Friday, March 12, 2010

inflation and the rate of profit

Suppose the surplus generated by an economy is a fixed proportion of total production. This might be imagined along the lines of an agricultural economy where a certain amount of the product must be distributed to the labourers involved in its production, and for replenishing the capital used up. We could assign a rate of profit on turnover, Π/Y, based on this information alone, as Quesnay did (or, indeed Sraffa).

If we also know the price level, we can establish the value of working capital, which, ignoring monopoly titles etc, consists of commodities and money. We can consequently calculate the rate of profits proper, Π/C.

The effect of inflation on this economy, if all prices adjust to changes in efective demand at the same rate, will be to increase the values of C, Y and Π proportionately. But real distributable profit: the possible claim on production from profit, is diminished by the increase in the money part of capital. Real profits correspond to Π - ΔMC.

Consequently, inflation can serve to reduce the rate of profit, by a ratio dependant on the monetary composition of capital, and the existing rate of profit.

Possible secondary effects of inflation, through changes in distribution and the scale of production, or changes in methods of finance, have been ignored in order to isolate this primary effect.

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