I am back from several weeks of travel, and finally have the time to think about and respond to Gils several recent posts (especially 7398 and 7399) on whether the rate of profit is uniquely determined by the technical conditions of production and the wage rate. Gil, thanks very much for your very interesting "thought experiment". It has been thought-provoking indeed. Sorry for my delay in responding. First, a summary of Gil's argument as I understand it. Gil has agreed with me that absolute prices should be defined as exchange-ratios with money, rather than pure numbers (as in Sraffas theory), from which it follows that the money commodity itself (e.g. gold) does not have an absolute price (in the above sense), because the money commodity is not exchanged with itself. Therefore, Gil suggests that the "price of production" equation for the gold industry should be replaced by an "accounting equation", which does not have the price of gold as a variable (since money has no price). The resulting system of equations consists of n equations ((n-1) price equations and the "accounting equation" for gold) and (n+1) unknowns (the (n-1) absolute prices, the wage rate, and the rate of profit). Now, if the wage rate and the rate of profit are taken as given, along with the technical conditions of production (as I have suggested, because the rate of profit is determined outside this system of equations), then this system of equations would be overdetermined, with n equations and (n-1) unknowns, such that no consistent solution is possible. If, on the other hand, only the wage rate is taken as given, then the rate of profit would be uniquely determined, contrary to my previous argument. Gil, I hope this summary is accurate. Please correct, if necessary. I think the flaw in Gil's argument is the "accounting equation" for the gold industry. First of all, this equation assumes that gold is produced by capitalist firms. But most of the gold produced until around 1900 was not produced by capitalist firms, but instead by self-employed "gold-diggers". The great increases in gold production in the 1850s and then again in the 1890s were mostly produced by self-employed producers in California and Australia and Alaska. Therefore, your assumption that the gold industry is a capitalist industry was not true before the 20th century. Things changed in the 20th century. After the easily extractable gold was exhausted, deeper mines had to be dug and heavy machinery utilized, which led to the dominance of capitalist firms. And S. Africa became the main source of gold. In the pre-20th century case of gold not produced by capitalist firms, the rate of profit is equalized among the (n-1) capitalist industries, producing non-monetary commodities. Therefore, the system of equations expressing the equalization of the rate of profit should consist of only these (n-1) equations, with no equation for the gold industry (such as your accounting equation). This system of (n-1) equations has (n+1) unknowns - the (n-1) prices, the wage rate, and the rate of profit. In this system, taking the wage rate as given does not uniquely determine the rate of profit. These (n-1) equations and the wage rate are consistent with an infinite number of rates of profit, which could be determined outside this system of equations, as in Marxs theory. And, if the rate of profit is also taken as given, along with the wage rate, then this system is not overdetermined, but rather determinant of the (n-1) absolute prices. Secondly, your accounting equation assumes that money is a commodity, which has not been the case since 1975. In the current period of fiat money, there is no industry that produces the money commodity, and no industry whose commodity-product does not have a price. Thus there is no equation for the money commodity that does not have a price, like your accounting equation. Instead, all n industries have a price, and all n equations have a price variable. Thus the system of equations now consists of n equations in (n+2) unknowns the n price variables, the wage rate, and the rate of profit. Again, taking the wage rate as given does not uniquely determine the rate of profit. The given technical conditions and wage rate are consistent with an infinite number of rates of profit. And, if the rate of profit is also taken as given, along with the wage rate, then this system is not overdetermined, but rather determinant of the n absolute prices. Therefore, your accounting equation for the gold industry is not valid before 1900 and after 1975. At best, it is valid only for the 75 year period of capitalistically produced gold as the money commodity, and I am not sure it is valid for this period either. In this case, your equation assumes that the capitalist gold industry participates in the equalization of the profit rate, just like all other capitalist industries. But I am not sure that this is true. At the very least, the adjustment process through which the rate of profit in the gold industry might be equalized to the average rate of profit is fundamentally different from the usual adjustment process in all other industries. The usual adjustment process through which the rate of profit in a given industry is equalized to the average rate of profit is through a CHANGE IN THE PRICE of the commodity produced in that industry. If, for example, the rate of profit in a given industry is below the average rate of profit, then capital will flow out of this industry, causing a reduction in the supply of this commodity, which in turn causes an increase in its price and therefore an increase in its rate of profit toward the average rate of profit. However, this usual adjustment mechanism is not possible for the money commodity, because the money commodity has no price. Therefore, its price cannot change in order to equalize the rate of profit. Instead, if the rate of profit in the gold industry is lower than the average rate of profit, and if capital flows out of the gold industry as a result, thereby reducing the supply of gold, then the effect will be a proportional REDUCTION IN THE PRICE OF ALL OTHER COMMODITIES, rather than an increase in the price of gold (since this is not possible). This reduction in the price of all other commodities increases the purchasing power of gold, and also increases the rate of profit in the gold industry to a small extent, to the extent that the price of its inputs are reduced by the general decline of all prices (which is likely to be very minor). Now, what if the rate of profit in the gold industry is still below the average rate of profit: will there be a further outflow of capital, or will the extra incentive of the increased purchasing power of gold be sufficient to stop further capital outflow, in spite of the fact that the rate of profit is still below the average? A related unique aspect of the adjustment process in the gold industry is that part of the adjustments in the supply of gold in circulation is through hoarding and dishoarding. The main cause of variations in the supply of gold from hoards is changes in the purchasing power of gold, caused by changes in the prices of all other commodities. The rate of profit plays no role in hoarding and dishoarding, since gold is not being produced. In the case just discussed, of a below average rate of profit in the gold industry, it seems possible that a partial adjustment to equal rates of profit, which reduces the prices of all other commodities, would induce some dishoarding, and thus would offset the reduction in the supply of gold currently produced, which would inhibit the further adjustment to equal rates of profit in the gold industry. In sum, because the adjustment process to equilibrium of supply and demand in the gold industry is by means of a change in the price of all other commodities, rather than a change in its own price, the purchasing power of gold seems to play a more important role in the supply of gold, and perhaps even a more important role than the rate of profit. I will stop here for now, and see what Gil (and Gary and others) have to say about the above. I just think that the money commodity is fundamentally different from all other commodities, and that we should not just blithely assume that the rate of profit is equalized in the gold industry, like in every other industry. I want to study the actual workings of the gold industry during the gold money period, and also think some more about the theoretical issues involved. I would appreciate any references on the gold industry, and especially on the issue of the equalization of the profit rate in the gold industry during the gold standard period. Gil (and others), I look forward to your response and to more of this productive discussion. I am up in Maine and have access to email only 2 or 3 times a week, so my response rate will probably be slow. Comradely, Fred
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