Keynes and Sraffa on ‘Own-Rates’: A Present-Day Misunderstanding in Economics

Keynes and Sraffa on ‘Own-Rates’: A Present-Day Misunderstanding in Economics Scholars, who in recent years have studied the Sraffa papers held in the Wren Library of Trinity College, Cambridge, have concluded from Sraffa’s critical—though unpublished—observations on Chapter 17 of Keynes’s General Theory that he rejected Keynes’s central proposition that the rate of interest on money may come to ‘rule the roost’, thus dragging the economy into recession. While Sraffa does express dissatisfaction with Chapter 17, the commentators have, we believe, misunderstood his concern: we suggest he was unhappy with Keynes’s use of ‘own-rates’ rather than with the substance of the theory developed in Chapter 17. Since the papers of the late Piero Sraffa have become available to scholars, that most intriguing and important component of Keynes’s General Theory, Chapter 17 on ‘The Essential Properties of Interest and Money’, has again come under critical fire, specifically from Ranchetti (2000) and Kurz (2010, 2012, 2013).1 Oka (2010) tries to fend off the criticism. From their study of the Sraffa papers, the critics contend that Keynes, having borrowed Sraffa’s concept of ‘commodity rates of interest’ (Keynes preferred the designation ‘own-rates of interest’), failed to make proper use of it, and—as long ago perceived by Sraffa himself, but recorded only in unpublished notes—fell into serious error, calling in question a key proposition of his theory. Keynes famously argued that in conditions of developing recession, a relatively sticky own-rate on money would come to ‘rule the roost’, knocking out investment in other assets, the falling returns on which could not compete with the return on money. Sraffa, it has been discovered, objected privately that, with deflation, the own-rate on money would be lower, not higher, than own-rates on competing assets. On the basis of Sraffa’s observations, the critics take it that Keynes was guilty of confusion and error—the implication being that Sraffa had effectively blown the argument of Chapter 17 out of the water. That interpretation needs looking into; the purpose of this paper is to do so.