[OPE-L:6413] Re: Two Rates of Profit

John R. Ernst (ernst@PIPELINE.COM)
Sat, 4 Apr 1998 21:30:54 -0500 (EST)

I had written:

>1. Absolute Rent. In developing his notion of absolute rent,
>Marx criticized Ricardo for his inability to see the possibility
>of absolute rent. In CAPITAL, the landowner earns absolute
>rent when the worst producer operates with a below average
>composition of capital. Marx assumes that the product
>produced under such conditions sells at a price greater than
>its price of production. That is, all the value created in
>production remains within that sector. The excess profit
>becomes absolute rent. Can one carry out the transformation
>of values into prices of production, given the inclusion of
>absolute rent? Here, I refer to the usual technique of
>transforming values into prices. My answer is "Yes." However,
>you would need to start from values and not from physical
>quantities since you would need to know how much absolute rent,
>if any, is produced in each sector. Or, perhaps, one could
>develop a different way of determining absolute rent.
Ajit commented:

Tell me how would you do it?

I'm not completely satisfied with your presentation of Marx's theory of
absolute rent. But that is a minor point.

I respond:
First, the minor point. Clearly, the worst producer mentioned in the
above would have to be one in a sector where there is a natural
monopoly. Someday, I would like to hear your misgivings about
absolute rent.

Second, how would I do it? If a given sector earns absolute rent and
if this rent is seen as part of profit for that sector, its rate of
profit would be, say, R(1) and the rate of profit of the other sectors
R(0). R(1) > R(0). To solve for both R(1) and R(0) one would need
an additional assumption. One possibility would be to assume that
all of the value created in the rent producing sector is captured by
that sector.

John had written:
>For me, the idea that Marx did not include "natural monopolies"
>in his transformation procedure indicates that what he had in mind
>was something less rigorous than those who correct him do. That
>is, all we see in CAPITAL are 5 sectors earning equal rates of
>profit. The surplus value created within the 5 is shared according
>to amount of investment in each. It seems to me that the
>some of the inputs of the 5 might well be products of capitals
>in which all types of rent are produced. Further, Marx himself
>notes that some of inputs may not have been purchased at value
>but rather at prices of production which may differ from the
>values. Thus, Marx seems to be adding the newly created value to
>prices of production and values in order to obtain the outputs
>in terms of prices of production. What is the alternative?

Ajit wrote:

If you have read Marx's critique of Ricardo in TSV II, then, in my opinion,
you would not believe in what you have said above. The transformation
problem is a very serious theoretical problem for Marx. He is extremely
upset with Ricardo for not taking up his own first modification of the
labor theory of value seriously enough and getting bogged down with,
according to Marx, the secondary issue of effects on prices due to changes
in wages. The problem the modern day Marxists have with understanding the
transformation problem is that they have no understanding of Ricardo.
Engels was not a stupid guy to have made the solution to the transformation
problem the defining issue in the preface of the second volume of *Capital*.

John comments:

The standard critique of Marx's transformation procedure is that he
did not transform the inputs. If he assumed that they were already
transformed, he would be adding values to prices of production to get
the total value or total price of production.

It's not clear to me that he did not simply see the exchange value
of a commodity as a representation of value. He would thus be
adding exchange values to obtain prices of production or values.
He has to be doing something like this if he excludes certain
sectors of the economy from the transformation procedure while
including the outputs of those sectors as inputs into one of
5 sectors in which values are transformed into prices of
production. But this does not give Marx a theory of prices
acceptable to modern economics.

Regardless, I agree with you that Marx took the problem seriously.
Indeed, he had to. It was obvious that capitalists with capitals
of varying compositions were earning, more or less, equal rates
of return.

I had written:

>2. Transformation Stuff. Obviously, even with the presence of
>absolute rent, one could argue that the inputs must, at first,
>be in terms of value and then with the outputs transformed into
>prices of production. If we do this, we end up with the usual
>correction of Marx. But now we face new problems.
Ajit remarked:

Again the meaning of this is not clear. The "correction", as i understand
it, suggest that you got to take prices of production on both sides of the
equation and not what you are suggesting above. First of all, what are the
units of value and prices of production in your understanding?

John comments:

You're right. I was unclear. The units have to be some monetary
unit. I was attempting to say that with absolute rent some of the
inputs will have exchange values greater than their price of production.

John had written:
>How do we know the economic lifetime of the fixed capital to
>transformed? Clearly, it would be effected by the relative prices
>of fixed and circulating capital. But those prices change as the
>usual type of transformation is carried out. Thus, ex ante or from
>a set of values, we know little of the lifetimes of fixed capital.
>Put simply, we seem to have no way to proceed. Hence, the question,
>"What is to be done?"
Ajit commented:

You keep asking me this question of yours without telling me how do you
propose to solve it. We all are working on our own little research
projects, how do you expect us to take on your research project and solve
it for you. We can only help by critiquing what you are doing and suggest a
few other ways of looking at it at best. My sense is that you should look
at your problem from the point of view of choice of technique first.
Because the question of whether to carry on with the old machine or discard
it and use a new machine is basically a question of choice of technique.

John comments:

I agree it is a choice of technique problem and I have done some work
on it. Basically, if the RRI of a new technique exceeds the RRI of
a technique in which the fixed capital is fully depreciated, then
investment is withdrawn from the older technique. Of late, I've
been looking at cases where the fixed capital is not fully
depreciated and examining the effects of new techniques with greater
rates of return on the depreciation process itself.

I had written:

>We could assume that there is no technical change as we transform
>values into prices of production. I find no evidence that Marx
>himself pursued this possibility.
Ajit remarked:

There is no need to *explicitly* assume no technical change when the
question of technical change is simply not a part of the problem under
investigation. It is a problem of deriving a set of prices from a *given*
set of technology. Why should anybody explicitly mention that there is no
technical change here? This should satisfy Andrew, so that I don't have to
repeat the same thing in a separate message.

John comments:

I am not sure why the set of technology is given. If we are dealing
with inputs and outputs of a particular period, then why can't the
techniques be changing during that period? To be sure, they may not
be changing. However, if techniques in general do not change as
production takes place, when do they change?

I had written:

>a. When he assumes that technical change is not taking place as
>he does in Vol. II of CAPITAL, he explicitly says so. I may be
>wrong but I find no such assumption in his transformation procedure.

Ajit remarked:

Because IInd volume is mainly concerned with reproduction and accumulation
over time, where technical change becomes a legitimate variable. Thus when
you are developing your theory on the assumption of no technical change
over time, it is simply proper to spell the assumption out.

John comments:

I may not be picking up on something you're saying but I still do not
know why the techniques used to produce the inputs are identical to
those that produce the outputs in the transformation procedure. Would
it not have been "proper" for Marx to state that the techniques used
to produce inputs and outputs in the transformation procedure are
unchanging? Like Andrew, I am uncertain where this assumption can
be found in Marx.

I had written:

>b. Given that technical change is taking place, by the time he
>gets to transformation procedure, Marx has already described moral
>depreciation and its effect upon the lifetime of fixed capital. Why
>would he now drop the idea in order to obtain a set of equilibrium

Ajit remarked:

Do you find fixed capital in Marx's transformation equations? There is no
fixed capital there john. So now you should see my point.

John comments:

Hmmmm. In the equations themselves you're right -- there is no fixed
capital. However, the "c" includes an allowance for depreciation.
The allowance itself would be based on the lifetime of the fixed
capital. If the lifetime of a machine is 10 years, given exchanges
at values and, say, 8 years given exchanges at prices of production,
then the depreciation allowances in the equations Marx uses would
change and, I suspect, make the usual correction of Marx impossible.

I do not think this problem is peculiar to Marx. If you or I were
to look at a piece of machinery, we would have no idea how long
it may last. To be sure, we could ask an engineer to tell us how
long it will physically be useful. But, clever souls that we are,
we would also attempt to reckon the time it takes for the machine
to become obsolete or no longer profitable. But if we start with
only values, we would be lost. If we had knowledge of only the
physical inputs and outputs, we would also be lost since we really
would not know how much of the fixed capital is to be depreciated
in any given period unless we know the time it takes for the machine
to become obsolete.

I had written:

>But maybe Marx is simply wrong and one needs to make the necessary
>assumptions to carry out the transformation. Then what? We now
>have a price theory that cannot take into account either continuous
>technical change or moral depreciation. As you put it, perhaps,
>I have described an intractable problem. But, with this type of
>price theory, we have no way to analyze the reality that involves
>traversing from one period to the next as technical change and
>moral depreciation take place. Here I do not mean to be "negative"
>but am merely following your idea that the problem I pose is
>perhaps "intractable."

Ajit commented:

I think we need to keep working on it. As I have said, I think
your problem is a worthy problem.

John remarks:
You surprise me. Pleasantly at that. Why? You seem to hold fast
to the usual way of obtaining prices of production and, yet, somehow
see how one can arrive at "intractability" while using it to solve
a real problem.

John had written:

>c. It seems to me that to get to the point of Marx's efforts one
>must somehow consider those traverses. After all he was concerned
>with "the economic law of motion" of capitalism. If, as he does
>so, he is forced to settle for a less rigorous price theory
>than you would like, so what. He may well have done so not of
>ignorance but for the sake of developing that law of motion.
>The choice seems to be -- Prices or Crises.

Ajit remarked:

If you leave Marx out of it, i.e. your interpretation of the transformation
problem, then I'll not have much problem with what you have said above.

John comments.

Oh! Oh! Now there is no surprise. But wait -- why not credit Marx
with idea that "a less rigorous theory of prices" must be used
to get at the notion of crisis?

John had written:

>Here, again, I do not mean to be rhetorical or negative, but
>merely want to stress that alternative readings of Marx are possible.
>Such readings are not without purpose but rather seek to come to
>terms with what you have correctly described as an intractable
>problem. Frankly, this description of the problem is helpful since
>it's yours and you have always insisted on what I have called a
>rigorous theory of prices. Too often, folk use those equilibrium
>prices as they describe patterns of economic growth. In so doing,
>they often fail to take into account what you have called periods
>of rapid technical change and moral depreciation.

Ajit remarked:

My sense is that those so-called "equilibrium" prices have important
theoretical role to play. They are kind of reference points. Without them
it may be too difficult to navigate.

John comments:
You may have a point. The problem is how to use the reference points.
For me, they may well be useful in describing the beginning and end of
periods of accumulation with technical change. Unfortunately, if
we assume that equilibrium prices prevail in each and every period
as accumulation takes place, the above mentioned traverses become
impossible to track.

John had written:

>A Clearly Positive Thought
>Too often, we see descriptions of the accumulation process without
>fixed capital or with non-depreciating fixed capital. Here,
>Sraffa's notion of viewing fixed capital as a joint product may
>be helpful. It comes close to the idea of depreciating fixed
>capital on an economic basis rather than on an accounting basis.
>For me, this has been useful in understanding Marx's notion of
>moral depreciation. I find it a bit sad that none of his
>followers attempts to use his idea of joint production to describe
>technical change and the devaluation of fixed capital. (Correct me,
>if I'm wrong on this.)

Ajit remarked:

It is because it is not that easy. But the Schefold reference I gave you
does broach the issue. Cheers, ajit sinha

John concludes:

I agree it isn't easy. Thanks, again, for the reference.

The best,