[OPE-L:7106] [OPE-L:605] Re: equilibrium and non-equilibrium

Alan Freeman (a.freeman@greenwich.ac.uk)
Fri, 05 Mar 1999 17:55:11 +0000

OK Fred,

I'll try to respond; then for now I'll have to wind up because the EEA
conference is going to occupy me full time till it's over. That's also the
reason for the flurry of posts from myself.

> So, I ask Alan: in what precise sense do you think Marx's price of
> production is NOT an equilibrium concept and Ricardo's natural price IS
> an equilibrium concept? What condition or characteristic of equilibrium
> is satisfied by Ricardo's natural price and not satisfied by Marx's price
> of production? I have been trying to figure this out from your paper and
> your posts, and I have some ideas, but am still not clear.

Well, first off it's important to note that price of production is perfectly
well-defined without supposing equilibrium, without any long-run behaviour,
and without supposing that profit rates actually equalise.

The general rate of profit is formed whether or not profit rates equalise;
it's simply the ratio of the mass of surplus value to the mass of advanced
capital. Prices of production exist whether or not they are the actual rates
of exchange; they are simply the notional or, as Marx puts it 'ideal' price
that is arrived at if one adds this rate pro rata to advanced capital.
Moreover even though no actual profit rate attains the general rate, it can
still enter the mental processes of the capitalists as a 'notional ideal
markup' with which they will compare their actual rate of return. This becomes
important in determining, for example, the return on financial assets and
rent; it is the principal reason for absolute rent.

Note that for you as for ourselves, this definition is consistent, in that the
mass of surplus value is equal to the mass of profit AND the mass of value is
equal to the mass of price, provided of course all are measured in the same
units, either money or time.

What I think you have not perhaps recognised or given due credence to (and I
don't know why, because I don't think it does any damage to your theory) is
that these two results hold whether or not profit rates equalise. We don't
have to suppose that profit rates actually equalise, in order to demonstrate
the formation of a general rate of profit, or in order to demonstrate the
formation of prices of production.

Now, if one was literally to take the Ricardian approach I think one would say
that equal-profit-rate-prices-of-production (EPRP) are the prices at which
goods actually exchange. One would take profit rate equalisation as the
definition of price. Indeed this is Ricardo's literal argument; treating
interest as the price of capital he states (pace Gil) that capital cannot have
two prices.

I think the modern view isn't so extreme, but in many senses it is worse.
Ricardo just says well, there's a contradiction here, because according to my
definition of value, goods ought to exchange at their values but according to
my Law of one price, they must exchange at EPRP. Modern comparative statics
says, actually they don;t do either but EPRP prices can be treated *as if*
they were actual prices. That's what I take the concept of 'long run' to mean.

The problem is that empirical actual prices *can't* be treated as if they were
long-run prices, and if one does this, it produces catastrophic errors.

Not least, it yields a rising profit rate where Marx's treatment (as I
interpret it) yields a falling profit rate. You can't get much more
catastrophic than that, if you are interested in the validity of Marx's
theory, not to mention the behaviour of actual markets.

To the extent that prices did empirically diverge from EPRP the 'Ricardian'
(comparative static) view treats this divergence as an accidental deviation
from a long-run trend, which seems to be your position
though I'm not clear. That's my understanding of the term 'long-run price' in
any case.

My point is a very straightforward and standard non-equilibrium criticism; the
long-run never happens. The process of so-called 'adjustment' (I think Marx
would speak of this as the tendency for profit rates to equalise) begets
forces that move the target, that alter the general profit rate, alter
sectoral capital compositions, and drive apart that which the equalisation
process drives together. The process is path-dependent. Moreover, the path-
dependent effects modify all fundamental variables (eg the rate of profits)
If, therefore, one eliminates the dynamic effects of the adjustment process
itself, one ends up with completely different results: false results, I
would say.

Moreover the processes of adjustment make capitalism what it is: the drive
for superprofits (which Marx discusses extensively) which in turn drives the
movement of capital. Paradoxically *unless* profits diverge
from each other, the market has no dynamics and there cannot even be a
tendency towards equalisation. By its very nature, the market is in a constant
state of failure. This failure is not an exception to the market; it is what
the market consists of. 'Perfect competition' is an utter oxymoron; if it's
perfect, then there's no competition.

I think that is one of the reasons that Marx himself doesn't use the word
'natural price'; that's why he doesn't say "I'm doing natural prices, better
than Ricardo"; he says "I'm doing something else, superior to Ricardo". Of
course in so doing he is entitled to say, and does say, "this is what Ricardo
was actually trying to get at, and couldn't", just as Einstein is entitled to
say "The curvature of space-time is what has hitherto been called gravity."
Whenever science invents a superior concept, it sublates the preceding
concepts; the new concept explains everything the old concept was intended to
explain but also overcomes the contradictions of the preceding concept.

One of the most important ways in which price of production sublates Ricardo's
"natural price" is that it abandons the supposition that Ricardo always makes,
of the equalisation of supply to demand. "Natural price" cannot then be
defined, as Ricardo would have liked, and as Ricardo actually defined value,
as the price which the market "would" obtain "if" supply equalled demand. No
such hypothesis is neeeded. Instead we take the actually observed prices of
capital advanced, divide this into the actually observed time worked less the
actually observed price of labour-power, and derive the rate of profit. This
rate has empirical reality; it isn't something that prices 'tend to' or 'might
become'; it's what exists. It is nevertheless not the same as the price rate
of profit because it is measured in labour-time; as Andrew's paper
demonstrates and I have in the past also shown, the rate of profit is not the
same in labour-time as it is in money or 'physical units'.

That's my definition, and I think it's Marx's too, and I don't think it's
Ricardo's. The tremendous advantage of it is that it applies under actual
market conditions, so that it allows us to study non-equilibrium behaviour in
its full complexity. We may therefore study all manifestations of the law
of value and all variants of capitalist motion. We are not confined to use
a concept that is valid only when the market is in stasis, that is, valid
only under conditions that cannot happen and which contradict the very
nature of the market.

It is perfectly possible with this definition to demonstrate dynamic
processes through which this non-equilibrium general profit rate and the
resulting non-equilibrium production prices, 'regulate' observed prices. I
think that what actually happens is more or less what Marx says, that this
regulation takes place over the period of the whole business cycle; I think an
empirical study would show (and this is what Marx himself reports) that the
*moving average* of market prices over the period of a cycle, tracks the
movement of these non-equilibrium production prices. I think it is quite easy
to show the processes that lead to this phenomenon; if a superprofit is
realised in a given sector (price higher than the EPRP price) then capital
migrates into this sector and brings the price down. However in general, it
does not bring it *closer* to the EPRP price but to the *other side* of the
EPRP price so that the EPRP price appears as regulator only in the average,
not as an approximation.

We don't need any notion that the EPRP price is a long-run tendency, in order
to express this idea.

Now let's look at the alternative, the idea that EPRP 'regulate' actual prices
by serving as long-run prices, a concept which in the literature means that
that actual prices are merely an accidental deviation from EPRP; that in some
sense EPRP 'approximate' actual prices.

The two ideas really are different. If the sun were to serve as the 'long-run'
position of the earth, this would mean that either the earth was actually in
the sun, or that it was on average so close to the sun that its distance from
the sun doesn't matter. This is not so; nevertheless the sun's position both
'regulates' the position of the earth, and serves as its average.

My fundamental point is that under technical change it is *impossible* for
market prices to approximate to EPRP prices.

*If* the economy is static, that is, if technology isn't changing, it turns
out that nevertheless EPRP prices have an important property; we can show that
there is a possible process of adjustment which over time could be conceived
of as allowing goods to exchange at non-equilibrium prices, and nevertheless
converging on EPRP prices. I think that this property is the *main*
justification for treating them as an aspect of reality. As long as we
hypothesise a static economy, we (or at least, equilibrium economists) can
wave their hands in the air and say 'OK, prices don't equal EPRP prices. But
they move around them, and they get closer to them.'

But this property vanishes when we introduce technical change; that's what I
demonstrate. With secular technical change, it is impossible to devise an
adjustment process such that profit rates are equal or converge, *and* market
prices approximate to EPRP prices.

In my paper I demonstrate this: I show that one or other of the fundamental
Sraffian propositions must be violated in any actual process of exchange;
either profit rates diverge, and goods exchange at prices of production, or
market prices diverge indefinitely from prices of production. EPRP *cannot* be
the basis of any actual exchange.

I think this is a pretty severe hole: what justification is there for using
the word 'price' for something that cannot function as the basis of exchange?
What meaning can we give to the concept of 'long-run' prices if it is actually
impossible for market prices to approximate them? What is left, that they
actually explain?

Therefore, 'long-run' prices *cannot* act as a determinant of actual prices.
The two don't have any necessary relation.

I hope this offers some clarification.