# [OPE-L:3725] COST PRICE

From: Rakesh Bhandari (bhandari@Princeton.EDU)
Date: Sat Aug 26 2000 - 04:36:48 EDT

re3722
Ajit,
I think you missed my point. I include your reply below. This can't be a
point by point reply at this hour and in my state. But I shall strive for
brevity and coherence, and then sleep.

How is r determined?

Total value(a)-total cost price(a)=total profit(a)
total profit(a) divided by total cost price(a)=r(a)
The cost prices will then be kr(a).

If we now modify cost price, what changes?

Total value remains the same, and that's ultimately the most important
'variable' of all since it is this mass which sets the limits within which
each capital can move and therefore the enlargement to any particular
capital.

And the method by which r is determined remains the same.

So if we modify the cost prices of this SAME system, then what do we have
Total value (a)-total cost price (b)=total profit(b)
total profit (b) divided by total cost price(b)=r(b)

And the cost prices are now k(b)r(b).

That total value (a) does not change despite a modification in the cost
prices is not a "normalization" condition but rather what is logically
entailed by the labor theory of value. That is, how can the value
transferred from the means of production change or the new value which
workers are adding change simply if the input prices have been modified?

By working on the assumption of the truth of the labor theory of value,
Marx shows that it can only govern bourgeois society through formation of
the average rate of profit, not in terms of relative prices. There is
actually no attempt in Marx's work to get the relative unit prices right as
there is in bourgeois economics.

Marx is not interested in demonstrating what the relative prices or the
exact average profit rate would have to be. That would be impossible on the
basis of tabeleau anyways because it does not deduct rent and interest
payments before determining the average industrial rate of profit; it makes
no allowance for monopoly; it makes no allowance for differential turnover
times. Any attempt to determine actual prices is simply a pseduo
quantitativism.

So the attempt to test Marx on the terrain of relative prices is simply a
waste of time; actually relative unit prices have no place in his theory.
He doesn't even really consider them. His prices of production are
aggregates for industries; they are not unit prices.

But there are much more important testable predictions which derive from
Marx's hypothesis of the form in which in the law of value regulates
capitalist production. That is, if the law of value holds in this Marxian
form, it may then be possible for an individual capitalist to appropriate
the average rate of profit and even more just as less surplus value is
produced in his own enterprise due to the cost cutting substitution of more
direct labor for less indirect labor, which thereby depresses the average
rate of profit in the system as a whole on the basis of a rising OCC for
total capital though this is not felt immediately by the innovative
entrepreneur himself. This is the central paradox with which Marx was not
concerned, not the unexpected effects on relative prices from
distributional shifts. That is a Ricardian problem which shares with
bourgeois microeconomics an obsessive concern with the hardly important
question of relative values. It is not Marx's main concern at all; if Marx
is concerned with prices, it is not the relative ones in a snapshot of
time, it is the continuous revolution in values in time (again see Korsch).

Also, you seemed not to understand my point that it is not the precise
quantitative magnitude of the profit rate which matters (or has to be
determined) as much as its downward movement as an index of a looming
shortage in the mass of surplus value that is needed for further
accumulation.

Finally you tell me on the authority of one the heavyweights in the
Sraffian world (whose work I do not know) that in the lieu of simultaneous
equations Marx had no other recourse than value in determining the profit
rate. Leaving aside my previous point that Marx was not interested in
relative prices, I now simply turn around and say that because you have
expunged value you have had no recourse than to turn to simultaneous
equations in the determination of the profit rate and this means you must
accept the fantastically atemporal assumption that input prices must equal
output prices. Moreover, once you resolve your problem with the use of this
upper reach high school math, you can no longer understand the central
paradox with which Marx was concerned. So Marx's mathematical ignorance
here puts him on much more solid ground than you and your Anglo Italian neo
Ricardian friends who now survive apparently only as critics of Marx's
logical inconsistencies, since the neoclassicals seems to think reswitching
and all that amount to curiosa and no more.
Yours, Rakesh

>________________________
>
>As I understand it, up till here you have not said anything different than
>Shaikh's 1977 paper on the transformation problem. You are basically describing
>the iteration method suggested by Shaikh. But as Shaikh knows, and you should
>too, that the iteration method is nothing but a cumbersome way of solving the
>simultaneous equation system. The idea that it was logical for Marx to begin
>his iteration with the assumption that value = price is neither great nor
>objectionable. Since formally you could begin with any other assumption and
>still eventually arrive at the same result. By the way, instead of suggesting
>iteration method, Garegnani suggests that in the absence of simultaneous
>equation method, Marx had no other way to arrive at the rate of profits than go
>via value. See my paper in RRPE 32 (2), 2000 for further discussion on Marx's
>method and the whole question of profits being a non-price phenomenon. It's all
>there in Sraffa!

>No serious problem till here. However, you should keep in mind that "BUT...the
>total mass of
>value will not have been changed (transferred value + new value added)" can
>only be accepted as a condition imposed on the system. Mathematically you
>cannot prove that total value must be equal to total prices of production after
>what you have accepted above. (May be you should take a look at my piece on
>'transformation problem' in *Encyclopedia of Political Economy, 1999,
>Routledge)

>
>You want me to take a chapter entitled, 'the transformation in Marxism: Last
>Refuge of the
>Bourgeoisie?' seriously? Most of the bourgeoisie haven't even heard of the
>transformation problem. I can tell by the title only that Mattick Sr. is not
>too knowledgeable about the transformation problem. The chapter most likely
>will be full of time wasting rhetoric.

>
>It is more importantly about getting the rate of profits right.

>I don't understand what is this "most brilliant theoretical discovery". As far
>as imposing the condition that total value is equal to total prices of
>production (in the gross sense), not many people have any serious objection to.
>It is just a normalization equation. If you think there is some deep philosophy
>issue as far as the transformation problem is concerned. Secondly, who is
>problem? And as far as your claim that "and profit will STILL be apportioned
>according to the principle of the average rate of profit on cost price which
>for Marx is the FORM in which the law of value must assert itself" is
>concerned, the problem, as you have yourself accepted, that the "cost price" of
>Marx is not correct. So you now have two problems, neither you know the "cost
>price" nor you know the "average rate of profit". So what you gonna do now? As
>far as your "principle" is concerned, every child knows that. If you think that
>it is Marx's great discovery, then you got to be kidding yourself.

>So my guess was correct. Mattick Sr. is poorly read on transformation
>literature. It is true that for simplicity sake Bortkeiwicz assumed a simple
>reproduction model. But as early as 1948, Winternitz liberated the
>Seton and Morishima (who gives more emphasis on the dynamic transformation
>problem than the static one) he would have never bothered to write this
>meaningless mumbo jumbo. By the way, in my Ph.D dissertation I have developed a
>solution to the transformation problem in a dynamic context. Both the Marx's
>conditions will be satisfied in the balanced growth model if we assume that the
>labor employed to produce capitalist consumption is unproductive. I have not
>published this solution for the simple reason that it restricts the relevance
>of Marx's value analysis a bit too much, and Marx, though came close to
>declaring luxury production as unproductive, never did so. Cheers, ajit sinha
>
>>
>>
>> All the best, Rakesh

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