Prices and Distributive Antagonism in the Work of Smith and Kalecki

PRICES AND DISTRIBUTIVE ANTAGONISM

IN THE WORK OF SMITH AND KALECKI

BY

SERGIO NISTICO

I. INTRODUCTION

Adam Smith's adding up theory (Sraffa 1951, p. xxxv) has generally been interpreted as an expression of the "harmonious" view of the mechanisms governing exchange ratios and distribution. 1 In two preceding works (Nistico 1988, 1991) I tried to show that Smith's theory of prices is instead fully compatible with the classical approach to the theory of value and distribution based on the essential role played by class antagonism in a capitalist system. The argument presented there was developed through a discussion of the critiques that both David Ricardo and Karl Marx addressed to Smith's procedure of "composing" natural prices by starting from given levels of the distributive variables. With special reference to Smith's idea that a rise of money wages tends to produce a generalized increase in money prices, I argued that the critiques addressed by Ricardo and Marx to the theory of the component parts would be fully legitimate only if Smith's contention was that the natural price varies, ceteris paribus, with the real wage. The magnitude which Smith considers as given prior to natural prices seems, however, to be the money wage, with the subsistence (real) wage simply playing the role of a sort of lower floor. The existence

A first draft of this paper was presented at the 16th meeting of the Eastern Economic Association in Cincinnati, March 30 to April!, 1990. I am grateful to G. Caravale for he lpful comments on previous versions of this work. Responsibility for the opinions expressed is, however, entirely my own.

I. This is the position held for instance by K. Marx (1969, 2, p. 217), M. Dobh ( 1973, p. 50) , R. Meek (1977, pp. 153-154), P. Garegnani (1984, pp. 301-2) and J. Schumpetcr (1954, p. 601). The latter defines the theory of the component parts as "the rudimentary equilibrium theory which points toward Say and, through the latter's work, to Walras" (ibid). Garegnani seems, however, not to share the idea (expressed by Dobb and Schumpetcr) that Smith's theory of the component parts is a truly neoclassical formulation based on the supply and demand functions of the productive factors (sec, for instance, Garegnani 1984, p. 302 n. 21 ).

lou mal of Lhe Hislory of Economic Though!, 13, Spring 1991. "1991 by the History of Economics Society.

54

SMITH AND KALECKJ 55

of a distributive antagonism- I maintained- need not manifest itself as an inverse relationship between the wage rate and the rate of profit. The conflict between workers and capitalists could in fact be characterized by the capitalists' unwillingness- in the face of the laborers' attempt to obtain higher real wages through an increase in money wages- to accept any reduction in the profit rate.

The present paper represents an attempt to move a step further in this "recovery" of Smith's adding up theory. It is argued that some basic elements of the Smithian theory of value might constitute the basis for the development of a non-neoclassical explanation of relative prices and distribution in an institutional context where imperfect competition prevails. Textual evidence is put forth in section II in order to suggest that a non-competitive context is the one in which Smith's analysis has to be placed. A context in which his idea about both the money wage and rate of profit being given prior to and independently of natural prices appears to be fully sustainable. With that perspective, section IV discusses the analytical foundations of Smith's treatment of both distributive variables as given from outside the model. It is emphasized that the consideration oft he money wage and of the profit rate as data appears crucially linked to the absence of a real wage exogenously given at its subsistence level in Smith's theoretical construction.

Section III and section V contain a comparison of Smith's adding up theory, respectively, with Piero Sraffa's system of prices and Michal Kalecki's theory of income distribution based on the notion of degree of monopoly. The main conclusion is that Sraffa's and Kalecki's price equations2 both appear compatible with the theory of component parts. Sraffa's and Kalecki's theoretical constructions can, moreover, be used within a non-competitive context to strengthen, on the analytical plane, three important intuitions of Adam Smith: (i) the idea that, when determining natural prices, both the money wage and the rate of profit might be considered as data; (ii) the hint at the existence of an inverse relationship between the rate of profit (added up to the other components of the cost of production) and the degree of competition among capitalists; (iii) the circumstance that in a given situation, and hence with a given degree of competition, an increase in the money wage tends to raise the whole set of money prices without affecting the rate of profit.

II. CAPITALISTS, MONOPOLIES AND THE ClASSICAL ANALYSIS

Smith's theoretical construction, in the interpretation suggested above, appears to be based on the idea that capitalists are to some extent price

2. Almost exclusive reference is made in this essay to Kalecki's last paper, posthumously published in 1971.

56 JOURNAL OF THE HISTORY OF ECONOMIC THOUGHT

makers. They are represented as capable, given their bargaining power, of fixing prices at a level that guarantees what they believe is the ordinary rate of profit. Implicit in this representation of the price fixing mechanisms is the idea that the market - at least on the supply side- is characterized by substantial distortions compared to a situation of free competition. This is a very delicate matter since the classical notion of natural equilibrium being characterized by a uniform rate of profit might be thought to require the full working of the competitive forces on the supply side.

In relation to this, two points need, however briefly, to be discussed. First of all, it is worth recalling that contrary to what happens for the marginalist authors, the classical economists did not build their analytical schemes on the basis of a detailed definition of the elements characterizing perfect competition. The only essential requisite for the classical concept of natural equilibrium is, given a certain degree of information, the possibility for capital to move in search of the highest rate of profit. In John Eatwell's words:

Adam Smith's conception of "perfect liberty" consists of the mobility of labour and stock between different uses.... (Eatwell 1982, p. 207). Thus the conception of competition found in the works of, say, Walras, Wicksell, Marshall and the early Hicks (1932) is an amalgam of two distinct propositions. First, there is the characterization of capitalist competition inherited from the Classical economists, in which mobility, information, etc., are the key elements. Second, there is the infinity of infinitesimally small agents which generates the price taking behavior required by neoclassical theory (ibid., p. 217, emphasis added). 3

As it emerges from Eatwell's writings, the notion of competition upon which Smith has built his analytical model appears compatible with a price making behavior of capitalists, insofar as it is not based on the presence of "an infinity of infinitesimally small" firms.

The second point which needs to be emphasized is the circumstance that the analytical relevance of monopolistic elements appears to be perfectly congruous with Smith's notion of natural price. This latter varies, in fact,

3. A similar position is held by P. Sylos Labini: "The neoclassical economists' perfect competition has never existed anywhere. The static hypothesis and the application of marginal analysis within it Jed the neoclassical school to ascribe to competition certain characteristics (in particular, perfect homogeneity of goods, horizontal demand curve for the individual firm) , which severely limit the realism of the concept. The classical economists' concept of competition, especially Ricardo's, is very different. Its principal distinguishing feature is easy of entry. As long as the entry of new firms is easy, no producer can raise prices, and, except for a short time, none can earn above-normal profits .. .. For the purpose of certain types of analysis, the classical concept is preferable because, although it is Jess rigorous than the neoclassical one, it is much more realistic" (Sylos Labini 1962, pp. 52-53).

SMITH AND KALECKI 57

according to Smith "with the natural rate of each of its component parts, of wages, profit, and rent." Although the matter is treated more in detail below, it is necessary here to recall that the natural rate of profit, in turn, varies, according to Smith, "with the degree of competition." A different set of natural prices is thus associated, in Smith's analysis, with each natural level of the rate of profit and hence with each degree of competition.

In some passages of The Wealth of Nations, it may be thought that Smith associates the notion of natural price to the state of perfect liberty or free competition, thus excluding any analytical role of monopolistic elements in the definition of natural equilibrium (see, for instance, Smith 1976, p. 69). If this association were accepted, the whole analytical structure of Smith's theory of the component parts would collapse. This association must, however, be rejected. The strict connection between the natural price and a situation of free competition, strikingly contrasts with the idea, repeatedly emphasized by Smith, that the natural rate of profit and hence the natural price depends on the degree of competition among capitalists. Stigler enunciated a "principle of scientific exegesis" (Stigler 1965), according to which, if there are two conflicting statements by the same author it is necessary to take into consideration only the one which is consistent with the main analytical conclusions of his system of thought. That principle must be applied to this case. A further element should lead to the rejection of the above-mentioned association: Smith's own clear perception that "the policy of Europe ... no-where leaves things at perfect liberty." Would it be possible to say that Smith's theory of natural prices was confined by Smith himself to the realm of an imaginary and chimerical world?

It should be noted that the other classical economists and Marx did not assign, within their theoretical models, an equally important analytical relevance to the monopolistic forces at work in the system. As Eatwell rightly points out (Eatwell1982, p. 208), according to Ricardo, for "commodities which are monopolized, either by an individual, or by a company ... their price has no necessary connection with their natural value" (RiCardo 1951-1973,1, p. 385) and the analysis of natural prices and distribution is confined to "such commodities only as can be increased in quantity by the exertion of human labour, and on the production of which competition operates without restraints" (ibid., p. 12). John Stuart Mill believed that "only through the principle of competition has political economy any pretension to the character of a science" (Mill1848, p. 242), and Karl Marx asserted that "free competition is the real development of capital" (Marx 1973, p. 650). This shift of emphasis on "free competition" on the part of the later classical economists and of Marx, might perhaps find its rationale in the circumstance that Smith on the one hand, and Ricardo, Mill and Marx on the other, faced different historical contexts.


As some economic historians have emphasized, the initial phase of industrial capitalism was characterized by the predominance of monopolies. Only at a later stage competition prevailed, and did so until the end of the nineteenth century. In the words of H. Levy:

The economic history of modern times shows that it was not individual competition which stood at the threshold of modern industrial capitalism. On the contrary, the early period of modern industrial capitalism was characterized by monopolies.... This changed only with the emergence of factories.... The desire to "concentrate" disappeared and the competitive system took its place (Levy 1936, p. 270).

In this perspective, the existence within The Wealth of Nations of systematic references to monopolistic distortions - as well as the analytical irrelevance of such references in the models of the later classical economists- should not constitute a matter of surprise. The fact that only in the nineteenth century did "free competition" become dominant in the European industrial system could thus explain Smith's reiterated concern with the pricemaking behavior of capitalists.

At the beginning of Chapter X of The Wealth of Nations, Smith distinguishes two fundamental distortions with respect to ideal competition characterized by uniform rates of wage and profit. These distortions derive, according to Smith, both from circumstances relating to the peculiar activity characterizing each sector, and - more relevantly- from the same institutional asset of the economic systems: "Pecuniary wages and profit, indeed, are everywhere in Europe extremely different according to the different employments of the labour and stock. But this difference arises partly from certain circumstances in the employments of themselves ... and partly," as mentioned above, "from the policy of Europe" (Smith 1976 pp. 111-12; emphasis added). It is precisely with reference to the distortions deriving from institutions-which allow and sometimes encourage monopolistic positions- that Smith develops his idea of capitalists being price makers:

People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices (Smith 1976, p. 144; emphasis added) .... The policy of Europe, by restraining the competition in some employments to a smaller number than would otherwise be disposed to enter into them, occasions a very important inequality in the whole of the advantages and disadvantages of the different employments oflabour and stock (ibid., p. 145; emphasis added).... The interest of the dealers, however, in any particular


branch of trade or manufactures, is always in some respects different from, and even opposite to that of the public. To widen the market and to narrow the competition, is always the interest of the dealers ... to narrow the competition .. . can serve only to enable the dealers, by raising their profits above what they naturally would be, to levy, for their own benefit, an absurd tax upon the rest of their fellow citizens (ibid., p. 278; emphasis added).

The cornerstones of Smith's theory of prices seem therefore to be: (i) the idea that outside the ideal competitive market, the rate of profit and hence the natural price are magnitudes manageable by capitalists; and (ii) the existence of an inverse relationship between the level of profits earned by capitalists in each sector and the degree of competition characterizing the sector itself.

III. CLOSING THE CLASSICAL SYSTEM AND THEW -R INVERSE RELATIONSHIP

The price-fixing process, as it emerges from Smith's formulation, can be represented by a sort of "modified Sraffa system"4 which is resolved by assuming as exogenously given both the money wage rate and the rate of profit. For each industry we would have:

where w and r represent respectively the money wage rate and the rate of profit, both given from outside the model. On the basis of these two data, the solution of the system determines the whole set of long-period money prices which, in line with the Smithian theory of the component parts, depend on the level of the distributive variables given prior to and independently of the natural prices.

A further significant analogy5 seems to emerge between the analytical properties of the modified Sraffa system and one facet - perhaps too hastily

4. I borrowed this expression from G. Mongiovi (1989) who proposed a model similar to the one presented in this work. Mongiovi, however, makes no reference to Smith's theory of price and in his paper the modified Sraffa system represents an attempt to introduce money into Sraffa's reconstructed classical model. A similar scheme is also provided by Leontief (1984) who, in his analysis of the effects on prices of an increase in the money wage, treats the rate of profit as given, thus substantially rejecting the idea that the inverse relation between the wage rate and the rate of profit constitutes an essential feature of the capitalistic system.

5. The circumstance that in the modified Sraffa system the money wage plays the role of numeraire is moreover in accordance with Smith's notion of labor commanded.


criticized- of the Smithian theory of price. In particular, with the assumption that both the money wage and the rate of profit are given from outside the model, the inverse relationship between the wage rate (defined in money terms) and the rate of profit is no longer a necessary outcome of the model. When no other factors affect the profit rate a rise in the money wage rate will tend to produce, in accordance with Adam Smith's theory, a general increase in all money prices. The inverse relationship, however, could in principle manifest itself; but its existence will depend, in this context, upon the relative bargaining power of workers and capitalists. This point touches upon the delicate question of the role that the w-r inverse relationship plays within the whole classical approach. The idea suggested in this paper is that, in a Smithian context, it does not constitute a fundamental feature of the "antagonistic view" that the classical economists held of the distributive process.

The point stressed here appears to be in line with G. Caravale's (1980, 1985) interpretative scheme of Ricardo's theory. According to Caravale, while the worsening of productive conditions in the wage-goods sector is always associated with a reduction in the general rate of profit (Caraval and Tosato 1980, ch. 2 and appendix), that happens, in Ricardo's work, with the real wage exogenously given at its natural level. The effect on money wages, given the real wage bundle, will depend on the price changes of the various wage-goods associated with the reduction in the rate of profit. 6 In Ricardo's model, then, the reduction in the rate of profit, on the one hand, does not depend on the increase in the real wage and, on the other hand, does not seem to be necessarily associated with an increase in money wages.

A different position is held by P. Garegnani (1984). Neglecting the dynamic nature of Ricardo's model and thus the presence of rents, Garegnani considers the inverse relation between the wage rate and the rate of profit to be the fundamental analytical advance of Ricardo's theoretical construction with respect to Smith's theory of the component parts. 7 The

6. This matter is hinted at in Caravale 1991, and was pointed out to me by Caravale in private conversation.

7. The idea, held by Garegnani, according to which the w-rinverse relationship constitutes the essence of the "antagonistic" (classical) view of the distributive process, is similar to that of Marx. In Garegnani's own words: "The attempt to preserve a harmonious view of society took--Marx thought--the form of turning a blind eye upon the analytical advances of Ricardo and keeping closer to the 'appearances' by which the price of the product, seen as the sum of profits, wages and rents, may seem capable of accommodating the rise in one of these elements without a decrease in the others" (Garegnani 1984, p. 303). Commenting on Garegnani's interpretation of Ricardo's theory, Caravale (1985, p. 168) observes that "the only possible antagonism remaining in Garegnani's interpretative context is that between real wages and profits, a circumstance that sharply contrasts with Garegnani's own clear perception that 'the specific analysis of the relationship between capital and wage labor made by Marx could not have been made by Ricardo, interested as he mainly was in the relationship between capital and landed property at a time when the conflict between capital and labor was not yet concretely manifest."'


strict association, emphasized by Garegnani in line with Marx, between the existence of a distributive antagonism and the w-r inverse relation, should, however, be rejected. The fact that, in real terms and in a given situation, an increase in the income share accruing to one class implies a decrease in the share of the other class, is- as Bortkiewicz (1907) notes- "a selfevident proposition" and is not linked to any specific theory of prices. In Smith's model, on the contrary, it is the very existence of the distributive antagonism, expressed by the rigidity of the rate of profit in the face of the laborers' attempt to obtain higher wages, that produces the effect of a generalized increase in money prices:

The workmen desire to get as much, the masters to give as little as possible .... It is not, however, difficult to foresee which of the two parties must, upon all ordinary occasions, have the advantage in the dispute, and force the other into a compliance with their terms. The masters, being fewer in number, can combine much more easily; and the law, besides, authorizes, or at least does not prohibit their combinations, while it prohibits those of the workmen (Smith 1976, p. 74).

IV. WAGES AND PROFITS IN A SMITHIAN MODEL

In the perspective of the argument presented above, it is plausible to suggest that- contrary to what most of Smith's critics have maintained - a theory of prices and distribution, as an alternative to the neoclassical one, is tenable on the basis of Smith's methodological choice. As mentioned in the previous section, the Smith ian theory of prices appears centered: (i) on the idea that since capitalists can be seen as price-makers, both the money wage and the rate of profit can be treated as given prior to natural prices; and (ii) on the assumption that, within an institutional context characterized by the existence of monopolistic elements, the degree of competition affects the level at which capitalists can raise "their profits above what they naturally would be." The idea of the distributive variables both being given prior to natural prices has been expressed by means of a sort of modified Sraffa system. This suggests the possibility of employing Sraffa's analytical scheme in order to take account of a market structure where capitalists consider the rate of profit as a rigid component of the cost of productionan institutional context clearly different from the competitive one in which Sraffa's original analysis was placed.

This section attempts to evaluate the analytical foundations of Smith's idea of both the distributive variables- the money wage and rate of profitbeing logical precedents to natural prices. This idea should be based on a sound explanation of the circumstances rendering these magnitudes actu-


ally being determined prior to and independently of exchange ratios. The money wage is a magnitude clearly susceptible of being treated as a datum, since its level represents, in modern economic systems, the outcome of an agreement between workers and capitalists. In Smith's theoretical construction, however, the relation between the money and the real wage is not sufficiently specified. 8 Smith's idea seems to be that, once the money wage is given, capitalists, given their bargaining power, can indirectly exert a control upon the real wage through the level of money prices of the wage goods.

The possibility of treating the money wage as given is then crucially linked to the absence of an exogenously determined real wage. In effect, in Smith's discussion of the circumstances determining the reward for labour, the subsistence wage seems simply to play the role of a sort of lower floor, and not that of a long-period real wage: "But though in disputes with their workmen, masters must generally have the advantage, there is however a certain rate below which it seems impossible to reduce, for any considerable time, the ordinary wages even of the lowest species of labor" (Smith 1976, p. 76; emphasis added). Insofar as, given the money wage, the real wage depends on the level of money prices, it ends up depending on the rate of profit (in accordance with the Sraffa-type solution) which capitalists are able to add up to the other components of the money price. The maximum rate of profit is the one which is associated with that level of money prices corresponding to the subsistence real wage. The real wage can thus rise above its subsistence level only when capitalists are not able- for instance, because of a high degree of competition - to add up the maximum rate of profit. The rate of profit appears then to be, for Smith, the true exogenous variable with respect to the real wages.

This dependence of the real wage on the rate of profit is moreover in accordance with the dynamic character of the real wage within Smith's formulation: "The demand for labor, according as it happens to be increasing, stationary, or declining, or to require an increasing, stationary, or declining population, determines the quantities of the necessaries and conveniences of life which must be given to the laborer" (ibid., p. 95). Since in a progressive phase, according to Smith, the degree of competition is higher, the rate of profit added up by capitalists - and hence the level of money prices-is lower. With a given money wage, for those countries "which are growing rich the fastest," workers will enjoy a greater quantity of "the necessaries and conveniences of life." The reverse applies for the case of a declining economy.9

8. Smith's failure to clearly distinguish between monetary and real effects of a change in the wage rate, was probably the catalyst for the critiques of Ricardo and Marx.

9. For a discussion of Smith's theory of wages, see also Caravale (1988) and Eltis (1984, pp. 68-105).


Although exogenously given when determining money prices, an explanation of the circumstances determining the rate of profit is obviously necessary in order to make the model meaningful. In Chapter IX of The Wealth of Nations Smith expresses the idea that the rate of profit can be inferred from the level of the monetary rate of interest: "Though it may be impossible to determine with any degree of precision, what are or were the average profits of stock, either in the present, or in ancient times, some notion may be formed of them from the interest of money .... According, therefore, as the usual market rate of interest varies in any country, we may be assured that the ordinary profits of stock must vary with it, must sink as it sinks, and rise as it rises. The progress of interest, therefore, may lead us to form some notion of the progress of profit" (ibid., p. 99). Interestingly enough, Smith's idea anticipates Sraffa's well-known suggestion that the rate of profit instead of the real wage could be considered the datum of the system: "The rate of profit, as a ratio, has a significance which is independent of any prices, and can well be 'given' before the prices are fixed. It is accordingly susceptible of being determined from outside the system of production, in particular by the level of the money rates of interest" (Sraffa 1960, p. 33).

This hint, however, is not further developed by Smith, and a full-fledged theory capable of explaining the rate of profit along these lines is not to be found in Smith's work. More important in Smith's theoretical construction seems to be the already-mentioned idea that the rate of profit depends on the increasing, stationary or declining state of the economy and thereby on the degree of competition among capitalists:

When the stocks of many rich merchants are turned into the same trade, their mutual competition naturally tends to lower its profit; and when there is a like increase of stock in all the different trades carried on in the same society, the same competition must produce the same effect in them all (ibid., p. 98). An accession of new business to be carried on by the old stock, must necessarily have diminished the quantity employed in a great number of particular branches, in which, the competition being less, the profits must have been greater" (Smith 1976, p. 105; emphasis added).

Smith's idea of competition being capable of lowering the general rate of profit, was firmly criticized by both Ricardo and Marx on the basis of the argument that competition plays simply the role of equalizing the rate of


profit throughout the economy, 10 and cannot permanently depress it .11

Two elements underlie Ricardo's and Marx's criticism: (i) the existence of a full competitive context, and (ii) the assumption of a real wage exogenously given at its subsistence level. On the basis of these two assumptions, Ricardo's and Marx's claim that a change in the rate of profit can derive on ly from a change in the technical conditions of production appears- as is proved by Sraffa's analysis- unquestionable. But if these two assumptions are not made, as is the case for Smith, the idea that th e degree of competition affects the rate of profit that capitalists can add up to the other components of the cost of production seems to become fully sustainable. It is furthermore worth recalling that at the time at which both Ricardo and Marx worked out their analytical models the assumption of a full competitive context surely grasped the essential features of economic reality. This seems not to be the case for the time period in which Smith wrote The Wealth of Nations, and it is surely not the case for modern industrial systems.

V. SMITH'S DEGREE OF COMPETITION AND KALECKI'S DEGREE OF MONOPOLY

Keeping this in mind, with reference to the role played by the degree of competition in the determination of the rate of profit, a comparison between the Smithian model and Kalecki's theory of price may now turn out to be theoretically fruitful. Some central elements of Kalecki's analysis could, on the one hand, show an interesting analogy to the Smith ian model and, on the other hand, consolidate the Smithian approach on the analytical plane. As is well known, the Kaleckian model is based on the concept of degree of monopoly, which is, according to Kalecki, in some way an expression of the firm's power to fix its price at a level which is higher than

10. Ricardo's criticism is expressed in the following terms: "If the necessaries of the workman could be constant ly increased with the same facility, there could be no permanent alterat ion in the rate of profit or wages, to whatever amount capital might be accumulated . Adam Smith, however, uniformly ascribes the fall of profits to accumulation of cap ital, and to the competition which will result from it without ever adverting to the increasing difficulty of providing food for the additional number of laborers which the additional capital will employ" (Ricardo 1951-1973, 1, p. 289) .

Similarly Marx wrote: "Adam Smith explained thefall of the rate of profit, as capital grows, by the competition among capitals. To which Ricardo replied that competition can indeed reduce profits in the various branches of business to an average leve l, can equa lize the rate, but cannot depress th is average rate itself.... Competition can permanently depress ... the average rate of profit, if, and in so far as a general and permanent fall of the rate of profit, having the force of a law, is conceivable prior to competition and regardless of competition" (Marx 1977, pp. 751-52).

11. As it is well known, whereas Ricardo ascribed to the existence of decreasing returns in the wage-goods sector the tendency for the profit rate to fall, Marx imputed this tendency to the increasing organic composition of capital.


the average price of the industryY Analytical difficulties, above all relating to the treatment of fixed capital,

obviously arise when comparing Smith's and Kalecki's analysis of pricefixing policy, since the latter is mainly based on the concept of gross margin (mark-up), while the former is instead centered upon the rate of profit. 13 It is, however, possible to say that both Smith's and Kalecki's formulations share the idea that the mark-up depends on the relative bargaining power between capitalists and workers, but most of all among the capitalists themselves.

The main difference between the Smithian approach and the other formulations of a classical-type, such as those of Ricardo, Marx, and Sraffa, seems thus to be the following. According to Smith and Kalecki the rate of profit or the mark-up is somehow, and obviously not without limits, manageable by capitalists, but in the representations of the distributive process emerging in the models of Ricardo, Marx, and Sraffa, the rate of profit appears instead as a variable whose level depends, given the real wage, on the technical conditions of production. Within what may be called the monopolistic approach, which has been suggested to be common to both Smith and Kalecki, the latter's theoretical framework contains perhaps some important specifications in relation to the elements determining the degree of monopoly and therefore the level of the mark-up. 14

As far as the relation between the rate of profit and the degree of competition is concerned, it is interesting to note that Smith's idea according to which the rate of profit tends to go down in a situation of marked expansion because of increasing competition, and vice versa, is also substantially shared by Kalecki, who believes that the degree of monopoly is higher in the slump and lower in the boom. The most significant element ofKalecki's analysis for the purpose ofthis paper, an element that is in line with the Smithian theory of the component parts as well as with the modified Sraffa system, is the assertion that an increase in the wage rate does not tend to alter the distributive set-up.15 After a discussion of the effects deriving from an increase in the wage rate with reference to a perfectly competitive market, Kalecki faces this issue in relation to a situation characterized by

12. See Kalecki 1954, pp. 12-13. For a clear discussion of the use Kalecki made of the concept of degree of monopoly in the evolution of his theoretical construction, see Basile and Salvadori 1984-1985, pp. 257-259.

13. On this ground, Jossa rightly points out that: "[Kalecki's] idea was undoubtedly that the firms determine margins, not profit rates, and that in fixing the margins, firms do not rigorously follow any maximizing rule" (Jossa 1988, p. 17; my translation).

14. For the main factors influencing the degree of monopoly, according to Kalecki, see Kalecki 1954, pp. 17-18.

15. "Until fairly recently it was generally accepted that if wages are raised profits decline pro tanto .... Although even today quite a number of economists would argue in this fashion, the fallacy of this approach is fairly widely recognized, even though it may be countered by various economists in a somewhat different way" (Kalecki 1971, p. 156).


monopolistic distortions, since "a major part of the economy may be plausibly represented by a model very different from perfect competition" (Kalecki 1971, p. 160). And it is precisely with reference to this latter market situation, that Kalecki's analysis can be compared with Smith's formulation.

Kalecki's argument is based on the assumption that, given the average cost u, firms fix prices by adding to the latter a mark-up whose level "is dependent on 'competition,' i.e., on relation of the ensuing price p to the weighted average price of this productp' for the industry as a whole" (ibid). We will then have, according to Kalecki:

p-u =f(p'/p)

u (1)

that is,

p = u [1 + f(p '/p)] with f>O 16 (2)

The economic system could then be represented by n + 1 equations, n of the type of equation (2) and one which defines p' in terms of then prices of the system. The Kaleckian model appears, then, substantially similar to the modified Sraffa system which was obtained by assuming the distributive variables as both given prior to natural prices, as is done in the Smithian theory of the component parts. It is, in effect, sufficient to break up u in order17 to get a substantially equivalent modeP8 which possesses the advantage of having an explanation of the level of the profit margins, depending on (according to Kalecki and in line with Smith) the degree of competition, which is expressed by the ratio of weighted average price of the industry to the price of the firm.

It is not difficult to verify that in the above-mentioned Kaleckian model, given the structure of the market and hence given all thef(p'/p ), an increase

16. According to A. Asimakopulos,f(p'!p) is< 0, since "for the firm in a given situation both u andp' are given ... and therefore the higher the mark-up, the higher p, and the lower p'! p. Contrary to Kalecki's statement the functionfappears to be a decreasing function!" (Asimakopulos 1975, p. 318). In defense of Kalecki's assumption about the slope of the function f, see Basile and Salvadori 1984-1985, p. 256, and Sebastiani 1985, p. 66, n.

17. For industry i we would have:

u; = alip1 + a2ip2 + .... + l;w where the ai, represent the technical coefficients of production, (the quantity of labor, and w the money wage rate.

18. When the assumption is made that all the capital is circulating, the term f(p'Jp) coincides with the rate of profit r of the modified Sraffa system.


in the wage rate determines a proportional increase in all money prices, thus leaving the distributive set-up unaltered. In Kalecki's own words:

Let us now imagine that in a closed system of this type wage rates in all industries increase in the same proportion, 1 + x times. It follows easily that all prices will also increase 1 + x times provided that functions fin industries to which they are relevant are unchanged. It follows .. . that a general increase in money wages in a closed economy does not change the distribution of national income (ibid., p. 162).

Several problems remain however unsolved in Kalecki's formulation. To what extent, for instance, the ratio of the weighted average price of the industry to the price of the firm is really an expression of the degree of monopoly, constitutes a matter of controversy. 19 Furthermore, prices resulting from the Kaleckian model represented above, are not long-run equilibrium prices since the model does not contain any mechanism capable of ensuring the equalization of the rates of profit throughout the economy.

It seems nevertheless worth emphasizing that the above suggested analogy between Smith's and Kalecki's formulations might contribute to a rediscovery of the Smithian approach to the explanation of prices and distribution in a capitalist system. It might also contribute, as an alternative to the neoclassical analysis, to the development of a theory of prices and distribution capable of taking into account both the fundamental results of the classical-type approach and the formulations based on the notion of fullcost price in an imperfectly competitive context.

REFERENCES

Asimakopulos, A. 1975. "A Kaleckian Theory of Income Distribution," Canadian Journal of Economics, 8, 313-33.

Basile L. Salvadori N. 1984-85. "Kalecki's Pricing Theory," Journal of PostKeynesian Economics, 7, no. 2, 249-62.

Bortkiewicz, L. von. 1907. "Value and Prices in the Marxian System," International Economic Papers, 2, 1952, 5-60.

Caravale, G. 1985. "Diminishing Returns and Accumulation in Ricardo," in G. Caravale ed., The Legacy of Ricardo, Basil Blackwell, Oxford.

19. A strong criticism on this ground is put forth by Asimakopulos (1975, p. 318): "His [Kalecki's] attempt to allow for the factor of competition between firms by relating its price to the weighted average price for the industry as a whole, by means of the function!, does not succeed. This function has no explanatory power; it does not provide a causal relation between a firm's mark-up and average industry price."


1988. "The Notion of Natural Wage and Its Role in Classical Economics," Rivista Intemazionale di Scienze Economiche e Commerciali, 35, no. 7, 599-624.

. 1991. "Marx's Views on Ricardo: A Critical Evaluation," in G. ---Caravale, ed., Marx and Modem Economic Analysis, Elgar, London.

___ and D. Tosato. 1980. Ricardo and the Theory of Value, Distribution and Growth, Routledge and Kegan Paul, London.

Dobb, M. 1973. Theories of Value and Distribution since Adam Smith Ideology and Economic Theory, Cambridge University Press, London.

Eatwell, J. 1982. "Competition," in I. Bradley and M. Howard, eds., Classical and Marxian Political Economy: Essays in Honour of Ronald L. Meek, Macmillan, London.

Eltis, W. 1984. The Classical Theory of Economic Growth, Macmillan, London.

Garegnani, P. 1984. "Value and Distribution in the Classical Economists and Marx," Oxford Economic Papers, 36, 291-325.

Harrod, R. 1936. The Trade Cycle, Clarendon Press, Oxford. Jossa, B. 1988. "Lotta di Classe e Distribuzione del Reddito in Kalecki ,"

Studi Economici, 35, 3-32. Kalecki, M. 1938. "The Determinants of Distribution of the National

Income," inK. Arrow, ed. , Selected Readings in Economic The01y ji-om Econometrica, M.I.T. Press, Cambridge, Mass., and London.

___ . 1941. "A Theory of Long-run Distribution of the Product of Industry," Oxford Economic Papers, 5, June, 31-41.

___ . 1954. Theory of Economic Dynamics, Allen and Unwin, London. ___ . 1971. "Class Struggle and Distribution of National Income," in

Selected Essays on the Dynamics of the Capitalist Economy, Cambridge University Press, Cambridge.

Leontief, W. 1984. "Nuove Tecnologie e Sviluppo," Socialismo Oggi, Nu-mero del31.12.

Levy, H. 1936. The New Industrial System, Routledge, London. Marx, K. 1969. Theories of Surplus Value, Lawrence and Wishart, London. :-:---_· 1977. Grundrisse, Harmondsworth, Penguin. Meek, R. 1977. Smith, Marx, and After, Chapman and Hall, London. Mill, J. S. 1848. Principles of Political Economy, 1st ed., Parker, London. Mongiovi, G. 1989. "A Note on the Development of Sraffa's Monetary

Thought," typescript, History of Economics Society, Richmond, Virgmia.

Nistico, S. 1988. "Prezzi Naturali e Conflitto Distributivo in Smith e Ricardo," Studi Economici, 36, 125-154.

___ . 1991. "On Marx's Critical Reading of Adam Smith's Theory of Price," in G. Caravale, ed., Marx and Modem Economic Analysis~ 2, Elgar, London.


Ricardo, D. 1951-1973. The Works and Correspondence of David Ricardo, 11, edited by P. Sraffa with the collaboration ofM. H. Dobb, Cambridge University Press, London.

Schumpeter, J. 1954. History of Economic Analysis, Oxford University Press, New York.

Sebastiani, M. 1985. L'equilibrio di sottoccupazione nel pensiero diM. Kalecki, NIS, Roma.

Smith, A 1976. An Inquiry into the Nature and Causes of the Wealth of Nations, University of Chicago Press, Chicago.

Sraffa, P. 1951. Introduction to The Works and Correspondence of David Ricardo, I, Cambridge University Press, London.

___ . 1960. Production of Commodities by Means of Commodities, Cambridge University Press, Cambridge.

Stigler, G. J. 1965. "Textual Exegesis as a Scientific Problem," Economica, 32, 447-450.

Sylos Labini, P. 1962. Oligopoly and Technical Progress, Harvard Univer-sity, Cambridge, Mass.

Prices and Distributive Antagonism in the Work of Smith and Kalecki

Documents

Transcript of Prices and Distributive Antagonism in the Work of Smith and Kalecki