# [OPE-L:3092] Re: Fred's Comments on 3074

Duncan K. Fole (dkf2@columbia.edu)
Mon, 23 Sep 1996 08:55:36 -0700 (PDT)

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A response to some of John Ernst's points:

>Duncan,
>
>Let me see if I can be locate the problem you find
>with the TSS approach.
>
>
>You state (among other things):
>
>The problem I'm raising doesn't have to do with the rate of
>profit, which can be calculated on historical cost if one
>prefers, but with the definition of the value added, which
>is crucial in translating the Labor Theory of Value assumption
>that the source of exchange value is the expenditure of
>living labor in production into a theory of prices in the
>examples we have been offered.
>
>I respond:
>
>I think TSS is in agreement with you that living labor is the
>source of exchange value. And if you'll let us have a
>rate of profit based on historic costs, I say "Welcome
>aboard." However, here no doubt the devil is in the
>details.
>
>Let's say that I buy \$90 worth of the commodity in a
>one-commodity world and spending next to nothing on wages
>manage to produce \$120 worth of that commodity. The living
>labor created a value of \$30. Clearly, with this informa-
>tion we would agree that my rate of profit is 33.3%. Of
>that \$120, I invest \$100 in constant capital in the next
>period and introduce a new technique, which I hope will
>increase my profits as well as my profit rate. Despite
>my hopes, it doesn't since the price of the commodity
>falls after production such that the total price of
>the output is \$130. If we in the world of TSS look at
>this situation, we see that there is \$100 invested in
>constant capital and, as before, \$30 added to the product
>by the living labor. For us, the given amount of living
>labor is adding the same exchange value to the product in
>both periods -- \$30. To be sure, the rate of profit has
>now fallen to 30% as the living labor created the \$30 in
>exchange value.

The critical methodological issue here is whether you are taking the prices
as given, or you are using the labor theory of value to determine the
prices. As you describe this example, I can't tell which situation you have
in mind.

In the examples Andrew puts forward, it is clear that he is using the
principle that the expenditure of living labor is the source of added
exchange value to determine the path of prices. In doing this he takes
value added to include the inventory valuation adjustment, and as a result
his price and profit rate paths deviate dramatically from those that one
would get with the same assumptions, but taking value added net of the
inventory valuation adjustment. With the usual assumption about value
added, these examples do not support such dramatic results on the FRP.

In your example it's not clear what you are assuming about the price of the
items that go into constant capital, and therefore whether or not you are
assuming any inventory valuation problem at all.

Duncan

Duncan K. Foley
Department of Economics
Barnard College
New York, NY 10027
(212)-854-3790
fax: (212)-854-8947
e-mail: dkf2@columbia.edu