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An monetary theory of within the surplus approach, an unified theory?

Introduction

In 1960 Production of Commodities by Means of Commodities was published, by Italian economist Piero Sraffa, a book that, besides accomplishing the objective advanced in its subtitle, to be the prelude of a critique of dominant , also gave the first step towards the recovery of the approach of economists such as William Petty, Francois Quesnay and the physiocrats, , and , whose theoretical approach was based upon the distinction between two different parts of a society’s economic product, one part which is necessary for its reproduction and another of which such society can freely dispose, the latter being its economic surplus; hence, we can assert that Piero Sraffa started the renewal of the surplus approach. If we are to seriously take Sraffa’s book as a first step towards the revival of the surplus approach, then we must highlight the ending wods of chapter V of PCMC “The rate of profits, as a ratio, has a significance which is independent of any , and can well be ‘given’ before the prices are fixed. It is accordingly susceptible of being determined from outside the system of production, in particular by the level of the rates of .” (Sraffa, 1960, p. 33), such sentences have a key role to play in theoretical analysis because of two reasons. The fact that Sraffa wrote this just before chapter VI “Reduction to dated quantities of labour” implies that his suggested theory of distribution was to be understood as one to apply to a circular flow economy, specifically, to a monetary circular flow economy. While, as correctly pointed out by Pasinetti (Pasinetti, 1990, p. 460) , still being a mere suggestion towards a theory of distribution, and not a concrete one, these sntences started the focus of the Monetary Theory of Distribution, a theory that saw its main developments in the final 1980’s and start of 1990’s with two books, Carlo Panico, Interest and in the Theories of and Distribution and Massimo Pivetti, An Essay on Money and Distribution. It is precisely the theories presented in this last two books which will constitute the main object of analysis of the present paper, which looks forward to identify the common features of both authors, emphasizing the measurable categories they give rise to, but also pointing out the differences between them, arguing that they’re not fundamental, that they’re second order differences, which exist because of the distinct objectives on which each author focused 1.

Common ground

Before proceeding to the compare and contrast section of the paper, it is of outmost importance to give some common ground where to stand, that’s the purpose of this section, to deal with the roots of the surplus approach, in order to do that, we must put on the table the main features that classical economists added to their thought, and that Piero Sraffa and theorists of monetary distribution share with them.

Pre-contemporary surplus approach

The first economic categories were brought about by William Petty, in the XVIIth century, when he conceptualized “the stock-flow distinction between wealth and income; the national expenditure=national income identity; an analysis of the different sources of income” (Murphy, 2009, p. 34), and also "correctly identified production as the ultimate source of income" (Mongiovi, 2011, p. 1149), of all these, together with te production-income link, the stock-flow distinction is the most important, Petty, we assume, would not have worried himself with the formulation of such categories had he not been worried about the study of wealth, such a preoccupation implies a concern with the long term, it precisely this what we deem to be one of Petty’s most important additions, not only to the surplus tradition, but to economic science, the initial concern with the long period method, hence, focusing the main study of on the persistent and fundamental of the , in his own words: “I am content. You must

1 It is precisely because of this that Amadeo and Dutt identify them as an unified theory (Amadeo and Dutt, 1990) therefore know that theses intrinseck causes are principally foure, vizst. Weight, extent, colour or water, cleaness from faults, & to theise you may adde the mode and workmanship of the cutting.” (Petty, 1662(1899), p. 626)2, a concern that remains alive today 3, such focus on persistent causes implied studying the qualities of an economy that were most directly associated with the socio- institutional economic system, being that system for the last centuries, hence the specificity that it brings to production, distribution, and prices, and their consequences, became the object of study of political economy; however, it does not suffice to postulate long term topics as the main concern of the political economist, the flows that add to the stock must be studied, causation had yet to be introduced, and that was done by Francois Quesnay who introduced the Tableau Economique, “an expenditure-driven diagram. (where) Three sources of expenditure are outlined” (Murphy, p. 125), and whose “Objects to be considered (were): (1) three kinds of expenditure; (2)their source; (3) their advances; (4) their distribution; (5) their effects; (6) their reproduction; (7) their relations with one another; (8) their relations with the population; (9) with agriculture; (10) with industry; (11) with ; (12) with the total wealth of the nation.” (Quesnay, (2003), p. 29), in the Tableau each kind of expenditure was related to an economic class, in Quesnay’s case farmers, landlords, and sterile sector, so, while correctly identifying the economic system as one that reproduces itself through expenditure decisions, and through the production of a product, by a class of farmers that reproduces “whatever comes to it in the form of income” (Murphy, p. 127), it is the existence of a reproduction of what has been received as income what makes the economic system to be a circular flow, expenditure of the three kinds is realized, exchange comes up in the , where , that require production are sold, thus generating income for the ones selling it, “This circulation and mutual distribution are continued in the same way by means of subdivisions down to the

2 It must also be noted that in the dialogue of diamonds, not only the seeds of the long term concern are there, but there’s also a conception of markets different from that of marginalist economics, see specially Petty, 1662, p. 630 3 Murray Milgate referred to long period method as something shared by both classic and marginalist economists, both distinguishing “the nature of the causes that operate in the situation under consideration –and the distinction at this level is between ‘fitful and irregular’ causes and those of a ‘permanent’ nature” (Milgate, 1983, p. 22), and focusing primarily on the latter. last penny of the sums of money 4 which mutually pass from the hands of one expenditure class into those of the other” (Quesnay, p. 32), the previous reasoning is not affected by the fact that Quesnay thought of a division between sterile and non-sterile sectors, only agriculture being non-sterile, hence, having the possibility of producing a surplus, a distinction that can no longer be maintained in modern capitalist economies, however, the basic flow of the system: expenditure- production of surplus-reception of income, being the basis of a circular flow, is a quality still featured by contemporary economies, so the issue is how it is that modern capitalism shapes its expenditure classes (which are really income classes), hence, what now follows is Adam’s Smith approach, in his study of wealth, he saw two main contributors to , labour and 5, these were not only the main sources of economic growth, but also the basic socio-economic division under capitalism, from this follows his famous assertion: “In the primitive state of society, which precedes and land appropriation, the only circumstance that can serve as a norm for reciprocal exchange of different objects seems to be the proportion between different kinds of labor needed to acquire them…But as soon as capital is accumulated under certain people, some of them try to regularly use it to give job to laborious people, giving them materials (inputs) and food, so as to gain benefit from the selling of their product or of the value that labor adds to the materials. When changing a finished product, for money, or labor or other goods, besides paying what is sufficient to pay for the value of materials and labor’s , it is also necessary to give something as profit that corresponds to the entrepreneur, who compromised his capital through this contingency.” (Smith, 1776 (1958), p. 47-8)6, having identified such classes not

4 For the sake of future reasoning let us remark the use of the term “sums of money” by Quesnay. 5 “he immediatly linked the division and specialization of labour with capital” (Murphy, p’. 170) 6 Own translation from Fondo de Cultura Económica version: “En el estado primitivo y rudo de la sociedad, que precede a la acumulación de capital y a la apropiación de la tierra, la única circunstancia que puede server de norma para el cambio recíproco de diferentes objetos parece ser la proporción entre las distintas clases de trabajo que se necesitan para adquirirlos…Mas tan pronto como el capital se acumula en poder de personas determinadas, algunas de ellas procuran regularmente emplearlo en dar trabajo a gentes laboriosas, suministrándoles materials y alimentos, para sacar un provecho de la venta de su producto o del valor que el trabajo incorpora a los materiales. Al cambiar un producto acabado, bien sea por dinero, bien por trabajo, o por otras mercaderías, además de lo que only helped to clarify the expenditure and income flows, but to the study of formation, because now a category of long term prices was defined, natural prices (nowadays called prices of production), and those were made to depend on the sum of the natural (long run) income paid to the previously mentioned socio- economic classes 7, also a category of non-persistent prices was postulated, market prices, which could differ from natural (production) prices, but , "the intersectoral movement of capital in pursuit of its highest return" (Mongiovi, p. 1150), will continuously push the former towards the latter, it is only in the adjustment process that there’s a role to be given in Smith’s theory to in affecting market prices, specially effectual demand, still, there’s no role for supply and demand on determining natural (production) prices, in other words, defining effectual demand: “the demand of those willing to pay the natural price of the commodity…Such people may be called the effectual demanders, and their demand the effectual demand; since it may be sufficient to effectuate the bringing of the commodity to market” (Smith, 1776 (1904), p. 56), what then happens is that “The market price of every particular commodity is regulated by the proportion between the quantity which is actually brought to market, and the demand of those who are willing to pay the natural price of the commodity…(so that in the long run) The whole quantity of industry annually employed in order to bring any commodity to market, naturally suits itself in this manner to effectual demand” (Smith, (1904) p. 56 & 58)”, hence, determination and analysis of output has been separated from analysis of prices and distribution 8 because long term prices are production prices, determined by quantities and distributive variable, to finish the picture, Ricardo and Marx are needed, for the purpose of the present investigation, both can be put together because of the emphasis they both placed on the inverse relation between distributive variables (related to social classes),

sea suficiente para pagar el valor de los materiales y los salarios de los obreros, es necesario que se dé algo por razón de las ganancias que corresponden al empresario, el cual compromete su capital en esa contingencia.” (Smith, (1958), p. 47-8) 7 “When the price of any commodity is neither more nor less than what is sufficient to pay the rent of the land, the wages of the labour, and the profits of the stock employed in raising, preparing, and bringing it to market, according to their natural rates, the commodity is then sold for what may be its natural price.” (Smith, (1904), p. 55) 8 Not implying that that are completely independent from one another, but that’s another issue. For an example of analysis of output taking distribution into account, see Barba and Pivetti, 2009. “having seen that in a circular flow framework the maximum rate of profits (corresponding to zero wages) is finite, not infinite” (Kurz, 2010, p. 207), having, as a result, an inverse linear relationship between profits and wages, which is key because it out rules the use of caeteris paribus method on the study of distribution, e.g. no changes in profit can be studied under the assumption that wages remain the same, because changes on the former imply changes in the latter 9. As a result of this brief summary of history of economic thought, we have the following characteristics central to the surplus approach: a long period study of a circular flow economy, with a division of income distribution according to socio- economic classes, with a tendency towards uniformity in distributive variables (which also implies a tendency of market prices towards production prices)10 , a separation of the analysis of prices and distribution, and the analysis of output, so that when prices are studied (which is the object of study of the core of the surplus approach), social output (and its composition) is to be taken as given, as well as the dominant method of production (technique) 11 , and also, one distributive variable is taken as given from outside of the economic system, allowing social and historical factors to enter the determination of distribution and of prices of production, without any reference to supply and demand, around which market prices tend to gravitate (see Kurz 2007, Bharadwaj, 1983 and Garegnani, 1984), it must be noted that “The fact that output, methods of production and the are ‘given’ for the derivation of prices does not rule out interaction among these factors.” (Bharadwaj, p. 19), which, along with the fact that output causation is part of a separate stage of analysis 12 , the result is that the core of the surplus approach,

9 In Sraffa’s words: “ In a world where everything moves in all directions…one sympathizes with Ricardo in his quest for an ‘invariable measure of value’. In an universe where everything is in motion we need a rock on which to grab ourselves”, own translation from Spanish: “En un mundo en donde todo se mueve en todas direcciones…uno simpatiza con Ricardo en su búsqueda de una medida invariable del valor’. En un universo en donde todo se mueve necesitamos una roca a la cual asirnos” (Kurz, 2007, p. 33, 34). 10 Because of free competition. 11 Having output and technology as given data, it’s relatively easy to obtain the quantity of labor required for such a production. 12 Of course, core and non-core studies must be consistent, but that does not imply that they share the same mechanism in their determination. while it may seem closed at first, is quite a flexible approach, a positive quality of the theory that should not be forgotten.

Contemporary, sraffian, surplus approach

The division between pre-contemporary and contemporary (pre-sraffian and sraffian) surplus approach follows mainly from the fact that such theory had not had any development since Marx, not until its main revival came with Piero Sraffa in the (contemporary) XXth century, a revival that was not characterized by blindly accepting the pre-contemporary developments of the theory, but by adding and correcting punctual aspects of the theory while still maintaining the key features of it. As seen previously on footnote 9, Sraffa sympathized with Ricardo (and Marx) in their quest for an invariable measure of value, its importance being to derive a linear relationship between distributive variables, Ricardo and Marx ended up using the labor theory of value for such a purpose, but that did not suffice for Sraffa, he was, instead, “concerned with elaborating a theory of the rate of profits and prices of production that starts from ‘objective data’…he considered to be the right approach in terms of ‘physical real costs’. He stressed that labor values cannot be known prior to and independently of the physical conditions of production” (Kurz, 2010, p. 190), because of this he tried to develop of his own tool for analysis, that’s how Sraffa’s Standard System and the Standard Commodity (a commodity invariant to changes in distribution) came into being, besides serving Sraffa for the establishment of the linear relationship between distributive variables, with it also came two other important distinctions, presented in chapter 2 of Sraffa's PCMC, first of all, a distinction of commodities in two categories, those that enter into the production of all commodities are called basic commodities, and those that don't, are called non-basic commodities; another distinction, in this case about the wage, is included in this chapter; it is recognised that wages can have a share of the surplus, hence, being above its level of subsistence, following this, the surplus wage can be considered a variable element, once having this explicited in chapter 2, the next chapter begins by posing the question of what happens when wages are reduced (not necessarily as to meet their subsistence level); we see that if proportion between labour and means of production is the same through all industries, in other words, if we had the same methods of production, then a wage change wouldn't change prices; let's see this from another position, the position where proportions are unequal, in this case, because of some industries having less labour employed in respect to capital, what is paid less because of wages is not enough for to cover extra payments of benefit (and viceversa when proportions are the other way). Seeing that unequal proportions divide industries into 2 groups, they're called deficit industries and surplus industries, this division being made "It follows that, with a wage-reduction, price-changes would be called for to redress the balance in each of the 'deficit' and in each of the 'surplus' industries" (Sraffa, 1960, p. 14), one might think that the previous argument is enough, but it isn't, Sraffa goes further and he explains that, in order to see how prices move, we must not only take into account the proportions between labour and means of productions in every industry, we must recognise that these industries use means of production which were also produced by means of a prior combination of labour and means of production, this affecting price determination, in other words, "the relative price-movements of two products come to depend, not only on the 'proportions' of labour to means of production by which they are respectedly produced, but also on the 'proportions' by which those means have themselves been produced" (Sraffa, p. 15). Hence, we now have commodities produced by commodities. Also, given the inequality of proportions between industries, we could still talk about the existence of a critical proportion dividing the two types of industries, this proportion would be one that if it existed in one industry, such an industry would not see its price affected by changes in distributive variables (this industry would also need, in order to be a critical industry, to have all its means of production made by processes which used the same critical proportion). While this industry may not exist in reality, it's importance will be remarked in Sraffa's closure of his third chapter: "It follows that the only 'value-ratio' which can be invariant to changes in the wage, and therefore is capable of being 'recurrent' in the sense defined in s21, is the one that is equal to the rate of profits which correspond to zero wage. And that is the 'balancing' ratio. We shall call Maximum rate of profits the rate of profits as it would be if the whole of the national income went to profits. And we shall denote by a single letter, R, the two coincident ratios" (Sraffa, p. 17). It is the value of R the one obtained by the Standard System. Besides having now clarified the inverse relationship between profits and wages, the method to obtain the maximum , with given technology and level of output, without any need of labor theory of value, Sraffa has also introduced the circular flow implication for prices, something in which he has a strong resemblance to Leontief when he claims that: "In production certain elements are generated by certain other elements and are then themselves used and consumed in further production. The two basic concepts here are costs and returns. Cost items (inputs) are those elements whose consumption in production causes the generation of corresponding return items (output). (Leontief, 1991, p.163) namely: commodities use other commodities as inputs, therefore, a change in distribution affects the price of a commodity not only because of its structure of labor and input (property of capitalist), but also by changes in its inputs used, since they're also commodities. Such a circular flow implication on prices gives as a result his reduction to dated quantities of labor method, "an operation by means of which, in a commodity's equation, the different means of production utilized are replaced by a series of labor quantities, each one of which carries its adequate date" (own translation, Sraffa, p. 57), the general formula for any n-th term of labor being 1314 :

Lan =(1-r/R)(1+r)^ n

The price of a commodity solving itself

Ap a=(A apa+B apb+...+K apk)(1+r)+L aw

Which is turned into

n Law+L a1 w(1+r)+...+L an w(1+r)^ =Ap a

13 (Sraffa, p.57-59) 14 For this equations, and the following: L standing for labor utilised, r as the rate of profit, R as the máximum rate of profit, w as wage, w r as real wage, and i as the rate of interest, the pure cost of capital.

Reduction to dated quantities of labour is not the only possible tool of analysis, sub-systems (as in Appendix A of PCMC) and its evolution into vertically integrated: labor coefficients, productive capacities and sectors (Pasinetti, 1973, p. 222-223) also exist, but for the purpose of this paper, it suffices to know the basic structure of dated labor reduction; and, since all prior tools of analysis share a common point, that of showing "that each price is ultimately made up of only two components: wages and profits" (Pasinetti, p. 225) and "resolve the price of every commodity into a sum of profit-weighted quantities of labor" (Pasinetti, p. 234), we see no problem in advancing the way we have proposed. The problems reduction to dated quantities of labor might have when facing joint-production, as long as they do not undermine the explanation of prices of production (Schefold, 1989, p. 33-35, 42), are not reasons important enough to excluse reduction to dated labor from our analysis. Finally, it comes the topic of money, following Deleplace, 2012, the recognition of money in the economy (and in economic theory) will be subject to two stages, thus, two concepts emerge: "Sraffa then introduces an important distinction between two levels of analysis of money in an economy. The first one is the study of what makes money “essential”; a way to perform that study is to compare what happens in any monetary economy with what would happen in any non-monetary economy. The second level is to compare the properties of various monetary economies. The first level of analysis is logically prior to the second, since, by bringing out 'the essential characteristics' of money, it is 'supplying the elements' of the latter" (Deleplace), hence, a first step will be to analyse whether the economic theory of Sraffa (shared by monetary distribution theorists) includes money essentially, for that purpose, it is not PCMC the writing to be used, but rather Sraffa's paper/review: "Dr Hayek on money and capital", where, in it's second half, Sraffa talks about how, when the case is that supply and demand for a commodity are not in equilibrium, interpreted this as a divergence between market price and cost of production, then a difference will occur between spot and forward prices for that commodity, qualifying the divergence among rates on various assets that arises because of this, the same "as is the divergence of prices from the costs of production; it is, in fact, another aspect of the same thing." (Sraffa, 1932, p. 50), then, the element of divergence between forward and spot Sraffa adds to obtain the own rate of interest; it must be noted as well, that in introducing the forward-spot difference, money enters the picture, since it is the standard of deferred payments, and it is the standard of deferred payments because it is the general . The important question is the following: The fact that no forward-spot divergence would exist in equilibrium eliminates money from analysis? Here's our answer: • Money as standard of deferred payments depends on money as medium of exchange, prices and output long state may (or may not) do not eliminate the use of money as medium of exchange, thus, the fact that expenditure and income are made through money implies the existence of a monetary economy; essentiality remains. • Since forward-spot divergences are basically the same phenomena as market-production prices differences, the same conclusion can be obtained, the existence of a long term value, even if it's never reached, doesn't undermines it's importance; we may never reach the center of the earth, even though gravity constantly pulls us there, that does not imply it doesn't exist or that it isn't relevant for studies referring to it. In our specific case, there may always exist a forward market, that does not imply that we don't have a long term value of interest; of course a specific foward market implies a specific price adjustment and hence, specific dynamics of market prices. Up to this point, no specific theory of distribution has come into stage, but the introduction of one may serve to further clarify in this topic, and even help us to talk, not only about an essential sraffian economy, but a non-neutral sraffian economy.

A Monetary Theory of Distribution, Pivetti's Theory

In so far no concrete theory of distribution has been presented, even though in Sraffa's analysis distribution and price determination go together, he did not devoted his book to defend a specific distribution theory, even though he did hinted towards one, where the rate of profit was determined from outside the system via the level of money rates of interest. Massimo Pivetti was one to seriously take that hint and so he developed a theory of distribution where "profits on capital employed in production normally include, beside interest, also a remuneration for the 'risk and trouble' of productively employing it, or what may be termed the normal profit of enterprise" (Pivetti, 1991, p. 4), in order to do this, two basic steps must be taken into account, first of all, it must be justified why the rate of interest is to be taken as given exogenously, then, a mechanism that explicits how the rate of interest affects the determination of the rate of profit, this Pivetti accomplishes by postulating "the rate of interest as an autonomous determination of normal production costs -an interpretation of interest not requiring any particular assumption as to the kind of capital employed in production" (Pivetti, p. 5), still, there remains yet to be explored the topic of the autonomous determination of the rate of interest, how is it justified? Pivetti mainly talks about its importance for the management of government debt, the size of government debt relative to other financial assets, because of the importance of the cost of the debt , also important is the impulse to extend the average life of securities, trying "to ensure a debt structure more consonant with the objective of retaining control of the general liquidity of the economy...the desired structure of the debt requiring the long-term rate to be pushed to a level that is high enough to attract sufficient firm holders for it" (Pivetti, p. 13) and the external financial influence a country receives; because of these three reasons (government debt service, debt structure to control liquidity and how the international financial situation affects) that the rate of interest can be regarded as a monetary phenomenon, meaning that "in the usual relationship between the rate of interest and the rate of profit, it is the former which 'sets the pace'." (Pivetti, p. 16), having said that, what is needed next is to determine which of all the different interest rates is to be the one relevant for profit rate determination, since the rate of profit has previously been defined as composed by two elements, interest and the normal profit of enterprise, this latter covering elements of risk and trouble, thus, logically, the rate of interest relevant to this study is one free of risk elements, "then the rate one should take into consideration is that to be earned in the market on long-term fixed securities, in which there is no element of risk...the rate on long- term government securities, followed by the rate of interest on loans of the best " (Pivetti, p. 21), this rate of interest is perfectly plausible to be used as the pure remuneration of capital, no matter the kind of capital utilized, and whatever the form of its employment, it can hence be called the of capital, so entering such a rate of interest as a determinant of production costs, and, since by the mechanism of competition prices of production equate themselves with normal costs, it results that "a lasting change in interest rates causes a change in the same direction in the level of prices in relation to the level of money wages...would also be accompanied by a change in relative prices -owing to the differential weight of interest in the production costs of the different commodities" (Pivetti, p. 22), hence having two effects, "a change in the ; and a change in relative prices." (Pivetti, p. 22) The other element composing the rate of profit, namely, the pure profit of enterprise, besides being conceptualised as independent of the rate of interest, since it must pay objective elements of risk and trouble, it do has a relationship with the use of capital being made (and the quantity of capital in use, because of the principle of increasing risk), in other words, the objective elements of risk and trouble vary with the type of enterprise carried, e.g. if the type of capital employed is of the financial type, then the difference between the cost of opportunity of capital and the risk remuneration of such financial enterprise will account for the normal profit in such a case, the same holding for every other asset, whether real or financial, as another element of risk "one may refer to the illiquidity risk. The additional yield of in real assets (such as factories or houses), in relation to gilt-edged securities...different in real assets may present very different illiquidity risks" (Pivetti 1990, p. 451) the prior has been mentioned in order to start solving (but not completely accomplishing it) the fact that "there are often differentials between the rates that should, according to the view here proposed, be regarded as relevant for the determination of normal profits in different employments of capital" (Pivetti, 1991, p. 21). Having thus understood how is it that normal profit of enterprise varies, in a constant manner based on objective elements, according to the type of enterprise carried out, and how the opportunity cost of capital ( on risk-less assets) affects prices of production via its two-fold effect, on absolute and on relative prices, it is then possible to see "'reduction to dated quantities of labor', when it can be applied, provides the simplest way of calculating the effects on money prices and on the real wage on changes in the rate of profit brought about by changes in the rate of interest." (Pivetti, p. 31). If an explicit system of equations is required, then Pivetti, 1998, p. 45 is our obliged reference, presenting the following system:

(A apa+B apa+…+K apk)(i+r a)+L aw=Ap a

(A bpa+B bpa+…+K bpk)(i+r b)+L bw=Bp b . . . (A kpa+B kpb+…+K kpk)(i+r k)+L kw=Kp k

ra=i+p ai

rb=i+p bi . . . rk=i+p ki

(Awpa+B wpb+…+K wpk)=p w

wr=w/p w

Two notes will close the presentation on Pivetti's system. Having introduced an explicit theory of distribution within the surplus approach, not only the essentiality, but also the non-neutrality of money, to do so, the two-fold effect of interest must be noted, the full effect of interest rate on profits wouldn't happen if absolute prices were not assumed to change, monetary factors affecting prices and distribution quite explicitly, not only by being a cost element, but also by the mechanism by which they operate, this, in turn, implies the existence of a contemporary monetary economy, in the sense that "in a system in which the value of money is fixed neither in gold nor in any other commodity -then, given money wages and production techniques, a persistent lowering of the rate of interest will actually lower the normal production costs of the various commodities, and hence the general level of money prices" (Pivetti, p. 50). The fact that "Pivetti deals with the maintenance of a particular real interest rate through suitable changes in the nominal rate of interest" (Ciccone, 1990, p. 455) does not undermine the fact that monetary authorities "are assumed to control, through the nominal interest rate, the real rate of interest" (Ciccone, p. 455), the exogenous interest-profit theory of distribution stands on firm ground, the real analysis introduces a few more logical steps into the analysis, but doesn't contradicts the conclusions obtained with the initial nominal analysis, thus, as long as real analysis isn't necessary, the present exposition will maintain the nominal one.

A monetary theory of distribution Panico's theory

Carlo Panico in his 1988 book, "Interest and Profit in the Theories of Value and Distribution", while, on principle, his theory shares with Pivetti's one the fact of interest as cost and prices adapting to costs, differences between both of them exist, in some respects one excels the other and viceversa; the main virtue of Panico is that it provides us with tools to analyse the mechanism by which financial assets reach (tend towards) their long term values being those long term values the ones that entered the determination of long term prices; also, what in Pivetti's analysis enters as a constraint on on the interest rate, liquidity , in Panico, following Keynes, is seen as the base of determination of the market interest rate and it's fluctuations, "always through its effect on the preference of the public for liquid assets that the tendency for the market interest rate to ultimately converge towards some 'normal' level asserts itself." (Panico, 1988, p. 130), this normal level mainly affected by monetary authorities, even though expectations concerning future levels of interest may affect the operation of monetary authorities, hence, they may enter as a constraint, how the rate of profits is affected by the action of monetary authorities is by "modifying the structure of interest rates. It is only with some delay, due to the slowness of the banks to adjust the rate of interest on deposits, that the whole structure of interest rates move to a higher or a lower level...sets in motion a process of adjustment in the rate of profit charged by them in the cost of production of their commodities." (Panico, p. 160). Four assets enter Panico’s analysis, money, short term bond, long term bonds and real capital assets. For each of them, its “net” yield (e) will include yield (q) minus its carrying cost (c) e=q-c An excess percentage appreciation of the asset with respect to money, which is an expected value, will be represented by (a). Also, an illiquidity premium (l) will enter as a deduction. Hence, the own rate of money interest (ormi) of an asset will be: ormi=e+a-l The coefficients for the 4 assests are:

• For money: l m=0, e m>0, a m=0

• For short term bonds: lb>l m, e b=interest rate on short term loans on banks,

ab different to 0

• For long term bonds: l l>l b>l m, e l=interest rate on long term loans on banks,

al different to zero

• For real capital: l k>l l>l b>l m, e k=e k, a k will be irrelevant Long period will be characterized by a uniform ormi

ormi m=ormi b=ormi l=ormi k This in turn requires the following conditions

em=e b-lb=e l-ll=e k-lk

Implies that ormi m=e m is nothing else that Pivetti’s pure cost of capital, the normal remuneration arising from the different type of capital, in this case, for our 4 assets, will be easily recognizable as obtained by the inequality

lk>ll>l b>l m That implies long term higher yields for the other assets that can be described as

ek>e l>e b>e m

The difference the respective e’s have with respect to e m will be the normal remuneration of that kind of capital 15 The fact that in Pivetti's analysis monetary authorities act directly upon the risk- free interest rate and that in Panico their influence is indirect through coefficients

15 Let us assume, for simplicity, that “a” is already included. that through "a market mechanism, though lagged, will operate towards changes in t." (Panico, p. 177), does not, up to this point of the analysis, create great conflict between both theories. An issue may rise however, when Panico introduces a full set of price equations where money wages are taken as given, and, in his own words, "it does not show any degree of freedom to determine distribution exogenously. On a more careful look, however, the difference with these other models turns out to be more apparent than real. Even though all distributive variables are endogenously determined, their level depends upon some parameters, the 'illiquidity discounts'" (l’s) (Panico, p. 187), the indirect influence authorities have on interest in Panico's model are, in our view, an expression of strong constraints, thus, making it a particular case (as frequent as this particular case may be), and hence, because of generality, we'll prefer Pivetti's analysis of price determination, but will stick with Panico's adjustment views, considering both analysis are complementary, not contradictory, to make consistency out of this it's only necessary to see the yield of assets (e’s) as given, determined in Pivetti's stage of analysis of "pure remuneration + normal profit", calculated through the method of reduction to dated quantities of labor, and the adjustment mechanism operating through movements in the other coefficients, by moving the asset structure, until it reaches it's long term value and so will do the asset structure.

Conclusions

In a first exercise of compare and contrast between the two main theories of monetary distribution within the surplus approach no fundamental contradictions have arise, while a complementary role for each of them do has arised; of course some differences exist, but not being fundamental, they do not make the models uncompatible, besides, criteria of generality and/or of clarity have been told so as to choose between any of both models when differences appear; a long term mechanism of monetary distribution has been presented as well as an adjustment analysis of market values towards long term values, the presentation of such constraints and of an adjustment analysis has given us tools to study not only long period positions, but fluctuations, therefore showing the flexibility of the surplus approach.

Appendix A On government debt and liquidity GDP, Private and Public debt securities, 2010, in billions of US dollars GDP Private debt Public debt securities securities

World 63,074.9 53,289.7 41,274.2

United States 14,526.6 21,215.8 11,165.5

European Union 15,171.6 20,741.3 10,392.9 (Euro Area + Denmark, Sweden and United Kingdom)

Latin America and 4,900.3 992.3 1,664.2 the Caribbean

Source, International Monetary Fund.

As seen in the last box, public debt relative to GDP is still a quantity as important as when Pivetti wrote his book, however, the bigger importance of financialisation (implying a bigger debt and deregularisation of international financial transactions) has changed, from our perspective, not the facts Pivetti proposed in order to justify autonomous determination of debt, but the relative importance of such facts. Ever since the last quarter of the XXth century a political struggle towards a diminishing public debt has taken place and succeeded in its objective, which can be seen in the slightly bigger size of private over public debt, even though with the 2007-2009 crisis 16 lots of private debt was turned into public. Besides, international financial deregulation has caused the trends of the country

16 Not meaning by this that the crisis is over, but trying to focus on the, so far, worst period of it. with the hegemonic to influence greatly the interest trends of the rest of the countries, this meaning that, nowadays that the United States have lowered their risk-free interest rate to practically zero (which for them represents not so much of a problem since they have not so many troubles locating their liquidity as other countries), there has been an impulse towards lowering interest rates in the rest of the world, however, another distributive force must be reckoned, since the size of private debt (mainly to ) has grown so much, and hence, their debt turned into a category of benefits for financial capital (Panico, Puchet, Pinto, 2012), some elements of the structure of interest rates are, for the benefit of some, an impulse to be put upwards. What we try to point out is that there are a variety of new impulses, none of which is to be ignored; what we are not saying is that their existence justifies abandoning the view of an autonomous determined free- risk interest rate.