Rise and Decline of the Notion of Own Rate of Interest in Sraffa. (Ascesa e declino della nozione di saggio proprio di interesse in Sraffa)

Abstract

The notion of commodity rate of interest, introduced by Sraffa in a short review-article published in 1932, is taken up by Keynes a few years later under the label of own rate of interest. The latter expression soon spreads in the literature, eventually replacing Sraffa's original name. At its birth Sraffa's notion, developed within the framework of a stationary equilibrium model of Wicksellian derivation, appears to be a very promising tool of analysis. Sraffa focuses his attention on the phenomenon of the possible multiplicity of the own rates of interest associated with the various commodities produced and traded in a monetary economy, suggesting that such phenomenon ought to be interpreted as a disequilibrium occurrence, originated by the exogenous perturbations to which the economy is continuously subjected. By assuming that the agents correctly expect, and the forward commodity markets perfectly anticipate, the underlying stationary equilibrium prices, Sraffa is able to show that the divergence among the own rates of interest associated with the various commodities can be interpreted as an effective market signal, analogous to the one supposedly provided by the divergence between market and natural prices in classical price theory: such a signal, in fact, would affect producers' decisions, fostering the appropriate changes in the production levels of the various industries and thereby promoting the convergence of the economy towards the given stationary equilibrium. At first sight, Sraffa's analysis seems to foreshadow interesting theoretical developments in the area of expectations formation, equilibration processes, the working of forward and futures commodity markets, and related topics. But such hopes are bound to be disappointed, for Sraffa drops the notion of own rate of interest shortly after its introduction in 1932, subsequently abstaining from any discussion of both that notion and any other related concept in all his later writings. In this paper, after dispelling a certain ambiguity surrounding Sraffa's original definition of the concept of own rate of interest, we shall explain why Sraffa does not proceed along the road deceptively opened by his 1932 article. In particular, we shall single out three different reasons explaining why Sraffa almost immediately gives up any kind of research in that area: first, in the 1932 paper Sraffa's analysis of expectations formation and the functioning of forward markets is not pursued for its own sake, but only with the purpose of making the adjustment process towards the stationary equilibrium of the economy more plausible and robust; secondly, the constant costs (or constant returns) assumption, that Sraffa is forced to make in order to analyse the disequilibrium adjustment process, is an assumption that he will come to disown in his later work; finally, in the 1932 paper the analytical treatment of the notion of own rate of interest is seriously incomplete, for Sraffa is unable (or unwilling) to contrive that sort of futures contract, essentially different from the forward contract actually envisaged therein, that alone would make the notion of own rate of interest applicable to a real (that is, a moneyless) economy, as Sraffa pretends to be able to do. Now, since the required sort of futures contract, which Sraffa neglects, is instead systematically employed in modern general equilibrium theory, of both the Arrow-Debreu and the Incomplete Markets type, the paper also examines the peculiar fate of the notion of own rate of interest in such contemporary theoretical models.