Michele I.

Naples 119

Unperceived Inflation
in Shaikh, and Kliman
and McGlone:
Equilibrium,
Disequilibrium, or
Nonequilibrium?

● A recent article by Andrew Kliman and Ted McGlone The two ‘iterative’
(1988) in this journal provides a novel transformation from models discussed
labour-values to prices. Kliman & McGlone (K&M) explicitly exhibit unanticipated
reject the static-equilibrium analysis of Neo-Ricardian1 models inflation. Real
industry profit rates
as the starting point for determining prices of production and
are not uniform;
the profit rate. Instead they treat Marx’s original transformation then why should
procedure as methodologically superior: costs are parameters nominal profit rates
for capitalists, rather than variables determined at the same be? Even at Marx’s
time as output prices are. Prices are set in real, historical time. first iteration, the
Despite their methodological innovation, their model appears real average (non-
to reconcile Marx’s initial transformation procedure with uniform) profit rate
convergence to Neo-Ricardian equilibrium. corrected for
inflation does not
K&M’s formal model is similar to Anwar Shaikh’s (1977)
equal the value rate.
iterative solution to the transformation problem.2 Shaikh There is no iterative
models the transformation from values to prices as a dis- reconciliation of
equilibrium adjustment process to the Neo-Ricardian Marx with Sraffian
equilibrium. However, K&M reject the rubric ‘iterative’ equilibrium.

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120 Capital & Class ● 50

because it suggests that Marx’s (1976) original solution was

wrong. Rather, they argue that each ‘iteration’ is as much a
solution to the transformation problem as the prices and profit
rate finally reached in equilibrium.
The K&M and Shaikh sequential models of the implications
of a general rate of profit represent a major methodological
advance over equilibrium analysis, as will be discussed below.
However, while arguing that the Neo-Ricardian model is
methodologically wrong, the authors agree it is ultimately right
on the magnitude of the profit rate. And while arguing that
Marx is methodologically right, they agree that he is ultimately
wrong on the magnitude of the profit rate.
I have argued elsewhere (1989) that it is possible to follow
Marx’s methodology, and to show he correctly calculates the
magnitude of the real rate of profit as determined by labour
values economy-wide. However, this requires abandoning all
aspects of equilibrium analysis. The conflict between Marx
and equilibrium implies that capitalism cannot reach a long-
period equilibrium with a uniform profit rate.3 Then the
money-of-account in which prices are expressed cannot be a
commodity-money. Nor can prices be directly interpreted as
real values, since nominal price changes may also occur out of
equilibrium.4
Shaikh and K&M take a step towards nonequilibrium
analysis by treating time as historical rather than simultaneous.
But they do not sufficiently break with the equilibrium
method. Their reconciliation of Marx’s method and Sraffa’s
results is problematic on three grounds:
(1) Neither author(s) is aware that his procedure generates
unanticipated inflation involving uneven, nominal movements
in prices and therefore costs.5 Thus their uniform nominal
profit rate masks unequal real industrial profit rates.6 The
inflation calls into question K&M’s interpretation of nominal
wage changes as causing a change in the real rate of
exploitation.
(2) Both studies define a commodity-money as the unit in
which prices of production are expressed. Since some price
changes are purely nominal, it will be shown that this is
logically flawed. The models err in conflating the real money
(e.g., gold) which is the price standard at a point in time, and
the money of-account (i.e., currency unit) in which nominal
prices are expressed over time.
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 Unperceived Inflation in Shaikh, Kliman & McGlone 121

(3) Both studies fail to recognise that the only reason they
successfully link Marx’s original transformation procedure
with the Neo-Ricardian one is because they assume a uniform
profit rate, simple reproduction, and the absence of technical
change from period to period; Marx had assumed only the
first. These assumptions are essential elements of the equilib-
rium Neo-Ricardian model, and are critical for reconciling
their procedure and the Neo-Ricardian result.
This paper first addresses the methodological advantages of
the sequential models. The discussion then considers each of
the criticisms outlined above. While these models relax one
element of equilibrium analysis, simultaneous time, the
conclusion argues that it is necessary to wholly abandon
equilibrium in order to accurately represent Marx’s theory of
the profit rate (see Naples 1989).

Sequential vs. Equilibrium Modelling

Shaikh and K&M explicitly criticise Neo-Ricardian methodology.

Both papers differentiate Marx’s view of capitalism as a dynamic
system moving through time from the static-equilibrium
orientation of the Neo-Ricardian solution. K&M fault the
Neo-Ricardian model for treating time as instantaneous, where
Marx treated time as historical. Both studies insist that Marx
was correct to treat prices as formed over historical time, ‘the
cost price of the commodity is a given precondition,
independent of his, the capitalist’s, production’ (Marx in
K&M 1988 p.64).
Both articles view general-equilibrium ‘solutions’ to the
transformation problem as tautological results, and recognise
the limited role for mathematical reasoning, whose tautological
method is no substitute for qualitative economic analysis.
Both studies eschew the Neo-Ricardian focus on exchange, ‘a
smooth, static, inherently equilibrating process’ (Shaikh 1977
p.111), as missing underlying contradictions and crisis-
tendencies, even in the process of price formation.
The Neo-Ricardian model rejects Marx’s original idea that
labour productivity in all sectors determines both prices and
the profit rate, and returns to Ricardo’s earlier notion that only
production conditions in basic industries (wage and capital
goods) determine the rate of profit. Both K&M and Shaikh
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122 Capital & Class ● 51

see Marx’s original labour-value theory as an indispensable

starting point for explaining the existence of prof its.
Therefore Marx’s original transformation algorithm in Volume
III is an abstraction from the feedback of today’s prices on
tomorrow’s costs, not an ‘error’.
K&M observe that ‘the market and the factory never
come into contact’ in the Neo-Ricardian model (1988 p.65).
Neo-Ricardian models not only treat labour performed and
labour-hours hired interchangeably, but many prominent Neo-
Ricardians have deemed the distinction between labour and
labour-power to he irrelevant. On its face, the Neo-Ricardian
model appears to be at odds with the labour-value theory of
the profit rate.
Yet the sequential models claim to have reconciled Marx’s
original transformation procedure with the Neo-Ricardian
equilibrium solution.7 I argue (1989) that Marx’s historical
method fundamentally conflicts with both the Neo-Ricardian
method and its results. Either there is no fundamental conflict
between Marx and the Neo-Ricardian model, or there is
something wrong with their reconciliation. The next three
sections detail internal inconsistencies in the Shaikh and
K&M models.

Inflation

K&M and Shaikh interpret prices and profits as just redis-

tributed values and surplus value. If production conditions are
constant, then aggregate prices (value) and profits (surplus
value) should be constant from period to period. In Shaikh
(1977), aggregate prices are constant, but profits and costs
change over time; in K&M (1988), aggregate value-added is
constant, but constant capital and total prices change over time.
Then prices and profits in these models do not directly express
values and surplus values. There is an asymmetry in requiring
some element of price to be constant period to period when
other elements of price change.
The inflation inherent in these models is illustrated in Tables 1
and 2. Sections A of the tables provide the raw labour-value data
for each study; Sections B provide the authors’ own calculations
of the profit rate and prices of production at each iteration up
until the equilibrium solution is reached. The last two columns
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 Unperceived Inflation in Shaikh, Kliman & McGlone 123

show that the real profit rates and real relative prices are
different from the nominal rates reported in their papers. First
the original models will be summarised. Then the uneven cost-
inflation implicit in each model will be taken up in turn.

Table 1 Analysis of Shaikh’s Results

A. Shaikh’s Production Data, in Labour Value Units
Department C = cX V = vLX S = sLX Z = zX R e
I 225 90 60 375 0.296296 0.66666
II 100 120 80 300
III 50 90 60 200
Aggregate 375 300 200 875

B. Shaikh’s ‘Money-Prices’ by Production Period

Unperceived Results

Revenue (Price)
Capital costs

Money Profit

Money Profit
Labour costs
Department

Cost-price

Rate of Cost
Real Profit
Period

Inflation
Rate

Rate
MC* MV* M* M'* ∆M* r*
1 I. 450.00 180.00 630.00 816.67 186.67 0.2963 0.2353 0.0494
II. 200.00 240.00 440.00 570.37 130.37 0.2963 0.2791 0.0135
III. 100.00 180.00 280.00 362.96 82.96 0.2963 0.2963 0.0000
Aggreg. 750.00 600.00 1350.00 1750.00 400.00 0.2963 0.2617 0.0274
2 I. 490.00 171.11 661.11 834.11 173.00 0.2617 0.2463 0.0123
II. 217.78 228.15 445.93 562.62 116.69 0.2617 0.2573 0.0035
III. 108.89 171.11 280.00 353.27 73.27 0.2617 0.2617 0.0000
Aggreg. 816.67 570.37 1387.04 1750.00 362.96 0.2617 0.2550 0.0053

5 I. 504.90 168.42 673.32 841.89 168.58 0.2504 0.2499 0.0003

II. 224.40 224.56 448.96 561.37 112.41 0.2504 0.2501 0.0002
III. 112.20 168.42 280.62 350.88 70.26 0.2504 0.2502 0.0001
Aggreg. 838.18 561.41 1399.59 1750.00 350.41 0.2504 0.2501 0.0002
6 I. 505.14 168.41 673.55 842.00 168.45 0.2501 0.2500 0.0001
II. 224.51 224.55 449.05 561.36 112.30 0.2501 0.2500 0.0001
III. 112.25 168.41 280.66 350.85 70.19 0.2501 0.2500 0.0000
Aggreg. 838.53 561.37 1399.90 1750.00 350.10 0.2501 0.2500 0.0001
7 I. 505.20 168.41 673.60 842.02 168.42 0.2500 0.2500 0.0000
II. 224.53 224.54 449.07 561.35 112.28 0.2500 0.2500 0.0000
III. 112.27 168.41 280.67 350.85 70.17 0.2500 0.2500 0.0000
Aggreg. 838.62 561.36 1399.97 1750.00 350.03 0.2500 0.2500 0.0000
8 I. 505.21 168.41 673.62 842.03 168.41 0.2500 0.2500 0.0000
II. 224.54 224.54 449.08 561.35 112.27 0.2500 0.2500 0.0000
III. 112.27 168.41 280.68 350.85 70.17 0.2500 0.2500 0.0000
Aggreg. 838.64 561.35 1399.99 1750.00 350.01 0.2500 0.2500 0.0000
Notes to Table 1
C = constant capital used up in industry S = surplus value produced in industry
c = constant capital per unit output s = hourly surplus value produced
V = variable capital used up in industry Z = total value of industry output
v = value of labour-power, measured per hour (wage z = unit value of industry output
in value terms) R = value rate of profit
L = average labour-hours per unit; value-added in e = rate of exploitation
labour-value units r = nominal profit rate
X = units of output * Notation used in the original studies.

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124 Capital & Class ● 51

A. The Original Models

In Shaikh’s 3-department model, gold is assumed to embody

one-half labour hour. Input costs in the first period are at
values, following Marx, but assessed in gold, so each cost-price
is twice the cost in labour-value units. Shaikh assumes a
uniform profit rate, which he initially sets equal to the value
rate of profit, at 0.296. This assures at the first iteration that
aggregate gold prices equal aggregate gold-values, reflecting the
fact that the transformation is a pure change of form, not a
real change (Shaikh 1977 p.134).8
The uniform profit rate in Shaikh’s next iteration is that
number which is consistent with this constant-price-level
constraint in that next period. The uniform profit rate is not
given a priori by the labour theory of value, it is endogenous to
the pricing process. At each iteration the uniform profit rate
(r) declines, approaching the Sraffian rate of 0.25 (from 0.296
to 0.262 to 0.253 in 3 periods).9
In Kliman’s & McGlone’s 2-department model (capitalists
and workers share in the consumer goods produced), gold is
assumed to embody one labour-value unit, so the same numbers
can be interpreted as money-commodity numeraire prices or as
values. Input costs in the first period are at values, as in
Shaikh and Marx. They assume a uniform profit rate, initially
set at the value rate of profit (0.4286 in their model). At the
end of the first production period, aggregate prices sum to
aggregate values, but this is not their concern. Rather, they
treat value-added in price terms as constant over time.
Although this is a key assumption, there are only indirect
explanations for why this should be. For instance, the authors
criticise ‘mappings’ of values onto prices which treat these as two
separate phenomena (K&M 1989 pp.59, 62, 65), and advocate
retaining ‘values and prices in one relation’ (ibid. p.64).
Because this assumption differentiates their model from
Shaikh’s, a more explicit justification is warranted.
The assumption of invariant price-value added has also
been proposed by others (Foley 1982; and Lipietz 1982);
K&M’s model is unique in making the rate of exploitation
endogenous to the pricing procedure. K&M argue that
increases in the prices of consumer goods, given a constant real
wage and constant value-added, imply a decline in the rate of
exploitation, changing both the value of labour-power and
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 Unperceived Inflation in Shaikh, Kliman & McGlone 125

hourly surplus value. That is, if wage costs rise as a share of

money-value-added, they argue that it takes a larger share of
one hour for workers to create corresponding value-added,
and consequently the rate of exploitation falls. This is an
interesting feedback from prices of production to the value
realm. Its implications will be examined further below.

Table 2 Analysis of Kliman and McGlone’s Results

A. Kliman and McGlone’s Production Data, in Labour Value Units
Department C = cX V = vLX LX S = sLX Z = zX R e
I 100 50 100 50 200 0.428571 1.000
II 100 100 200 100 300
Aggregate 200 150 300 150 500

B. Kliman and McGlone’s ‘Money-Prices’ by Production Period

Unperceived Results
(VA) + Capital costs

Price (Revenue)
Capital costs

Value Added
Labour costs

Real Profit Rate

Department

Rate of Cost
Period

Profits

Inflation
MP* L* (VA)* s* C+s* C'-M' * e* r*
1 I. 100.000 50.000 100 50.000 200.000 214.286 1.000 0.428571 0.384615 0.031746
II. 100.000 100.000 200 100.000 300.000 285.714 0.428571 0.411764 0.011904
Aggreg. 200.000 150.000 300 150.000 500.000 500.000 0.428571 0.400000 0.020408
2 I. 107.143 47.619 100 52.381 207.143 222.857 1.100 0.44 0.392857 0.033846
II. 107.143 95.238 200 104.762 307.143 291.429 0.44 0.397260 0.030588
Aggreg. 214.286 142.857 300 157.143 514.286 514.286 0.44 0.395348 0.032
3 I. 111.429 48.571 100 51.429 211.429 226.977 1.059 0.418604 0.394190 0.017511
II. 111.429 97.143 200 102.857 311.429 295.880 0.418604 0.394904 0.016990
Aggreg. 222.857 145.714 300 154.286 522.857 522.857 0.418604 0.394594 0.017216

7 I. 115.002 49.941 100 50.059 215.002 230.159 1.002 0.395387 0.394448 0.000672
II. 115.002 99.881 200 100.119 315.002 299.845 0.395387 0.394449 0.000672
Aggreg. 230.004 149.822 300 150.178 530.004 530.004 0.395387 0.394448 0.000672

13 I. 115.138 50.000 100 50.000 215.138 230.277 1.000 0.394455 0.394448 0.000004
II. 115.138 99.999 200 100.001 315.138 299.999 0.394455 0.394448 0.000004
Aggreg. 230.276 149.999 300 150.001 530.276 530.276 0.394455 0.394448 0.000004
14 I. 115.138 50.000 100 50.000 215.138 230.277 1.000 0.394451 0.394448 0.000001
II. 115.138 100.000 200 100.000 315.138 300.000 0.394451 0.394448 0.000001
Aggreg. 230.277 149.999 300 150.001 530.277 530.277 0.394451 0.394448 0.000001
15 I. 115.139 50.000 100 50.000 215.139 230.277 1.000 0.394449 0.394448 0.000000
II. 115.139 100.000 200 100.000 315.139 300.000 0.394449 0.394448 0.000000
Aggreg. 230.277 150.000 300 150.000 530.277 530.277 0.394449 0.394448 0.000000
16 I. 115.139 50.000 100 50.000 215.139 230.277 1.000 0.394449 0.394448 0.000000
II. 115.139 100.000 200 100.000 315.139 300.000 0.394449 0.394448 0.000000
Aggreg. 230.277 150.000 300 150.000 530.277 530.277 0.394449 0.394448 0.000000
17 I. 115.139 50.000 100 50.000 215.139 230.278 1.000 0.394448 0.394448 0.000000
II. 115.139 100.000 200 100.000 315.139 300.000 0.394448 0.394448 0.000000
Aggreg. 230.277 150.000 300 150.000 530.277 530.277 0.394448 0.394448 0.000000

For Notes see Notes to Table 1

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126 Capital & Class ● 51

In the second production period, the uniform profit rate is

determined subject to the constraint of constant value-added.
Again, as in Shaikh’s model, it is not given by the labour theory
of value a priori, but is endogenous to the pricing process. At
this second iteration the uniform profit rate (r) rises to 0.4400,
but it declines in each subsequent production period, approach-
ing the Sraffian rate of 0.3944 (from 0.4400 to 0.4186 to
0.4056, etc.).10

B. Inflation in Shaikh’s Model

Shaikh does not observe that because his transformation

algorithm generates uneven price changes, the nominal profit
rate deviates from the real rate despite constant aggregate
prices. Because the organic composition of capital in luxuries
is below the economy average, the prices of basics tend to rise
relative to the price of luxuries. Costs in price terms appreciate
from iteration to iteration, more so for capitalists who consume
relatively more capital goods (department I has the highest
organic composition). The denominator of the real profit rate
is costs evaluated in current prices, not historic costs. Other-
wise capitalists will find that they have not set aside sufficient
gold-capital to continue to produce the same amount of
output. When nominally uniform profit rates are deflated for
uneven cost-inflation, real profit rates are unequal across
industries.
Hence even in Shaikh’s (and Marx’s11) first iteration, the
real profit rate (0.262) does not equal the value rate of profit
(0.296), it lies between it and the Neo-Ricardian profit rate.
Nor is the real profit rate uniform, only the nominal rate is.
At each subsequent iteration the variation among real sectoral
prof it rates diminishes, approaching the uniformity of
equilibrium. The real prof it rate approaches the Neo-
Ricardian rate as the nominal profit rate approaches the real.
Thus the distinction I make between nominal and real value
and profit rates does not change the final result: the system
converges to the Neo-Ricardian result for the profit rate in
both nominal and real terms, somewhat faster in real terms.
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 Unperceived Inflation in Shaikh, Kliman & McGlone 127

C. Inflation in Kliman’s and McGlone’s Model

K&M recognise that aggregate prices and the costs of capital

goods are expanding over time. They speak of this as ‘the
incorporation of additional value into capital’ (K&M 1989
p.76; emphasis added), without asking whether real value or
only nominal value is rising. As in Shaikh’s example, the
organic composition of capital in department I is above
average, so the price of capital goods must rise vis-à-vis prices
in wage- and luxury-goods (in their model, in consumer
goods).
Consequently there is aggregate cost-inflation. Even in
K&M’s first production period, the real profit rate (0.4000)
does not equal the value rate (0.4286), it lies between it and
the Neo-Ricardian profit rate (0.3944). Nor is the real profit
rate uniform, despite the uniform nominal rate. For each
subsequent production period the variation among real
sectoral profit rates diminishes, approaching equilibrium
uniformity. The real profit rate approaches the Neo-Ricardian
rate (0.394448) twice as fast as the nominal rate does,
reaching it by the 8th production period, while the nominal
rate only reaches the Neo-Ricardian rate by the 15th period.
K&M mistakenly interpret the nominal rate of the 13th and
14th periods (0.3945) as the Neo-Ricardian rate; they are only
off by a fraction.12
After the 8th period, the inflation is no longer uneven —
the economy is simply adjusting the price level to be
consistent with the uniform nominal profit rate and the value-
added constraint they impose. The only substantive change is
continued reduction in the price rate of exploitation, until it
returns to the original value rate in equilibrium.
K&M posit constant value-added in price terms over time
despite the fact that aggregate prices and costs do change.
They interpret the change in labour costs as a real change,
affecting the value of labour-power, the rate of exploitation,
and constant capital. They defend this in terms of Marx’s
dialectical method, since prices affect labour-values as well as
labour-values affecting prices. After all, Marx interprets the
rate of exploitation as the share of an hour workers spend
producing the equivalent of their wage bundle. If wage-goods
cost more, workers must spend more time working for
themselves, and less working to create the source of profits.
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128 Capital & Class ● 51

Because of the assumed constancy of money-value-added,

there is a strict inverse relation between wage costs and profits.
This formulation has a certain appeal in that the market
conditions workers face in reproducing themselves are brought
into the calculation of the rate of exploitation; for capitalists
too, changing market conditions which adjust the cost of
physical capital goods will change the value embodied in their
constant capital.
But Marx consistently argued for sequential causation and
against simultaneous or mutual causation. K&M themselves
recognise that Marx did not write equations as ‘abstract
identities. They are, rather, asymmetrical and imply a specific
direction of movement’ (K&M 1989 p.67). In Marx’s value
theory, causation generally runs from production to exchange,
not back and forth.
Nevertheless, Marx did allow at least one secondary feed-
back from exchange to value. Labour-value is defined as
‘socially necessary abstract labour time.’ Failure to sell
products causes a re-valuation of the item and of the firm’s
physical capital, as well as causing changes in market price.
The value of the good changes because of events in the sphere
of circulation of that good. Notice that this feedback is only
negative: Marx provides examples of how inadequate demand
destroys the value embodied in some goods which cannot be
sold, but never suggests that heightened demand would create
values.
K&M also propose a feedback from circulation (prices paid
for wage goods/capital goods) to value (the value of labour-
power/constant capital). This feedback is problematic in that
the consumption bundle of workers is constant, and
production conditions in the consumer-goods and capital-
goods industries are constant. The labour-hours embodied in
wage- and capital-goods therefore have not changed, so the
new dialectical ‘value of labour-power’ (’value of capital-goods’)
would no longer equal the labour-embodied in wage-goods
(capital-goods). There is no conservation of real value in this
transformation process.
Perhaps K&M seek to redefine values to include the labour
hours ‘socially necessary’ to produce the equivalent of the
money-wage or money capital, following Marx. But the
feedback Marx recognised was from the sphere of circulation
of the good in question to the value of that good, not from
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 Unperceived Inflation in Shaikh, Kliman & McGlone 129

capitalist pricing to values. While K&M’s modification has a

certain appeal with respect to the rate of exploitation, it
nevertheless represents a departure from Marx’s method.
Rather than causation running from production to
circulation, with a minor feedback, circulation (the source of
demand for the product, combined with its price) causes the
value of labour-power and unit constant capital. Hence these
values may either rise or fall, while for Marx circulation could
only have a negative feedback on production-based values.
K&M’s model takes circulation out of the realm of a feedback
and allows it to claim precedence over production in
determining ‘values’. This is no longer a labour theory of
value.

The Money-of-account: Real or Nominal?

Both Shaikh and K&M identify the money-of-account in

which prices are expressed with a commodity embodying
value. ‘The value congealed in a commodity is always
expressed as a money price, a sum of money, because it is
always related to the value of the universal measure of value,
money’ (K&M 1988 p.63). An economy

‘socially recognise[s]… one commodity in which all others

are to express their ‘worth’; this special commodity therefore
becomes the universal equivalent, the money-commodity.
We will henceforth assume it is gold… The money-price of
a commodity is the ‘golden’ reflection, the external measure,
of its exchange-value’ (Shaikh 1977 p.114; see also Shaikh
in Mandel and Freeman 1985 pp.46-47).

In introductory economics we are taught that ‘money’, a

single concept, has several functions. But both Keynes and
Marx differentiated money into two distinct aspects: the
money-of-account (Marx’s ‘accounting money’), and the
money proper (Marx’s ‘real money’) (see Keynes 1930; Marx
1973). The first aspect of money refers to the currency unit,
which functions as the unit in which prices and debts are
expressed; the second refers to the money which comprises the
money supply, and may function as the standard of price,
medium of exchange, means of payment, and/or store of
value.
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130 Capital & Class ● 51

Gold may be the commodity-money standard of price

without serving as the money-of-account. Under stable
monetary regimes, countries typically announce and defend a
gold standard or official exchange-ratio between the currency
unit (money-of-account) and gold (commodity money-proper).
This in no way automatically prevents inflation, i.e., a change
in that exchange ratio. If it did, the monetary authorities
would never need to intervene in financial markets to defend
the gold standard.
Thus there may be a change in the real value represented by
the currency unit, reflecting its appreciation or depreciation,
without a corresponding change in the real value the gold price
standard can command. And there may be a change in the
value commanded by gold, perhaps even reflecting the fact
that its value is also transformed because of the equalisation of
profit rates,13 without a corresponding change in the real value
represented by the currency unit.
Marx saw the transformation from labour-value to price of
production as merely a re-allocation of units of surplus value
from the industries where they are produced to the industries
which realise them. Then both the input-prices in values, and
the prices of production of outputs can be measured directly in
labour-value units or gold.
But both Shaikh and K&M recognise that their transfor-
mation procedure leads to an expansion of some element(s) of
value over time. In both models, all costs rise, yet input prices
and output prices are interpreted as so many units of the
commodity-money. If this were literally true, at each
production period a larger money supply14 would have to
change hands in the K&M model, where aggregate prices are
increasing. Where would this additional money proper (gold)
come from? On the other hand, if the money-of account is
only a currency unit, and total real value is not changing, the
(nominal) numbers on a bookkeeping ledger may rise, with no
corresponding change in the quantity of gold money proper
required.
Shaikh and K&M follow the Neo-Ricardians and assume
reproduction despite the fact that their models are not initially
in equilibrium. They do not examine whether reproduction
over time at nonequilibrium prices is possible without uneven
inflation; therefore they fail to recognise that a commodity-
money money-of-account is not possible outside of equilibrium.
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 Unperceived Inflation in Shaikh, Kliman & McGlone 131

Convergence to Equilibrium

Both Shaikh’s and K&M’s models converge to equilibrium the

Neo-Ricardian solution for relative prices and the profit rate.
Shaikh (1977 p.136) treats the convergence as natural,
illustrating the consistency between Marx’s initial
transformation and the ‘correct’ Neo-Ricardian solution.
Shaikh motivates the ongoing equality between aggregate
prices and values heuristically; ‘the average commodity, and
hence the total mass of commodities, would be under no such
compulsion [to adjust individual money rates of profit to
conform with the average rate], so that the total sum of prices
would remain constant’ (Shaikh 1977 p.133).
K&M treat the convergence as an accident:

‘Because our procedure accounts for the determination of

prices of production in the absence of general equilibrium,
convergence to equilibrium is not necessary. The feature
of our illustration which produced convergence, the
constancy of total living labour hours over time, was
therefore not imposed as an equilibrium-producing
normalisation condition. Rather, it follows from the
assumption of simple reproduction in every period’ (K&M
1989 p.76).

It is unlikely that K&M mean that the constancy of total

living labour hours would of itself produce equilibrium. This
merely reflects constant production conditions, which could
also be consistent with ongoing non-equilibrium. But in
denying that they have imposed some normalisation condition,
they implicitly refer to the constancy of the price-expression of
living labour hours, which they also assume. Foley (1982) and
Lipietz (1982) do impose this as a normalisation condition in
their ‘new solution’ to the transformation problem.
It is not the normalisation condition which produces
convergence to the Neo-Ricardian profit rate, it is the uniform
prof it rate, combined with two assumptions Marx had
abstracted from in his own transformation: simple reproduc-
tion, and constant production conditions from period to
period. If the profit rate were not uniform across industries,
there would be no convergence to the equilibrium rate. If
either aggregate prices or the price-expression of value-added
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132 Capital & Class ● 51

were allowed to change each period in a determinate fashion,

absolute prices might not converge to equilibrium prices, but
both the profit rate and relative prices would converge.
In the model, constant aggregate prices or value-added in
price terms imposes a price level, closing the model so that we
can evaluate subsequent production periods. On p.66, K&M
(1989) suggest that the equilibrium model has n+1 unknowns:
the prices of n commodities and the equilibrium profit rate.
But the equilibrium model can only solve for n variables: n-1
relative prices and the profit rate. The price level is indeterminate
without an invariance postulate or normalisation condition.
I have shown elsewhere (1989) that the assumed uniformity
of the profit rate forces the profit rate to equal the Neo-
Ricardian rate, dependent only on production conditions in
basics, and conflicts with Marx’s labour-productivity theory of
the profit rate. Shaikh and K&M begin their models with a
(nominally) labour-value rate of profit, but their models
converge to the equilibrium Ricardian rate. If the uniformity
of the profit rate is what causes this convergence, given the
inconsistency between Ricardo and Marx, it becomes critical to
understand why these models impose a uniform profit rate.
Each study motivates the assumption of a uniform profit
rate in terms of its association with equilibrium. For Shaikh,
prices of production are ‘centers of gravity’ of the system
(Shaikh 1977 p.116), since above-average profit rates would
attract capital, causing both the industry’s profit rate and price
to fall to their equilibrium rates. K&M (1988 p.71) observe
that a uniform profit rate implies ‘no further incentives for
capital flows [to] exist and that supplies and demands should
therefore actually equilibrate at these [disequilibrium] prices.’
But the uniform nominal profit rates mask underlying
variation in real profit rates. Non-uniform real profit rates call
into question the justification for assuming a uniform rate in
the first place. Capital will continue to move in search of
higher real rates of return; in simple reproduction, a higher real
rate of return means more luxury goods for that sector’s
capitalists, while other sectors’ capitalists earning lower real
profit rates can only consume fewer luxuries. Only a uniform
real profit rate can be motivated by inter-industry capital
mobility. There is no economic law which justifies a uniform
nominal profit rate despite uneven cost inflation and dis-
equilibrium prices.
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 Unperceived Inflation in Shaikh, Kliman & McGlone 133

The discovery of inflation brings into doubt the validity of

this critical assumption. If the nominal profit rate is not
uniform across industries, it is an open question what the
average profit rate would be after the initial production
period. The advance over Marx which these models represent
stands or falls on the legitimacy of the assumption of a
uniform nominal rate of profit.

Conclusion

The sequential models have been shown to embody valuable

advances over the Neo-Ricardian equilibrium methodology,
yet to be problematic along several dimensions. Their assertion
of a uniform nominal profit rate in the presence of divergent
real industry profit rates is without foundation in economic
theory. And their apparent reconciliation of Marx with the
Neo-Ricardians turns out to hinge crucially on substituting
Neo-Ricardian assumptions for Marx’s. Marx had assumed a
uniform profit rate, but not simple reproduction, nor that
technical change was absent. The combination of these three
assumptions causes the sequential models to converge to the
equilibrium model.
I have shown elsewhere (1989) that to add the second two
assumptions requires reexamining the legitimacy of assuming
a uniform profit rate. Interindustry capital mobility may tend
to equalise profit rates by attracting capital from lower-profit-
rate to higher-profit-rate industries. But once we take
reproduction into account, we must recognise that it may
simultaneously produce the counter-tendency of divergent
profit rates.15 The adjustment of industry prices associated
with profit-rate equalisation will have a second-round impact
on costs. Industries buy inputs whose prices were raised or
lowered by the first round relative to their own output prices.
The realised prof its of these industrial consumers will
therefore diverge from the average, rising (falling) if their costs
fell (rose). Instead of ceasing, the incentive for capital
mobility will recur at each iteration.
Once we incorporate these counter-tendencies implied by
consideration of reproduction over time, it is no longer clear
that the profit rate can be equalised across industries. I argue
that the conflict between the labour-value theory of the profit
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134 Capital & Class ● 51

rate and the Neo-Ricardian theory provides prima facie

support for the impossibility of profit-rate equalisation in
capitalism. That is, capitalism is incapable of the equilibrium
which the Neo-Ricardian model assumes, and which Shaikh
and K&M build in by positing a uniform profit rate as well as
simple reproduction.
The full Nonequilibrium model which I develop elsewhere
(Naples 1989) determines the real profit rate by the labour-
value profit rate, but nominal and real price determination
become open-ended. By implication, prices depend not on the
determinant calculations of a formal model, but on historically
developed institutions which constitute competition among
capitalists across industries. This methodology may be
unsettling for those used to the closure and determinacy of
equilibrium models. But the K&M model also provides more
than one solution for prices. In light of the other problems
with the sequential models, the Nonequilibrium model should
provide an appealing alternative.

_________________________

Acknowledgement This paper benefited from helpful comments from Andrew Kliman,
Ted McGlone, Nahid Aslanbeigui, Charles Clarke, Cyrus Bina, Reza
Ghorashi, Alfredo Saad-Filho and Behsad Yaghmaian.

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 Unperceived Inflation in Shaikh, Kliman & McGlone 135

1. I use the term Neo-Ricardian since these Sraffian (1976) models Notes
produce Ricardian results for the profit rate using the post-
Ricardian method of equilibrium analysis. Neo-Ricardian models
assume that goods markets clear and the profit rate is uniform.
These assumptions imply that there is no further tendency for the
economy to move, which constitutes an equilibrium. This is not
a neoclassical equilibrium since for the Neo-Ricardians supply
and demand curves play no role in determining equilibrium.
2. While Brody (1974) and Morishima (1973) also offer iterative
solutions, theirs are purely mathematical demonstrations, which
they treat as having no particular methodological advantage over
the Neo-Ricardian solution.
3. See Naples (1988). Several essayists in Mandel and Freeman (1985)
argue that a uniform profit rate is unlikely; I argue it is not possible.
4. I showed in Naples (1985) that historical time, a conventional
money-of-account, and the possibility of inflation in no way
violated the Neo-Ricardian solution for the profit rate as
independent of production conditions in luxury industries. In
Naples (1989) I showed that when the assumption of a uniform
profit rate is relaxed, it is necessary to relax corollary Neo-
Ricardian assumptions about simultaneous time, a commodity-
money money-of-account, and the absence of inflation.
5. The nominal values of wage and capital goods change unevenly
from period to period, reflecting the fact that prices of goods with
higher (lower) organic compositions of capital must rise (fall)
relative to their values. Uneven price changes in basics imply that
the producer price index will change over time, causing cost-
inflation or -deflation, despite no change in the quantities
purchased.
6. Firms’ real profit rates must be calculated relative to current costs,
not historic costs, if they are to reproduce themselves over time.
Capitalists must adjust nominal profits for rising or falling costs
before assessing how much that is really profit they have left to
spend on luxuries.
7. Kliman and McGlone see this reconciliation as an unintended
byproduct of their model; for Shaikh it is an explicit objective of
his study.
8. Shaikh is not disturbed by the fact that there is not a comparably
‘pure’ change of form for direct profits (the gold expression of
surplus value) into money-profits. He observes that ‘The relation
between the mass of surplus-Value and its transformed money-
form (total money profits under prices of production) still needs
to be better specified’ (1977 p.134), reflecting the fact that he has
made no prediction about the deviation of gold-profits from
gold-surplus-value.
9. The minor differences between the prices in table 1 and those
presented in Shaikh (1977) probably reflect rounding errors.

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136 Capital & Class ● 51

10. This number should be 0.3944, which is only reached at the

fifteenth iteration; see below.
11. This is not a fair criticism of Marx, since he abstracted from
reproduction over time, and cost-inflation only matters if today’s
revenue is to be reinvested as tomorrow’s capital. But if Marx’s
transformation were extended as Shaikh has suggested, the
criticism would hold of him as well.
12. The nominal profit rate to 6 decimal places for production
periods 13 though 18 are as follow: 0.394455, 0.394451,
0.394449, 0.394449, 0.394448, 0.394448. See the column
headed ‘r’ in Table 2.
13. The literature on the transformation problem has long treated gold
as a commodity-money unit-of-account whose own value is also
transformed to a ‘price of production’ with the onset of profit-rate
equalisation. Shaikh (1985 p.46) acknowledges that ‘money itself
has no price,’ yet treats the exchange-value of his gold commodity-
money as determined like any other good’s price of production.
But unlike most other commodities, gold is mined, it is not built
in an alchemist’s factory. Marx (1976, chapter 45) argued that
both agricultural and mining products exchanged at their values as
a result of the ground rent captured by mineowners. This claim
requires more research. But if true, then it is inappropriate to
treat the exchange value of a gold commodity-money as being
affected by profit-rate equalisation. Instead, the equalisation of
the profit rate would change the share of profit and ground rent
in the total surplus value accruing to gold-mine owner-operators
whose gold product continues to exchange at its value.
14. This reference to a ‘money supply’ is purely illustrative. Both the
sequential and Neo-Ricardian models are barter models involving
only a money of-account and, implicitly, bookkeeping money; no
provision is or need be made for a stock of money that serves as a
medium of exchange.
15. Ted McGlone (1992) recently discussed ‘Simultaneous
Tendencies Towards Equilibrium and Disequilibrium’ in a
different context, the tendency for supply to create its own
demand while demand simultaneously tends to fall short of
supply.

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 Unperceived Inflation in Shaikh, Kliman & McGlone 137

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