[OPE-L:3188] Equal Profit Rates

Alan Freeman (A.Freeman@greenwich.ac.uk)
Mon, 30 Sep 1996 08:24:26 -0700 (PDT)

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Paul writes [OPE-L 3043]:

"I would suggest that the whole debate around Okishio is
flawed by the price of production equal rate of profit

I think this is largely true and I agree with Paul's point in
the rest of this post. I think we need to revisit the equal
profit rate discussion.

In the last chapter of our book I tried to present a general refutation
of the Okishio theorem for the case of general market prices and
hence, any general dispersion of profit rates.

In my view Marx's conception of the profit rate is better
understood as the basis of his critique of bourgeois economic
thought. The notion of an actually equal profit rate (which
Ricardo introduced) enters bourgeois political economy as a
vulgar category where it is turned into an apologetic
category. This is because it appears as the 'price' of the
commodity 'capital'. But capital is not a commodity. Marx
wished to show where the categories of bourgeois thought came
from and had to demonstrate that the illusion of a commodity
called 'capital' with its own price, the interest or profit
rate, arose from an actual material process which it failed to
represent accurately.

Therefore, on the one hand he had to exhibit the actual
material process (the formation of a general profit rate) and
on the other to show that the way this is presented in
bourgeois thought (as the price of the 'commodity' capital)
was a false idealisation.

I think there is very little evidence that Marx actually
envisaged an actually equalised profit rate and much evidence
against it. If he had any empirical point at all I think it
was that the general profit rate formed the *average* around
which market prices fluctuated, over the whole economy and
over the period of the business cycle. But an average need
never actually be realised and Marx clearly didn't think it
was. Moreover as the debate has shown, the moving average rate
in a dynamic process is not equal to the moving average static

Moreover the idea of an equal profit rate is completely incompatible
with the main mechanism for technical change outlined by Marx,
namely the pursuit of an excess or above average profit rate.

My take on Andrew's Okishio refutation (as well as Andrew/Ted
on transformation) has always been - and this has come up
before - that the equal profit rate assumption is strictly
for the purposes of illustration, not least because this
assumption is made by everyone else in the debate. But I don't
think any of us think it is a necessary assumption and it
certainly isn't true in the real world.

The problem is as follows: everyone says (including ourselves
- this isn't a complaint) that Okishio has to be refuted on his
own terms. But *He* (not us) assumes, along with all static
theory, an equal profit rate.

Andrew and myself took different routes to this. Andrew
produced an example where the profit rate equalises but the
Okishio rate is different from the dynamic rate. I decided to
look at the most general possible case, on the grounds that
the special case of equal profit rates are included within it.

It is useful to reflect why the 'orthodox' view is so attached
to the idea of an equal profit rate, because it is extremely
counter-empirical. Even Dumenil and Levy's very thorough work
(which I think we should discuss in more detail) shows rates that
are actually very widely dispersed with only a very long-term
tendency to equalisation.

I think there are two reasons; the first, frankly, is the
pressure of bourgeois thought. I don't think that people simply
rech out and take thirty pieces of silver, but since in the
general academic environment the entire dialogue is in terms
of equal profit rates except for oddballs like the rent-seekers
it is just 'easier' to adopt the prevelant terminology (eg to
speak of the interest rate as the 'price' of capital, as I
seem to remember happened in an early OPE debate...).

The second reason is that static formalisations require an
equal profit rate; without it, their equations have no solution.
This is very awkward because it leaves comparative statics
without a concept of determination.

However, I tend to think we should draw a bit of a line under
the equal profit rate assumption. In 'giving in to it',
what we do is take on all the ideological baggage that goes with it,
so maybe we should in future think twice about using the idea at
all. Personally, I have always been extremely hostile to it. I
think it is the *main* form in which equilibrium ideology
penetrates marxist thought. At one time I definitely considered
the idea that it was more important to wage war against the
idea of an equal profit rate, than against the idea of
equilibrium. This was the course taken by Ernest Mandel.
But actually, the two issues are synonymous. You can't have
an equilibrium model without equal profit rates.


PS Julian Wells has started a very interesting research project
to collect company data both to test the Farjoun-Machover
statistical hypotheses on profit rate distribution and to see
if this corresponds to the predictions of a dynamic value
model. A priori, I don't see any reason it shouldn't. I don't
see the two views as incompatible.