Thursday, October 15, 2020

Non-Uniform Rates Of Profits

This post presents a limited account of the history of analyzing prices of production with non-uniform rates of profits. I start from developments in post Sraffian price theory. D’Agata (2018) and Zambelli (2018b) have argued that Sraffian prices of production can still be defined when rates of profits have regular and persistent variations among industries. Barriers to entry or idiosyncratic properties of investment can result in such variations. Steedman (1981) presents the first formulation in post Sraffian price theory that I know of in English with systematic variations of the rate of profits among industries. Roemer (1981: 23-29) provides microfoundations for modeling imperfect competition in linear production models. He assumes different capitalists have different information sets; they only know of some of the production processes that are available. He argues that this can lead to specified ratios of rates of profits among industries. Cogliano et al. (2018) and Screpanti (2019) are some more Marxist contributions along the same lines.

Adam Smith (1776) called 'natural prices' what I, following Marx, am calling prices of production. He explained differences in rates of profits among industries as arising both in competitive conditions and as a result of barriers to entry. Book 1, Chapter X of The Wealth of Nations is titled 'Of wages and profits in the different employments of labour and stock'. According to Smith, the rate of profits is systematically higher in industries thought disagreeable or disgraceful. It is also higher in less risky investments, because capitalists overvalue their chance of gain and undervalue the chance of loss. (Smith also explained systematic differences in wages from these same causes. Typically, in my approach:

"We suppose labour to be uniform in quality or, what amounts to the same thing, we assume any differences in quality to have been previously reduced to equivalent differences in quantity so that each unit of labour receives the same wage" (Sraffa 1960: 11).))
Smith argues that for natural prices to obtain, employments must be well-known and long established in each neighborhood. Policy in European countries, according to Smith, restricted competition in some employments and encouraged excessive employments in others. Furthermore:

"It is to prevent this reduction of price, and consequently of wages and profit, by restraining that free competition..., that all corporations, and the greater part of corporation laws, have been established" (Smith 1776).

(This chapter contains another well-known quotation:

"People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices" (Smith 1776).)

David Ricardo and other classical economists accepted Smith’s account of the causes of non-uniform profits and wages.

Many groups of economists during the twentieth century developed theories of oligopoly and analyzed the effects on prices and the rate of profits of barriers to entry. Edward Chamberlin (1958) and Joan Robinson (1933) put forth almost simultaneously their theories of monopolistic and imperfect competition. Robinson drew on the earlier work of Sraffa (1926). These works clarified, to some extent, the assumptions needed for the neoclassical theory of perfect competition.

Some were inspired by empirical research. The Oxford Economists’ Research Group was set up in the 1930s. As part of the group’s research, Hall and Hitch (1939) found, in interviews with businessmen, that firms do not set prices based on marginal cost and marginal revenue. Michal Kalecki (1965) took these findings in stride and developed a theory of markup pricing as a microfoundation for his independently developed Keynesian macroeconomics. Perhaps some of my work can be seen as a partial answer to Steedman's questions for Kaleckians (Steedman 1992).

Old industrial organization, as developed by Joe Bain (1956) and Paolo Sylos Labini (1969), (Modigliani (1958) is a prescient survey.) rediscovered a classical notion of competition and a corresponding theory of oligopoly. Free competition is about the absence of barriers to entry, in contrast to the marginalist notion of perfect competition, in which managers of firms take prices as given.

Since I am interested in the labor theory of value, I want to mention the treatment of oligopoly and monopoly by economists associated with the Monthly Review. (For example, Sweezy (1942), Baran (1957), and Baran and Sweezy (1966).) As I read them, oligopolies and monopolies present a challenge to maintaining a quantitative theory of prices:

"Under conditions of monopoly, exchange ratios do not conform to labour-time ratios, nor do they stand in a theoretically demonstratable relation to labor-time ratios as is the case with prices of production." (Sweezy 1942: 270)

Baran (1957) is a Marxist who, as a consequence of his understanding of the importance of the role of monopoly, drops talk of 'surplus value' for the more qualitative concept of the 'surplus'. At the high level of abstraction of my work, however, this attitude seems unjustified.

Managerial theories of the firm (Marris (1964), Eichner (1973 and 1976), Harcourt and Kenyon (1976), and Wood (1975), for example. See also Penrose (1980).) were developed during the 1960s and 1970s. In these theories, firms set their markup over cost to generate internal funds to, in combination with external finance, fund investment plans to achieve a target rate of growth. They strive to achieve a normal rate of profits at a planned rate of capacity usage.

The research briefly summarized above has been quite influential, particularly among non-mainstream economists, to this day. For my purposes, I ignore distinctions among behavioral and managerial theories of the firm, administrated prices, full cost prices, normal cost prices, theories of the degree of monopoly, and markup pricing. (Lee (1999) emphasizes the distinctiveness of the theories of administered, normal cost, and markup price theories.) Rather, ratios of rates of profits among industries are taken as given parameters in defining prices of production.

This post is basically an abstract from something I may never publish.


Anonymous said...

Two topics about non-uniform rates of profits that I think motivating are on one hand the introduction of non-uniform rates in a Random System à la Schefold and one the other hand a change on the perspective on the non-uniform rates going from a fixed relation between rates to a functional relation between them, in other words non-monotonic functions of the sectoral rate of profit moving against the wage.

Anonymous said...

In the case of "Anything Goes" sectoral functions of the rates of profits I would be a good question if one function determines the other n-1. And if that is the case to see then if relaxation of the numéraire can make the sectoral functions least for n-1 functions. One of the interesting contributions by Ian Paul Wright was the "complete reduction of the standard commodity" that one can see as an "Something Goes" function of a variable quantity of labour. Maybe a more "Anything Goes variable quantity of labour" can be an extension to non-uniform rates of profit.

Robert Vienneau said...

I am hoping that one can make the claim that relative rates maintain some stability through time and avoid introducing n degrees of freedom.