anwar shaikh, adam smith/david ricardo (lecture 04 – 09/21)

key, Smith's argument re: labor and price: the ratio of the price of two commodities will be equal to ratio of labor time of these two commodities if (a) all value added goes to labor; (b) part of value added goes to labor, rest goes to capital/landlord, but in the same proportion for both. (c) but natural profit in a sector is not determined in proportion to its labor time but rather in proportion to its capital (because the natural profit in any sector is the uniform rate of profit multiplied by the amount of capital invested. So obviously, if the capital labor ratios are equal across sectors, then the natural profit is also to proportional to labor in each sector, which means that natural prices are still proportional to labor time) [the equation is: natural profit = rate of profit multiplied by capital invested ]

1. what determines the uniform rate of profit? we want to know what determines the size of this difference, which will be influenced by the rate of profit?

2. what causes the difference in capital-to-labor ratio? differences in the capital labor ratio can cause differences between relative prices and relative labor-times – how do they do this?

There is a deep logic to this. Ricardo is going to answer these two questions that Smith leaves unanswered (indeed, he's going to start with them).

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the first question that Ricardo addresses: what determines the profit rate? let's suppose that we abstract away from differences in capital-labor ratios, and think of the output as one whole (made of parts of the same substance). Ricardo will argue that this is justified, because you can represent things in terms of common inputs/outputs.

this is where we get Ricardo's corn-corn model (economy as a single sector).

Ricardo's answer is that it will depend on the conditions of production in corn (abstracting, remember), and the wage rate.

you have a hundred workers, and your wage rate is .008 corn bushels/worker

you will need .8 bushels of corn in advance, of course.

you will employ these .8 bushels in the course of production

your output for these hundred workers is 1 bushel of corn (remember, your output must be greater than your cost, for this to make sense)

the profit is .2 bushels of corn.

your profit rate (profit divided by capital) is 25%

here it's very clear, then, that the profit rate is dependent on the level of technology and the wage rate. he's solved the first problem in Adam Smith, which is the question of the determination of the profit rate.

we have more.

what happens if I was to raise the wage rate, to .009? profit goes down, as does your profit rate. So Ricardo establishes the antagonistic relationship between wages and the profit rate.

economists will say, “but the economy is not one sector?”

Sraffa's reply was simple. think of this model as an average sector, which becomes the center of gravity of a complex economy (any given wage in that sector will give you the profit rate). this sector will have the property that outputs and inputs will be made of the substance.

so we have an argument not just about a single sector, but about a general sector (Marx has a concept of the “standard industry,” which he doesn't develop).

the second question relates to the issue of relative prices. when we have acknowledged that capital-labor ratios are not equal, how do differences in the capital-labor ratios affect relative prices? (see spreadsheet—the difference between the capital-labor ratios is 'muted' in the difference in relative prices)

to look at the effects of differences in the wage rates, you increase the wage rate in the corn sector (which raises the prices). But you will see that this doesn't greatly affect relative prices.

having done this reasonsing and analysis, Ricardo's hypothesis is that relative prices are not very sensitive to distributions in the changes of income. the dominant determinant is the capital-labor ratio, and the secondary element is the distributions of income.

(NB: the natural price is not necessarily the price you will get on the market, remember—you have to fight for the natural price)

Ricardo couldn't run this whole thing empirically, because he didn't have any information on direct and indirect labor time. We, however, have input/output tables, which were started by the Soviets, but are now published regularly.

the main point of all of this is that the center of gravity is set, structurally. the second row in Shaikh's table (Price of Production vs. Market Price) would suggest that supply/demand, taxes, monopoly, etc. can only explain 8.2% of the deviation from Mkt Price.