Swayamsiddha Sarangi

A central question around classical political economists has been regarding the question of distribution. In works of Smith, Marx and Ricardo to name a few, the foundation of a theory of value is required to suggest how a capitalist mode of production lead to a certain form of distribution among workers and capitalists.
For Adam Smith, division of labor formed the central force that drives the increase in productive powers of labor.This is also controlled by the extent of the market. Although Smith did not have a consistent theory of value, it was largley hinged on the labor commanded in a certain commodity (although later in the Wealth of Nations, the focus has only been to explain natural prices as a sum of wages profits and rents). The discrepancy between labor commanded and labor embodied (and hence a “labor embodied” theory of value) was later taken up by David Ricardo. In Smithian analysis, it will be observable that he conflated the technical division of labor with the social division, something that can be better understood with Foley’s hub and spoke model : diversified producers forming the hub while specialized production requiring the existence of other specialized producers formed the spoke with the possibility of increasing returns to scale. In this kind of a decentralized system, it was the fungibility and movement of labor that reflected in the change in prices of commodities. For Ricardo, the relative prices of goods will depend upon the relative wages paid to labor. The important caveats to this Ricardian relationship, is that the ratio of capital and labor (K/L) must be the same across industries and that profit rates are equalized across sectors. While profit rate equalization is still a justifiable proposition, there is no reason to expect a given K/L ratio across different commodities. This is a central component of the Ricardian analysis and neo-Ricardians, Sraffians and even neoclassical scholars to the current day look at differences in K/L and its relation to profits. For the mainstream theory (before the Cambridge Capital Controversy), an increase in the wage rate to profit rate (w/r) ratio was associated with a specific change in K/L, as w/r increased (and if workers were paid their marginal product), then this would imply an increase in the K/L ratio – capital deepening. This relationship came from assuming a linear wage-profit relationship with no possibility of the capitalist choosing between technologies in the past and the present. In other words, there was not a possibility of non-linear wage profit frontiers intersecting which would allow the cases to be possible where increases in w/r actually lead to possibility of reverse capital deepening. This last point formed a major focus of Pierro Sraffa and the Cambridge Capital controversy debates. The central assumptions on which the neoclassical production function was based was what was challenged on this basis and the construction of surrogate production functions of Samuelson were then questioned based on this. Although empirical evidence has often found very rare cases of the Sraffian “reverse capital deepening”, as many theorists have suggested this does not naturally lead us to accept neoclassical aggregate production functions as bullet proof. Sraffa’s critique also poses a problem for Marxian theorists, since it raises a question as to whether prices are governed by the value of labor power and if this relationship holds even under capital reswitching. Again non-linear wage profit schedules might suggest that the labor theory of value in Marx might not hold (since prices and wages might not linearly depend on each other).