Dynamic Adjustment and Long-Run Inflation in a Marxian Model

Author(s): Michele I. Naples

Reviewed work(s):
Source: Journal of Post Keynesian Economics, Vol. 8, No. 1 (Autumn, 1985), pp. 97-112
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MICHELEI. NAPLES

Dynamicadjustmentand long-run
inflationin a Marxianmodel

In the divisionof laborbetweenPostKeynesianandSraffiantheory,

inflationhas been the provinceof the formerand long-periodprice
theorythatof the latter.PierangeloGaregnani(1983) has contended
thatnaturalpricesarethecenterof gravitytowardswhichtheeconomy
tends.YetH. Nikaido(1983)has shownthatwhenthemachine-goods
sector is more capital-intensive than the economyas a whole, the
systemwill tendto moveawayfrom,nottowards,its long-runposition
(seealsoRoemer,1980).Interestingly, Nikaidoassumesawayinflation
undersimplereproduction, by setting aggregatechangein money-
the
capitalin the systemequalto zero.
This paperexploresthe consistencybetweenMarx'shypothesized
mechanismwherebytheprofitrateis equalized,andSraffianlong-run
positions.Toanticipate,it is foundthattheMarxianadjustment process
impliesthatchronic,pureinflationis likely to characterize the long
period.
Firsta standardof pricefor the long-runmodelthatallowsfor the
recognitionof purelynominalchangesin priceswill be defined.Then
thelikelihoodof long-periodinflationwill be derived.It is shownthat
for Marx'sdynamicadjustment mechanismto be renderedconsistent
withpostulatedconstantprices,it wouldbe necessaryto positirrational
The authoris Assistant Professor in the Departmentof Economics, Rutgers
University.
She wishes to thankMargaretAndrews for many insightful comments and con-
versations about this paper.Thanksare also due to L. Beneria, S. Bowles, S. Cohn,
J. Crotty, J. Epstein, D. Foley, H. Gintis, R. Guttmann,D. Laibman, S. Marglin,
L. Rapping, S. Roncaglia, J. Schor, N. Shapiro, J. Walker,and an anonymousref-
eree for helpful suggestions.

Journalof Post KeynesianEconomics/Fall1985, Vol. 8, No. 1 97

98 JOURNALOF POST KEYNESIANECONOMICS

firms or a central plannerand more extensive "perfect information"

than that required for Walrasiangeneral equilibrium. A concluding
section traces the implications of this result.

Money and nominalprice

It is common practice in long-run models to designate a money-com-
modity (whether gold, a numeraire, or a composite commodity) and
interpretprices as relativeprices or real exchange-values.Sucha model
is incapable of showing purely nominal price movements. Only real
exchange-ratiosand real rates of return can be calculated when the
referencemoney is itself a commodity.Gold-moneyno more allows the
calculation of nominal prices and profits than does corn-money if its
exchangeratio is determinedby its costs of production,the real rate of
profit, and absolute rent.
Marx himself never fully recognized the distinction between nomi-
nal price and real relative price. However,he did criticize Ricardofor
treating the standardof price as if it were itself a commodity, or,
equivalently,for equatingthe determinationof nominalprices with that
of real exchange-values:

[quotingRicardo,1976, p. 29] "if wagesfell, thosecommoditiesonly

wouldfall whichhad a lowerproportionof fixed capitalemployedon
them,thanthemediumin whichpricewasestimated;all thosewhichhad
more, wouldpositivelyrise in price."

Withregardto moneypricesthisseemswrong.Whengoldrisesorfallsin
[exchange-]value, from whatevercauses, then it does so to the same
extentforall commoditieswhicharereckonedin gold, . . . it is notatall
clearhowanyrelativecombination of fixedcapitalandcirculatingcapital
in gold, comparedwithcommodities,canbringabouta difference.But
thisis dueto Ricardo'sfalseassumption thatmoney,in so faras it serves
as a mediumof circulation,exchangesas a commodityfor commodities.
(Marx,1973, p. 200)

Why should gold not exchangelike other commodities?One reason

is thatnewly mintedgold is a small proportionof the total stock of gold
and therefore provides little of the circulating medium. Second, the
supply of gold is constrainedby the scarcity of gold veins. As the
demandfor gold rises, lower-yield veins are exploited, raisingproduc-
tion costs in marginalmines andthereforeincreasingthe price of gold.
 DYNAMICADJUSTMENTAND LONG-RUNINFLATION 99

Keynes observed that when a commodity is absolutely scarce and is

demandedprimarilybecause of its social status as money, it is less a
commodity-money and more a representative-money(1930, p. 14).
While he providedthe exampleof the tribalstone monies of Polynesia,
Keynes's criteria apply equally to gold, which is also only money
because selected by law and convention.
However, Marx insisted:

The priceof the commoditywhichservesas the measureof valueand

henceas money,does notexistat all, becauseotherwise,apartfromthe
commoditywhichservesas moneyI wouldneeda secondcommodityto
serve as money-a doublemeasureof values.(1973, p. 201)

If gold has a price, is it not money? Marx is in fact collapsing two

different concepts: money-proper and money-of-account (Keynes,
1930). Commoditiesare not "reckonedin gold,"'but in a currencyunit
like the dollar,the pound, or others;such measuresof value do not have
a price, except in terms of other currencies. Gold does not serve as
money-proper until it has been evaluated in terms of the currency
(given a price). Moreover, a long-period model could incorporatea
commodity-moneyas medium of circulationand yet exhibit inflation;
in such circumstancesthe money-properwould also serve as a store of
value, since it would appreciateas the currency unit depreciated.
This distinctionbetweenthe accountingunit and money-properwas
observed by Tlrgot in 1770:

Intruth,thereis somedifferencebetweensheep,but . . . peoplewill take

as unitythe commonvalueof a sheep of averageage and of average
quality .... [S]heep,in the habitsof trade,will signifya certainvalue
which,in the meaningof thosewho understand it, carriesthe idea not
solelyof a sheep,butof a definite of
quantity each of the mostcommon
commodities, whichare regarded equivalent this value;andulti-
as to
will
mately expression so thoroughly
this meananimaginary andabstract
valueratherthanrealsheepthatif by chancea suddendecimationof sheep
occurs. . . people will say that one sheep [commodity]is worthtwo
sheep[accountingunit]. (quotedin Nussbaum,1939, p. 7)

Marx rejected such nominalist treatmentsof the money-of-account

as idealist (see his criticisms of the Proudhonistesin the Grundrisse,
1973). But the recognitionthata price standardis a conventiondoes not
mean thatnominalprices are not determinedby materialconditions. A
100 JOURNALOF POST KEYNESIANECONOMICS

materialistnominalism wouldrelatepurelynominalchanges(likeinfla-
tion) to real causes, but not by attachingthe money-of-account to a
physicalcommodity. Rather, it is necessaryto trace the structural
relationships betweenrealcausesandmonetaryor nominaloutcomes.
In whatfollows, pricesare measuredin a currencyunit, like the
dollar, ratherthanin terms of a numeraire.The implicit money-proper
is a bookkeeping-moneylike Hodgson's(1981)accountmoney,rather
thangold. Thismodificationof thestandardmodelpermitsinflationas
a possiblecharacteristic
of the long run.

The dynamic adjustment model

A firm-level mechanism whereby the profit rate would be equalized
acrossthe economywas outlinedby Marxin his expositionof how
prices of productionare determined:

[C]apitalwithdrawsfroma spherewitha low rateof profitandinvades

others,whichyield a higherprofit.Throughthis incessantoutflowand
influx, or briefly,throughits distributionamongthe variousspheres,
whichdependson how the rateof profitfalls here and rises there, it
createssucha ratioof supplyto demandthatthe averageprofitin the
variousspheresof productionbecomesthe same,andvaluesare, there-
fore, convertedinto pricesof production.(Marx,1975, pp. 195-196)

When capital leaves an industry,the remainingfirms, facing fewer

competitors, are able to sell at a higher price.2 Like other classical
economists, Marx typically assumedthat average costs are not a func-
tion of output, so the price increase permitted by capital flight is
entirely caused by a rise in the industry'sprofit margin. The reflection
of capitalflight from industry 1 is capitalentry into industry2, and an

'See Althusser (1977, pp. 94-116) on reductionismversus structuraldetermination.

2Whetherthe price is only nominally higher or has changed in real terms depends
on changes elsewhere, including in the real profit rate.
In the aggregatemodel, productionrequirementsare taken as given before prices
or the rate of profit is known. Thus the demandfor capital- or wage-goods is also
given, a function of outputlevels but not input prices. That is, the demandcurve in
basics is vertical. As Garegnani(1983) has observed, both Marx and the classicals
used supply to refer to a quantity,not a curve. Therefore when supply is below the
level of demand, price rises, but it is not known precisely how much it rises. (It is
worth noting that the demandcurve in luxuries is a hyperbola:the higher the price
of luxury goods, the lower the quantityof luxury goods purchased.The mass of
profits determinesthe shape or degree of curvatureof the hyperbola.)
 DYNAMICADJUSTMENTAND LONG-RUNINFLATION 101

increasein quantitysuppliedthere.Competitionin industry2 intensi-

fies, leadingto a fall in the profitmarginand industryprice. The
economy settles into its long-runposition when the profit rate is
averagedacrossindustries.
Marx'sdynamicadjustment modelthusdoesnotrelyon anauction-
eer in orderto propelthe economyto its centerof gravity.Nor are
expectationsexogenous-decentralized decisionsbasedon actualrates
of returnin variousindustriesleadtheeconomytowardsa stablesitua-
tion. Thecapitalthatmovesbetweenindustriesin a circulating-capital
modelis therevenueaccruedfromsalesin theimmediatepastwhichis
used to buy new raw materialsand to hire labor-timein order to
producea newgoodin theimmediatefuture.Quantitiessuppliedarea
functionof therealcapitalavailableto an industry;hencethelong run
dependson suchmaterialconditionsas capitalconstraintsas well as
expectationsaboutratesof return.
Moreover,in Marx'sdynamicadjustment modeltimeis sequential,
not simultaneous.Decisionsarebasedon profitexpectationsextrapo-
latingfromcurrentconditions.But systemicforcespreventtheseex-
pectationsaboutthefuturefrombeingrealized.Whenthefirmwhichis
drawnto a high-profitsectoractuallyinveststhere, it and all other
firmsin the industryearnlowerratesof returnthanbeforeit entered,
becauseof the effectof its presenceon quantitysupplied.As a result,
excessprofitsareeroded,theprofitrateis averagedacrossindustries,
andthe economybroughtto a self-reproducing situation.

Two examples
Marx'sbasicmodelof capitalmobilityin searchof higherprofitscan
now be appliedto theproblemof the equalizationof the rateof profit
afteran exogenouslygiven changein technique,i.e., how the system
movesfromonelongperiodto thenext.Thecaseof a reorganization of
production in basicswill be takenupfirst,andthena in
change produc-
tion conditionsin luxurygoods. Under modernmodels of simple
reproduction,only productionconditionsin basic industryaffectthe
aggregateprofitrate.Thereforein the firstcase capitalmobilitymust
redistributecapitalsuchthatthe averagerateof profitchanges,in the
secondcase suchthatthe aggregateprofit-ratedoes not change.
Suppose,in aneffortto cutcosts,a designchangein department 1 is
implemented which is and
capital-saving permits less steel equipment
to be usedto producesteel.Thechangein techniqueincreasestheprofit
102 JOURNALOF POST KEYNESIANECONOMICS

ratein the steel industryrelativeto the average.3As a result,capital

fromotherindustriesis attractedto steel. Thereis a net movementof
capitalout of departments2 and 3 and out of other capital-goods
industriesinto steel production,expandingthe supplyof steel. This
increasescompetitionin the steel industry,leadingto a fall in prices
anderosionof excessprofitsforsteelfirms.Theconcomitant shrinking
of supplyin departments 2 and3 reducescompetitivepressuresthere
andpermitsan increasein pricesandthereforetheirprofitrate.
Thisapplicationof Marx'sdynamicadjustment processis consistent
with currentlong-runmodels,includingthe hypothesizedstabilityof
thepricelevel oncetheprofitratehasbeenequalized.Turnnowto the
caseof a steel-savingchangeintechniqueindepartment 3, forinstance,
in yachtproduction.In the shortrun, yachtfirms will earn excess
profits,dueto thefall in theirsteelcosts.Butin thelongerrun,capital
will be attractedfromotherluxuryindustriesandfrombasicsto yachts,
increasingthe supplyof yachts.4Competitionin the yacht industry
intensifies,andthe pricefalls. In the longrunthe profitratein yachts
equalsthat in all otherindustries.
The paradoxariseswhenthe basic industrieswheresome mobile
capitaloriginatedare examined.The reflectionof capitalentryinto
yachtsis capitalexit frombasics-take for instancethe shoe industry.
Thesupplyof shoesshrinks,competitioneases,andtheremainingshoe
firmsare ableto sell at a higherprice. Thatis, they realizea higher
profitrate, greaterthanthatbeforethe changein technique.
Yetit canbe shownthatprofitsareonlynominallyhigher,sincethe
real rateof profitis determinedby the unchangedproductioncondi-
tions in basics. This is Sraffa'sinsight-a changein the real cost of
producinga wageor capitalgoodreducesinputcostsforeveryindustry
whichdirectlyor indirectlyuses thatgood. Thereforethe profitability
3Lowercosts of producingsteel increase the quantityof steel that can be supplied
with the existing capital (revenues)held by steel firms, which itself tends to reduce
steel prices. Here Marx must have assumed that this is not sufficient to reduce that
industry'sprofit rate to the economy average. This may be attributedto rentiers
using windfall profits and their surplus working capital to increase their luxury pur-
chases ratherthan the supply of steel. Unless circulatingcapital moves from luxu-
ries to steel, there will be no change in supply conditions in department3, so the
profit rate there will not rise to equal the new average rate.
4Clearlyone source of mobile capital might be the steel industry,where demandhas
shrunk. In the first example outlined above such adjustmentsto changes in demand
were not capable of supplyingenough capital to the high-profitsteel industryto
equalize the economy-wide profit rate (see footnote 2). So in this second example
there is no reason to assume the capital released by demand shifts will be sufficient
to bring the profit rate in luxuries back in line with the average rate.
 DYNAMICADJUSTMENTAND LONG-RUNINFLATION 103

of the economyas a whole rises, given the real wage. A changein

techniquein a luxurysectorhas no suchfeedbackon the rest of the
economy;it is anisolatedeventwithno impacton realsocialprofitabil-
ity.
Marx'sdynamicadjustment modelimpliesthatthe nominalprofit
rateriseswhenproduction conditionschangein a luxuryindustry,even
if therealprofitrate(henceforth a*) doesnot. (Thestabilityof thereal
rate of profit is demonstratedin the Appendix.)But then chronic
inflationwill resultin the new long period.
Toclarifythisoutcome,Marx'sdynamicadjustment processcanbe
dividedintofourstages:(1) theinitiallong-runposition,(2) thepoint
in timewhena newproductionmethodis firstintroducedin luxuries,
(3) the periodduringwhichcapitalmoves, and(4) the finallong-run
position.Supposeat the initialpricelevelPo,thepriceof yachtsis Py.
At stage(2), unitcostsin yachtsfall, butthepriceis still Py,andyacht
companiesearnexcessprofits.At stage(3), capitalmovementscause
the priceof yachtsto fall to Py, andthe priceof othergoodsto rise.
Thereis a fall in thepriceof yachtsrelativeto all othergoods.Relative
pricesamongbasicsdo notchangebecausetherealaverageprofitrate
has not been affected.The aggregateprice level at the beginningof
stage(4), P', thereforemayor maynot differfromP°, dependingon
therelativeeffectsof loweryachtpricesandslightlyhigherpricesof all
othergoodson thepricelevel. However,sinceat stage(4) thenominal
profitrateearnedeverywhereis abovethe(unchanged) realprofitrate,
it mustbe thatovertimethepricelevel risescontinuously, despitethe
constancy of the new relative of
price yachts.
Marx'sdynamicadjustment processthereforeimpliesthattheprofit
ratein basicsmayriseabovea* andconsequently thatsimplereproduc-
tion could be characterized by inflation.The higherthe price rise
(decline) when capitalleaves (enters)basics, greaterthe differen-
the
tialbetweenthenominalandrealprofitrates(a anda*) andthehigher
the inflation(deflation)rate.5It mustbe emphasizedthatthe inflation

5It is widely agreed that no profit-maximizingfirm will implementa new technique

if it means a lower profit rate for the firm. But if the innovatingfirm does not set
marketprice, it judges the new techniquein terms of its associated lower costs and
above-averageprofits. Once others in the industryhave taken up the new technique,
the marketprice will fall, and a priori the profit rate may be above or below that
before the innovation. Thus a change in techniquecan lead to a fall in the rate of
profit in department3, because decisions about new techniques are made at histori-
cal prices, i.e., marketprices, not at the naturalprices resulting after the technique
has spread throughthe industryand the profit rate equalized throughoutthe econo-
my. See Andrews (1984); Laibman(1983).
104 JOURNALOF POST KEYNESIANECONOMICS

or deflation so produced is not a temporaryadjustmentphenomenon,

but a permanentfeatureof the long period. The nominalprofit rate at
which the system comes to rest is a function of the permanentlevel of
competitionin the variousindustriesonce capitalhas been reallocated.
The same competitive forces that reduce the nominal profit rate in
yachts when capital enters raise the nominal profit rate in shoes when
capital leaves. Once inflation is set in motion, firms and workers
simply pass on their cost increases. Real incomes do not change, yet
there is no endogenousmechanismto cause the inflationto dampenor
dissipate.

Dynamicrequirementsfor a stable
price level in the long run
Inflationin the long period is an unexpectedimplicationof the dynamic
adjustmentprocess Marx proposed. This section investigates how
Marx's adjustmentmodel would have to be modified in order to pre-
vent a rise in the prices of basic goods, a change in the nominalprofit
rate, and thereforelong-runinflation in the aftermathof a reorganiza-
tion of productionin luxuries.
Returningto the second case in Section 2, we see that the paradox-
ical result occurred because excess profits in yachts attractedcapital
from shoes, leading to a price rise in shoes. To prevent inflation, the
price of shoes cannotrise. But if shoe firms maintainthe originalprice
(associatedwith a = a*) when capital leaves the industryand supply
shrinks,there will be chronicexcess demandfor shoes, althoughquan-
tity suppliedequals quantitydemandedin yachts. Clearlythis is an odd
"'centerof gravity."'Unlike underWalrasianequilibrium,for instance,
the excess demandin shoes has no reflectionin excess supplyelsewhere
in this model. Quantitysupplieddoes not equal quantitydemandedin
one industry, yet the average profit rate, a*, is consistent with no
capital mobility.
This is hardlya satisfactoryalternativeto Marx's model. If instead
the price of yachtscould fall to a level consistentwith a* withoutcapital
leaving shoe production,the price andprofit ratein shoes could remain
the same without leading to excess demand in basics. However, it is
necessary for the price of yachts to fall if excess profits are to be
competed away. In order to exclude the possibility of chronic excess
demandin luxuries, the fall in the price of yachts can result only from
an increase in the quantityof yachts supplied.
 DYNAMICADJUSTMENTAND LONG-RUNINFLATION 105

It is thereforerequisitefor the capitalthatentersyachtproductionto

appearfrom outside the system, to be a net additionto the total amount
of capital in the economy.6Of course in the case of a change in tech-
nique in basics, the capital that flows to the sector experiencingexcess
profits must come from other basic industries and from luxuries in
order for the profit rate to be equalized at the new level, as in the first
example in Section 2. Thus ex nihilo capital can appear only when
excess profitsare being earnedin department3 andcannotappearwhen
excess profits exist in departments1 or 2.
Such a dynamic adjustmentmodel requires first some agency or
institution to provide the ex nihilo capital. If the agency is to act in
accordwith the goal of a stableprice level, it cannotbe motivatedby the
search for privateprofit. Otherwiseevery profitableopportunityaris-
ing from new production techniques, whether in basics or luxuries,
would attractex nihilo capital, insteadof only excess profits in depart-
ment 3. This can no longer be considered a model of a perfectly
competitiveeconomy. The neoclassicists' auctioneerhas been replaced
by a public or voluntarynon-profitagency, motivatedby the needs of
the system, the preventionof inflation, ratherthanthe profit-incentive
per se.
The second problemwith such a micro-modelis the inducementfor
firms to act as they must in order to ensure a nominalprofit rate of a*.
If a firm in basic industrysees that the profit rate in luxuries is higher
than its own, why should it refrain from transferringsome capital to
department3; i.e., why behave irrationally?It is clearly in its individ-
ual interestto pursue a strategywhich would lead to an averageprofit
rateabove a* andthus inflation. If individualfirms' good faithand self-
restraintcould assureconstantprices, inflationwouldneverhappen,no
matter what its cause.
If the providerof ex nihilo capitalreactedmore quicklyto profit-rate
differentialsthan individualfirms could, it would be possible to avoid
the need for irrationalentrepreneurs.However,dauntinginformational
problems make this implausible. The classification of industriesinto
basics and luxuries is not self-evident, but requires research. If one
fishermanbuys a yacht which he rents out to wage-earnersfor fishing
trips on their summer vacations, then yachts are not only luxuries but
also an inputinto the productionof wage-goods and services. A techni-

6Note that even this alternative dynamic adjustmentmodel differs from Nikaido's,
since capital is not conserved in the circulationprocess and the total rate of change
of money-capitalin the system consequentlywill not be zero.
106 JOURNALOF POST KEYNESIANECONOMICS

cal changein yachtswill thereforechangethe averageprofitrate,and

the external-capital agency must refrainfrom investingin yachts,
permittingcapital flows fromotherbasicsto theprofitableopportunity
in yachts.Onlyif no yachtproducerhasa clientwho is a wage-earner,
nor uses the yachtto producegoods or servicesultimatelysold to a
wage-earner,may andmustex nihilocapitalbe allocatedto yachts.
Such "perfectinformation"is moreextensivethanthatnormally
calledforin neoclassicalgeneralequilibrium analysis,whichis limited
to marketsignalsand firm-levelinventorychanges.It requiresthat
firmshavea highdegreeof trustin theagencyandthattheagencyhave
enforcementpowersin orderto guaranteeits accessto the necessary
data.
The informationneeds of the modelalso pose a problemfor the
speedwith whichthe external-capital agencymustrespondto profit-
ratedifferentialsif the modelis to avoidirrationalfirms. Unlessthe
agencyhason handa detailedanalysisof theclienteleof everyindustry,
eachchangein techniquewill forceit to studythehigh-profitindustry's
clients, which wouldtake time. The external-capital providermust
thereforedirectfirmsto delaytheirreallocationsof capitaluntil the
agencyhas verifiedwhetherprivatecapitalor ex nihilocapitalshould
on the
be allocatedto the excess-profitsindustry.Thatis, irrationality
part of firmscan be a
supersededonlyby full-fledged central
planner,
directlyorganizinginvestmentfor the economyas a whole.

Implications
For the nominalprofitrateconsistentwith a zero inflationrateto be
maintained whenthereis a reorganization of productionin non-basics,
dynamicadjustment mustfollow a patternthatrequiresinordinately
extensiveinformationfor economicactorsandeitherirrationalbehav-
iorby firmsor a highlydevelopedcentralplanningagency.Thesimpler
andmorerealisticmodel,followingMarx,impliesthatthesystemmay
well cometo restatanaveragenominalprofitratethatis abovethereal
profitrate.If a reorganizationof productionin department3 leadsto a
risein theprofitratethere,thenas firmsareattractedfrombasics,the
nominalprofitratewill riseabovetherealprofitrateandinflationwill
result.
Theideathatthelongrunwill exhibiteitherinflationor deflationis
novel.Itsnoveltymayin partbe dueto thetraditionaltreatment of the
money-of-account as a commodityratherthanas a socialconventionin
 DYNAMICADJUSTMENTAND LONG-RUNINFLATION 107

models of simple reproduction.Onlya conventionalmoney-of-account

allows for the possibility of purely nominal price movements (infla-
tion).
That a redistributionof income, via a change in the terms of trade
between classes, industries,or countries, may set off chronic inflation
is an outcome acceptedby manyPost KeynesiansandMarxists(see, for
instance, Appelbaum, 1979; Marglin, 1984). Marx argued that the
equalizationof the profitrateleads to a redistributionof income-in his
terms, of surplus value. The transformationfrom values to prices of
productionpermits an unequalexchange of surplusvalue, in the sense
that firms may realize more or less surplusvalue than is produced in
their plants. The foregoing analysis suggests that such a redistribution
of surplusvalue, from where it is producedto where it is realized, may
also generate chronic inflation.
Furthermore,other analystshave arguedthat the postwareconomic
structuremay have a built-in inflationary bias (Baran and Sweezy,
1966; Hirschman, 1981; Kotz, 1982). They suggest that a highly
oligopolistic market structureand trade unions (i.e., unequal profit
and wage rates) will lead to downwardlyrigid wages and prices and
therefore an inflationarytendency, particularlyin a stagnantperiod.
The analysis presented here implies that an inflationary bias could
also result from competition and the equalization of the profit rate
when technical change in luxuries tends towards a higher profit rate
there.
It is generallyagreedthatproductivitygrowthwill have a deflation-
aryeffect, ceterisparibus. This studyimplies thatif technicalchangein
the luxury sector most often leads to higherprofitsthere, simple repro-
duction will be characterizedby chronic inflation. This built-in infla-
tionarybias could explainthe absenceof steadilyfalling prices in most
historicalperiods, despite productivitygrowth. It could make sense of
the postwarexperienceif luxury-sectortechnicalchange has been par-
ticularlyprofitable,generatinghigherlong-runratesof inflationwhich
were not fully offset by productivitygains.
There is a tradition which maintainsthat technical change always
leads to a rise in the profit rate (Okishio, 1961). Then continuous
reorganizationsof productionin the luxury sector will cause accelerat-
ing inflation, ceteris paribus, as the nominal profit rate rises further
and furtherabove the real profit rate. That is, unless some changes in
techniquein department3 lead to a temporarilylower profit ratethere,
the inflationratewould continuallytend to rise. This is no more consis-
108 JOURNALOF POST KEYNESIANECONOMICS

tent with historicalexperiencethanthe steady rate of deflation implied

by constant productivitygrowth.
It is possible to interpretthe results presented here in an entirely
differentvein. First, perhapsthis investigationshouldpersuadeus that
the long period is not a position towardswhich the economy tends, but
only a logical representationof the economy's structure.As Alessandro
Roncaglia(1978) has emphasized,neitherMarx nor Sraffaarguedthat
an equal profit rate would ever be achieved.
However, the process by which the economy moves to a long-run
position is a logical problem even if not an empirical one. The
determinacyof basic industryderives from a model in which the profit
rate has been averaged. It may be that Marx's dynamic adjustment
mechanismis unsatisfactory.But if the achievementof this averagerate
of profit cannot be shown to be theoretically possible, the long-run
result itself comes into question.
Third, long-run inflation results because productionconditions in
non-basicsare irrelevantfor determiningthe averageprofit rate. Marx
himself argued that labor-using technical change in luxuries should
raise the real profit rateeconomy-wide, notjust the nominalrate. Then
there would be no long-runinflation. A centuryof debate on the labor
theory of value has ruled out this possibility.
We are left with an anomalousresult, a changing price level in the
long run, and a menu of alternative conclusions.

APPENDIX
It canbe shownthat,if thesystemcomesto restat a nominalprofitrateabove
(below)a*, the real profitrate will not be affectedand chronicinflation
(deflation)will result.Inthefamiliarapproach,P represents a vectorof prices
forall goods,whetherpurchased as inputsor soldasoutputs,A is thematrixof
input-outputconditionsin all industries,includingwage-goodrequirements
andthereforelaborrequirements implicitly,7anda* is the realrateof profit:

7The usual Marxiannotation for equations (1) is

(PA' + WL)(1 + a) = P,

where A' refers only to capital goods, W is the money wage (W = Pw, where w is
the real wage-bundle), and L is the vector of unit labor requirements.The Sraffian
notation in the text is preferredbecause of its simplicity, since the augmentedA ma-
trix summarizesboth capital-goodsrequirementsand the labor requirementsimplicit
in wage-good "inputs."
 DYNAMICADJUSTMENTAND LONG-RUNINFLATION 109

(1) PA(1 + a*) = P.

As Sraffa showed, price equations for all industries whose outputs are not
inputsto manyothergoods can be eliminatedfromequations(1), andthe profit
rate will be determinedby the structureof productionin basics,

(2) PbAb(l + a*) = Pb',

where the subscriptb refers to basic goods. Price can be factored out,

(3) 1
P Ab - I- = 0,
I + a*

so a solution exists if and only if [A, - [1/(1 + a*)]II is a singular matrix.

Since a* is as yet a variable, it is set equal to the unique solution to

1
al, - a12 . . aln
+ a*

(4) a21 a22 - . .a2n

1 + a*
= 0

nl an2 .. . ann *
1 + a*
which is consistent with positive prices.8
If the (nominal) profit rate a is greater than a*, equations (2) have to be
modified since inputprices (Pb ) will be paid at the beginningof the produc-
tion period, and output prices (P ,) realized at the end:
b

(5) P- 'Ab( + a) = P,.

However, if relative prices are stable over time,

(6) Pt P1-l
- =- for all i, j,
ptp;t-

then there must be a single discrete rate of inflation (P) for all industries.

8Thatsucha uniquepositiveprofitrateexistsis impliedby the Perron-Frobenius

theoremregardingthepositiveeigenvalue,1/(1 + a*). See the Appendixin Bowles
andGintis(1977).
110 JOURNALOF POST KEYNESIANECONOMICS

Using the definition of inflation to substitute for P`1 in (5) yields

(7) 1
_ Pb [Ab(l + a)] = P.
1+ P

Therefore

(8) 1+ P
Pbt Ab - I- =0.
(\ l+f+a

It is necessary to eliminate the unknown P from equation (8). The real

profit rate, r, is defined as gross revenueminus costs over costs, all evaluated
at currentprices, and has a direct relation to the nominal profit rate and the
inflation rate:

(9) PtX - PtAX Pt-'A(1 + a)X - Pt-(1 + P)AX

PtAX Pt- (l + P)AX

I +a- 1- P a- P

1+ P 1+ P
where X is the vector of final outputs.9But then the inflation rate is a simple
function of the nominal and real profit rates:

(10) . a -r
P= ----
1+r

Notice that, if the nominalprofit rate is consistentlyabove the real profit rate,
equation (10) implies that a constant inflation rate will result.
Using equation (10) to substituteinto (8),

(11) / a - r
1 + |r
Pt Ab - I
\ l+a
1+a /
I 1 \
= Pt Ab - I- = 0.
1+ r /
9Theusualmethodfor correctingnominalprofitratesfor inflationis to takethe dif-
ferencebetweenthe nominalrateandthe inflationrateto findthe realprofitrate.
Butthatmethodwouldapplyonlyin continuoustime for compoundrates(i.e., the
changein the naturallogarithm),whilethe correctionneededhereis for effective
yields-inflationandprofitsmeasuredas discretepercentages.
 DYNAMICADJUSTMENTAND LONG-RUNINFLATION 111

Equations (11) are equivalent to equations (2), and the real profit rate (r)
consistent with a nominalprofit rate above a* (and thereforeinflation) is the
same as the profit rate in the absence of inflation, i.e., a* in equations (2).

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