Money, Banks and Finance in Economic Thought

A reflexion on Adam Smith’s notion of the centre of gravitation and Garegnani’s interpretation of it

Sinha Ajit, Azim Premji University

In this paper I shall argue that Garegnani’s interpretation of Adam Smith’s notion of the ‘centre of gravitation’ as applied to Sraffa’s equations by him is not entirely true to Adam Smith’s own formulation. In Adam Smith’s formulation, his industries are not necessarily an interconnected system of basic goods but are completely vertically integrated separate and independent industries producing and exchanging only the ‘final goods’. Secondly, the natural rates (or the equilibrium rates) of wages, profits and rent are all known data on the basis of which the ‘natural price’ of the commodities are determined. Thirdly, Smith defines ‘effectual demand’ as the quantity demanded of the commodity at its ‘natural price’—the ‘effectual demand’ is a point on the downward sloping demand schedule in the price (on the vertical axis) and quantity (on the horizontal axis) plane. In Smith’s formulation the level of the demand schedule or the quantity of the ‘effectual demand’ is not a known datum. Given whatever happens to be the ‘effectual demand’, Smith argues that once the quantity supplied is brought to market the gap between the quantity supplied and the quantity of effectual demand (and the nature of the commodity) determines its ‘market price’ that results in some of the rates of its returns such as wages, profits or rent diverge from the known ‘natural rates’, which brings about the adjustments in quantity supplied in such a way that supply tends to bridge the gap between the quantity supplied and the effectual demand. This adjustment mechanism requires an implicit assumption of constant returns to scale. In Garegnani’s formulation as applied to Sraffa’s equations the effectual demand quantities of all the interconnected industries must be known quantities since Sraffa’s outputs are already adjusted to that given ‘effectual demand’ quantities. But since Smith defines ‘effectual demand’ as the quantity demanded at its ‘natural price’, an assumption of ‘effectual demand’ as datum takes away the problem of price determination. Therefore, Garegnani redefines ‘effectual demand’ only in terms of given quantity, independently of price. This allows the production equations to determine the prices. The paper shall discuss the theoretical implications of these crucial differences in the notion of the ‘centre of gravitation’ introduced by Garegnani.

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Keywords: Adam Smith, Centre of Gravitation, Sraffa, Garegnani

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