Re: (OPE-L) Ajit's paper

From: ajit sinha (sinha_a99@YAHOO.COM)
Date: Mon Jun 07 2004 - 09:53:14 EDT

--- Phil Dunn <pscumnud@DIRCON.CO.UK> wrote:
> 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.
I don't mean general inflation. I mean changes in
prices of x and y. Let's suppose I go to you to borrow
money for my next round of production. I tell you,
look I just made 20% profit in this business, so
please lend me some money to reinvest in it. Given
that you follow TSS logic, you gladly lent me the
money. But again the same thing happened. The prices
of x and y rose to $80 each and my z is now priced at
$96. So I again go to you asking to borrow more money
to carry on my business. Tell me for how long you will
keep faith in TSS and keep lending me money? Economics
needs to know which sector is viable and which is not.
The viability of a sector depends upon whether it can
keep producing at the same level. So you will see that
what I wrote was good enough once you start to think
of yourself as the person who may have to lend money
to a TSS business fellow. Cheers, ajit sinha

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