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I'll have to weigh in with Gil on this one.
I haven't read the reference Rakesh cites which he says bars
neo-Ricardianism "due to its untenable assumption of constant returns to
scale"--though I will check it out at some point. But on first glance, this
looks like a classic misinterpretation of why Sraffa argued for constant
returns to scale in the first place.
Of course, Sraffians themselves are frequently guilty of misinterpreting
Sraffa, so it's no great claim to accuse Marxists of the same. But Gil
correctly points out that a necessary component of a Marxian theory of
value--whether based on the labor theory of value or not--is constant
returns to scale.
An inevitable concomitant of varying returns to scale is, as Gil shows, the
conclusion that prices depend upon demand--the point of intersection between
demand and a rising supply curve determining the short run equilibrium.
Sraffa's point in his 1926 articles was to argue that, at the level of both
the individual firm and the industry, constant returns were more likely to
apply in the short run than increasing or decreasing returns, since the
conditions needed to give varying returns implied irrational behaviour at
the firm level (this is clearest in his Italian paper), and assumptions
inconsistent with the nature of time at the industry level.
As a result, Sraffa concluded that equilibrium prices are set by costs of
production. I agree with Gil that this result is as necessary for Marxian
economics--especially for those who believe in the labor theory of value--as
it is for "neo-Ricardians".
Numerous empirical studies since then--well documented by Fred Lee's 1998
work *Post Keynesian Microeconomic Theory*--have shown that Sraffa's
theoretical argument is confirmed by the data.
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