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Capital & Class

http://cnc.sagepub.com/ Unperceived Inflation in Shaikh, and Kliman and McGlone: Equilibrium, Disequilibrium, or Nonequilibrium?
Michele I. Naples Capital & Class 1993 17: 119 DOI: 10.1177/030981689305100105 The online version of this article can be found at: http://cnc.sagepub.com/content/17/3/119

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Michele I. Naples

119

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

120 Capital & Class G 50 because it suggests that Marxs (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 Marxs 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 longperiod 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 Marxs method and Sraffas 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&Ms 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.

Unperceived Inflation in Shaikh, Kliman & McGlone 121 (3) Both studies fail to recognise that the only reason they successfully link Marxs 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 equilibrium 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 Marxs theory of the profit rate (see Naples 1989).

Sequential vs. Equilibrium Modelling Shaikh and K&M explicitly criticise Neo-Ricardian methodology. Both papers differentiate Marxs 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 capitalists, 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 crisistendencies, even in the process of price formation. The Neo-Ricardian model rejects Marxs original idea that labour productivity in all sectors determines both prices and the profit rate, and returns to Ricardos earlier notion that only production conditions in basic industries (wage and capital goods) determine the rate of profit. Both K&M and Shaikh

122 Capital & Class G 51 see Marxs original labour-value theory as an indispensable starting point for explaining the existence of prof its. Therefore Marxs original transformation algorithm in Volume III is an abstraction from the feedback of todays prices on tomorrows 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 NeoRicardians 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 Marxs original transformation procedure with the Neo-Ricardian equilibrium solution.7 I argue (1989) that Marxs 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 redistributed 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

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 costinflation implicit in each model will be taken up in turn.
Table 1 Analysis of Shaikhs Results A. Shaikhs Production Data, in Labour Value Units
Department I II III Aggregate C = cX 225 100 50 375 V = vLX 90 120 90 300 S = sLX 60 80 60 200 Z = zX 375 300 200 875 R 0.296296 e 0.66666

B. Shaikhs Money-Prices by Production Period


Revenue (Price) Capital costs Money Profit Money Profit Rate Labour costs Unperceived Results Rate of Cost Inflation Real Profit Rate Department Cost-price Period

I. II. III. Aggreg. I. II. III. Aggreg. I. II. III. Aggreg. I. II. III. Aggreg. I. II. III. Aggreg. I. II. III. Aggreg.

MC* 450.00 200.00 100.00 750.00 490.00 217.78 108.89 816.67 504.90 224.40 112.20 838.18 505.14 224.51 112.25 838.53 505.20 224.53 112.27 838.62 505.21 224.54 112.27 838.64

MV* 180.00 240.00 180.00 600.00 171.11 228.15 171.11 570.37 168.42 224.56 168.42 561.41 168.41 224.55 168.41 561.37 168.41 224.54 168.41 561.36 168.41 224.54 168.41 561.35

M* 630.00 440.00 280.00 1350.00 661.11 445.93 280.00 1387.04 673.32 448.96 280.62 1399.59 673.55 449.05 280.66 1399.90 673.60 449.07 280.67 1399.97 673.62 449.08 280.68 1399.99

M'* 816.67 570.37 362.96 1750.00 834.11 562.62 353.27 1750.00 841.89 561.37 350.88 1750.00 842.00 561.36 350.85 1750.00 842.02 561.35 350.85 1750.00 842.03 561.35 350.85 1750.00
S s Z z R e r = = = = = = =

M* 186.67 130.37 82.96 400.00 173.00 116.69 73.27 362.96


168.58 112.41 70.26 350.41 168.45 112.30 70.19 350.10 168.42 112.28 70.17 350.03 168.41 112.27 70.17 350.01

r* 0.2963 0.2963 0.2963 0.2963 0.2617 0.2617 0.2617 0.2617 0.2504 0.2504 0.2504 0.2504 0.2501 0.2501 0.2501 0.2501 0.2500 0.2500 0.2500 0.2500 0.2500 0.2500 0.2500 0.2500

0.2353 0.2791 0.2963 0.2617 0.2463 0.2573 0.2617 0.2550 0.2499 0.2501 0.2502 0.2501 0.2500 0.2500 0.2500 0.2500 0.2500 0.2500 0.2500 0.2500 0.2500 0.2500 0.2500 0.2500

0.0494 0.0135 0.0000 0.0274 0.0123 0.0035 0.0000 0.0053 0.0003 0.0002 0.0001 0.0002 0.0001 0.0001 0.0000 0.0001 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000

Notes to Table 1 C = constant capital used up in industry c = constant capital per unit output V = variable capital used up in industry v = value of labour-power, measured per hour (wage in value terms) L = average labour-hours per unit; value-added in labour-value units X = units of output

surplus value produced in industry hourly surplus value produced total value of industry output unit value of industry output value rate of profit rate of exploitation nominal profit rate Notation used in the original studies.

124 Capital & Class G 51 A. The Original Models In Shaikhs 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 Shaikhs 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 Klimans & McGlones 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 Shaikhs, 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&Ms 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

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

B. Kliman and McGlones Money-Prices by Production Period


(VA) + Capital costs Price (Revenue) Unperceived Results Real Profit Rate Rate of Cost Inflation Capital costs Value Added Labour costs Department

Period

I. II. Aggreg. 2 I. II. Aggreg. 3 I. II. Aggreg. 7

MP* 100.000 100.000 200.000 107.143 107.143 214.286 111.429 111.429 222.857

L* 50.000 100.000 150.000 47.619 95.238 142.857 48.571 97.143 145.714

(VA)* 100 200 300 100 200 300 100 200 300

s* 50.000 100.000 150.000 52.381 104.762 157.143 51.429 102.857 154.286 50.059 100.119 150.178 50.000 100.001 150.001 50.000 100.000 150.001 50.000 100.000 150.000 50.000 100.000 150.000 50.000 100.000 150.000

Profits

C+s* 200.000 300.000 500.000 207.143 307.143 514.286 211.429 311.429 522.857 215.002 315.002 530.004 215.138 315.138 530.276 215.138 315.138 530.277 215.139 315.139 530.277 215.139 315.139 530.277 215.139 315.139 530.277

C'-M' * 214.286 285.714 500.000 222.857 291.429 514.286 226.977 295.880 522.857 230.159 299.845 530.004 230.277 299.999 530.276 230.277 300.000 530.277 230.277 300.000 530.277 230.277 300.000 530.277 230.278 300.000 530.277

e* 1.000 1.100 1.059

r* 0.428571 0.428571 0.428571 0.44 0.44 0.44 0.418604 0.418604 0.418604

0.384615 0.411764 0.400000 0.392857 0.397260 0.395348 0.394190 0.394904 0.394594

0.031746 0.011904 0.020408 0.033846 0.030588 0.032 0.017511 0.016990 0.017216

I. 115.002 49.941 100 II. 115.002 99.881 200 Aggreg. 230.004 149.822 300 I. II. Aggreg. I. II. Aggreg. I. II. Aggreg. I. II. Aggreg. I. II. Aggreg. 115.138 115.138 230.276 115.138 115.138 230.277 115.139 115.139 230.277 115.139 115.139 230.277 115.139 115.139 230.277 50.000 99.999 149.999 50.000 100.000 149.999 50.000 100.000 150.000 50.000 100.000 150.000 50.000 100.000 150.000 100 200 300 100 200 300 100 200 300 100 200 300 100 200 300

1.002

0.395387 0.394448 0.000672 0.395387 0.394449 0.000672 0.395387 0.394448 0.000672 0.394455 0.394455 0.394455 0.394451 0.394451 0.394451 0.394449 0.394449 0.394449 0.394449 0.394449 0.394449 0.394448 0.394448 0.394448 0.394448 0.394448 0.394448 0.394448 0.394448 0.394448 0.394448 0.394448 0.394448 0.394448 0.394448 0.394448 0.394448 0.394448 0.394448 0.000004 0.000004 0.000004 0.000001 0.000001 0.000001 0.000000 0.000000 0.000000 0.000000 0.000000 0.000000 0.000000 0.000000 0.000000

13 14 15 16 17

1.000 1.000 1.000 1.000 1.000

For Notes see Notes to Table 1

126 Capital & Class G 51 In the second production period, the uniform profit rate is determined subject to the constraint of constant value-added. Again, as in Shaikhs 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, approaching the Sraffian rate of 0.3944 (from 0.4400 to 0.4186 to 0.4056, etc.).10

B. Inflation in Shaikhs 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. Otherwise 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 Shaikhs (and Marxs11) 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 NeoRicardian 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.

Unperceived Inflation in Shaikh, Kliman & McGlone 127 C. Inflation in Klimans and McGlones 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 Shaikhs example, the organic composition of capital in department I is above average, so the price of capital goods must rise vis--vis prices in wage- and luxury-goods (in their model, in consumer goods). Consequently there is aggregate cost-inflation. Even in K&Ms 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 valueadded 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 Marxs 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.

128 Capital & Class G 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 Marxs value theory, causation generally runs from production to exchange, not back and forth. Nevertheless, Marx did allow at least one secondary feedback 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 firms 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 labourpower/constant capital). This feedback is problematic in that the consumption bundle of workers is constant, and production conditions in the consumer-goods and capitalgoods 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

Unperceived Inflation in Shaikh, Kliman & McGlone 129 capitalist pricing to values. While K&Ms modification has a certain appeal with respect to the rate of exploitation, it nevertheless represents a departure from Marxs 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&Ms 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 (Marxs accounting money), and the money proper (Marxs 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.

130 Capital & Class G 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 transformation 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 commoditymoney money-of-account is not possible outside of equilibrium.

Unperceived Inflation in Shaikh, Kliman & McGlone 131 Convergence to Equilibrium Both Shaikhs and K&Ms 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 Marxs 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 reproduction, 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

132 Capital & Class G 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 NeoRicardian rate, dependent only on production conditions in basics, and conflicts with Marxs 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 industrys 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 sectors 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 disequilibrium prices.

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 Marxs. 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-profitrate 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

134 Capital & Class G 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 labourvalue 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 produce Ricardian results for the profit rate using the postRicardian 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 NeoRicardian assumptions about simultaneous time, a commoditymoney 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 costinflation 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 moneyform (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.

Notes

136 Capital & Class G 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 todays revenue is to be reinvested as tomorrows capital. But if Marxs 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 commoditymoney as determined like any other goods price of production. But unlike most other commodities, gold is mined, it is not built in an alchemists 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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Brody, A. (1970) Proportions, Prices and Planning: A Mathematical Restatement of the Labour Theory of Value. North Holland Publishing. Foley, Duncan (1982) The Value of Money, the Value of LabourPower and the Marxian Transformation Problem in Review of Radical Political Economics 14 (Summer) pp.37-48. Keynes, John Maynard (1930) A Treatise on Money. Harcourt, Brace & Company. Kliman, Andrew and Ted McGlone (1988) The Transformation Non-Problem and the Non-Transformation Problem in Capital&Class 35 (Summer) pp.56-83. Lipietz, Alain (1982) The So-Called Transformation Problem Revisited in Journal of Economic Theory 26 pp.59-88. Mandel, Ernest and Alan Freeman (1985) Ricardo, Marx, Sraffa; the Langston Memorial Volume. Verso. Marx, Karl (1976) Capital, Vol. III. International Publishers. __________ (1973) Grundrisse: Introduction to the Critique of Political Economy. Vintage books. McGlone, Ted (1992) Simultaneous Tendencies Toward Equilibrium and Disequilibrium. Paper presented at Eastern Economics Association Meetings, New York City, March. Morishima, Michio (1979) Marxs Economics: A Dual Theory of Value and Growth. Cambridge University Press. Naples, Michele I. (1985) Dynamic Adjustment and Long-Run Inflation in a Marxian Model in Journal of Post Keynesian Economics 8(1) (Fall) pp.97-112. __________ (1988) Is a Uniform Profit Rate Possible? A LogicalHistorical Analysis in Science & Society 52(1) (Spring) pp.110131. __________ (1989) A Radical Economic Revision of the Transformation Problem in Review of Radical Political Economics 21(1&2) (Spring & Summer) pp.137-158. Shaikh, Anwar (1977) Marxs Theory of Value and the Transformation Problem in Jesse Schwartz, [ed.] The Subtle Anatomy of Capitalism. Goodyear Publishing Company, Inc., Santa Monica, California, pp.106-139. Sraffa, Piero (1976) Production of Commodities by Means of Commodities: Prelude to a Critique of Economic Theory. Cambridge University Press.

References

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