Pasinetti on Structural Dynamics and Vertical Integration

Pasinetti’s research programme on the ‘long-term evolution of industrial economic systems’ (Pasinetti 1981: xi) was originated, as he wrote, by ‘[a] combination of three factors—one factual and two theoretical’. In his own words:

The factual element was provided by the extremely uneven development—from sector to sector, from region to region—of the environment in which I lived (post-war Europe) at the time I began my training in economics. The two theoretical factors are represented by the two types of theories—specifically the macro-dynamic models of economic growth and input-output analysis ... Both the macro-dynamic growth models and input-output analysis impressed me at the time; but they left me profoundly dissatisfied when I tried to use them in order to understand what was going on in economic systems with a very high degree of dynamism, i.e. of technical progress. And I began to think that an attempt might be made to develop a theoretical scheme which, while retaining the analytical character of input-output analysis, could also deal with uneven increases in productivity, in the way the macro-dynamic models had begun to do, but only for the very simplified case of a one-commodity world (ibid.).

Pasinetti’s emphasis on economic dynamics also implies a special constant focus on technical progress. Again in his 2007 book on the Cambridge

Keynesians, he stresses the ‘[n]ecessity of finding an appropriate analytical framework for dealing with technical change and economic growth’ (Pasinetti 2007: 232). The trio of factors just mentioned lie at the core of Pasinetti’s magnum opus on structural dynamics (Pasinetti 1981). That is a work that provides the omega point, as it were, of his whole research programme and gives the flavour and the gist of the fundamental Smithian inspiration of his own brand of enriched classicism in economics. The book has as a notable subtitle: A Theoretical Essay on the Dynamics of the Wealth of Nations’. The vertical integration approach provides a way of representing the dynamics of the economic system that has been crucial for the development of economic analysis since its early application in Smith’s Wealth of Nations:

[T]he concept of vertical economic structure, in its dynamic applications, has been mainly associated with the analysis of technological requirements for economic expansion (Smith), or with the technological interrelatedness in its implications for the diffusion of particular impulses (Pigou). On the other hand, vertical integration has been linked with the autonomous role of effective demand on the dynamic path (Malthus and Keynes). The analytical formulation introduced by Pasinetti provides a logical framework in which both technological and demand conditions may be integrated in order to give a comprehensive interpretation of the dynamics of the ‘wealth of nations’, concerning both its absolute level and possible changes in its composition (structural economic dynamics) (Baranzini and Scazzieri 1990: 299).

Step by step, Pasinetti’s work became a ‘theoretical essay on the dynamics of industrial systems’ (Pasinetti 1981: xi). It was only with his 1973 article in Metroeconomica on vertical integration that Pasinetti was able to establish the link with Sraffa’s analysis and to work out on its basis, without any loss of generality, all analytical inter-industry connections, while at the same time bringing out the correct hierarchy within the Classical School between a Smithian vertical view and a Ricardian horizontal approach:

Pasinetti introduces a vertical integration of production processes that allows a reclassification of the inter-industry commodity flows so that the intermediate input requirements for each produced commodity are reduced to the corresponding quantity of labour input and to a certain residual quantity of physical means of production. This procedure can be performed more than once so that eventually one is left with a negligible residual of physical means of production and with the quantity of labour input directly and indirectly required to produce the commodity under consideration. In the particular case in which the starting point is provided by a production technology, in which commodities are produced by means of labour and other produced commodities, one is left with an economic system of the ‘pure labour type’ (Baranzini and Scazzieri 1990: 241).

In this case, the stock of each particular intermediate commodity (performing the role of capital goods) is also split into distinct components depending on the final use with which they may be associated. As a result the overall economic system ends up being split into as many subsystems as there are final uses. According to this framework of analysis, the production process is represented in its purest form: men produce commodities by means of their activity alone, and the produced commodities are used only for their personal consumption; no intermediate goods or services need to be taken into account. That is why Pasinetti is led to produce a further outline of his approach in his 1993 book, where the ‘economic consequences of human learning are explored’ in the framework of structural dynamics: here the pure labour economy becomes dominant. ‘In the end, I became convinced that indeed the “pure labour economy” takes in classical and Keynesian economics the place that the “pure exchange economy” has taken in Walrasian (or...in neo-classical) economic theory’ (Pasinetti 1993: xiv).

No doubt, however, the same ‘one way’ picture of the overall technology may be maintained if the procedure of vertical integration, which has been outlined above, is applied to a production technology in which commodities are produced by means of labour and other commodities (labour and intermediate inputs). For, in this case, the produced commodities that may be used as inputs in each other’s production are reclassified depending on the type offinal consumption good in whose production they are indirectly used (e.g. the corn used as an input for the production of machine tools to be used in the textile sector will now appear as a quantity of corn directly used in the textile sector). This ingenious device put forward by Pasinetti allows economic analysis to ‘break’ the horizontal structure of the ‘circular flow’, and brings forth the unidirectionality underlying the production process. Once this is achieved, only one other logical step is required to obtain an increasingly smaller residual of produced inputs by iteration of the vertical integration procedure outlined above.

Pasinetti’s (1973) contribution to the study of vertical integration outlines in a rigorous way the logic of unidirectionality in the specification of economic structure. We may say that the exclusion, in Pasinetti’s analysis, of intermediate commodities provides a sort of ‘shortcut’ for a direct link between the technological conditions determining the ‘productive power’ of the economic system (as influenced by technical progress) and the level and composition of effective demand. Additionally, vertical integration allows for the handling of technical progress without unsettling the relationship between changes in the productive potentiality of the economic system and the level of disposable income. The latter in fact determines the level and composition of effective demand which is so crucial in Keynesian macroeconomic models.