Value and Distribution in The Classical Economists and Marx

Value and Distribution in the Classical Economists and Marx
Author(s): P. Garegnani
Source: Oxford Economic Papers, New Series, Vol. 36, No. 2 (Jun., 1984), pp. 291-325
Published by: Oxford University Press
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OxfordEconomicPapers 36 (1984), 291-325
VALUE
AND DISTRIBUTION
IN THE
CLASSICAL
ECONOMISTS
AND MARX'
By P. GAREGNANI
I. Introduction
1. THE theoryof value and distribution
is at presentin a situationof unease
and uncertainty:we no longer findthe same general agreementabout its
basic elementswhichobtained untila few decades ago. Two main theoretical developmentshave underminedthe dominanttheorywhich explained
distributionand relativeprices by means of the "equilibrium"of the two
"opposing sets of forces",demand and supplyforfactorsof production.
The firstdevelopmentin orderof timehas been Keynes's refutationof the
doctrineaccordingto which a competitiveeconomic systemtends towards
the fullemploymentof labour, i.e. towardsthat equilibriumbetween "demand and supply" of labour, which was to determinethe wage. Keynes'
concentrationon the shortperiod,and the persistencein the GeneralTheory
of many traditionalpremisesfavouredthe successive attemptsto reconcile
his resultswith orthodoxlong-periodanalysis: but the weakening of the
dominanttheorywhichnonethelessresultedfromhis workcan be seen both
in the uneasinesswhich,in ever-changingforms,characterizesthe renewed
orthodoxy,and in the tendencyof Keynes' directfollowerstowardsa more
radical departurefromtraditionaltheory.
The second developmentconsistsin the critiqueof the notionof capital as
a "factor of production" measurable independentlyof distribution.2
This
critiquehas shownthe invalidityof some propositionsof the theory,like the
inverserelationbetween the rate of interest(rate of profit)and the "quantityof capital" per worker,whichare basic forthe explanationof distribution in termsof demand and supplyfor "factorsof production".
The uncertaintywhich has resulted from these developmentsfindsits
expressionin authorswho thinkthat new theoreticalapproaches should be
explored. It is also revealed by the natureof some of the work carriedout
by those who adhere to the traditionalapproach.3
1 This paper whichdevelops underthe impactof Sraff
a's production
of commodities
by means
of commoditiessome propositionscontainedin a Ph.D dissertationof 1955-1958, is based on
notes deliveredat a conferenceon "Marx's Transformation
of Values into Prices of Production" held in Siena in 1972, and used thenforlecturesgivenin Cambridgeand elsewheresince
1973-4: in the meantime,referencesto the ideas contained in them have appeared in other
a and
works.I would like to acknowledgethe benefitI derivedfromdiscussionswithPiero Sraff
fromcommentsfrommanypeople and in particularby K. Bharadwaj, A. Campus, B. Cutilli,
H. Kurz, and M. Pivetti.Financial assistanceby the 'Consiglio Nazionale delle Ricerche' is
gratefully
acknowledged.
2This line of criticism,hints of which may be found in Sraffa's1951 p. XXII, was first
broughtto lightin printby Robinson 1953. (See also Robinson, 1973, p. 195.)
3 Thus, the attemptto avoid the difficulties
besettingthe theoryappears to have led to an
abandonment of the method based on "long-period positions" of the economic system,
characterizedby a uniformrate of profit.This notion had been central to the theoryof
competitivedistributionand value since the very inceptionof systematiceconomic analysis.
(See Garegnani,1976, pp. 26-29.)
292
VALUE AND DISTRIBUTION
It is perhapsnaturalthatwhenthiskindof uncertainty
arisesin a scientific
field,thereshould also arise a tendencyto go back into the historyof the
subject, and see when and how theorizingtook the turn leading to the
presentdifficulties.
When we do so and look back over the two centuriesof
systematiceconomic analysis,we findthat,at the cost of severe simplification, we can distinguishtwo successive approaches to the theoryof value
and distribution.
The moderndemand-and-supply
approachhad in factbeen
preceded by a different
approach whichhad its centrein a notionof "social
surplus". This earlier approach found its firstsystematicexpression in
Quesnay's Tableau Economique of 1758, became dominantwiththe English
Classical economistsfromSmithto Ricardo, and was then taken over and
developed by Marx at a time when the main streamof economic analysis
was already movingin a different
direction.
2. The purpose of this paper will be to consider this earlier "surplus
approach" to value and distribution.Section II will examine the premises
which distinguishit fromthe later demand-and-supplyapproach. Sections
III and IV then set forththe problem of "measuring-value"which arose
withinit and led to Ricardo's and Marx's explanationof value in termsof
the labour necessaryto produce the commodities.At the end of Section IV,
Marx's errorwithregardto pricesof productionwillbe seen as arisingfrom
treatingas integralpartsof a singlemethodfordetermining
the rate of profit
and relativeprices, what can be developed as two equivalent but distinct
methods for this determination:what we shall call the "Price-equations
method" and the "Surplus-equationmethod". The solution based on the
firstmethod will be considered in Section V, where it will be shown to
consist of the price equations in Sraff
a's Productionof Commoditiesby
Means of Commodities,1960. The two solutionsobtainable on the basis of
the "Surplus-equation method" will then be examined, respectively,in
SectionVI, dealingwiththe "Integratedwage-goodssector",and in Section
VII dealing withSraffa's"Standard system".
II. The "core" of the surplustheories
3. The notionof social surpluscharacteristic
of the classical theoriescan
perhaps be seen in its simplestform in Quesnay's Tableau Economique,
where we findits firstsystematicexpression.Quesnay saw thatif the social
product-which he considered to consist entirely of agricultural
commodities-4 was to repeat itselfyear after year withoutincrease or
diminution,a part of it had to be put back into production.Besides the
necessaryreplacementof the means of production,this part included the
subsistence of the agriculturallabourers. What remained of the annual
productafterdeductingthispart constituteda "surplus",or "produitnet",
commoditiesfromthe social producton
4 As is well known,Quesnay excluded manufactured
of agriculturalproducts.
the groundthattheywere a mere transformation
P. GAREGNANI
293
of which society could dispose without impairingthe conditions of its

survival.
The fact that the subsistenceof workerswas considered necessaryfor
reproductionestablisheda directlink between the analysisof reproduction
and that of the distributionof the product among the classes into which
societyis divided.Thus Quesnay linkedthe surplusto the landowners'share
of the social product. And when Smith extended Quesnay's notion of
surplusby showingthat surplusoriginatedfromproductionin general and
not fromagriculturalproductionalone, profitsemergedas a second component of the surplusalongside the rentof land, thus providingthe basis for
the English classical economists'theoryof distributionup to Ricardo.
The determinationof the size of the social surpluswas accordinglythe
centre around which these theories revolved. In principle this way of
the non-wagesharesis simple.Two magnitudesare assumed to
determining
be knownprior to the determinationof the surplus.They are: (i) the real
the wage
wage, i.e. the quantitiesof the several commoditiesconstituting
rate,5(ii) the social product,i.e. the aggregateof the commoditiesproduced
in the year. Since (iii) the technicalconditionsof productionof the various
commoditiesare also known prior to the determinationof the surplus,a
knownsocial productimpliesa knownnumberof labourersemployed.6By
the numberof labourersby the knownphysicalwages,we obtain
multiplying
the part of the product that goes to the labourers, which we may call
"Necessary consumption",usinga phrase by Ricardo (1951-58, VI, p. 108).
The surplus,i.e. the share of the productgoing to the classes of society
the "Necesotherthanthe labourers,can thenbe determinedby subtracting
sary consumption"from the Social product, taken net of the means of
production;7that is:
Social product-Necessary consumption
= Shares otherthanwages (surplus) (1)
'We are followingthe authorshere discussed in assuminga single "average" or "natural"
wage and thus homogeneouslabour. As is well known,the possibilityof reducinglabour to
homogeneityrestson the suppositionof a constancyin the ratiosbetweenthe wages forlabour
qualities: see Ricardo, 1951-1958 I, pp. 20-23 on the constancyof relativewages
of different
(see also Smith,1910, bk. i ch X vol. I, p. 130). These ratios were in fact leftto be studied
raised by taking
outsidewhatwillbe indicatedbelow as "core" of these theories.(The difficulty
physicalcompositionsof the wages fordifferent
these ratios as knownin the face of different
kindsof labour, seems to have been implicitlydealt withby takingthe knownreal wage to be
that of common unskilledlabour and then supposingthat the wages of other kinds of labour
will tend to remain a constantproportionof it in termsof value.)
can be producedby means of one method
6 We are at presentassumingthateach commodity
only. The considerationof alternativemethodsof productionof the same commodity,which
betweenfactorsof production
providesone of the two bases forthe notionof a substitutability
of moderntheory(cf. par. 7 below), can on the otherhand only affectwhat has
characteristic
been said here by makingthe employmentof labour associated with a given physicalsocial
product depend on the wage rate as well: under the hypothesisadopted in this paper the
tendencyto adopt cheaper methodswill bringthe economyto a definitetechniquethat giving
the highestwage for the given rate of profit.(See Garegnani, 1972, p. 266-7 and 281).
7The assumptionthat the means of production are physicallyreproduced has the sole
purposeof postponingthe complicationsarisingout of errorsin Smithand Ricardo's notionof
capital (par. 12 below).
294
an equation where "shares otherthanwages" is the onlyunknown(see also

the diagramFig. 1 below).
Techniques
Labor Einpl.
t \
Real Wage
A<
NecessaryCons.
_
\st
Surplus
=shares
S
than
~~~~~~~~~~~~other
Ad~~~~~~~wages
~~~~~~~~~~~//
1. A diagramof the "core" in the surplustheories.Underliningdistinguishes

circumstancesdeterminedoutside the core. Continuous arrowspoint to dependent
magnitudes inside the "core"; discontinuousarrows indicate influencesstudied
outsidethe "core".
FIG.
of the sharesof
The peculiarfeatureof these theories-the determination
the product other than wages as a residuum or "surplus"-thus has its
logical basis in the considerationof the real wage and social productas being
determinableprior to those shares. It is to the determinationof the real
wage and to thatof the social productthatwe mustthereforeturn,however
briefly,for an understandingof the view of the economic systemwhich
underliesthe simple formalstructureof the surplustheories.
4. We have seen how Quesnay and the Physiocratsthoughtthat the
quantityof the productretainedby the agriculturallabourerswas fixedat
the subsistencelevel (forexample Turgot 1786, ch. VI). The same was true
for Ricardo who, however,while holdingthat an increase in wages above
the subsistencelevel would tend to be reversedby the consequentincrease
in population, also freelyconsidered the possibilitythat the increase be
absorbed into "subsistence" as a result of "improved habits" and thus
rendered permanent (Ricardo, 1951-1958, II, p. 115). In assessing
Ricardo's and Quesnay's view of the wage, it is in factimportantto note that
the "subsistence"theyreferredto was alwaysunderstoodas determinedby
historical,ratherthan physiologicalconditions.Robert Torrens, to whom
Ricardo referredas having"most ably illustrated"the subject (1951-1958,
I. p. 97) argued that the "habits of the country"act in this respect as a
"second nature" and, accordingly,the "natural price of labour" may vary
not only from countryto country,but also in the same countryat the
"differentstages of national improvement".And Ricardo' for his part,
P. GAREGNANI
295
definedthe naturalwage as including"those comfortswhichcustomrenders

absolute necessaries".'
Adam Smith's position regardingthe "average" or "natural" wage was
less clear-cutand, in some respects,more interesting
than that of Ricardo.
He also saw the wages as tendingto an historicalsubsistencelevel, but he
explained this by the "advantage" which the "masters" have in disputes
over wages, ratherthanby any tendencyof the populationto growin excess
of the possibilityof employmentofferedby accumulation.Thus, forexample, Smithnoted how the "masters" could "hold out" muchlongerthanthe
workersin all wage disputes,since the master's"necessity"forthe workman
is not so "immediate"as the workman'sforhis master,and pointedout how
"masters are always and everywherein a sort of tacit but constant and
uniformcombination,not to raise wages": a "combination"againstwhich,as
Smithsaw it, the combinationsof workers,hinderedby law, were of little
avail.9 Marx, forhis part,was also far fromadheringto a simple theoryof
wages based on subsistence.He assertedthatthe "regulatingaverage wage"
is givenby an historically
determinedlevel of subsistence,but the tendency
to this "average wage" was the resultof a complexinteractionbetween the
actual wage and the size of the "industrialreserve army" of unemployed
labour: a mechanismwhich gave considerableflexibility
to his position on
the probable, long-term,evolutionof the "average" wage."
Thus, at a closer inspection,what all these authorshad in common was
not, as is oftenheld, the idea of a wage determinedby subsistence.It was
the more general notion of a real wage governedby conditions(oftenof a
the
conventionalor institutional
kind) that are distinctfromthose affecting
social product and the other shares in it, and are thereforebest studied
separatelyfromthem. This separation between the determinationof the
8 Cfr. respectively,Torrens, 1815, quoted in Cannan, 1967, pp. 191-193; Ricardo, 19511958, 1, p. 94. For the social element in subsistence,see also Adam Smith's definitionof
"necessaries", 1910, bk. V, ch. II; vol. II, pp. 528-9.
9 In keeping with this view, pointingto the relative bargainingpower of the two classes,
Smithsaw that in an "advancing state of society", "mastersvoluntarilybreak trough[their]
natural combination.
not to raise wages", whereas the contrarywould be true in a
"decliningstate of society" (Smith 1910, bk. I, ch. VIII; vol. I, pp. 56, 64). On the idea in
Hicks-Hollander 1977, in Samuelson, 1978, and in Casarosa, 1978 accordingto whichSmith
and/orRicardo would have determinedthe "equilibrium" real wage as that balancing the
growthof the supply of labour with that of its demand, resultingfrom accumulation,cfr
Garegnani[1983], p. 311.
10Thus, for example, in Capital, vol. I, 1969a, ch. XXV p. 580. Marx admitsthat the real
wage could rise in the long run to the extentin whichthe corresponding"diminutionof the
unpaid labour ... would [not] threatenthe [capitalist]systemitself".This positionhas important implications.In particularthe fact that, under sufficiently
general hypotheses,technical
change cannot lower the rate of profitcorrespondingto a given real wage (cf. n. 6 above),
entailsthe possibilityof a long-termrise in the real wage whichdoes not "threaten"the system:
Marx's erroneous notion as to the possible effectsof technicalchange on profitsled him to
discount this possibility.(Samuelson seems thus to move on questionable groundswhen in
to the
1971, p. 422 he reduces the question of the validityof Marx's approach to distribution
question of "whetherreal wages rise or stagnateover a century".For furtherevidence against
the idea that Marx held any simple subsistencetheoryof wages, cf Baumol, 1983).
296
wage and that of the social product is evident when, as in Quesnay or

Ricardo,the wage is explainedin termsof a customarysubsistence,but the
same separation between the two problems emerges in Marx and Smith,
who admitteda greaterinfluenceof currenteconomicconditionson the real
wage. It is thisseparate determinationof the real wage thatis expressedin
of the
its treatmentas a magnitudewhichis knownwhen the determination
othershares of the productis approached."
As for the physicalsocial product the circumstancesthat were seen to
determineit, thatis, basically,the accumulationof capital and the technical
conditionsof production,12 were such that it was naturalto suppose it was
knownpriorto its divisionamong the classes.
5. It is importantto stresshere that this separate determinationof real
wage and social product entails a structuringof the analysis which is
radicallydifferent
fromthatof the theorieswhichwere to become dominant
later. The surplustheorieshave, so to speak, a core whichis isolated from
the rest of the analysis because the wage, the social product and the
technicalconditionsof productionappear thereas alreadydetermined.It is
of the sharesotherthanwages
in this"core" thatwe findthe determination
as a residual:a determination
which,as we shall see in the nextsection,will
also entailthe determination
of the relativepricesof commodities.Further,
as a naturalextensionof this,we shall findin the "core" an analysisof the
relationsbetween,on the one hand, the real wage, the social productand
thetechnicalconditionsofproduction(theindependentvariables)and,on the
otherhand, the shares other than wages constituting
the surplus,and the
relativeprices (the dependentvariables).
An importantpoint to notice is that the treatmentof the real wage, the
social product and the technicalconditionsof productionas independent
variables in the "core" in no way entailed denyingthe existence of influencesof any singleone of these threesets of variablesover the remaining
two. The interactionbetween these circumstanceswas in factfreelyadmitted by the classical economistsand by Marx. An example is Marx's discussion of the "realization" of surplusvalue, in whichthe real wage played a
of the size of the social product(cf. e.g. Marx
keyrole in the determination
1969a, III, pp. 492-49). Anotherexample is the reverseinfluencewhichthe
speed of growthof the social productwas generallyrecognizedto have fora
shorteror longerperiod on the real wage.
" As Marx observed"The foundationof modernpoliticaleconomy.... is the conceptionof
thevalue of labourpower as somethingfixed,as a givenmagnitude"(Marx, 1969, vol. I, p. 45).
as those of Quesnay, Smith,Malthusor
to reduce analysesas different
12 In factifwe attempt
Ricardo to theircommonbasic elements,whatwe findis the view thatthe volumeof the social
product depends on: (i) the stage reached by accumulation,which governs the number of
"productive"labourersemployed;(ii) the technicalconditionsof productionwhichregulatethe
physicalproductper labourerand depend in turnon the stage reached by accumulation.(See
Smith,1910, vol. I, pp. 1-2). The commoditycompositionof the social product,on the other
hand, was studied fromthe angle of the needs of reproduction(cfr.for example Quesnay's
Tableau Economique or Marx's reproductionschemes in chapters XX-XXI of vol. II in
Capital), or else was leftto be studied case by case as the need arose.
P. GAREGNANI
297
Moreover, the fact that those three sets of circumstancesappeared as

independentvariables in the determinationof the surplusdid not prevent
the classical economistsfromfreelyadmittinginfluencesof the surplusupon
them: e.g. the classical economistsgenerallyadmittedthe influenceswhich
the level of profitcould have on the real wage, via the speed of accumulation, and Marx went furtherby consideringhow a fall of the rate of profit,
consequent upon a rise of the wage rate, may reverse that very rise by
checking accumulationand causing technical changes, thus re-creatinga
level of labour unemployment(cf.par. 5 above).
sufficient
What the structureof classical analysisdid implywas that these interactions and reverseinfluences,like the influencesof the other factorsdeterminingwages, social product and available techniques, were left to be
studied outside the 'core'. The multiplicityof these influencesand their
variabilityaccordingto circumstanceswas in fact understood to make it
impossibleto reconductthemto necessaryquantitativerelationslike those,
variablesand relativeprices and
studiedin the "core", betweendistributive
betweenoutputsor techniquesand the dependentdistributive
variablesand
prices.
6. Now thisseparationof the analysisinto distinctlogical stages contrasts

sharplywith what we findin the later marginalisttheories. In these, the
determinationof the wage is in factinseparablefrom,and symmetrical
to,
thatof the othershares of the product.Moreover,the demand-and-supply
mechanismused in thatdetermination
impliesthatreal wages and the other
distributivevariables (and hence relative values) can only be determined
and simultaneouslywiththe volume and compositionof the
simultaneously,
product.Indeed, in latertheory,distribution,
outputs,and relativevalues of
commoditiesare all determinedsimultaneouslytakingas data the tastes of
consumers,the endowmentsof "factorsof production" and the technical
conditionsof production.The determinationof these three sets of data is
thenseen as fallinglargelyoutside the domain of economics.As a result,in
these theories the determinationof revenues other than wages and of
relativepricescomes to includemostof economics.Instead of constituting
a
limited"core" of economicanalysis-dealing withthe necessaryquantitative
relationshipsamong distributivevariables and among them and prices-it
becomes almostco-extensivewitheconomicsitself.The more limitedscope
whichthe theoryof value has in the surplusapproach13may howevergive it
the greater flexibilitywhich is required by a subject as complex as
economics. 1,15
13
the "theoryofvalue" such as we findin
The "core" mightin factbe describedas constituting
the surplustheories.
of the "surplustheories" seems provided
example of the greaterflexibility
14 An important
by the attitudeto possible deficienciesof aggregate demand: while Ricardo held that no
view of the problemwas taken by
"general glutsof commodities"were possible, a different
Malthus or Marx, (who also worked within the same "surplus" approach to value and
and were no less consistentwithit on the necessityof "shortchainsof reasoning"
distribution,
(footnote15 on p. 298)
in economicscf. Marshall,1961, I, p. 773.)
298
The remainderof thispaper will be exclusivelyconcernedwithwhat has

here been describedas the 'core' of the surplustheories.More particularly
we shall be concernedwiththe part of this"core" whichconsistsof treating
the real wages, as distinctfromoutputsor techniques,as the independent
variable.
of the two theories
7. An effectof the above contrastin the structuring
may be seen in how modern authors,used to focusingattentionon "conof outputs,seem oftensurprisedby the
sumers'choice" in the determination
fact that in classical theories the changes in real wages are considered
separatelyfromchanges in outputs,even in outputs of wage goods. The
modern focus on consumers' choice and the correspondingsimultaneous
determinationof prices and outputs is however an integralpart of the
demand-and-supply
mechanismfordetermining
distribution
just mentioned.
Consumers' tastes for goods requiringdifferent
proportionsof factorsof
productionare in fact supposed to determine,togetherwith the choice
betweenalternativemethodsof production,the relative"scarcity"of these
factors.When the explanationof distributionis different-aswe saw to be
the case forthe classicaleconomist-the need to studythe effectsof changes
withtheireffectson outputsis no longer
in wages on prices simultaneously
evident (a similarneed to study the effectsof a change in the technical
conditionsof productionsimultaneouslywith its effectson the tastes of
consumers-is for example denied in the marginalisttheoriesusing those
tastes as data.) It mighthowever be insistedthat if non-constantreturns
prevail,the output changes resultingfromchanges in real wages (and the
consequent changes in prices and techniques adopted) will in turn affect
variablesotherthanwages, and hence modifythe
pricesand the distributive
relationshipsstudiedunderthe assumptionof givenoutputs.A simultaneous
of prices and quantitieswould thenseem requiredin orderto
determination
study those relationships.This line of argumentpresumes however the
possibilityof expressingthe dependence of outputs upon changes in distributionby means of functionalrelations of the same nature as those
postulatedin modern theory,endowed, that is, with known propertiesof
15The classical surplus theories are characterizedby some authors as being concentrated
on reproduciblecommodities,and hence "production",as opposed to the concentrationon
commoditiesof the scarcitytypeand hence on "exchange" whichwould be the hallmarkof the
dominantmarginalist
theories.Accordinglythe two kindsof theorywould deal withtwo distinct
seriesof problems,withan opposite practicalrelevancein relationto time,the classical theory
becomingrelevantjust when (in the long run) the marginalisttheorybecomes irrelevant(cfr.
betweenthe two
e.g. Pasinetti,1977, pp. 6, 31-33). Whereas it aptlydescribessome differences
whichlies in the way
approaches,thisdistinctionseems not to go to the rootsof the difference,
in which both"production"and "exchange" are treatedin each approach. The determination
of the wage on the basis of the forcesmentionedat par. 5 above-entailing the determination
of profitsas a surplusand not by the "scarcityof capital" relativeto labour-also impliesthat
the problemsof exchangethemselvescannotbe viewed as problemsof "scarcity".This remains
true whetherwe consider a short period, or a long period, in which plant in the several
industriescan adapt to outputs. (For a criticalview of this criterionof distinctionsee also
Roncaglia, 1979 pp. 145-6.)
P. GAREGNANI
299
generalityand with persistenceover time. If this were in fact

sufficient
possible it would be natural to consider the changes in the quantities
produced simultaneouslywith the change in distributionfromwhich they
originate.But thisview was not thatwhichthe Classical economiststook of
the matterand, it seems, we today have even betterreasons than theyhad
fornot takingit. Thus forexample importantchangesin the real wage may
have a multiplicity
of effectson aggregatedemand, the intensityof which
will depend on the particularcircumstancesin whichtheyoccur and cannot,
in our present state of knowledge,be reconductedto known functional
generalityand persistence.If this is admitted,it will
relationsof sufficient
appear thata generaldeterminationof outputssimultaneouslywithrelative
prices is impossible,and thatthe basic procedurecan only be thatfollowed
by the classical authors.They analysed changes in prices and outputs by
whatwe may describeas two distinctlogical stages. In the first,the effectof
the change in real wage was examinedwhile takingthe outputsas given.In
the second stage, the possible effecton outputsof the initial change was
analysed in accordancewiththe circumstancesof the case under considerain
tion,jointlywithits possible secondaryeffectson prices and distribution,
pp
311-312).
non
returns
to
1983
scale (cf.Garegnani,
the case of
constant
III. Ricardo's measurementof the value of aggregatesby means of
embodied labour
8. We have seen the rationalebehind takingthe Social productand the
Necessaryconsumptionas given physicalaggregateswhen determiningthe
sharesotherthanwages in the surplustheories.But how are we to measure
those two magnitudesin equation (1)? As we shall presentlysee, the theory
cannot stop at conceivingthemas physicalaggregatesand mustproceed to
their measurementin value; will these values also be given when the
physical aggregates are given? It is in connection with this problem of
measurementthat the surplustheoriesof distributionmeet the question of
The remainderof this
value and with it, their chief analyticaldifficulty.
paper will turnon thisquestionwhichwill be taken up in the comparatively
advancedformit assumedin the theoryof profitsof Ricardo's Principles.'6
Since we are concerned with aspects of the Classical problem of value
whichare independentof the rentof land, we shall assume thatfertileland
abounds and thatrentcan accordinglybe ignored."7Thus, on the righthand
16 We are thusnot concernedhere withthe physicalmeasurement
the reasoningin
underlying
both Ricardo's earlierEssay on theInfluenceof a Low Priceof Corn on the'Rate of Profit,and
a, 1951, pp. xxxi-xxxii.
Quesnay's Tableau Economique (on these points cf. respectively,Sraff
n. 4, and Sraffa,1960, p. 93).
17See above par. 6. We may however notice how the characteristicseparation between
determiningthe quantitiesproduced and determiningthe shares of the product other than
wages (par. 6 above) allowed Ricardo to isolate the share of land rent.This separation(and the
implicitassumptionthat each worker is assisted by the same capital, whatever the land
cultivated,or the intensityof its cultivation)allowed Ricardo to take as giventhe productivity
of labour on the no-rentland or, even, thatof the last labourerempoyedon land alreadyunder
cultivation(on the latterpoint,cf. Ricardo 1951-1958, vol. I, p. 71).
300
side of equation (1) we shall findaggregateprofits.Two observationsare

however necessary in order to proceed to the rate of profit,on which
Ricardo's interestwas in factfocused.The firstis thatin Ricardo, as in the
otherClassical economists,a yearlyproductioncycleis implicitlyassumed;18
the wages are supposed to be advanced at the beginningof the cycleand are
thereforea part of capital. The second observationconcernsthe factthatin
determiningthe rate of profitRicardo operated as if capital consisted
entirelyof the wages advanced for the year. In facthe saw the divisionof
the product between wages and profitsas the only factor capable of
influencingthe rate of profit,thus ignoringthe independent influence
exerted by the proportionbetween labour and means of production.19In
order to give an accountof his theoryof profitwhichis both consistentand
we shall assumethatproductionrequiresonlyverysimple
sufficiently
faithful,
means of production,whichcan be ignored.
Under the above assumptions,the annual rate of profitwill be expressed
by the ratio betweenthe social surplusand the annual wages or "Necessary
consumption",i.e.
Social product- Necessaryconsumption
Necessaryconsumption
(2)
9. Suppose, now, thatthe "Necessaryconsumption"advanced to workers

is reproducedin kind duringthe year and the yearlyaggregateprofitscan
accordinglybe reckonedin physicalterms,thatis, as a surplusproduct.Even
under this most favourablehypothesisit would be impossibleto stop at a
18 "A year is assumed in politicaleconomyas the period whichincludesa revolvingcycleof
productionand consumption"(JamesMill, 1821, p. 185).
19 Cf. forexample: "whetherthese increasedproductions,and the consequentdemand they
occasion, shall or shall not lower profitsdepends solely on the rise of wages" (Ricardo,
1951-1958, I, pag. 298, our italics; for a similarstatementcf. also ibid pp. 289-292). More
generally,Ricardo failed to show any awareness that the rate of profitcan change for causes
otherthanchangesin the proportionbetweenwages and profitsin the (net) social product.The
originof thiserror,whichRicardo sharedwithhis contemporaries,
can be tracedback to Adam
Smith.In a well-knownpassage of Wealthof Nations he had argued that,althoughit may be
thoughtthatbesides wages, profitsand rents,the price of a commodityalso includesall thatis
necessaryforreplacingthe means of production,yet since the prices of the latterare in turn
made of those parts,the entireprice "resolves itselfeitherimmediatelyor ultimatelyinto the
same three parts of rent,labour and profit"(Smith, 1910, I, pp. 44-45). From this view of
prices, in which we find in germ the correctidea of reducingcapital to wages (and rents)
idea that
advanced forvariousperiodsof time,Smithoftenslipped into the altogetherdifferent
capital can be reduced to the wages advanced for the currentyear.
Marx indicated the above deficiencyof Ricardo's analysis as an erroneous identification
between rate of profitand rate of surplusvalue (cf. for example, 1969, II, p. 463). Marx's
criticismof Ricardo seems to have been misapprehendedas an accusationthatRicardo "ignores
to the economyas a whole" (Steedman,1982, p. 126).
non-wagecapital,at least whenreferring
However Marx did not deny thatSmithand Ricardo saw the existenceof means of production
(cf.forexample the carefullywordedpassage in 1969a, III, p. 841 and n. 51): what he said was
thatRicardo ignoredthe effectof changesin the proportionof labour to means of production
on the rate of profit(Marx, 1969, II, p. 373; on this point cf. also G. De Vivo 1982, pp.
91-92).
P. GAREGNANI
301
physicalnotionof the two magnitudesinvolved,because the surplusproduct

and the necessary consumptionwould generally consist of commodities
proportions.The ratio between
whichare different,
or are taken in different
the two aggregateswould give the quantityof "surplusproduct" (a compocomposite
site commodity)per unitof "necessaryconsumption"(a different
i.e. the ratiobetweenthe values of the
commodity),but not the rateofprofit,
two magnitudes.
In the PrinciplesRicardo is accordinglyfaced withthe need to measure
the Social product and the Necessary consumptionin value terms and,
hence, withthe problemmentionedabove: will these givenphysicalaggregates also be given when expressed as value magnitudes?If the value
expressionof either aggregatewere to depend on the rate of profit,the
determinationof profitsas a surplusin accordancewithequation (1) or (2)
above is threatenedby circularreasoning.
Ricardo's startingpoint in dealing withvalue was Smith'stheoryof the
"naturalprice". Smithhad definedthe naturalprice as the sum of the wages
and profits(we are ignoringrents)whichmustbe paid in order to produce
the commodity,reckoned at their "natural" or "average" rates (Smith,
1910, bk. I, ch. VII, pp. 48-51). As forthe unitin whichthese naturalprices
should be expressed,Smithhad suggesteda "real" or "invariable"measure
of value consistingof the quantity of labour which a commoditycan
"command", thatis, in modernterms,the wage unit (ibid,bk. I, ch. V, vol.
I, p. 28). If, however,we use Smith'smeasure in equations (1) or (2) we are
faced with exactly the difficulty
we mentioned above: the value of the
physicallygivensocial productwill not be knownbeforethe rate of profitis
known.Take, for example, an economyemploying3 millionworkers.The
Necessary consumptionwill "command" 3 million labour-yearsand be a
known magnitude.But the same will not be true for the Social product:
with,forexample, the capital consistingonly of the wages advanced yearly
we assumed above, the Social product will command 3(1 + r), million
labour-years,where r is the rate of profit,namely 3.3 m. if r= 10%, but
6.6 m. if r = 120%. We may accordinglyseem to be reasoningin a circle
when we follow the surplusapproach and attemptto determineprofitsby
in accordance withequation (2): in order to do that we need to
difference
know the size of the Social product,whichis not knownuntilwe know the
This dependenceof the value
veryrate of profitwhichis to be determined.20
of the product upon distributionmeans that,when we look at the Social
productand the Necessary consumptionin value terms,the constraintby
whichone class cannot have more withoutthe other class havingless-so
evident if we could look at the product in physical terms-is no longer
20
The difficulty,
however,is ultimatelythatof expressingthe capital requiredin production
independentlyof distribution,
(cf. Garegnani,1960, pp. 18-19). Thus, we shall see in Section
VI below how measurementsin termsof commandedlabour are in fact compatiblewith the
determinationof the rate of profitsin accordance withequation (2) above.
302
apparent:mightnot the real wage rise withoutaffecting

the rate of profit,or
vice-versa? Indeed Smith himselfoften lost sight of the constraintand
envisagedthe rate of profitand the wage as determinedindependently
of
each other.He wrotethat "the naturalprice varies withthe naturalrate of
each of its componentparts" (Smith,1910, bk. I, ch. VI, vol. I, p. 56) giving
rise to what has been described as Smith's "adding up theoryof prices"
(Sraffa,1951, p. xxxv).21 And, afterSmithMalthuscould argue that a tariff
on corn would raise both the rent of land and the rate of profits,without
apparentlyseeing the consequences these rises would be bound to have
upon the real wage (e.g. Malthus 1951, p. 398, and passim).
10. Ricardo's greatmeritwas in factthathe saw throughthese "appearances" (cf.par. 11 below) and broughtconsistency
back intoeconomictheory.
This achievementof Ricardo's Principleswas renderedpossible by relating
the exchangevalue of the commoditiesto the quantityof labour necessary
to produce them.
Let us in factsuppose that the proportionbetween wages and profitsin
Smith'snaturalprices are the same for all commodities-as theywould be
underour assumptionat par. 8 of a capital consistingonly of the advanced
wages. All commoditieswould then exchange accordingto the quantityof
labour requiredfor theirproduction.The ratio between the values of any
two aggregatesof commodities-or between sums or differencesof such
values-would accordinglybe equal to the ratios between the respective
quantitiesof labour embodied.22The value of Social product and of the
Necessaryconsumptionin equation (2) could then be "measured" in terms
of the quantitiesof labour embodied, here indicatedby P and N, and we
21 Adam Smith's "adding-up theory of prices" seems often to have been construed as
anticipating
the demand-and-supply
explanationof value and distribution
of the latermarginalisttheories,in contrastwiththe explanationof the same phenomenalaterprovidedby Ricardo.
Thus, in 1954, p. 189, Schumpeterwritesof Smith'sconceptionof the "naturalprice" as "the
rudimentaryequilibriumtheory of chapter 7 [of the Wealth of Nations which]... points
towardsSay and, throughthe latter'swork,to Walras", and originatesa "Smith,Mill, Marshall
line" whichwas rivalto thatof Ricardo (ibid. 530, cf. also ibid pp. 557-558; 567-568, 599). A
is adopted by Maurice Dobb who, in 1973, refersto Smith's"determinasimilarinterpretation
tionof the generallevel [of wages and profits]by conditionsof supplyand demand forlabour
and capitalrespectively"(p. 50, cf. also p. 112, and passim). This view of Smith'sapproach to
seems to overlook that,behind Smith'svague referencesto the rate of
value and distribution
profitas determinedby the "competition"of capitalists,therelay, as we saw, the inconsistency
of rates of wages, profitsand rent determinedindependentlyof one another.And it was just
thisinconsistency
thatRicardo and Marx criticisedSmithfor.The demand and supplyforcesof
the modern theories, founded as they are, on the "substitutability"between "factors of
production',(cf. above p. 76) are as absent in Smithas theyare in Ricardo.
22 As we saw in par. 9 the rate of profit
can be directlyenvisagedas a relativevalue, namely
the value of the Surplusproduct(a compositecommodity)in termsof the Necessaryconsumption (a second compositecommodity):if all individualcommoditiesexchange accordingto the
quantityof labour embodied, the same will be true of these two composite commodities:
When theeconomyis not replacingitswage capital,equation (3), writtenas r = (PIN) - 1, shows
how the rate of profitcan still be derived froma relativevalue: that of the Social product,
relativeto the Necessaryconsumption.
P. GAREGNANI
303
would obtain the rate of profitr as

P-N
(3)
where P and N are now known magnitudes.Thus, if we returnto our

example of an economywith3 m workers,a doublingof the real wage and,
from,for
hence, of the labour requiredforthe productionof its constituents
example, 1/3to 2/3 of a labour-year,would make the rate of profitfallfrom
(3 - 1)/1= 200% to (3 - 2)/2= 50%. The constraintbinding changes in
wages and changesin the rate of profitbecomes selfevidentand no space is
leftforthe illusion,generatedby the appearance of price as a sum of wages
and profits,that the rivalrybetween capital and labour "tends to increase
the value of the productto such an extentthateach receivesa largerpiece"
(Marx, 1969a, III, p. 503). In yetanotherquotationfromMarx,relatingparticularlyto Ricardo:
thisfalseappearance
"It is thegreatmeritofclassicaleconomyto havedestroyed
and illustion,thismutualindependence... of the varioussocial elementsof
wealth"(Marx,1969b,III, p. 830).
11. It may here be appropriateto notice how the nature of Ricardo's
in overcomingthe errorimplicitin Smith'sadding-uptheoryof
contribution
pricesmayhelp us to comprehendMarx's oftenmisunderstoodpositionwith
respectto whathe called "vulgarpoliticaleconomy". Ricardo had begun to
overcomethe difficulties
whichhad preventedhis predecessorsfromseeing
the constraintbindingwages to profitsand rents:howeverhis verysuccess in
bringingthisto lighthad the resultof exposingthe class antagonismswhich
underlie the division of the product. In this situation, the attempt to
preserve a harmoniousview of society took-Marx thought-the formof
turninga blind eye upon the analyticaladvances of Ricardo and keeping
closer to the "appearances" by whichthe price of the product,seen as the
sum of profits,wages and rents,may seem capable of accommodatingthe
rise in one of these elementswithouta decrease in the others. In Marx's
ironicwords,alreadyreferredto above, these economistsheld that:
theoutcomeof this
bringsthemto blows,nevertheless
"Even ifthisoccasionally
betweenland,capitaland labourfinallyshowsthat,althoughthey
competition
tendsto increasethevalue
theirrivalry
overthedivision,
quarrelwithone another
of theproductto suchan extentthateach receivesa largerpiece,so thattheir
whichspursthemon, is merelythe expressionof theirharmony
competition,
Marx,1969a,III, p. 503.
The fact that these views were the resultof adhering,as popular thought
oftendoes, to "appearances" explains the specificadjective "vulgar", i.e.
popular,whichMarx applied to these economists.Accordingly,Marx defines
as ''vulgareconomy" that"economy" "whichdeals withappearances only",
in contrastwith"classical politicaleconomywhichhas investigatedthe real
relationsof productionin bourgeoissociety" (Marx, 1969b, p. 85, n. 1). In
304
this"vulgareconomy"he includes,ifnot the workof Say himself,thatof his

followersin France and Germany(Marx, 1969a, III, p. 500), and that of
Seniorand hisfollowers(Marx, 1969b, pp. 596-7). Marx's frequentreference
to the existenceof "vulgarrepresentations"in Smith,an authorforwhose
scientific
achievementhe had the highestrespect,seems on the otherhand
apt to bringout the specific,and not merelyderogatory,meaningwhichhe
attributedto the expression"vulgar economy".
The distinction
by Marx between'vulgar' and 'classical' politicaleconomy
turnedthuson a second, even more basic distinctionbetween two kinds of
of the economicrelationsof bourgeoissociety.There are, on
representation
the one hand, the "apparent relations" or "connections",which are those
observerand whichare representedin Adam
perceivedby the unsystematic
Smith's"adding up" theoryof prices,when "instead of resolvingexchangevalue intowages, profitand rent[he] constructsthe exchange-value of the
commodityfromthe value of wages, profitand rent,whichare determined
and separately"(Marx, 1969a, II, p. 217). In such an inconsisindependently
character
tent representationof the economic system"[the] contradictory
[of capital]is totallyconcealed and effaced... no contradictionto labour [is
evident]"(Marx, 1969a, III, p. 467). There are, on the otherhand,the "real
relations" constitutingthe "intrinsic", or "inner connections" of the
bourgeois system.These are the relations broughtto light by systematic
scientific
analysis.They centreon the constraintthatbindschangesin wages
to changesin profitsand rentsand reveal the economic antagonismbetween
classes (forexample,Marx, 1969a, II, p. 166). Now, forMarx, these "inner
connections"required,in orderto be revealed,thattheproductbe measured
of its divisionbetween the three classes. Hence the role of
independently
Ricardo's measurementof values in termsof labour embodied in which,in
Marx's own words, the value of the commodity"does not depend upon its
divisionintowages, profits
and rents"and constitutesinstead "the limit...
forthe dividendswhichthe labourers,capitalistand landlordwill be able to
draw fromthis value in the formof revenue, wages, profitsand rents";
Marx, 1969b, III, p. 854; cf.also p. 274 and 1969a, II, p. 219.23
23 When faced with passages like the ones above, it seems surprising
that various authors
followingwhat looks like an establishedtradition,should attributeto Marx's theoryof value
some "qualitative" role differentfrom that which the theoryhad in Ricardo, i.e. that of
measuringthe productindependentlyof its division(cfr.P. Sweezy, 1946, p. 33; the idea finds
an earlyexpressionin Hilferding1949, e.g. pp. 130-132. A recentclear-cutexpressionof this
positionmay be foundwhen it is claimed that "the idea thatthe theoryof value developed in
vol. I of CAPITAL is a (bad) theoryof relativepricesis ... untenable" (Medio, 1977, p. 382).
Medio (a participantin the Siena conferencementionedabove) appears howeverto contradict
thisclaim of his, when in the verynextline, he admitsthat "the cost of productiontheoryof
[because] it containedan apparentelement of circularity...
price seems to be unsatisfactory
the calculation of the rate of profitrequires valuing [product,wage goods and means of
production]at theirequilibriumprices. The latter,however, can not be calculated without
knowingthe rate of profit".Here indeed we have a verygood reason forMarx's "bad" theory
of relative prices: for what means were available to Marx for breaking that "apparent
circularity"if not the labour theoryof value developed by Ricardo for that verypurpose?
P. GAREGNANI
305
IV. Marx's "prices of production"

12. And forthisanalysisof the innerorganicconnection"bindingwages
and profits,Marx took the road whichRicardo's theoryof value had opened
up forhim.
As we saw (par. 8 and n. 20) when determining
the rate of profitRicardo
had operated as if capital could be resolved entirelyinto the wages advanced for the year. Marx started by clearing up this confusionwhich
Ricardo had inheritedfromSmith.He showedthatthe proportionwhichthe
means of productionbear to the labour (and hence, to the wages advanced)
constitutesa factorwhichcan influencethe rate of profitindependentlyof
the proportionin whichthe productis divided between wages and profits.
Accordingly,he distinguished
capital into two parts: the wages advanced or
"variable capital" and the means of productionor "constantcapital". To
simplifyour exposition,we shall assume that constantcapital is entirely
consumed during the yearlyproductioncycle (i.e. consists of circulating
capital) and shall retainthe assumptionof free land. If, then,commodities
exchangedaccordingto the quantitiesof labour embodied,the rate of profit
would be determinedas
(4)
r= s
c + v
where c and v are respectivelythe "constant" and "variable" capitals,

measuredin termsof the labour necessaryto produce them,whereas s, the
social "surplusvalue", is Ricardo's (P-N) and is measuredby the quantity
of "surplus labour", the labour exerted in the year over and above that
necessaryforreproducingthe wages.24
Commoditieshowever do not exchange accordingto the quantities of
labour embodied. If we look at "natural"pricesas resolvingthemselvesinto
wages and profits,as Ricardo did, we findthat these wages and profitsare
presentin different
commoditiesand
proportionsin the prices of different
the latterdo not, therefore,exchangein proportionto the labour necessary
fortheirproduction.Ricardo had admittedthisin termsof "modifications"
to the rule that commoditiesexchange accordingto the labour embodied:
his argumentconcerningprofitscontinuedhoweverto restultimatelyon that
rule.25
24
Equation (3), by which we expressed Ricardo's determinationbecomes, in the new
symbols,r = s/vand its difference
fromequation (4), due to Marx's considerationof the organic
compositionof capital,may become clearerifwe rewriteequation (4) as
s/v
r=(c/v) + 1
25 Ricardo struggled
withthatproblemuntilthe end of his life. Cfr. the paper On Absolute
and Exchangeable Value, Ricardo 195 1-58 V, whichwas in factwrittenin the summerof 1823,
just beforehis death. A misunderstanding
of the positionof Ricardo and of Marx's criticismof
it seems to occur when in Steedman 1982, it is assertedthatMarx was "quite wrong... to say
thatRicardo's approach was inherentlyincapable of providinga theoryof the rate of profit",
)
(continuedoverleaf
306
Marx faces the question in the manuscriptsposthumouslypublished by

Engels as vol. III of Capital and, in the sketch of a solution he provides
there,he comes withinone step of a correctgeneral solution. He even
indicatesthe stepwhichis yetto be taken-though, as we shall see, he failed
to realize its consequences.26
13. There, Marx startsby askinghimselfwhycommoditiesdo not generally exchange accordingto the quantitiesof labour necessaryto produce
them.The answerhe givesis simple:ifcommoditiesexchangedaccordingto
that principle,those produced with capital of a higher"organic composition" (i.e. a higherproportionof "constant" to "variable" capital) would
give a lower rate of profit.Thus, suppose that only corn and steel are
where,as the contextshows,"Ricardo's approach", as distinctfromMarx's, would be founded
on the idea that "the general rate of profitand the prices of productionmustbe determined
withinthe theory"(ibid. p. 124). In factthe basis of Ricardo's argumentin the
simultaneously
is the assumptionof the constancyin the value of commodities"in the productionof
Principles,
whichno additionalquantityof labour is required" (e.g. Ricardo, 1951-58 I, pp. 110-11.1).
fromMarx's in admittingthat comRicardo's actual procedureseems thereforeno different
the
moditiesdo not exchangeaccordingto the quantityof labour embodied,but in determining
rate of profitas if they did so exchange-by looking, that is, for a commoditywhich would
constitutea "medium",such that"Those on the side of thismediumwould rise in comparative
value witha rise in the price of labour. . . and those on the otherside mightfallfromthe same
cause" (Ricardo, 1951-58, for Marx cf. p. 34 below). Moreover Ricardo, like Marx, uses the
rate of profitso determinedto ascertainhow far the relativeprices of commoditiesdeviate
from,or change independentlyof, the relativequantitiesof labour embodied.
The main difference
betweenRicardo and Marx lies thereforein whetherthislogical orderis
explicitlyfollowed and justified,as it is by Marx, or has instead to be extractedfrom an
of prices and
argumentwhich,iftakenliterally,farfrombeing a "simultaneous"determination
since it would reston ignoringthatverydependence
the rate of profit,would be contradictory,
of relative prices on distributionwhich is admittedelsewhere in the argument.Now, this
criticismof Ricardo is preciselythe one expressed by Marx when for example he charges
Ricardo with a "erroneous confusionof cost prices and values" (Marx, 1969, II, p. 199). It
would on the other hand contradictthe facts to view Ricardo's procedure as a better
preparationthan Marx's for the later simultaneousdeterminationof prices and profits:when
the lattercame, withBortkiewicz,Seton and Sraffa(cfr.n 32 below) it grew out of Marx's
equationsforpricesof production,ratherthandirectlyout of Ricardo's less definiteprocedure.
26 We mayhere noticethe curiousmisunderstanding
accordingto whichthe labour theoryof
value is held to be incompatiblewith the existenceof alternativetechniques(cf. Morishima,
1973, p. 189, Steedman, 1982, p. 65). The dependence of labour values on the technique
the rate of profit,any more thanthe
adoptedwould not in factpreventtheiruse in determining
similardependence of physical inputs preventsthem from playing the same role in price
the rate of profitcorrespondingto
equations(8) below: labour values would allow determining
each technique,and hence that which could be shown to rule under free competitionat the
givenwage (cf. p. 3 n. 6, above).
Here we may also noticethe misconceptionby whichSamuelson in 1974, p. 292, writesthat
"in a regimeof values ... the techniquethatminimizesvalues at r = 0 willminimizethemforall
of the values model". A confusionoccurshere betweenthe labour theoryof
r's, a shortcoming
value, by which the several commoditiesexchange according to embodied labour-and the
conditionsunder which costs for the same commodity,produced with alternative
different
techniques,should equal the ratio betweenthe respectivequantitiesof labour embodied,when
the techniquemaximizingthe net productper workerwould in factdominateat all levels of the
real wage. Equal organic compositionas betweencommoditiesdoes not conceptuallyentail
equal organiccompositionas betweenalternativetechniques,as shownforexample by Samuelson's "surrogateproductionfunction",1962, whichrestsentirelyon labourvalue conditions,but
clearlydoes not entail dominationof one techniqueover all others.
P. GAREGNANI
307
produced in the economy and, the "rate of surplusvalue" s/v being for
example 1, the organiccompositionc/v is 1 forcorn and 3 for steel: steel
productionwould give a rate of profitof 25% as againstthe 500/oof corn
prodution.The competitivetendencyto a uniformrate of profitwill then
make steel exchangeformorethanthe quantityof cornembodyingthe same
amount of labour, so as to raise the surplusvalue (the differencebetween
value of outputand value of capital) in steel productionand lower it in corn
productionuntilthe two ratesof profitbecome the same. It maythenappear
thatthe divergenceof thepriceof steel in termsof cornfromthe ratioof the
respectivequantitiesof labour embodied, has the meaningof redistributing
surplus value away fromthe surplusindustriesto the "deficit"industries
(fromthe corn industryto the steel industryin our example). Marx in fact
arrivedat thisconclusionand argued thatwhen the redistribution
has been
completed,we shall findin each branchof productionthe same rate of profit
we obtain in equation (4), by distributingtotal surplus value over total
capital:27just as when 5 sacks of corn are re-distributedproportionally
among 10 people, each will end up with 5 of a sack, irrespectiveof the
initialdistribution.
The prices of productionthat ensure this resultwill be
those obtainedby applyingthe rate of profitcalculatedin equation (4) to the
capital used in each branch.In our steel and corn economy:
(SSAS+ scAc)
(csAs + ccAc) + (vsAs + VcAc)
Ps= (Cs+ Vs)(I + r)l

pc= (CC+ vc)(l + r)J
(5)
(6)
in whichthe prices of productionps of steel and pc of corn are referredto

physicalunits of the two commoditiesrequiringa unit of labour for their
production (so that cs + vs + s = cc + vc + sC= 1), and As, Ac indicate the
quantitiesproduced of the two commodities.The way in which r is calculated implieson the otherhand that the prices ps and pc are expressed in
termsof the compositecommodityconstituting
the social product,taken in
the quantityrequiringa unit of labour for its production.28
This reasoning(accordingto whichthe rate of profit-thekey variable of
the system-is determinedby equation (5) as if commoditiesexchangedin
proportionto the quantitiesof labour necessaryfortheirproduction,may go
a long way towardsexplainingwhyMarx thoughtit possible to conducthis
argumentin vol. I and II of Capital on the basis of just that assumption,
postponingto vol. III the determinationof the prices of production.)
14. If this is what we findin the posthumouslypublishedChapter IX of
Book III of Capital, Marx did not fail to notice a shortcomingin this
Cfr. for example the illustrationof the cottonmill in Marx 1969a, III, p. 155.
Marx's conditionthattotalpricesshould equal totalvalues is in factequivalentto takingas
numerairethisparticularcompositecommodity,whichis also thatproducedwiththe "average"
organiccomposition.
27
28
308
intendedsolution. Competitionwill distributeprofitsin proportionto the

"prices" of the constantand variablecapitals,and not in proportionto their
"values" (i.e. the quantities of labour embodied). He wrote accordingly
"thereis alwaysthe possibilityof an errorifthe cost priceof a commodityin
any particularsphereis identifiedwiththe value of the means of production
[and variable capital] consumedby it".29
Marx seems to have leftthe question there.Had he attemptedto correct
that"error",he would soon have foundthatthe priceequationsmodifiedby
estimatingthe capitals at theirprices mustdeterminenot only the prices of
productionbut also the rate of profit:equation (5) would thereforehave
stood out as incorrect.Let us in factmodifyequations (6) by expressingboth
the constant capital, assumed here to consist of steel, and the variable
capital, consistingof "corn", in termsof prices. We obtain
pc = (ccp,+ vcpc)(1+ r)}
PS= (csPs+ vspc)(l+ r)
It is sufficient
to divideboth equations by one of the two prices,say pc to
realize thatMarx's two independentprice equations containin factonlyone
if r is to be
unknown,the relativeprice ps/p,and are thereforecontradictory
determinedby equation (5): in the price equationsthe uniformrate of profit
can only be determinedsimultaneouslywith the relativeprice of the two
commodities.
It is not difficult
to see wherelay the faultin the notionof a redistribution
of surplusvalue which,as we saw, led Marx to equation (5). Unlike the 5
sacks of corn which do not change in size relativeto the 10 people in the
the size of the social surplus value does so
course of the redistribution,
change relativeto capital. This surplusvalue is in fact the price of production of the surplusproduct,and cannotbut change relativeto thatof social
of surplusvalue, relative "prices" in
capital when, with the redistribution
general come to divergefromrelative"values".30 As we saw in par. 9 the
profitrate is but the relativevalue of those two compositecommoditiesand
it willnot be equal to the ratiobetweenthe quantitiesof labour embodiedin
them any more than the relativeprice of any two commodities.
15. There is, however,a sense in whichMarx's errorwas suggestive.The
errorcan be envisagedby us as the resultof treatingas integralparts of a
singlemethod (forthe determinationof the rate of profit)what are in fact
when consistentlydeveloped, two equivalent methods, each of which is
29 Marx, 1969a, III, p. 165. As is well knownMarx indicatesby 'cost-price'the value (price)
of the capital (constantand variable) used up in the productionof the commodityin question.
Marx continues the passage quoted above with the words "our present analysis does not
necessitatea closer analysisof thispoint".
30 It is curious to note how Hilferding,
in his answer to Bohm Bawerk's critiqueof Marx,
makes no
neatlymissesthispointwhen he writes:"It is obvious thatthe change in distribution
difference
in the total amount. . . of surplusvalue undergoingdistribution".Hilferding1949, p.
160.
P. GAREGNANI
309
sufficient
to determinethat rate. The first,which we may call the priceequationsmethod,is exemplifiedby equations (7) and determinesthe rate of
profits-or, more generally,the relationbetween the wage and the profit
rate-simultaneouslywithrelativeprices.However, the basic idea of profits
(the non-wage share) as a surplusproduct,which they can be seen to be
state,inevitablyleads one on to
wheneverthe economyis in a self-replacing
attemptsome simplermethod.The lattermethod,whichwe may here call
the Surplus-equationmethod,is exemplifiedby equation (4) or (3) for the
case in which commoditiesexchange according to the labour embodied.
Essentially,it depends on the possibilityof expressingboth the surplusand
the capital that appear in the equation in termswhichare proportionateto
theirvalues but do not containthe unknownprices,so thatthe profitrate is
the only unknown.
As sections VI and VII below indicate, this second method is also
available for sufficiently
general hypothesesand it appears to exhibitsome
over the Price-equationsmethod.
advantagesof simplicity
and transparency
V. The "Price-Equations Method" of determiningprofits
16. The "Price-equationsmethod" consistsof the generalizationof equations(6). In theseequationswe assumedthatconstantcapital consistsof one
commodityonly. When that assumptionis abandoned, the constantcapital
of each industryhas to be distinguished
into as manyquantitiesof embodied
labour as thereare kindsof means of production.To each of those kindsa
different
price of productionapplies: the additional unknownprice thus
introducedwill entail an additional price equation.3' Matters are even
simplerforthevariablecapital:theassumptionof a uniformreal wage ensures
thatin all industriesvariable capital consistsof the same composite "wage
commodity":we may thereforeapply to it the singleprice obtainable from
the prices of its constituentcommodities.
We may now writethe price equations obtainedby generalizingequations
(6) forthe case of any numberk of commoditiesa, b,... k.
31 A determinationof the rate of profitbased on Marx's price equations was proposed as
early as 1907 in L. von Bortkiewicz,1949. In thatarticleBortkiewiczacknowledgeda debt to
Tugan Baranowsky,who had used a similarmethod to show that Marx was mistakenin his
determinationof the rate of profit.It is fromthe latter author that Bortkiewiczapparently
derived the groupinginto three sectors (means of production,subsistencegoods and luxury
goods) of the variousindustriesto whichMarx had separatelyreferredwhendealingwithprices
of production.The aggregationof the means of productioninto a single sector is howeverin
contrastwiththe need to disaggregateconstantcapital,and Bortkiewiczhad to referto a single
price of production,thus treatingthe price systemas if only one capital good existed in the
economy.Bortkiewicz'saggregationof constantcapital also helped to hide the factthat,as we
shall see below, the measurementin termsof labour embodiedof the elementsof capitalcan be
replaced by a physicalmeasurement.However, a second solution to Marx's problem of the
determination
of the rate of profitwhichdid not sufferfromthe deficiencyof the aggregationof
capital goods and was based on work by Dmitrievwas advanced in Bortkiewicz,1954 (cf,
below p. 23, n. 39).
310
Let:
a be produced duringthe year by La labourers assisted by the constant

capitals Aa, Ba, ... Ka, (some of which may be zero) consisting of com-
modities
a, b... k;
thus
requiring
total
quantity
La + Aa + Ba + ...+ Ka of direct and indirect labour;

Lb, Ab, Bb,
Kb, B; ...; Lk, Ak, Bk, - Kk, K, be the analogous quantities in
the production of commodities b... k; w be the quantity of labour

necessaryto produce the given real wage;
+ Ag=1) be the quantitiesof labour emAa,Ab,..Ag (such that a. +Xb
bodied in the wage goods, g in number,constituting
a unitof the "wage
commodity"A, whichwe then choose as the numeraire.
We shall have:
[(AaPa + BaPb +
KaPk) + Law](1 + r) = Apa
[(AbPa + BbPb+... Kbpk)+ Lbw](l + r) = Bp,

............
i.............8
[(AkPa
+ Bkpb +
KIkPk)
(8)
+ LkW](l + r) = Kpk
= 1
AaPa+ AbPb+ ... Agpg
Equations (8) are (k + 1) in number and contain the same number of

unknowns:the rate of profitr and the k prices of productionPa, Pb Pk
It can now easily be seen thatthe need to distinguishthe constantcapital
of an industry,say a, into the quantities Aa, Ba,... Ka also makes it
inessentialto measure them in terms of labour embodied: the prices of
productionPa, Pb, P--Pk can be directlyapplied to the physical inputs of
a, b, ... k, and the same applies to the variable capitals (Law), (Lbw), etc.,
consistingof the composite"wage commodity"(which,beingour numeraire,
has a unit price).32 These physical measurementsare clearly preferable,
because theyonly depend on the methodof productionof the commodity
concerned and not, in addition,on the methods of its direct and indirect
means of production,like the correspondingquantitiesof labour embodied.
Equation (8) can thereforealso be read withthe quantitiesw, Aa, Ba, etc.,
taken as physical quantities.33Henceforthwe shall adopt this alternative
readingof equations (8).
a's Productionof ComEquations (8) are however those we findin Sraff
a's own symbolswere
modities by Means of Commodities,
Chapter11.34 Sraff
32
The possibilityof physicalmeasurementsin Marx's equations of the prices of production,
when modifiedby applyingprices to the capitals, appears to have been firstnoted in printin
Seton, 1957, p. 151, n. 3.
33 Even the numerical
values of the coefficients
would remainunchangedifwe choose forthe
unitof each commoditya, b, ... k, the quantityof it requiringa unitof labour forits directand
indirectproduction.
31 Cf. the equations in Sraffa1960 p. 6, whichdifferfromequations (8) above, because in
Sraffathe wages are included, commodityby commodity,in the quantitiesof the means of
production.
311
P. GAREGNANI
chosenforequations (8) so as to bringout the factthathis equations are the

same as Marx's equations (5) and (6) once these are modifiedby applying
thepricesof productionto variableand constantcapital.The factthatsuch a
modification
had been suggestedby Marx himselfhas not preventedit from
changinghis equations (5) and (6) beyond easy recognition.The essential
pointhoweveris that equations (8) provide a general solutionforprecisely
the same problem which Ricardo and Marx had faced by means of the
labour theoryof value. The characteristic
premisesof the surplusapproach,
forwhichthe real wage and the social productare givenwhen determining
the rate of profitand relativeprices(par. 4 above) have remainedunaffected
and, therefore,the notionof profitsas a residualand the associated view of
have also remainedunaffected.
the forcesdeterminingdistribution
17. Equations (8) are howeverless transparent
thanRicardo's and Marx's
equations (3) and (4) were about the forcesgoverningthe rate of profit.The
basic asymmetrybetween a wage independentlydeterminedand profits
resultingas a residual is obscured: in equations (8), to envisageprofitsas a
differencebetween the value of the product and that of the wages and
means of productionmakes no more sense than the reverseprocedureof
obtainingthe value of the productby adding the profits,the wages and the
value of the means of productiontogether.More fundamentally
the question
is that these "appearances"-the very ones which had misled Smith and
later authors into thinkingthat profitsand wages could be determined
independently
of one another-make it more difficult
to graspthe properties
of the system. These "appearances", which Ricardo had overcome by
measuringvalue in termsof embodied labour, are in factengenderedby the
of viewingthe effectsof theinterdependenceof prices,and are here
difficulty
dispelled by the mathematicalconsiderationof the systemof price equations.35Thus, fromequations (8) it resultsthatonce the real wage is given,
the rate of profitis determined,so thatthe two cannotchangeindependently
of one another.Moreover,system(8) reveals that,undersufficiently
general
conditions,there exists an inverserelationbetween the real wage and the
rate of profit(below par. 20). But a reasoningthatrelies on theoremswhich
abstractfromthe contentof the problemsanalysed cannot fullyovercome
of graspingthe effectsof the interdependenceof k + 1 unthe difficulty
knowns,and cannot thereforehave the transparencyof surplusequations
like (3) or (5).36 That transparencywas in fact ultimatelydue to the
3 The individualprice equation may indeed misleadingly
suggest,withits seemingsymmetry
betweenprofitsand wages, and, above all, itsseemingrepresentation
of price as a sum,the idea
that the two rates can be determined"independentlyand separately"fromone another (cf.
par. 9 above). Not surprisingly
it is only later in the developmentof theorythat the price
equations reveal theirimplicationsas to the constraintlinkingthe real wage and the rate of
profit.
36Thus, the nature of profitsas a residual can be clarifiedby Sraffain the firstchapterof
to repay the wages and replace the means of
1960 only by showinghow prices just sufficient
productionbecome contradictory
when a surplusproductcomes into existence.The fact that
thisindirectroute had to be followedto exhibitwhat would have been so evidentin equations
(continued
overleaf)
312
"picture" whichcorrespondedto those equations: thatof a knownproduct

to be divided between wages and profits;withthe rate of profitoriginating
fromthe distributionin proportionto the amountof capital of the surplus
whichthisproductshows above the knownamountof wages. This "picture"
of a highlyabstractanalysis:in the
allowed a concretementalrepresentation
'picture'the dependenceof the rate of profiton real wages was seen,and the
propertiesof the economic systemassociated with this key relation were
easier grip.37
under a correspondingly
Naturally,realityneed not be simple,and need not allow forthe existence
of a surplus equation like (3) or (5), beyond the hypothesesnecessaryto
validate the labour theoryof value. But the point we wish to make is that
the recovery,if at all possible, of that "picture" under the presentmore
general assumptions,would constitutean importantscientificadvance. It
would do so because it would entaila bettergripover the economicsystem's
known properties: and it would make it correspondinglyeasier to gain
greaterknowledgeby askingfurtherquestions.38
In the nextsectionwe shall indicatehow, underour presentassumptions,
of the rate of profitalong the lines of the "Surplusequation
a determination
method" becomes possible,providedwe focusour attentionon the sectorof
the economywherethe generalrate of profitis in factdetermined.We shall
then see, in Section VII, that a similar,even simpler"picture" of distribution becomes available in the shape of Sraffa's"standardsystem"when we
envisage the rate of profit,and not the wage, as the variable whichcan be
determinedoutside the "core" of the theory.
referredto. A furtherand perhaps
(3) or (5) providesan example of the loss of transparency
more strikingexampleof thislack of transparency
is the sense of noveltywhich,as late as 1961,
under the name of "non-substitution
theorem",greetedthe propositionthat,in an economy
like that of equations (8), the real wage is given irrespectiveof the "demand of consumers",
when the rate of profit(rate of interest)is given(cf. Samuelson,(1966) p. 528)-a proposition
whichwould have been obvious fromequations (3) and (5), or from(9) and (10) below.
3 Of course Social product,Necessary consumptionand Social capital, are, in themselves,
highlyabstractnotions.The mindcan howeverfittheminto a "picture"and proceed to operate
with them (just as the mind of a child can work with an abacus), as if theywere concrete
objects connectedby the simplerelationsof part and whole. This mentalproceduredrastically
differsfromthatwhichwe have when entirelyabstractmathematicalnotionsmustbe resorted
to in order to deal withvariableslike the prices and quantitiesof commodities,which,though
more concrete(i.e. more directlyexperienced)are both numerousand interdependent.
38 The loss of the "picture"whichwas associated withequations (3) or (5) should in factnot
be confusedwiththe loss of a mere didacticdevice,whichcould alwaysbe made good by using
appropriate,simplifying
assumptions.The natureof thisloss mayperhapsbe best illustratedby
referringto the uneasinesswhichsome physicistsfeel at the loss of the "pictures"of physical
realitywhichwere providedby the notionsof "waves" and "particles".This uneasinessinduces
one physicistto hold that "as a systemof calculationwhichgives the rightanswers[quantum
successful.But whetherit tells us anythingabout what matteris
theory]is overwhelmingly
actuallylike is anotherquestion". And the commentof a science historianto thiswas "if we
were forbiddento talk in termsof models at all, we should have no expectationsat all, and we
where "model"
should then be imprisoned... inside the range of our existingexperiments",
appears here to mean somethingcloser to what we have called "picture", than to what
economistsare at presentin the habit of calling "model" (Pippard, 1962, pp. 33 and Hesse,
1962, pp. 56-7, our italics).
P. GAREGNANI
313
VI. The surplus-equationmethod and the wage-goods sector

18. Let us single out the price equations of the commoditiesa, b,...h
the "wage commodity"
consistingof the wage goods a, b, ... g, constituting
(par. 16 above) and of theirdirectand indirectmeans of productiong + 1,
of these commodities,h in number(withh - k), implies
... h. The definition
thatin theirh price-equationswe findas unknownsonlytheirh pricesplus
the rate of profitr. It followsthatthese h equations, togetherwiththe last
equation in system(8), defining
thewage commodityas thenumeraire,willbe
sufficient
to determinethe rate of profitand the h prices independentlyof
the remaining(k - h) price equations.
This means that,once the real wage is given,the generalrate of profitwill
depend exclusivelyupon the technicalconditionsof productionof the wage
goods and their direct and indirectmeans of production.The technical
conditionsof productionof the otherscommodities-i.e. the luxurygoods
and the means of produtionspecificto them-will onlybe relevantin order
to determine,bymeans of theremaining(k - h) equationsof system(8), such
prices for these commoditiesas will yield the rate of profitdeterminedby
the firsth equations.39
19. Let us now look more closely at the part of the productivesystem
whichdirectlyor indirectly
reproducesthe aggregatewages advanced to the
workersfor the year.40This part of the economyconstituteswhat we may
call the "verticallyintegratedsector of the wage-goods", or integrated
wage-goodssectorforshort.Let us thenexpressboth the net yearlyproduct
of this sector and the wages paid in it, in terms of Smith's "labourcommanded"standardof value, i.e. in termsof the quantityof labour which
those aggregatesof commoditiescan buy. Both these two quantitieswill be
knownbeforethe rate of profitand pricesare known.The netproduct,being
the yearlywages of L labourers,will evidently"command" L labour years,
"9The principleaccordingto which the rate of profitis determinedby the conditionsof
productionof wage goods, and of their direct and indirectmeans of productionalone, is a
generalizationof thatwhichRicardo appears to have used in his Essay on Profit(1815), when
he concluded that "it is the profitsof the farmerthatregulatethe profitsof all othertrades"
(1951-1958, IV, p. 23; VI, p. 104). If we in factassume thatwages consistentirelyof "corn",
and that this is produced by itselfand labour, as is required in order to validate Ricardo's
argument,thenthe h commoditiesenteringdirectlyor indirectlythe wage narrowdown to the
single commodity'corn'. The role of wage goods in determiningthe rate of profitwas first
1974, p. 59 ff.It then emergedagain in the solutionsof
pointedout, it appears, by Dmitrieff,
Marx's "values" into "pricesof production",advanced
the so-called problemof "transforming"
in Bortkiewicz,1952, where the author recognisedhis debt to Dmitrieff,and also in Bortkiewicz,1949.
40For the unique determinationof such a sector cf. Garegnani, 1972, p. 264, and, more
generallythe notion of a "sub-system" in Sraffa, 1960, p. 69. We may note that the
role of this "sector" of the economyin no way depends on actuallybeing able to
determining
isolate it withinthe real economy: the rate of profitwould be determinedin the same way, if
the wage-goodsadvanced to the workerswere not being reproduced.The "sector" is therefore
which,like Sraffa's"standardproduct" to be
best consideredas a purelylogical construction,
to the forcesregulating
consideredin the next section,has the purpose of givingtransparency
the rate of profit.
314
whereL is the knownnumberof labourersemployedin the economy.4"The

wages paid in the sector,on the otherhand,willbe those of the L, labourers
requiredforthe directand indirectproductionof the "necessaryconsumption", a knownmagnitude,since the real, wage and the technicalconditions
of the directand indirectproductionof its constituentsare known. These
wages will therefore"command" L,, labour-years.
It followsthatin the integratedwage-goods sector,the amountof profits
in terms of "commanded labour" constitutesa "surplus value" (L - L,)
which is known before the rate of profit and the relative prices are
determined.This surplusvalue coincidesnumericallywithMarx's own social
fromthe latter
surplusvalue s (since L = v + s and L,, = v), thoughit differs
in conceptionbecause: (i) it is the surplusvalue of the wage-goods sector,
and not that of the entireeconomy; (ii) it is expressed in termsof labour
commanded and not in termsof labour embodied.42
When we proceed, as we must,fromthe amountof profits(surplusvalue)
to the rate of profit,the obstacle we meet is that,unlike the value of the
productand of the wages, the value in "commandedlabour" of the means of
productionof the integratedwage-goods sectoris not knownindependently
of the prices. We seem to be unable to proceed witha "surplusequation"
where the rate of profitis the only unknown(above par. 15), and to be
forced to returnto the price equations. This obstacle is not insuperable
however.Under our presenthypotheses43
it can be overcomeby the device
of "reducingto labour" the means of production:as will be presentlyseen
thisdevice allows us to expressthe value in commandedlabour of the means
of productionas a functionwhere the rate of profitis indeed the only
unknown.
The capital requiredforthe integratedproductionof any commoditycan
in factbe regardedin eitherof two alternativebut equivalentways.The first
is that,confinedto a singleyearlyproductioncycle-between, say, moments
41 The factthatthe value of thisnet product,expressedin labour commanded,is independent
of the rate of profitdoes not contradictthe fact,statedin par. 9 above, thatthe value in labour
commandedof any commodityis not independentof thatrate. The constancyof the value of
net outputof the wage goods sectoris in factdue to the changesin physicalsize whichthisnet
productundergoesas thereal wage changeswiththerateof profit.It mayhelp thereaderto note
that the use made here of the labour commanded standard has no connectionwith that
suggestedby Sraffa,in op. cit. par. 41-42, that is of using as numerairea quantityof labour
commandedwhichwould varywiththe rate of profitin such a way as to remainequivalentto
the "Standard product".
42 It should be noted that the net output of the integratedwage-goods sector is physically
homogeneouswith the wages paid there, since both consist of the same composite wagecommodity.The amount of profitsin the sector could then be determinedas the difference
betweentwo physicalquantitiesof the wage commodity,and the rate of profitcould be seen to
arise fromthe distributionof this surplusproduct over the capital of the wage-good sector,
reduced to wages in the manner we shall consider in the next paragraph.The commanded
labour standardused in the texthas howeverthe advantagethatin termsof this,the productof
the integratedwage-goods sector is constantas the real wage changes either in level or in
composition.
" Fixed capital of constantefficiencycan however be easily shown to leave the present
argumentunaffected,(cf. p. 53 n. 46 below).
P. GAREGNANI
315
(-1) and (O)-which we adopted for prices equations (8): capital there
includesthe means of production,besides the wages, both kinds of capital
being advanced at moment (- 1): the value of the capital so conceived
involvesthe unknownpricesof the means of production.The second way of
looking at capital, however,proceeds to consider the productionof these
means of productionand considersit as the resultof previous stages in the
productionof the finalcommodity:the stage between moments(-2) and
(-1), in which the means of production of the commodityhave been
produced; the stage between (-3) and (-2) in whichthe means of production of those means of productionhave been produced, and so forth.The
resultof thisprocedureis thatcapital is reduced to wages with,generally(in
the case of circularproduction,when the commodity,or one of its means of
production,requiresitselfdirectlyor indirectlyin order to be produced) a
residual of means of productionwhich may be rendered small at will by
numberof stages. These wages
carryingthe process on througha sufficient
are howeverconceivedas havingbeen advanced forvaryingperiodsof time;
not only at moment(-1) but also at (-2), (-3), etc. The advantageof this
device is that, when measured in "labour commanded", these advanced
wages will be givenby the quantitiesof "dated labour" theyare the wages
of. Unlike the prices of the means of production44in the other view of
capital, they will thereforebe known quantities since the methods of
productionof boththe commodityand itsmeans of productionare known.
A simple example will show how this second view of capital can be
applied to the means of productionof the integratedwage-goods sector to
obtain a "Surplus equation" determiningthe rate of profit.Consider an
economywhere (besides the general assumptionsalready made in par. 12)
we suppose thatwages consistonlyof "corn". "Corn" is producedwithone
"plough" per worker:the "plough", entirelyconsumedduringthe year,is in
turnproduced by one unassistedworker.The L, labourersemployedin the
integratedwage-goods sectorwill thereforebe distributedhalf in (directly)
producingthe "corn", and half in reproducingthe "ploughs": the capital
advanced for,the year (reckoned,therefore,accordingto the firstof the two
views above) will consistof the wages and the plough. If we take now the
44We are in fact expressingthe prices of the means of productionby means of these
"advanced wages" and the profitson themforthe relevantperiods of time.This is made clear
by theprocedureforthis"reductionof the commodityto dated labour", whichconsistsof taking
the price equation of the commodityand replacingthe pricesof means of productionwiththe
expressionsgiven by the respectiveprice equations. The opeation is then repeated with the
pricesof the second layerof means of produtionappearingin the equation thusmodified,and
so forthforthe furtherlayers,whichappear in successionaftereach roundof substitutions
(see
forexample Sraffa,1960 pp. 34-35). When looked at fromthis"dated labour" angle the other
view of capital appears to be the resultof "collapsing" all the successivestages of production
into a singleyear-a "collapsing"whichis made possible by the availabilityat the beginningof
theyearof the productsof all the intermediatestages,thatis the means of production.It should
howeverbe rememberedthatthe reductionto dated labour constitutesa morelogical device, as
is shown by the fact that, when the productionof a commodityis "circular", it cannot be
conceived as startingwithunassistedlabour.
VALUE ANTD DISTRIBUTION
316
LabOLur
LabOur
(b)
Time
-2
-1
-2
-1
FIG. 2. The "dated labour" curve for the aggregateof wage goods paid as yearly
wages (curve a) and the proportionaldistributionof labour over time in the
productionof the wage commodity(curveb).
second, "dated-labour" view of capital, the latter emerges instead as the

wages of the two quantitiesof "dated labour" shownin Fig. 2a: L,/2 labour
years applied at moment(-2) forproducingthe "ploughs", whichare then
used in the successive "stage" of corn production-togetherwitha further
L,/2 labour years applied at (-1). Expressed in "commanded labour" the
wages, to whichthe entirecapital of the integratedwage-goods sector has
thusbeen reduced,will equal the correspondingquantitiesof dated labour
i.e. L,/2 advanced at (-2) and L,/2 advanced at (-1). The rate of profitcan
of the surplusvalue L -L,, in
thenbe seen to emergefromthe distribution
proportionbothto the wages advanced, and to the timeby whichtheyhave
been so advanced, account being taken of compoundprofits,that is
L-LU=r-
LV
2+2r2u
2L
+r2
(9)
where the term rL,/2indicates the share of surplusvalue allotted to the

capitalistsadvancing the wages paid at time (-1); and the term 2rL,/2,
togetherwiththe compoundprofittermr2L,/2,indicatesthe share allotted
to those paying the wages at time (-2). The rate of profitis the only
unknownin (9).
20. It is now convenientto divide both sides of equation (9) by L,
obtaining
L -L
= rI+2r 2+ r2
2
2
2
LU
(9a)
and proceed to some propertiesof our "surplusequation" (9a) whichcan be

easily shownto hold beyond our presentsimple example.
On the leftof the equalitysignwe find,expressedin commandedlabour,
the amountof surplusvalue per workerin the integratedwage-goodssector.
This amount is identicalto Marx's rate of surplusvalue s/v and depends
purelyon the level of the real wage and on the labour requiredforthe direct
P. GAREGNANI
317
and indirectproductionof its constituents.On the rightof the equalitysign

we findinsteada functionexpressingthe amountof profitsper worker,also
expressedin commandedlabour, whichwould be necessaryin the sectorin
order to pay a rate of profitr. This function,which we may call "profit
of
time distribution
function"forshort,depends purelyon the proportional
does
(see
Fig.
2b):
it
the labour necessaryto produce the wage commodity
not thereforedepend on the level of the real wage, but only on its
compositionand on the methodsforthe directand indirectproductionof the
wage-goods. The "profitfunction"has an importantpropertywhich can
easily be seen to hold with any kind of circulatingcapital, and with fixed
it is zero when r = 0 and thenit risesmonotoncapital of constantefficiency:
ically with
r.45
The solutionof the "surplusequation" (9a) can now be representedin the

diagramof Fig. 3a where r is measuredhorizontallyand the rate of surplus
value is measured vertically.We have therethe curve Os representingthe
"profitfunction",whichrises monotonicallyfromthe origin(In the case of
as in Fig. 3a; in the
our example it willrise indefinitely
as r risesindefinitely
case of "circular production" it rises indefinitelyas the rate of profit
approachesa "maximumrate of profit"R as in Fig. 3c). The rate of surplus
value, (L - L,)IL0, can on theotherhand be representedby a horizontalline.
The level of the rate of profitwhichsolves the equation will be that for
whichthe "profitscurve" Os cuts the surplus-valueline. The factthat the
"profitscurve" is monotonicallyrising ensures that the solution will be
unique and positiveforany positiverate of surplusvalue-i.e. forany level
of the real wage less thanthe productper head in the integratedwage goods
sector).Figure 3a or 3c make it clear thatthissinglepositiverate of profit,
depends exclusivelyon two circumstances:(i) the rate of surplusvalue; (ii)
the proportionaltime-distribution
of the labour necessaryto produce the
wage commodity,whichdeterminesthe shape of the "profitfunction".
The fact that the "profitfunction"is an increasingfunctonalso makes
clear a second set of propertiesof the system,pertainingto the relation
between the wage and the rate of profit.A rise in the wage, leaving its
" When we admit fixed capital of constantefficiency
the validityof the propertyof the
"profitfunction"mentionedin the text can easily be seen if we startfromthe functiong(r)
givingthe profitsobtainingon a "pool" of n machinesof kind K, one of age 0, one of age 1
and so on up to the last, of age (n - 1), where n yearsis the lifeof machinesK. For r = 0 these
profitswill be zero, and for r>0 theywill be given by
-I]
g(r) [:Pk r(i r;" g)=[(I7(1 r)"
where Pk is the price in labour commandedof a new machineK. Now, the functionin square
bracketsis a monotonicallyincreasingfunctionof r. It followsthat the "profitsfunction",in
which functionsof the above form will be multiplied by, or added to, those of form
[(1 + r)0- 11,will also be zero forr = 0 and willthenmonotonicallyrise withr. It should also be
noticed that the integratedwage-goods sector will now have to be definedso as to include
withthe
amongits fixedmeans of productiononlysets of machinesof uniformage distribution,
correspondingconstantyearlyreplacementappearingin the gross output of the sector.
318

(a)
L-L
L
(b)
L-L
A~'C*
O\L
C*
'*
L-Lv
-,
(c)
FIG. 3. Determinationof the rate of profitwithreferenceto (a) the rate of "surplus

value" (b) the "surplus value" expressed in labour commanded of the integrated
wage-goods sector. (c) indicates the shape of the "profitsfunction"when productionis "circular".
commoditycompositionunchangedwill decrease the rate of profit.This will

be so because the rate of surplusvalue (LILr) - 1 will decrease withthe rise
of Lt, and will thereforeintersectthe unchanged "profitsfunction"for a
lower rate of profit:cf. the shiftfromB to B' in Fig. 3a.
The same conclusion can be seen to apply if the real wage changes in
composition,but in such a way thatit increasesin one or more components
with no decrease in any of the others. In order to see this,it is however
convenientto shiftour attentionfrom Fig. 3a which relates to rates of
surplusvalue (L-L ,)/L, to Fig. 3b which refersinstead to the aggregate
surplusvalue (L - L,) in the integratedwage-goodssectoras a whole. With
the assumedincrementin some componentsof the real wage, the amountof
surplusvalue will decrease by the amount AXL,of the labour required in
order to produce that incrementfor the aggregatewages. On the other
hand, for r>0, the curve OS of total profitsin the wage-goods sectorwill
"rotate" upwardsfrom OS to OS' because of the profitsaccruingon the
P. GAREGNANI
319
wages paid forthe additionallabour AL, Both changeswill have the effect
of decreasingthe rate of profit.46
However, when the compositionof the real wage changes in such a way
thatwhile the quantityof some componentsrises,thatof othersfalls,and it
becomes accordinglyimpossibleto referunambiguouslyto a rise or fall in
the real wage-the profitcurves,whetherthat of profitsper worker (Fig.
3a), or thatof total profits(Fig. 3b), can change in any way whatever.The
rate of profitmay then change in a directionopposite to that in whichthe
rate of surplusvalue has changed-in line withwhat Marx saw as possible
when the organic compositionof social capital changed togetherwith the
real wage (cf. e.g. Marx, 1969b, III, p. 869).
21. These properties,made easily visible by surplus-equations(9) and
(9a) are thus closer than we might perhaps have expected to Marx's
conclusionson the matter.In particular,it is confirmed
thatthe rate of profit
depends on two factorsonly,the rate of surplusvalue slv, and the proportions between means of produtionand labour. However, the correctionof
the errorimplicitin equation (5) modifiesMarx's specificationof the second
in termsof the "organiccomposition"clv of social capital,in
circumstance,
two importantrespect.
In the firstplace the proportionof labour to means of productionon
whichthe rate of profitdepends is thatof the integratedwage-goodssector,
and not that of the economy as a whole as Marx thought.This in turn
impliesthathe was mistakenin believingthatchangesin the relativeoutputs
of commoditiescould affectthe rate of profit,throughvariationsin the
It also
proportionof labour to the means of productionin the community.47
implies that Marx was equally wrong when he thoughtthat, throughthe
same variations,changes in the technicalconditionsof productionof "luxuries", or of their specificmeans of production,could affectthe rate of
profit.
In the second place, the proportionof labour to means of production
cannotbe expressedby the ratio clv, and mustinsteadbe expressedby the
proportionatedistribution
over timeof the labour necessaryto produce the
wage commodity,or by the quantitiesof the severalmeans of production,in
the price equations. This is a consequence of the factthatit is impossibleto
measurecapitalby a singlemagnitudeindependentof distribution.
This fact,
whichdeeply affectsthe validityof the marginalisttheories(above par. 1),
46 The monotonically
increasingcharacterof the profitsfunctionalso impliesthatin equation
(9a) a single value of Lo will correspondto any positivelevel of r or, in the case of circular
production,to any value of r where 0 = r<R. Equation (9a) thus shows that as the rate of
interestrises,the wage-ratemustfall when measuredin termsof any commodity(which,then
chosen as a measureof the wage, willplay the role of the "wage commodity"in thatequation).
be a verygreatdifference
4 Cf. forexample Marx, 1969a, III, p. 162,: "There will naturally
[in the generalrate of profit],dependingon whethera greateror smallerpart of total capital
a loweror higher
producesa higheror lowerrate of profit[i.e. whethercapital has, respectively,
organiccomposition]."(The deficiencyof thisthesisof Marx is ignored,e.g., in Mandel, 1975,
p.,,,, and passim and Rowthorn,1976, pp. 62-63 and passim).
320
has some importantconsequences also here: thus if Marx had been correct
the relative price of the productsof two distinctprocesses of production
would always change monotonicallywith r, whereas in fact such relative
pricesmayinverttheirdirectionof changeas r rises(falls)monotonically.48
VII. The "surplus-equationmethod" and Sraffa'sstandardsystem
22. The basis of our discussionof the surplustheorieshas so farbeen the
Classical economists' premise according to which, when approachingthe
determinationof profitsand prices,the real wage should be treatedas an
view of the wage is howeversuggestedin
independentvariable. A different
Sraffa,1960. Sraffabegins by observing(p. 9) that the wage, besides a
minimumconsistingof the necessarysubsistence,may includea share of the
surplus.He proceeds to argue (ibid.,p. 33) thatunder these conditionsthe
wage would have to be taken as given "in termsof a more of less abstract
standard" and, accordingly,
are
"it would not acquirea definitemeaninguntilthe pricesof commodities
determined".
Then, he continues,
as a ratio,has a significance
"the positionis reversed[and] the rateof profits,
of anyprices,andcan wellbe "given"beforethepricesare
whichis independent
fixed".
A discussionof the view of the operationof the economic systemwhich
seems to underlieSraffa'ssuggestionwould bringus beyond that "core" of
the theorywithwhichwe are here exclusivelyconcerned(cf. above par. 7).
Our present interest-confinedto examiningSraffa'suse of the "Surplus
equation method"-requires us only to consider how far the suggested
change in the independent distributivevariable is compatible with the
whichis the subjectof thisarticle.
surplusapproachto value and distribution
we envisagechangesin the
23. When withinthisapproach to distribution
rate of real wages over time,we may attributethese changesto eitherof two
circumstances:a long-termevolution of the social conditionsdetermining
the level of subsistence,or the kind of economic circumstanceswhich
authorslike Smithor Marx thoughtmightkeep the wage above the level of
subsistenceeven forlong periods of time (par. 4 above).49In the firstcase,
48 There is a furtheraspect of Marx's views which, when appropriatelymodified finds
confirmation
in the surplusequation of the wage-goods sector. It regardsthe role of prices in
"re-distributing"
total surplusvalue in proportionto the capital employed in the individual
industries.This role can be detectedwhen we look at the integratedwage-goods sectorand at
the pricesappearingthere.The same cannothoweverbe said whenwe look at the economyas a
whole, since in thatcase the amountof surplusvalue is not givenbeforethe prices and rate of
profitare given.
4 The view thatthe wage can exceed the level of subsistenceforlong periods of time seems
indeed impliedalso in the veryidea of a risingsubsistencelevel. This rise can resultonlyfrom
wages remainingabove the previoussubsistencelevel fora period of timewhichis long enough
to engenderthose 'habits' whichmay then become a 'second nature'in Torrens'sphrase later
adopted by Ricardo (par. 4 above) and by Marx in 1969b, III, p. 859).
P. GAREGNANI
321
the real wage will evidentlyhave to be taken as a given magnitudein the

"core" of the theory(par. 5). The same will be truein the second case only
if the share of the surplustaken up by the wage depends on circumstances
actingthroughthe wages. The real wage will then appear in the "core" as
the magnitudewhichhas been determinedin both level and compositionby
the circumstancesin question: profitswill continueto be determinedas a
pure residual,thoughnow theywill not constitutethe entiresurplus.
The share of wages in the surplusmighthoweverbe alternatively
determined by circumstancesacting throughprofits,like those which Sraffa
envisageswhen, afterthe passage already quoted, he writesof the rate of
profitas a magnitude
"susceptibleof being determined.... by the level of the moneyrates of interest"
(Sraffa1960, p. 33.)
Then, the rate of profitwill become the independentvariable withinthe

"core" and the wage, an unknown,can be treated as an "abstract" value
magnitudewhichcan be measured in termsof any standard.50'51
Thus, Sraffa's replacementof the wage by the rate of profitas the
independentdistributivevariable can be seen to resultfromhis choice of
one of the two viewsthatcan be taken of the circumstancesdetermining
the
divisionof the surplusbetweenwages and profits.As such it appears to be
no less compatiblewiththe surplusapproach to distributionthan the other
view, adopted by Smith and Marx, when they saw those circumstancesas
actingthroughthe wage. In eithercase we findthe basic distinctionbetwen
subsistenceand surplus,and we also findthe determination
of the divisionof
the surplusby means of social and economic circumstanceswhich,whether
they act throughwages or throughprofits,are best studied outside the
"core" wherethe unknowndistributive
variableis determinedtogetherwith
relative prices. In formal terms,what we have if we follow Sraffais a
modificationof the analysis conducted in that "core": the modification
consistsof the addition,so to speak, of a second layerto the determination
of the surplus by the differencebetween social product and "necessary
consumption"(par. 6 above). In thissecond layerwe have the sharingof the
surplusbetweenwages and profits,and the rate of profitappears thereas a
"datum" or independentvariable, with the surpluswage as the unknown.
The diagram(Fig. 1) may accordinglybe modifiedas in Fig. 4 below.
50
The treatmentof the wage as a residualneed not howeverentailthe treatmentof the wage
as an abstractvalue quantity.Commoditieswhichplay a primaryrole in workers'consumption
measure of the wage than is providedby other commodities.
may provide a more significant
The concept of the wage as an abstractvalue magnitudedoes not, on the otherhand, prevent
the use of the "integratedwage-goodssector",withrespectto any of the commoditiesin terms
of whichwe may wish to measure the wage. With r as the independentvariable in equation
(9a), the rate of surplusvalue would be the unknown,givingthe unique wage correspondingto
the givenlevel of r (cf. above n. 46).
51 E. Burmeisterfails to realize this implicationof Sraff
a's suggestionabout an exogenous
determinationof the rate of profitwhen in 1977, p. 68 n., he writes"Sraffa'smeasure of the
real wage is flawed... [the] weightsare not related in any way to human needs".
322
D/
~~~Social
cnqe
Jr
Laboipl.
Produict
\\
ateof
~~~~~~~~profits
|~~~~~Ei~l S~lrp1LloSu--11p1lus
Substance-+
partofwage
Necessan'
Colns.
tramOf
Wat ge
4. A diagramof the "core" of the surplustheorieswhenwe admitthatthe wage

may share in the surplusbecause of causes actingthroughthe rate of profit(compare
withFig. 1 above).
FIG.
24. The treatmentof the wage as an abstractvalue quantitymakes a very

simple Surplus equation possible for the studyof the relationbetween the
wage rate-or preferablyits surplus component-and the rate of profit
(Sraffa,1960, pp. 9-10). As is well-known,under the hypothesisof singleproduct industriesa unique set of positive proportionsalways exists such
thatthe net productconsistsof a compositecommoditywhichrequiresitself
as its only means of production.The unique composite commoditythus
defined,which depends exclusivelyon the technicalconditionsof produca calls "Standard commodity".A replica of the real
tion, is what Sraff
economy,employingthe same numberof workers,but producingexclusively
a calls the "Standard
the Standard commodityconstitutesthem what Sraff
system".The considerationof the wage as an abstractvalue quantitycan
then be used in order to measure the wage in terms of the Standard
commodity.In the "Standard system"we shall accordinglyhave a physical
homogeneitybetween all threemagnitudeson which the relationbetween
the wage and the rate of profitdepends, namelythe net product,the wages
and the means of production.
Let us then take the standard net product as our unit of the standard
commodity.Let us also choose as a unit of labour, the labour employedin
the real economy,and hence in the Standardsystem,so thatthe wage rate
w, paid postfactum,coincideswiththetotal wages in either.Looking at the
standardsystemwe may write
w = 1- rM
(10)
where M is the amount of the standard commodityused as means of

productionin the standardsystem.If we then referto Sraffa's"Standard
ratio" R, between the standardnet product and M we have R = 1/M or
M = 1hR whichwhen substitutedin equation (10) gives
w = I1- r
R
(10a)
P. GAREGNANI
323
The linear relation(10) or (lOa) between r and w also applies to the real
economyas soon as wages are measuredin termsof the standardcommodity. The price equations of the standardsystemare then identical to the
equations of the real economy, except for the multipliersapplied to the
latter in order to take the industriesin the proportionsof the standard
system.
What the standardsystemdoes, is only to provide a 'surplus equation
method' of arrivingat thatrelation,withthe corresponding'picture'of the
relationsof distribution(par. 17 above); in Sraffa'sown words,the purpose
is "to give transparencyto a systemand rendervisible what was hidden"
(1960, p. 23).52
Instituteof PoliticalEconomy, University
of Rome.
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Value and Distribution in the Classical Economists and Marx

OxfordEconomicPapers 36 (1984), 291-325

VALUE AND DISTRIBUTION

of which society could dispose without impairingthe conditions of its

VALUE AND DISTRIBUTION

an equation where "shares otherthanwages" is the onlyunknown(see also

1. A diagramof the "core" in the surplustheories.Underliningdistinguishes

definedthe naturalwage as including"those comfortswhichcustomrenders

VALUE AND DISTRIBUTION

wage and that of the social product is evident when, as in Quesnay or

Moreover, the fact that those three sets of circumstancesappeared as

6. Now thisseparationof the analysisinto distinctlogical stages contrasts

VALUE AND DISTRIBUTION

The remainderof thispaper will be exclusivelyconcernedwithwhat has

generalityand with persistenceover time. If this were in fact

VALUE AND DISTRIBUTION

side of equation (1) we shall findaggregateprofits.Two observationsare

9. Suppose, now, thatthe "Necessaryconsumption"advanced to workers

physicalnotionof the two magnitudesinvolved,because the surplusproduct

VALUE AND DISTRIBUTION

apparent:mightnot the real wage rise withoutaffecting

would obtain the rate of profitr as

where P and N are now known magnitudes.Thus, if we returnto our

VALUE AND DISTRIBUTION

this"vulgareconomy"he includes,ifnot the workof Say himself,thatof his

IV. Marx's "prices of production"

where c and v are respectivelythe "constant" and "variable" capitals,

VALUE AND DISTRIBUTION

Marx faces the question in the manuscriptsposthumouslypublished by

Ps= (Cs+ Vs)(I + r)l

in whichthe prices of productionps of steel and pc of corn are referredto

VALUE AND DISTRIBUTION

intendedsolution. Competitionwill distributeprofitsin proportionto the

VALUE AND DISTRIBUTION

a be produced duringthe year by La labourers assisted by the constant

La + Aa + Ba + ...+ Ka of direct and indirect labour;

the production of commodities b... k; w be the quantity of labour

KaPk) + Law](1 + r) = Apa

[(AbPa + BbPb+... Kbpk)+ Lbw](l + r) = Bp,

Equations (8) are (k + 1) in number and contain the same number of

chosenforequations (8) so as to bringout the factthathis equations are the

VALUE AND DISTRIBUTION

"picture" whichcorrespondedto those equations: thatof a knownproduct

VI. The surplus-equationmethod and the wage-goods sector

VALUE AND DISTRIBUTION

whereL is the knownnumberof labourersemployedin the economy.4"The

VALUE ANTD DISTRIBUTION

second, "dated-labour" view of capital, the latter emerges instead as the

where the term rL,/2indicates the share of surplusvalue allotted to the

and proceed to some propertiesof our "surplusequation" (9a) whichcan be

and indirectproductionof its constituents.On the rightof the equalitysign

The solutionof the "surplusequation" (9a) can now be representedin the

g(r) [:Pk r(i r;" g)=[(I7(1 r)"

VALUE AND DISTRIBUTION

FIG. 3. Determinationof the rate of profitwithreferenceto (a) the rate of "surplus

commoditycompositionunchangedwill decrease the rate of profit.This will

VALUE AND DISTRIBUTION

the real wage will evidentlyhave to be taken as a given magnitudein the

Then, the rate of profitwill become the independentvariable withinthe

VALUE AND DISTRIBUTION

4. A diagramof the "core" of the surplustheorieswhenwe admitthatthe wage

24. The treatmentof the wage as an abstractvalue quantitymakes a very