[OPE-L:4053] Equalization of Profit Rates

Gerald Lev (glevy@pratt.edu)
Fri, 24 Jan 1997 20:12:05 -0800 (PST)

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Andrew K wrote in [OPE-L:4046]:

> Assume a two-sector economy, with circulating capital only, in which
> production takes 1 year in each sector. The profit rate in sector A
> next year will be 10%, and the profit rate in sector B will be 8%, if
> prices remain the same. However, in the past several years, the price
> of A's product has been falling by 10er year, and the price of B's
> product has been rising by 10er year. Analysts forecast that these
> trends will continue, and judge the two investments to be equally risky.
> All else being equal, in which sector would you invest?

Like Rieu, I don't really see the point behind this exercise.

Given the assumptions stated above, *why* would we (and the
"analysts") expect price changes in the products sold by Sector A and B? I
suppose it is possible that wages and/or the intensity of labor could be
different in the two sectors (since Andrew has not stated that wages or
the intensity of labor are assumed to be constant, I suppose we have to
assume instead that they are variables in this model). Or, the amounts of
money capital allocated for unproductive labor could be different in the
two sectors. Or, the price of commodities that become constant circulating
capital could change.

Since there are only two sectors, it follows that one of the sectors
specializes in the production of commodities which are sold to the other
sector as circulating capital. Yet, how is it that the sector specializing
in the production of these commodities is able to increase or decrease price?
Perhaps we would have to consider rent here. In any event, once we have
limited our investigation to two sectors and assumed away fixed capital,
of what relevance is this model? For instance, since there is only
circulating capital, why should investors be concerned now what happens
after the close of the next period? That is, at the close of the next
period they can always disinvest all of their money from the sector where
the actual and anticipated [for the next period] rate of profit is lower
and invest it all in the sector where s/he can expect a higher rate of
profit in the following period. Indeed, given the assumption that constant
fixed capital = 0, then long-run problems re investment decisions seem to

In solidarity, Jerry