing to recognise both that Sraffa ended up by
abandoning the Marshallian approach in favour of an analysis of simultaneous
determination of all prices and that his work did not aim at imposing a view
on price determination in which demand plays no role.
38 This position is also clearly stated in the concluding passages of Sraffa's I925 and I926 critique. See
Sraffa (I925), p. 2I3; and (I926), pp. I86-7-
39 This is the letter recalled above, included within Keynes' Papers and in Roncaglia (I978), p. I2.
Sraffa pointed out the existence in partial analysis of some consistent non-
constant supply cases, reaching results similar to those achieved by Samuelson
some years later. He even identified less restrictive conditions that those
identified by Samuelson for the logical validity within partial analysis of the
rising supply cases. Nonetheless, he reached the conclusion that only an
analysis of simultaneous determination of all prices can provide a satisfactory
treatment of the connections between costs and quantities. These connections,
whose relevance in reality Sraffa's explicitly underlined, cannot be adequately
treated, that is, within the Marshallian approach.
A correction of the prevailing views on Sraffa's work in the I920S thus
appears necessary. This correction, besides permitting a proper account of his
work, can stimulate further reflections on Viner's and Lipsey's claim that the
main justification of partial analysis, rather than its logical validity, is the
assumption that the errors it implies are negligible,40and on the analytical links
between Sraffa's treatment of the connection between costs and quantities in
the I920S and in his I960 book.
University of Catania
Date of receiptoffinal typescript: June I990
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Panico 1991 Economic Journal

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Some Notes on Marshallian Supply Functions

Author(s): Carlo Panico

SOME NOTES ON MARSHALLIAN SUPPLY

This work deals with Samuelson's interpretation of Sraffa's critique of

of competitive partial analysis, although he pointed out - contrary to what

that when primary factors other than a single homogeneo'uslabour exist,

This conclusion was strengthened in I989 by saying that 'Sraffa by pure

After recognising the fallacy of Sraffa's critique, 'the economics pro-

equilibrium position, it may be necessary to derive a completely new

Sraffa 'external to both the firm and the industry'.

increase in xn brings about a more intense use of these constant factors,

variations in xn are negligible in size.33 Samuelson, instead, following Pigou's

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