Political Economist

The purpose of these illustrations is to show how and why, the classical economists linked relative prices (exchangeable values) to relative total labor requirement.

1. Case A: Commodity Production alone

l    This is a hypothetical situation in which various producers use particular means of production to produce different goods, which they sell under competitive market conditions. Each producer owns his means of production (tools) and keeps all of income per hour sales.

l    The goal is to introduce us to the notion of competition without yet bringing in profit and/or rent (hence without bringing in classes yet). This is Smith and Ricardo’s “Rude and Early State”, and Marx’s “Simple Commodity Production”

        i.            At these particular market prices, income per hour in beaver production (Yb =$11/hr) is greater than income per hour in deer production (Yd = $9/hr). Thus more producers will enter beaver production, raising beaver supply relative to beaver demand. The price of beavers, and hence income per hour in beaver production, will fall. The opposite will happen in deer production, whose price and income per hour will rise.

      ii.            Though there may be continuous overshooting and undershooting, the center of gravity of this process is a set of competitive prices that yield roughly equal incomes per hour in the two sectors. Hence these competitive prices will necessarily be proportional to total labor requirements.[1]

    iii.            Note that total requirements in each sector represent the labor required to produce input (traps, bow and arrows) plus the labor required to produce the sector’s output (beaver and deer). Raising productivity means it takes less time to conduct a given task, so that more output can be produced in a given amount of labor time. Thus productivity rises as labor requirements fall. But since relative competitive prices are equal to relative (direct and indirect) labor requirements, a sector whose (direct and indirect) productivity rises relatively faster will experience a relative fall in its competitive price. This points is central to the classical tradition.[2]

2. Case B: Commodity Production Under Capitalistic Conditions

        i.            We continue to consider a situation in which competition produces equal income per hour in each sector. Then we already know that under these conditions relative competitive prices will be equal to relative total labor requirement:  Pi*/Pj* = Li/Lj = 2

      ii.            But now, each sector’s (uniform) income is split between producers-turned-workers (whose labor now earns wages) and capitalist-owners of the means of production (whose business now earn profits).

l    If competition among workers results in equal wages per hour (Wi = Wj = W*), then since total incomes per hour are assumed to be equalized, this means that profits per hour are also equalized across sectors (Πi = Πj = Π*).

l    This makes it clear that the existence of class and class incomes (wages and profits) does not necessarily require a change in the preceding competitive pricing rule.

    iii.            Since (real) wages are equalized across sectors, the preceding situation is a competitive outcome for labor. So the question becomes: can it also be a competitive outcome for capital? For this to be case, profit rates would also have to be equalized across countries.

l    The rate of profit is defined as r = profit/capital = profit per unit labor/capital per unit labor = Π/K. Profit per hour are equal across sectors in the current situation (Πi = Πj = Π* = $6/hr). Hence if capital per unit labor was also equal across sectors (Ki = Kj = K), so too would rates of profit. For instance, if Ki = Kj = K = $60 per hour, then profit rates would be equal across sectors (Ri = Rj = R*=10%), and the previous pricing rule would also a competitive outcome for both labor and capital.

3. The upshot of the preceding analysis is that the proportional relation between competitive prices and total labor requirements has to be modified only when all of the following conditions hold:

                   i.           Class exist, so that sectoral incomes is divided between wages and profits

                 ii.           Competition equalizes real wages across sectors (Wi = Wj = W*)

               iii.           Competition equalize profits rates across sectors (Ri = Rj = R*)

                iv.           And Capital-labor rations are unequal across sectors (Ki ≠ Kj)

4. This classical perspective on competitive prices leads to two further questions.

l    Does the existence of unequal capital-labor ratios merely modify the previous pricing rule, or does it overthrow it altogether?

l    How different is the modified rule, in size and in determination, from the basic one? These are exactly the issue taken up by Ricardo and Marx.