Circular vs One-Way Production Processes: Two Different Views on Production and Income Distribution

This paper examines two distinct representations of production processes: circular production, where commodities function as both inputs and outputs, and one-way production, which starts with factors of production and ends with finished goods. These frameworks offer different views on profits. In circular systems, profits arise from surplus production, while in one-way systems, they appear to emerge from price differences between final goods and inputs. Using Sraffa’s price equations, we analyse the properties of both systems. We demonstrate that while one-way systems seem to allow for profit increases by raising prices, this is an illusion as it ultimately reduces real wages, the true source of profits. Additionally, we show that one-way systems become circular when real wages are fixed. Finally, the paper discusses how this distinction is important in understanding the shift from Walras’ general equilibrium theory to neo-Walrasian formulations. This study highlights the importance of circularity in the functioning of capitalist economies and its implications for the theory of distribution.