Circular vs. One-way Production: Two Different Views on Production and Income Distribution

In economic theory, there are at least two alternative ways to represent production processes: circular production processes, where the same commodities appear among the products and the means of production, and one-way production processes, starting with the factors of production and ending with finished goods.This distinction brings about two views concerning income distribution and the conception of profits. In circular production, profits arise from a difference between quantities, the quantities of commodities produced and those required as inputs (surplus theory of profit). In one-way production, profits are viewed as a difference between the prices of final goods and the prices of the productive factors employed to produce them (profits as a price phenomenon). This difference reflects contrasting views on the forces shaping income distribution and assessing the relative merits of production agents in generating profits. Moreover,it also sheds light on two specific issues: the neo-Walrasian scholars’ attempt to circumvent Walras’ problem of over-determination of the equilibrium system and the possibilities that wage moderation has for increasing international competitiveness.