Re: (OPE-L) Ajit's paper

From: Phil Dunn (pscumnud@DIRCON.CO.UK)
Date: Sun Jun 06 2004 - 15:33:26 EDT

Ajit Sinha wrote:
>what is price? I guess both of us would agree that it
>is not a thing or an animal like a dog. By price
>economists mean a set of ratios that exchange of
>commodities follow in a given circumstances. Once
>those circumstances are specified, one knows what
>those ratios are--they have no other place to go. Your
>contention is that the ratios that prevailed in the
>previous period must be the part of the specification
>of the circumstances that determine prices in the
>present period. But the contention begs the simple
>question: but on what grounds? Your answer, I presume
>would be: the cost or measure of capital goods on
>which a rate of profits is earned was bought in the
>previous period, and so those prices are relevant in
>determining today's prices (I guess, this is what the
>TSS argument is). So let's follow this to see where it
>takes us. Let us suppose that I used 2x and 3y to
>produce 1 unit of z. The price of x and y in the
>previous period happened to be $25 each, and the price
>of z in the current period happens to be $60, so
>according to your calculations I have made 20% rate of
>profit (alternatively I add 20% rate of profit on my
>$50 investment and sell the commodity at $60). But let
>us suppose that the prices of x and y have risen from
>previous period to the current period by 100% [60%, surely. PD], that is
>now they are $40 each. Now, if this is the case, then
>I have to be an idiot to think that I have made 20%
>rate of profit. Any business person would not be such
>an idiot. No matter at what price s/he bought her
>inputs, she must realize that she does not now have
>enough to stay in the business--given she cannot even
>produce one unit now. That is why to claim that
>profits must be calculated on money capital actually
>spent rather than cost of the replacement of capital
>goods amounts to irrational calculations. Economies
>cannot run on such irrational calculations. As you can
>see, my business is gone under but you would like to
>convince me that it is doing pretty good.

Hi Ajit

Not good enough.  You fail to distinguish between a general rise in
prices and a rise confined to just x and y.
If the rise is confined to x and y then the rate of profit is indeed
20%.  Whether the business person decides to continue operations
depends, inter alia, on whether she can make a profit when x and y
are $40 instead of $25.
That depends on the dollar price of z in the second period and
inflation).  The money capital required can be borrowed.

If, on the other hand, the rise in prices is due to general inflation
of 60%, then she has made a loss.

Profit (in period end dollars) = $60 - 1.6 times $50 = -$20

Suppose that the value of money is 0.16 hours per dollar at the start
of the period.  At the end it will be 0.1 hours per dollar.

Surplus value = $60*0.1 - $50 *0.16  =  -2 hours

The rate of profit is calculated on the VALUE of money capital
advanced (8 hours).  This does not change over the period.  The value
of replacement costs is not relevant.  Again, the decision to
continue operations is a matter of prospects.



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