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p i − wm .l i − ( a ci . p c + a ii . p i )
ri =
( a ci . p c + aii . pi ) ........(2.1)
p c − wm .l c − ( a ic . pi + a cc . p c )
rc =
( aic . pi + a cc . p c ) 6
In a subsistence economy:
Aa + Ab + Ac = A Aa pa + Ba pb + Ca pc = Apa
Ba + Bb + Bc = B ∴ Ab pa + Bb pb + Cb pc = Bpb
C a + Cb + Cc = C Ac pa + Bc pb + Cc pc = Cpc
=> any one of the price equations can be inferred
from the other two, e.g. from 2nd and 3rd equation =>
Ab pa + Ac pa + Bb pb + Bc pb + Cb pc + Cc pc = Bpb + Cpc
From Ab pa + Ac pa = Apa − Aa pa
Bb pb + Bc pb = Bpb − Ba pb
Cb pc + Cc pc = Cpc − Ca pc
Apa − Aa pa + Bpb − Ba pb + Cpc − Ca pc = Bpb + Cpc
Apa = Aa pa + Ba pb + Ca pc => only 2 indep. equs.
With two linearly independent equations, and
physical quantities known, two of the prices in terms
of one other could be determined endogenously =>
e.g. by setting pa = 1, and determining pba and pca
However, as Sraffa (1960) notes, if the physical
system generates a surplus the equations
Aa pa + Ba pb + Ca pc = Apa
Ab pa + Bb pb + Cb pc = Bpb
Ac pc + Bc pc + Cc pc = Cpc
become “self-contradictory” (p.6).
Physical quantities of inputs will no longer match
outputs => no one equation above can be inferred
from the other two => 3 linearly independent equs. to
determine 2 relative prices
With a surplus produced could we get back to the
original case, by “allotting the surplus before the
prices are determined” (ibid.,) (e.g. by subsuming the
surplus quantities of A, B and C in Aa, Bb, and Cc input
quantities), so as to maintain 2 linearly independent
equations ?
No. Need to know prices to “allocate the surplus”
i.e. “the surplus (or profit) must be distributed in
proportion to the means of production (or capital)”
(ibid.)
But prices include a rate of profit and therefore
cannot be known prior to the rate of profit
“The distribution of the surplus must be determined
through the same mechanism and at the same time as
are the prices of commodities” (ibid.)
Normal prices and a uniform rate of profit
In the absence of restrictions on mobility of
resources between sectors expect capitalists to
exploit differentials in profit rates
=> tendency to uniformity of profit rates
=> view by Classical Political Economy and in
marginalist theory up to 1930’s that uniform profit
rates represented a “center of gravity” in a
competitive capitalist economy
=> useful starting assumption that ri = rc = r
Rearranging equations (2.1) with ri = rc = r =>
pi = ( a ci . p c + aii . pi ).(1 + r ) + wm .l i
........(2.2)
p c = ( aic . pi + a cc . p c ).(1 + r ) + wm .l c
Note: if technical conditions of production
are given => 2 equations with 4 unknowns
Can reduce the problem to one of
determining relative values by choosing a
numeraire, e.g. corn, => setting pc = 1 =>
( aci + aii . pic ).(1 + r ) + w.li = pic
……..(2.3)
( aic . pic + acc ).(1 + r ) + w.lc = 1
where w = wm/pc and pic = pi/pc
=> 2 equations with 3 unknowns
Alternatively, one might take the money wage
as the numeraire =>
( aci . pcw + aii . piw ).( 1 + r ) + li = piw ……..(2.4)
( aic . pic + acc . pcw ).( 1 + r ) + lc = pcw
where piw = pi / wm and pcw = pc/ wm 10
For both (2.3) and (2.4), setting one unknown
exogenously, allows the remaining two unknowns
to be determined by the price equations
So which variable – real wage, rate of profit or
relative price – should be exogenous ?
Consider the n-commodity case
The n-commodity case
The technique of production is given by
a 11 a 12 a 13 a 1n
a a 22 a 23 a 2n
21
a 31 a 32 a 33 a 3n
a n1 a n2 a n3 a nn
l1 l2 l3 ln
z = 3x + y + 4
z = 7x + 2 y + 1
3x + y + 4 = 7 x + 2 y + 1
y = 3 − 4x
W2 =
( 1 − a11 ) . ( 1 − a22 ) − a12 .a21
W1 =
( 1 − a11 ) . ( 1 − a22 ) − a12 .a21
( l1.a12 − l2 .a11 ) + l2 ( l2 .a21 − l1.a22 ) + l1
……..(2.16)
=> maximum real wage depends on the numeraire
Summing so far: for each technique (i.e. set of
aij’s and li’s) one can construct a price system
which yields: (i) an inverse relation
between w and r, whatever
the numeraire;
w (ii) a maximum rate of
profit independent of the
W2 numeraire; and
W1 (iii) a maximum real
wage dependent on the
numeraire
R r
From equations (2.12) and (2.14) respectively
p1
=
( l2 .a21 − l1 .a22 ).( 1 + r ) + l1
and
wm ( a11 .a22 − a12 .a21 ).( 1 + r ) 2 − ( a11 + a22 ).( 1 + r ) + 1
p2
=
( l1 .a12 − l2 .a11 ) .( 1 + r ) + l2
wm ( a11 .a22 − a12 .a21 ).( 1 + r ) 2 − ( a11 + a22 ).( 1 + r ) + 1
so that
w2 p1
= = p12 =
( l2 .a21 − l1 .a22 ).( 1 + r ) + l1
w1 p2 ( l1.a12 − l2 .a11 ).( 1 + r ) + ……..(2.16)
l2
dp12 >
where 0 ……..(2.17)
dr <
depending on the technical conditions of
production
Note: any set of relative prices will in general
presuppose a particular income distribution
Note that where
l2 .a21 = l1 .a22
l2 l1
=
a22 a21
l1 .a12 = l2 .a11
l1 l2
= =
a11 a22
dp12
so that =0
dr
More generally, consider again the n-commodity
case (2.5) and assume wm = 1, and consider the
relative price pj1
From Pasinetti (1977, pp. 82-83),
dp j1 >
0 according to whether
dr <
n n
p1 ∑ aij . pi − p j ∑ ai1. pi +
i =1 i =1
n dpi n
dpi >
( 1 + r ) . p1 ∑ aij . − p j ∑ ai1. 0
i =1 dr i =1 dr <
Note: 1st term relates to technology solely of the
two sectors – i and 1
But 2nd term brings into play technologies in
other sectors, via effects of ∆’s in r on other prices
Where r = 0 and thus where w = W
p12 =
( l2 .a21 − l1 .a22 ) + l1
( l1.a12 − l2 .a11 ) + l2 ……..(2.18)
a11 aα a β a11 a δ
a
Aα = 12 A β = 11 12 Aδ = 12
a 21 a α22 β
a 21 a 22 δ
a 21 a 22
Which technique is chosen at different w-r
combinations?
Taking w as exogenous, presumably technique
yielding highest rate of profit
What if r is exogenous ?
Consider for example r = r
δ β wm wm
w
w >w => >
α
pδ pβ
=> pδ < p β
β
_
w δ
0 _ r
r
Suggests that technique which would dominate in
a long-period equilibrium, for a given rate of profit,
would be that which generates the highest real wage
=> dominant technique will be the technique
generating the highest rate of profit at the given
real wage or the highest real wage at the given
rate of profit
w
Suggests that the α
relevant portion of
the set of w-r curves
(representing
β
available
techniques) is the _ w δ
outermost envelope
of this set 0 _
r r
Note: adjacent techniques at a switch point will
in general differ in the method of producing only
one of the commodities
=> in the 2-commodity case, at the switch point
there are three unknowns between the two price
systems – p21, w1 and r
=> require three equations from the two systems
= > only one equation can be different between the
two systems
Applying this choice of technique analysis to basic
commodities, a lower price for one commodity under
one method => a lower price for all commodities
using that method
=> ranking of techniques according to profitability
as w falls and r rises is the same regardless of the
numeraire
Some comparisons with orthodox theory
How does one reconcile “modern classical”
analysis so far with orthodox demand and supply
explanation of relative prices ?
Analysis so far suggests that changes in the
composition of demand would not affect relative
prices unless they affect the exogenous distributive
variable or technical conditions of production
Orthodox theory however allows for such an effect:
specifically, for changes in demand to impact on
income distribution
For example, a rise in demand for a particular
commodity, relative to other commodities, increases
relative demand for factors used more intensively in
the production of this commodity
=> relative price of those factors rises
=> unit cost of production rises
Hence, even with CRTS (i.e. constant aij’s and li’s )
in an orthodox framework, unit cost and hence
“supply price” rises with output
i.e. supply curve can be rising with output even
with CRTS
=> dependence of price on demand in an
orthodox framework, at least with CRTS, is a
reflection of the dependence of the return to factors
of production and hence income distribution on
demand and supply
Is there a role for demand and supply interaction in
a modern classical approach ?
Yes – in disequilibrium, rather than equilibrium !
In an orthodox framework demand and supply
(interpreted as functional relations) interaction
governs the equilibrium price as well and the out-
of-equilibrium price
In a modern classical approach demand and
supply interaction affects out-of-equilibrium prices
BUT equilibrium prices are determined by
technical conditions and an exogenous distributive
variable