_{1}

An attempt is made here at proving a controversial intuition: real profits may be determined by prices not by wages.

In theories following, the classical economic approach, the prices of commodities and the income distribution are closely linked. Indeed, David Ricardo, Karl Marx and Piero Sraffa, all devised methods for the determination of prices founded on assumptions of given income distribution, either equating values of commodities to labour (directly and indirectly) incorporated in them or working out relative prices as the results of simultaneous equations representing the productive conditions of the industries making up an economic system. In fact, we argue that perhaps an opposite logical choice may be made, assuming the rate profit as the effect and the level of prices as the cause.

An insurmountable hurdle to this way of thinking is usually referred to as the circular reasoning which would apparently follow from the fact that prices, on their turn, usually depend on the rate of profit. As far as it may go, the attempt to sever the nexus between prices and distribution by entirely breaking down the price of a commodity into wages and profits, paid during the last and the previous production periods to realize it, would not almost ever reach the end: a residual of means of production will usually be leftover. So, the loop among distribution and prices seems impossible to be cut by taking the level of prices as the given circumstance.

However, in a fundamental case, such obstacle can be overcome, and the alternative path can be followed, by taking as the independent variable a peculiar price, the one of the “Standard Commodity”, the ingenuous analytical tool Sraffa [

Now we make the hypotheses that (a) wages be paid post factum; and (b) the “V” value of the Standard Commodity is gauged by the quantity of labour it can pay for (i.e. by the labour it “commands”, in the wording of Adam Smith). Then, in Equation (1) below, “V” is worked out as the limit of a sum, defined by a geometrical series, where “r” is the rate of profit and “1 + R” is the proportion between product and means of production:

V = w ( ( 1 + r ) / ( 1 + R ) ) 0 + ⋯ + w ( ( 1 + r ) / ( 1 + R ) ) n + ⋯ (1)

when “n” tends to the infinity.

As a consequence, we might as well assume that the bargaining between entrepreneurs and workers will determine wages (as suggested by John Maynard Keynes [

( 1 + R ) / ( R − r ) = V / w (2)

whereby: if, say, “V” increased from the minimum, viable level “(1 + R)/R” towards the infinity, then “r” would grow from zero to the maximum “R”.

The author declares no conflicts of interest regarding the publication of this paper.

De Marchi, M. (2019) Why A. Smith Might Have Been Right, After All. American Journal of Industrial and Business Management, 9, 1980-1982. https://doi.org/10.4236/ajibm.2019.911129