A Numerical Example Of Reswitching In A Model With Extensive Rent

Figure 1: Wage Curves for Epsilon and Theta

1.0 Introduction

This post presents a numerical example of reswitching. In this example, satisfying requirements for use necessitates farming some type of land to its full extent. That type varies with the rate of profits. Rent is paid on the scarce quality of land.

Two switch points exist in the example. Which type of land is scarce varies at the switch points. Around one switch point, the technique adopted at a higher wage requires less labor, across the entire economy, to produce the required net output. Around the other switch point, the technique adopted at at a higher wage requires more labor. It is a mistake to insist that wages and employment are determined, in the long run, at the intersection of well-behaved supply and demand curves in the labor market.

I do not know of any numeric example elsewhere of reswitching in a model with rent. The possibility of such, however, would not be a surprise to many developers of the theory. Perhaps I have missed something from Schefold or Quadrio Curzio. This example is part of a larger example I have presented earlier.

2.0 Technology, Endowments, Final Demand, and Techniques

Technology consists of three constant-returns-to-scale (CRS) processes (Table 1). Each process is specified by inputs of labor (person-years), services of a type of land (acres), iron (tons), and corn (bushels). This specification also includes the output (ton iron or bushel corn) of each process when operated at a unit level. No land is used in producing the industrial commodity, that is, iron. One process is available to operate on each of the two types of land. Each of these process produces the agricultural commodity, that is, corn. The scale for producing corn is limited by endowments of land.

Table 1: The Coefficients of Production

Input	Industry
	Iron	Corn
	I	II	III
Labor	a0,1 = 1	a0,2 = 9/10	a0,3 = 3/5
Type 1 Land	c1,1 = 0	c1,2 = 1	c1,3 = 0
Type 2 Land	c2,1 = 0	c2,2 = 0	c2,3 = 49/50
Iron	a1,1 = 9/20	a1,2 = 1/40	a1,3 = 3/2000
Corn	a2,1 = 2	a2,2 = 1/10	a2,3 = 9/20

I assume that endowments consist of 100 acres of each type of land. Required net output, also known as final demand, consists entirely of corn, and the required net output is taken as the numeraire. For the example, final demand is assumed to be 125 bushels of corn. At least some of both types of land must be farmed to produced the final demand. (For this property to hold, final demand must be between approximately 80.91 and 136.5 bushels corn.)

The processes defined by the technology can be combined in four techniques (Table 2). In the Alpha and Beta techniques, only one process is operated to produce corn. No land is scarce, and capitalists do not pay rent to landlords. In Epsilon and and Theta, two processes are operated to produce corn. One type of land is fully farmed, and landlords obtain rent on that type of land.

Table 2: Techniques of Production

Technique	Processes	Land
		Type 1	Type 2
Alpha	I, II	Partially farmed	Fallow
Beta	I, III	Fallow	Partially farmed
Epsilon	I, II, III	Partially farmed	Fully Farmed
Theta	I, II, III	Fully Farmed	Partially farmed

3.0 Quantity Flows

Which techniques are feasible varies with required net output. This variation does not arise in models with just circulating capital and no scarce land. Any level and composition of net output can be produced in those models. Also, I want to consider the variation in labor and capital-intensity with the technique. For both these reasons, I need to consider quantity flows.

Table 3 presents quantity flows for a particular level at which the first two processes are operated. The third process is operated at a level of zero. As with the other examples in this section, the total inputs of iron across all processes are replaced by the output of iron produced by the first process. Some corn is left over, as a surplus, after the inputs of corn are replaced by the output of corn from the second process. The table depicts a vertical integration, in which the total input of labor produces the surplus output of corn.

The levels of operation in Table 3 are set such that type 1 land is totally farmed. This combination of flows can be viewed as an extreme case of Alpha, in which no land receives a rent. It is the highest level at which Alpha can be operated, with a surplus output of only corn. For any increase in net output, the third process must also be operated, and type 1 land receives a rent. So these quantity flows can also be viewed as the lowest level at which Theta is operated.

Table 3: Alpha and Theta Quantity Flows at an Extreme

Input	Industry
	Iron	Corn
	I	II	III
Labor	a0,1q1 = 50/11	a0,2q2 = 90	a0,3q3 = 0
Type 1 Land	c1,1q1 = 0	c1,2q2 = 100	c1,3q3 = 0
Type 2 Land	c2,1q1 = 0	c2,2q2 = 0	c2,3q3 = 0
Iron	a1,1q1 = 45/22	a1,2q2 = 5/2	a1,3q3 = 0
Corn	a2,1q1 = 100/11	a2,2q2 = 10	a2,3q3 = 0
OUTPUT	q1 = 50/11	q2 = 100	q3 = 0

Table 4 shows another set of levels at which the three processes can be operated. In this case, type 2 land is totally farmed and obtains a rent. Type 1 land is also farmed, but not completely. Net output in this case, for the Epsilon technique, is the same amount of corn as in the previous example.

Table 4: Epsilon Quantity Flows for the Same Net Ouput

Input	Industry
	Iron	Corn
	I	II	III
Labor	a0,1q1 = 81650/47971	a0,2q2 = 122940/4361	a0,3q3 = 3000/49
Type 1 Land	c1,1q1 = 0	c1,2q2 = 136600/4361	c1,3q3 = 0
Type 2 Land	c2,1q1 = 0	c2,2q2 = 0	c2,3q3 = 100
Iron	a1,1q1 = 73485/95942	a1,2q2 = 3415/4361	a1,3q3 = 15/98
Corn	a2,1q1 = 163300/47971	a2,2q2 = 13660/4361	a2,3q3 = 2250/49
OUTPUT	q1 = 81650/47971	q2 = 136600/4361	q3 = 5000/49

Table 5 shows quantity flows for producing the largest possible surplus product of corn. More can only be produced with the discovery of more land or technical innovation that reduces at least some coefficients of production. Both types of land are fully farmed to the extent of their endowments.

Table 5: Epsilon and Theta Quantity Flows at an Extreme

Input	Industry
	Iron	Corn
	I	II	III
Labor	a0,1q1 = 2600/539	a0,2q2 = 90	a0,3q3 = 3000/49
Type 1 Land	c1,1q1 = 0	c1,2q2 = 100	c1,3q3 = 0
Type 2 Land	c2,1q1 = 0	c2,2q2 = 0	c2,3q3 = 100
Iron	a1,1q1 = 1170/539	a1,2q2 = 5/2	a1,3q3 = 15/98
Corn	a2,1q1 = 5200/539	a2,2q2 = 10	a2,3q3 = 2250/49
OUTPUT	q1 = 2600/539	q2 = 100	q3 = 5000/49

Table 6 summarizes results from the above tables. The same net output is produced, by the Epsilon and Theta techniques, in the first two rows. The same is true of the last two rows. This excursion into the analysis of quantity flows demonstrates the range of required net output, when it consists solely of corn, in which rent is paid in all feasible techniques. Theta is more labor-intensive within this range. (At the upper limit, quantity flows for Epsilon and Theta are identical.)

Table 6: Summary of Quantity Flows

Technique	Net Output (Bushels)	Labor (Person-Yrs.)	Labor Intensity (Person-Yrs. per Acres)
Epsilon	890/11 ≈ 80.91	4370990/47971 ≈ 91.1	437099/388129 ≈ 1.13
Theta	890/11 ≈ 80.91	1040/11 ≈ 94.55	104/89 ≈ 1.17
Epsilon	73560/539 ≈ 136.5	84110/539 ≈ 156.0	8411/735 ≈ 1.14
Theta	73560/539 ≈ 136.5	84110/539 ≈ 156.0	8411/735 ≈ 1.14

4.0 Prices of Production

A system of equations is available for the prices of production defined by each technique. For an example, I specify the price system for Epsilon. The going rate of profits is made in operating the first process:

(a_1,1 p₁ + a_2,1 p₂)(1 + r) + w a_0,1 = p₁

In this equation, p₁ is the price of iron, p₂ is the price of corn, w is the wage, and r is the rate of profits. The going rate of profits is also made in operating the second process:

(a_1,2 p₁ + a_2,2 p₂)(1 + r) + w a_0,2 = p₂

Type 1 land is not scarce under Epsilon and receives no rent. Thus, rent does not appear in the above equation. The going rate of profits is also obtained in operating the third process:

(a_1,3 p₁ + a_2,3 p₂)(1 + r) + rho₂ c_2,3 + w a_0,3 = p₂

Type 2 land receives a rent, and rho₂ denotes rent-per-acre on type 2 land. Finally, the numeraire has a price of unity:

p₂ d₂ = 1

In this equation, d₂ denotes the amount of corn in required net output in the example, that is, 125 bushels.

The above four equations determine five variables. Thus, the solution has one degree of freedom. I take the wage as a function of the rate of profits in the solution. That is, the wage curve showing a trade-off betwen the proportion of the net output paid to labor and the rate of profits depicts this degree of freedom. Prices, including the rent on type 2 land, are also functions of the rate of profits.

The first two equations in the price system also apply for the price system for Alpha. Along with the equation specifying the numeraire, they provide the 'solving subsystem' for Alpha and Epsilon. The wage curves for Alpha and Epsilon are identical. The third equation in the price system for Epsilon can be solved for rent, given the solution for Epsilon's solving subsystem.

5.0 Choice of Technique

For the given required net output, the Alpha and Beta techniques are not feasible. Epsilon and Theta are feasible. Figure 1, at the top of this post, graphs wage curves, from the price systems for the techniques. Alpha and Epsilon have the same wage curves. Likewise, Beta and Theta have the same wage curves. The wage frontier for the cost-minimizing technique, is, in this example, formed from the inner envelope of wage curves. Rent on scarce land must be non-negative for the technique that is cost-minimizing at a given rate of profits.

Epsilon is cost-minimizing at extreme ranges of the rate of profits. Theta is cost-minimizing in the middle. So this example is indeed one of reswitching. Two switch points exist for this reswitching example. A switch point is labeled as 'perverse' only because phenomena around that switch point contradict obsolete marginalist concepts. Figure 2 shows rent curves. Landlords obtain rent on type 2 land when Epsilon is cost-minimizing and on type 1 land when Theta is cost-minimizing.

Figure 2: Rent Curves for Epsilon and Theta

The analysis of the choice of technique allows you to plot the wage against the labor demanded by firms, given the specified level of net output (Figure 3). This plot may be interpreted as an economy-wide demand curve for labor. Switch points correspond to the horizontal segments on this graph. The ‘perverse’ switch point can be viewed as a step function approximation to an upward-sloping labor demand curve, if you insist on pretending that wages and employment are determined by supply and demand in competitive markets.

Figure 3: Employment as a Function of the Wage

You can also plot the value of advanced capital goods against the rate of profits. These capital goods consist of iron and corn in the example. The plot in Figure 4 can be interpreted as a demand curve for capital. Switch points correspond to the horizontal segments on this graph too. The value of capital goods varies between switch points because of price Wicksell effects. Prices of production generally vary with the rate of profits, given the technique. The 'perverse' switch point here too can be seen as a step function for an upward-sloping demand curve.

Figure 4: The Value of Capital as a Function of the Rate of Profits

6.0 Conclusion

The choice of technique is trivial in this example. Other than at switch points, the cost-minimizing technique:

• Is feasible. The technique can be used to produce the given final demand.
• Pays a positive rent in the solution to the price system for the technique.

Because of the simple structure of the example, only one technique satisfies these conditions, except at switch points, at any given rate of profits less than the maximum.

Reswitching and capital-reversing are compatible with models of land-like, scarce natural resources. Why do so many economists teach theoretically and empirically unfounded models with factor prices determined by interaction of well-behaved supply and demand curves?

References

• Deepankar Basu. A reformulated version of Marx's theory of ground-rent shows that there cannot be any absolute rent. Review of Radical Political Economics 54(4).
• Christian Bidard. 2014. The Ricardian rent theory: an overview. Centro Sraffa working paper 8.
• Christian Bidard. 2018. Ricardo and Ricardians on the order of cultivation. Journal of the History of Economic Thought. 40(3): 389-399.
• A. D'Agata. 1983. The existence and unicity of cost-minimizing systems in intensive rent theory. Metroeconomica.
• Heinz D. Kurz & Neri Salvadori. 1995. Theory of Production: A Long-Period Analysis.
• Alberto Quadrio Curzio. 1980. Rent, income distribution, and orders of efficiency and rentability. In Essays on the Theory of Joint Production (ed. by L. L. Pasinetti).
• Alberto Quadrio Curzio & Fausta Pellizzari. 1999. Rent, Resources, Technology.
• Bertram Schefold. 1989. Mr. Sraffa on Joint Production and Other Essays.
• Piero Sraffa. 1960. Production of Commodities by Means of Commodities. Chapter XI.
• Robert L. Vienneau. 2022. Reswitching in a model of extensive rent. Bulletin of Political Economy 16(2): 133-146.

Elsewhere

• Daniele Girardi. The neoclassical theory of aggregate investment and its criticisms. Review of Political Economy. (working paper)
• Antonella Stirati. 2025. The Godley-Tobin memorial lecture: beyond the NAIRU. Review of Keynesian Economics 13(1): 1-20.
• Graham White. 2010. Labour, Commodities and the labour market: a heterodox perspective. Economic and Labour Relations Review 21(1).
• A November 2025 post on substack, about the Cambridge Capital Controversy, from a Post-Keynesian stude
• An April 2025 post, about the Cambridge Capital Controversy, frm Maura Cassidy Burke, a PhD student at Utrecht University.

Two Dual Linear Programs (LPs) Equivalent To A Linear Complementarity Problem

1.0 Introduction

In a previous post, I mapped a specification of a long run position to a LCP. This specification is in terms of a system of inequalities and equalities, and is in a form appropriate for the application of the direct method to analyze the choice of technique. The LCP supports the application of the Lemke algorithm. Although I have not stepped through the algorithm, I finally understand an aspect of some of Christian Bidard's writings.

This post modifies the LCP so that the matrix M in the LCP has a certain kind of symmetry. With this formulation, the LCP is equivalent to dual LPs.

As far as I know, nobody has written down these dual LPs for analyzing the choice of technique in the special case described by the LCP.

2.0 The Parameters for the Previous LCP

The parameters of a LCP consist of a column vector u and a square matrix M. Where the LCP is equivalent to the specification of a long period position, the column vector is as in Figure 1. The column vector y denotes given final demands for n produced commodities. The row vector a₀ is the direct labor coefficients for each of the m processes comprising the technology.

Figure 1: The Given Vector in the LCP for the Cost-Minimization Problem

The matrix M in the LCP is as in Figure 2. The nxm matrix A is the input matrix. Each column consists of the physical inputs needed to operate a process at unit level. The nxm matrix B is the output matrix. Its columns are the outputs of each process, at a unit level. The scalar r is the given rate of profits.

Figure 2: The Given Matrix in the LCP for the Cost-Minimization Problem

The solution of a LCP consists of two column vectors. In the this case, where the LCP is equivalent to a specification of a long period position, these vectors have a block structure. The components of one solution vector consist of commodity prices and the levels at which each process in the technology is operated in a cost-minimizing solution. A unit of labor is taken as the numeriare.

3.0 A Modification of the LCP

I now consider a variation on the above LCP. Let the matrix M be as in Figure 3. With this modification, the vector y is now total consumption at a point in time along a steady-state growth path. The rate of growth is g.

Figure 3: The Updated Matrix in the LCP for the Cost-Minimization Problem

I make a further assumption that the rate of growth is equal to the rate of profits:

g = r

The matrix M is now skew-symmetric, in which its transpose is equal to its additive inverse. The solution of a LCP in which the matrix parameter has this structure also solves dual LPs.

4.0 Dual LPs

In this case, the primal LP can be written as:

Choose p

To maximize y^T p

Such that:

(1 + r) A^T p + a₀^T ≥ B^T p

p_i ≥ 0, i = 1, 2, ..., n

In other words, prices are set to maximize the value of consumption, while respecting the constraint that the cost of no process, at the given rate of profits, falls below the corresponding revenues.

The dual LP is:

Choose q

To minimize a₀ q

Such that:

[B - (1 + g) A] q ≥ y

q_i ≥ 0, i = 1, 2, ..., m

That is, the levels of operation of the processes comprising the technology are set to minimize total employment, while maintaining the given rate of growth at the point on the steady-state path specified by the consumption basket for the economy. With a unit of labor as numeraire, the objective function of the dual LP can be stated as minimizing total wages.

These dual LPs can be mapped to the LCP with the same mapping as in the previous post, with a couple of modifications. These modifications must be included to include the steady state rate of growth.

5.0 Duality Properties

I want to consider three properties of dual LPs.

If a constraint in the primal LP is met in the solution with an inequality, the corresponding decision variable in the dual LP is zero in the solution. In this context, this duality property is the law of non-operated processes.

If a constraint in the dual LP is met in the solution with an inequality, the corresponding decision variable in the solution to the primal LP is zero. This is the law of free goods.

The values of the objective functions of the dual OPs are equal to one another in the solution. This is Joan Robinson's neo-neoclassical theorem. Given a steady state growth path in which the rate of growth is equal to the rate of profits, the maximum total value of consumption throughout the economy, along that path, is equal to minimum total wages

This trip from the specification of a long period position through an equivalent LCP, the modification of that LCP to have a skew-symmetric matrix, and the consideration of the duality properties of equivalent dual LPs constitutes a novel derivation of Robinson's neo-neoclassical theorem.

On The Failure Of So-Called Neoclassical Economics

I want to contrast the theories of classical political economists and marginalists up to, say, the 1920s. I take David Ricardo as representative of classical political economy. For purposes of this post, I consider Karl Marx to also be a classical political economist.

For marginalists, I think of Eugen Bohm Bawerk, John Bates Clark, William Stanley Jevons, Alfred Marshall, Leon Walras, Knut Wicksell, and Philip Wicksteed among a host of others. Obviously, I am, at this level of abstraction, ignoring differences among both groups.

Modern economists have established that the classical political economists were broadly correct. And that the marginalists around the time of their intellectual revolution were ultimately incorrect.

Both groups tried to explain roughly the same object with their theories. That is, they proposed theories of long run equilibrium. (Some argue that, like other technical terms used by marginalists, applying the term 'equilibrium' to David Ricardo's theories is not quite correct.) Prices that exist in markets at any time vary. Even the same commodity may be sold at different prices by different buyers and sellers that are located nearby in time and space. Both goups thought, even so, that some sort of center of gravity was attracting these market prices, that they were fluctuating about this center. Anyways, they developed theories about this position. And in these theories, the law of one price would prevail. In competitive markets, the same rate of profits would prevail in all markets.

They did not theorize that a long run equilibrium would ever be reached. Walras, for example, compared his equilibrium to the flat surface of a lake that was always being disturbed by winds and waves.

But the groups differed on what data they took as given in that part of their theories that explained equilibrium prices. For the classical political economists, the givens in this part of the theory consist of:

• Technology
• The real wage
• How much of each commodity is produced.

As a matter of mathematics, these givens are sufficient to explain the prices prevailing in a long run position.

The marginalists have another set of data. These givens consist of:

• Technology
• Tastes
• The endowments of land, labor, and capital, including the initial distribution of these givens among the agents in the model.

As a matter of mathematics, a consistent model of a long run equilibrium cannot be constructed with these givens How to take the endowment of capital is one of those matters that differed among the marginalists. All of their approaches were incoherent.

This post merely echos conclusions that academics came to about half a century ago and have been repeating. I think of Leontief's input-output analysis and of some applications of mathematical programming as empirical work building on a renewed classical political economy.

The Choice Of Technique As A Linear Complementarity Problem

1.0 Introduction

Linear Complementarity Problems (LCPs) have well-known algorithms (as least known by others) to solve them. Of particular interest to me is the Lemke algorithm. I think Christian Bidard or Guido Erreygers was the first to point out that the Lemke algorithm applies to economics in this way. But I do not know they ever specify the details in this post. I often need to step through what others find obvious to understand something.

2.0 The Linear Complementarity Problem (LCP)

Table 1: Parameters and Variables for the LCP

Symbol	Type	Definition
k	Parameter	Problem size, known as the order of the LCP.
M	Parameter	A k x k matrix.
u	Parameter	A k-element column vector.
x	Variable	A k-element non-negative column vector.
z	Variable	A k-element non-negative column vector.

This section specifies the LCP. Let M be a given k x k matrix and u a given k-element column vector (Table 1). Find the k-element column vectors x and z such that:

x - M z = u

x_i ≥ 0, for i = 1, 2, ..., k

z_i ≥ 0, for i = 1, 2, ..., k

x_i z_i = 0, for i = 1, 2, ..., k

The last condition can be specified as the condition that the vector dot product x^T z must be equal to zero. (x^T is the tranpose of x.)

3.0 The Problem Of The Choice of Technique

I now specify inequalities and equalities (for duality conditions) that specify the problem of finding a cost-minizing solution in the analysis of the choice of technique. Table 2 defines the given parameters for this problem. Table 3 defines the vectors to be found. Technology and final demand is taken as given. Given the rate of profits, the level of operation of each process in the technology and the price of each produced commodity is determined by the solution, when a solution exists and is unique.

Table 2: Parameters for a Cost-Minimizing Technique

Symbol	Definition
n	The number of produced commodities.
m	The number of processes, m ≥ n.
A	The n x m input matrix.
a0	The m-element row vector of direct labor coefficients.
B	The n x m output matrix.
y	The n-element column vector of net output, also known as final demand.
r	The rate of profits.

Table 3: Variables for a Cost-Minimizing Technique

Symbol	Definition
q	A m-element non-negative column vector. The level of operation of each process.
p	A n-element non-negative column vector. The price of each produced commodity.

The net output must meet or exceed the specified final demand:

B q - A q ≥ y

A vector is greater than or equal to another if and only if each element of the first is greater than or equal to another. Each process must be operated at a non-negative level.

q_i ≥ 0, for i = 1, 2, ..., m

The above non-negativity conditions complete the specification of the quantity system.

The specification of the price system starts with the following system of inequalities:

(1 + r) A^T p + a₀^T ≥ B^T p

The cost of each process cannot fall below the revenues obtained by that process. Labor is paid out of the surplus at the end of the production period. Each price must be non-negative:

p_i ≥ 0, for i = 1, 2, ..., n

In this specification, a person-year of labor is the numeraire.

I turn to duality conditions. The law of free goods states that any commodity in excess supply has a price of zero. It can be stated as the following equality:

p^T [(B - A) q - y] = 0

The law of non-operated processes asserts that any process in which the cost exceeds revenues is not operated. It is stated like so:

[p^T(B - (1 + r) A) - a₀] q = 0

A (cost-minimizing) solution of the above systems of equalities and inequalities is a long-period position. The prices are prices of production.

4.0 Mapping the Choice of Technique to a LCP

The main inequality in the quantity system can be converted to equality by subtracting excess supplies from the left hand side (LHS). Some manipulation yields the equation in Figure 1. Notice that the two vectors on the LHS in Figure 1 are non-negative. The matrices and the vector on the RHS side are part of the data when finding a cost-minimization system.

Figure 1: Quantity System as an Equality

The same approach can be adopted for the main inequality in the price system. Here I introduce a vector of extra costs for each process. The result is shown in Figure 2.

Figure 2: Price System as an Equality

Two vectors are found in the solution of a LCP. The above suggests that k = n + m is the order of the LCP in which I am interested. Figure 3 specifies the other vector in the solution for the LCP in terms of the vectors to be found in finding a cost-minizing solution.

Figure 3: One Solution Vector in the LCP as Price and Quantity Vectors for Cost-Minimization

Figure 4 specifies the vector taken as a parameter in the LCP. Figure 5 specifies the matrix.

Figure 4: The Given Vector in the LCP for the Cost-Minimization Problem

Figure 5: The Given Matrix in the LCP for the Cost-Minimization Problem

With the mapping shown, the problem of finding a cost-minimizing solution to the problem of the choice of technique is now a LCP. The condition that x^T z must be zero incorporates both the rule of free goods and the law of non-operated processes.

5.0 Conclusion

Solving a LCP provides a solution to a linear program. In this formulation, duality considerations apprently enter. I have seen and even published an article, in 2005, with a LP formulation of the analysis of the choice of technique. Does the LCP formulation yield the same LP?

Above, the LCP is for a model of general joint production. I suppose that I could explicitly formulate the LCP to consider the theory of rent. I do not think that any difficulties arise here, at least as far as setting up the problem. Erreygers (1995) and Kurz and Salvadori (1995) provide an approach.

Can I find some way of illustrating a LCP by partitioning a low-dimensional parameter or solution space for some small problem? Can I actually step through the Lemke algorithm for a small problem?

References

• Erreygers, Guido. 1995. On the uniqueness of cost-minimizing techniques. The Manchester School 63: 145-166.
• Murty, Katta G. 1997. Linear Complementarity Linear and Nonlinear Pogramming
• Lemke, Carlton. 1965. Bimatrix Equilibrium Points and Mathematical Programming. Management Science 11(7): 681-689.

Joan Robinson On The Lack Of A Marginalist Theory Of The Rate Of Profits

John Eatwell conludes a 2019 article with the assertion, "There is no neo-classical theory of the rate of profit." As appropriate for a conclusion, this article demonstrates that this proposition is true.

I recently read Robinson (1972). The first crisis in economic theory in her lifetime, she says, is the failure of economic theory to explain the level of production. Keynes addressed that crisis, albeit mainstream economists these days seem mostly ignorant of his ideas. The second crisis concerns what is produced, of the composition rather than the volume of production. This crisis includes concerns about what governments should spend on, while trying to maintain effective demand. More social spending and less spending of technologies for war would be nice.

But here I want to note these passages:

What is the orthodox theory of profits actually received? Many years ago I set out to write a little book on Marxian economics; when I had written a chapter on Marx's theory of profits, I thought I had to write a chapter on the orthodox theory for comparison, and blest if I could fmd one high or low. Ever since I have been inquiring and probing but I still cannot find out what it is. We have Marshall's theory that the rate of interest is the 'reward of waiting' but 'waiting' only means owning wealth. A man 'may have obtained the de facto possession of property by inheritance or by any other means, moral or immoral, legal or illegal. But if, having the power to consume that property in immediate gratifications, he chooses to put it in such a form as to aflford him deferred gratifications, then any superiority there may be in deferred gratifications over those immediate ones is the reward of his waiting'. In short, a man who refrains from blowing his capital in orgies and feasts can continue to get interest on it. This seems to be perfectly correct, but as a theory of distribution it is only a circular argument...

...Each individual goes on saving or dis-saving till the point where his individual subjective rate of discount is equal to the market rate of interest. There has to be a market rate of interest for him to compare his rate of discount to. But of course the whole thing is quite beside the point once we have accepted the Keynesian view that investment governs saving, not saving investment...

...There is also the problem of the relative levels of different types of earned income. Here we have the famous marginal productivity theory. In perfect competition an employer is supposed to take on such a number of men that the money value of the marginal product to him, taking account of the price of his output and the cost of his plant, is equal to the money wage he has to pay. Then the real wage of each type of labour is supposed to measure its marginal product to society. The salary of a professor of economics measures his contribution to society and the wage of a garbage collector measures his contribution. Of course this is very comforting doctrine for professors of economics but I fear that once more the argument is circular. There is not any measure of marginal products except the wages themselves.

In short, we have not got a theory of distribution. We have nothing to say on the subject which above all others occupies the minds of the people whom economics is supposed to enlighten. -- Joan Robinson

This passage reminded me that Eatwell and Robinson collaborated, in the early 1970s, on a textbook. So Eatwell is drawing on Robinson, as well as Sraffa, in his argument about the lack of an orthodox explanation of how capitalists obtain income. And you can see that Robinson's attempt to find such a theory goes back to 1942. The generalization of the General Theory to the long run was a major part of her research program.

I do not think it makes sense to talk about the rate of profits in the Arrow-Debreu model of intertemporal equilibrium, in John Hicks' Value and Capital model of temporary equilibrium, or in models of dynamic equilibrium paths. In these models, relative prices vary over time.

John Eatwell, with others, says that economists changed the question. He is not referring to the marginal revolution. Early marginalists tried to explain the rate of profits, in a model of long run equilibrium with a given quantity of capital. All of their approaches were incoherent. The changed question looked only at prices along short run equilibrium paths, where the agents have perfect foresight. Joan Robinson objected that she could not get these models to stand up long enough to knock them down. They failed to be in historical time.

References

• John Eatwell. 2019. 'Cost of Production' and the theory of the rate of profit. Contributions to Political Economy 38(1): 1-11.
• Joan Robinson and John Eatwell. 1973. An introduction to Modern Economics. McGraw-Hill
• Joan Robinson. 1942, 1966. An Essay on Marxian Economics. Palgrave Macmillan.
• Joan Robinson. 1972. The second crisis of economic theory. American Economic Theory 62(1/2): 1-10.

Some Quotations On Rent

1.0 Introduction

This post presents some quotations about rent. I criticize most of these statements. I have great respect for the quoted scholars.

2.0 David Ricardo

Thomas Robert Malthus, David Ricardo, Robert Torrens and Edward West are credited with the first clear and comprehensive analysis of differential land rent and the associated economic relationships. Their pamphlets in February 1815 had a little known precursor at the time in the work of James Anderson. (I modified the Wikipedia entry for these sentences.)

Ricardo explains what the theory is about:

"Rent is that portion of the produce of the earth, which is paid to the landlord for the use of the original and indestructible powers of the soil." -- David Ricardo, Principles

Ricardo clearly distinguishes between rent paid for the services of land and, for example, house rent. The land, if properly cultivated leaves a production process in as good shape as in which it enters. And, by abstraction, the land was not the result of any investment or labor before initially being used for agriculture. Rent on the results of investment that must be periodically renewed is not under consideration.

Here Ricardo explains extensive rent:

"When land of the third quality is taken into cultivation, rent immediately commences on the second, and it is regulated as before, by the difference in their productive powers. At the same time, the rent of the first quality will rise, for that must always be above the rent of the second, by the difference between the produce which they yield with a given quantity of capital and labour.” -- David Ricardo, Principles

Ricardo takes differences in fertility as a matter of nature. He does not recognize that, with heterogeneous inputs, at least, that the order in which lands are taken into cultivation, depends on the distribution between wages and profits. Typically, prices of production differ at different levels of, say, a given wage. And, thus, the order of fertility can vary too.

Furthermore, Ricardo does not recognize that the order of fertility can differ from the order of rentability.

Here Ricardo combines extensive and intensive rent in his analysis:

"It often, and, indeed, commonly happens, that before No. 2, 3, 4, or 5, or the inferior lands are cultivated, capital can be employed more productively on those lands which are already in cultivation. It may perhaps be found, that by doubling the original capital employed on No. 1, though the produce will not be doubled, will not be increased by 100 quarters, it may be increased by eighty-five quarters, and that this quantity exceeds what could be obtained by employing the same capital, on land No. 3.” – David Ricardo, Principles

I have been elaborating on a combination of extensive and intensive rent.

3.0 Piero Sraffa

"No changes in output and (at any rate in Parts I and II) no changes in the proportions in which different means of production are used by an industry are considered…” -- Piero Sraffa (1960)

Part II is on joint production. Part III is the single chapter on the choice of technique, and Sraffa seems to imply that changes in output are allowed in that analysis. Chapter XI, on land, is a six-page chapter in part II. I cannot read section 88 as not considering a change in output.

Here Sraffa points to the need for further analysis (really, the whole book presents exercises for the reader):

"More complex cases can generally be reduced to combinations of the two [extensive and intensive rent] that have been considered. The main type of complication arises from the multiplicity of agricultural products." -- Piero Sraffa (1960)

I am not the first to note that Sraffa is overoptomistic about the simpler cases.

3.0 Alberto Quadrio Curzio

I consider Quadrio Curzio as the scholar who has probed most deeply into the theory of rent in the tradition of post Sraffian price theory. Others include Christian Bidard, Guido Erreygers, Heinz Kurz & Neri Salvadori, and Betram Schefold.

Quadrio Curzio draws a conclusion:

"Rent greatly complicates the relations between wages and profits" – Alberto Quadrio Curzio (1980: 238)

This is a conclusion that I want to avoid. I want to say something more than that it is complicated. I think I may have achieved this by demonstrating, for example:

• That the orders of fertility and rentability can each exhibit a kind of reswitching independent of each other.
• The the orders of fertility and of rentability may be completely opposite of one another.
• That the order of fertility may depend on techniques in which intensive rent is obtained, even though the cost-minimizing technique at the given output only pays extensive rent.

Here Quadrio Curzio and Pellizzari say something more:

"Even when the intensive rent disappears, the effects of intensive cultivation persist in the different productive processes applied to the different lands, which affect the extensive differential rents" – Alberto Quadrio Curzio & Fausta Pellizzari (2010: 46).

I think my third bulleted point above explains this observation a bit more.

References

• Quadrio Curzio, Alberto. 1980. Rent, income distribution, and orders of efficiency and rentability, in Pasinetti, L. L. (ed.) Essays on the Theory of Joint Production.
• Quadrio Curzio, Alberto and Fausta Pellizzari. 2010. Rent, Resources, Technologies.
• Ricardo, David. 1951. On the Principles of Political Economy and Taxation.
• Sraffa, Piero. 1960. The Production of Commodities by Means of Commodities.