Re: how does it work?

I should have written:

In article <rvien-B72238.06482019032006@xxxxxxxxxxxxxxxxxxx>, Robert
Vienneau <rvien@xxxxxxxxxxx> wrote:

I think an answer
to the Original Poster's questions should articulate some conditions
needed for smooth reproduction of a capitalist economy. One might
also mention that it is doubtful that markets alone can achieve
those conditions. Actual capitalist economies do not stray too far
from those conditions because of the embedding of markets in other
institutions conventions, such as on normal prices and fair wages.
One also sees political interventions, such as during the Great
Depression. Thus, to see how the self-reproduction of capitalist
economies comes about, one needs to look at economic history.

Here's another way of looking at these conditions. Imagine firms
in the economy partitioned into two great sectors. Firms in the
first sector produce capital goods. Firms in the second sector
produce consumer goods. The value of the yearly output in
each sector is the sum of the value of the captial goods used up
in that sector and the value added by labor in that sector. The
value added by labor, in turn, is divided between wages and
profits.

One condition for smooth reproduction of a competitive
capitalist economy is that prices be such that the same rate
of profit be earned in both sectors:

(a11*p1)*(1 + r) + a01*w = p1

(a12*p1)*(1 + r) + a02*w = p2

where
a11 = the capital goods used up per unit output (e.g., ton
steel) in the first (steel-producing) sector.
a12 = the capital goods used up per unit output (e.g.,
bushel corn in the second (corn-producing) sector.
a01 = the person-years of labor hired per unit output in
the first sector.
a02 = the person-years of labor hired per unit output in
the second sector.
p1 = the price of unit output (ton steel) in the first sector.
p2 = the price of unit output (bushel corn) in the second
sector.
w = the wage, that is, the price of hiring a person-year.
r = the rate of profits.

I'm assuming wages are paid at the end of the period, not
when the workers are hired. Given one of the distributive
variables (the wage or the rate of profits), the above system
of equations allows one to solve for the ratio of the price
of steel to the price of corn and either the rate of profits
or the wage in terms of the consumption good, respectively.
That is, the above conditions determine relative prices.

Quantity variables are easily introduced. The total output
of the first sector can be valued as the sum (a11*X1*p1
+ a01*X1*w + a11*X1*p1*r), where X1 is the tons steel
produced. Likewise, the total output of the second sector
is (a12*X2*p1 + a02*X2*w + a12*X2*p1*r), where X2 is the bushels
corn produced by the second sector.

Now consider an economy that continually reproduces itself
on the same scale (simple reproduction). There are no
technological improvements. Workers and capitalists consume
all wages and profits, respectively. In his case, the capital
goods used up in the second sector must trade for exactly the
consumption goods purchased by the workers and capitalists in
the first sector:

a12*X2*p1 = a01*X1*w + a11*X1*p1*r

This condition determines the relative size, X2/X1, of the
two sectors.

One can complicate the picture by adding savings and regular
growth. Consider a case of expanded reproduction in which
workers still consume all their wages, but capitalists
save a fraction, s, of their profits. One still has the
condition that the capital goods purchased by the corn-
producing sector equal in value the consumption goods
produced by the steel-producing sector:

a12*X2*p1 + s*a12*X2*p1*r = a01*X1*w + (1 - s)*a11*p1*X1*r

A further important complication results from considering
technological change. If the analyst postulates a certain
yearly increase in productivity in each sector, he can
set out the above conditions in a more complicated form.
The evolution of relative prices and relative size of
the sectors is determined in the model. If the increase
in productivity differs among sectors, relative prices
and the composition of output will change.

One should note that these conditions are not set out
at the level of the individual transaction (purchase or
sale). The willingness of all individuals to engage in
the trades they make does not ensure that the economy
will satisfy these conditions. In fact, if one appends
a condition that the labor force be fully employed
in some sense, economists have never been able to specify
how participants in a market economy can discover the
prices and quantities needed to ensure smooth reproduction
merely by market adjustments of prices and quantities.
Furthermore, these sort of conditions point out tensions
that will arise in a capitalist economy when they are
not met.

I think the above is one more rigorous (and elegant)
way of setting out the Original Poster's question. I
strive to avoid confusions between money and commodities,
between saving and lending. And I try to indicate ways
to extend these considerations.

--
Mostly economics: <http://www.dreamscape.com/rvien/#PublicationsForFun>
r c
v s a Whether strength of body or of mind, or wisdom, or
i m p virtue, are found in proportion to the power or wealth
e a e of a man is a question fit perhaps to be discussed by
n e . slaves in the hearing of their masters, but highly
@ r c m unbecoming to reasonable and free men in search of
d o the truth. -- Rousseau
.

Relevant Pages

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  • Re: how does it work?
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  • Re: how does it work?
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