<p>You say that a price of \$2.50 is way above the daily wage, but you haven't specified the daily wage, you've specified the wage per unit of bread (produced, I assume) at \$0.50.  Suppose the productivity of labour is 6 units of bread per day.  Then the daily wage will be \$3 and the price of \$2.50 will be affordable.</p>
<p>To that extent, the economy is viable if labour productivity exceeds 5 units per day, although there remain other issues, such as what the fixed costs consist of and, as jpfeifer's comment points out, what the profits are spent on.</p>
<p><strong>Edit: Oct 20, 2024</strong></p>
<p>I will try to specify a very simple economic system which will ‘work’, in the sense you have indicated, with scope for profits and use of those profits.  It has some features in common with systems set out by Sraffa in his <a href="http://pombo.free.fr/sraffa60.pdf" rel="nofollow noreferrer">Production of Commodities by Means of Commodities (1960)</a>, although his simplest system had two basic products, wheat and iron.</p>
<p>There is one firm, which effectively is the government, and one produced (physical) good, wheat.  Production of one unit of wheat requires <span class="math-container">$L$</span> units of labour days and <span class="math-container">$S$</span> units of seed (retained by the firm from previous production): <span class="math-container">$0&lt;L,S&lt;1$</span>.  There are no fixed costs.</p>
<p>The system is in steady state: in particular output and labour are constant over time.</p>
<p>There is no money, so the question of the price of wheat and the wage in money terms does not arise.  The wages of the wheat labourers are paid in kind (wheat) at a rate of <span class="math-container">$W$</span> units of wheat per day.  The labour cost of producing a unit of wheat is therefore <span class="math-container">$LW$</span>.</p>
<p>The rate of profit is <span class="math-container">$R$</span> units of wheat per unit of wheat produced. Thus:</p>
<p><span class="math-container">$$R=1 – LW -S\quad(1)$$</span></p>
<p>Unless profits are zero, a second sector uses labour paid out of the firm’s profit to provide services (eg servants, police,  clergy).  The services require no non-labour inputs, and are entirely controlled by the firm (never purchased by labourers).  The wheat-labourers and services-labourers have distinct skills and cannot substitute for each other.</p>
<p>The minimum subsistence requirement per labourer per day is <span class="math-container">$U$</span> units.  If the wage exceeds the subsistence minimum it is used for extra wheat consumption.</p>
<p>To confirm that output and income are equal, we must measure both in terms of units of wheat.  Suppose <span class="math-container">$N$</span> units of wheat are produced per day.  To find total output per day, we must add the output of services, which depends on the rate of profit.  Since the services are not marketed, they can only be valued at cost, which is the cost of the labour funded from the firm’s profit, ie <span class="math-container">$NR$</span>.  So total output per day is <span class="math-container">$N+NR$</span>.</p>
<p>Income consists of the wages of wheat-labourers <span class="math-container">$NLW$</span>, the seed retained by the firm <span class="math-container">$NS$</span>, the firm’s profit <span class="math-container">$NR$</span> and the wages of the service-labourers, also <span class="math-container">$NR$</span>.  The inclusion of <span class="math-container">$NR$</span> twice is not a double-counting error: it is quite normal in the context of the circular flow of income that income to one party is spent on output from another party and so constitutes income again to the latter.  Using (1) above the first three terms sum to <span class="math-container">$N$</span>, and total income per day is therefore also <span class="math-container">$N+NR$</span>.</p>
<p>For this economy to be viable for the labourers and for the firm, the daily wages must at least equal the subsistence level, and the rate of profit must at least be non-negative.  As we have seen in (1) above, the conditions of the system determine a relation between the rate of profit and the wages of the wheat-labourers.  For the extreme case of wheat-labourer wages at subsistence level the rate of profit <span class="math-container">$R_{max}$</span> is:</p>
<p><span class="math-container">$$R_{max}=1-LU-S\quad(2)$$</span></p>
<p>At the other extreme, with zero profits (and therefore no service sector), the wheat-labourer wage <span class="math-container">$W_{max}$</span> is:</p>
<p><span class="math-container">$$W_{max}=(1-S)/L\quad(3)$$</span></p>
<p>It should be explained that the profit-wage relation (1) is not intended to show what will happen to profits if the wage changes, or vice versa.  Its only purpose is to identify possible combinations of profits and wages in different possible steady states.  Thus the question ‘What happens to the wages of the services-labourers if the rate of profits falls to nil?’ does not arise: if profits are nil then they always have been nil and there have never been any labourers providing services.</p>
<p>So the ranges of possible values of profits and wheat-labourer wages are:</p>
<p><span class="math-container">$$0\leq R\leq 1-LU-S\quad(4)$$</span></p>
<p><span class="math-container">$$1\leq W \leq (1-S)/L\quad(5)$$</span></p>
<p>What then determines the actual rates of wages and profits within these limits?  The answer is that nothing <em>in the system</em> determines them.  We could of course add an assumption of profit maximisation and infer that wages of wheat-labourers must be at the subsistence minimum.  But once we ask whether that would really be feasible – whether the firm could maintain wages at that minimum level without provoking disruptive protests or even rebellion – we are no longer in the realms of economics but rather in that of politics or sociology.  More likely, if the system really is in steady state, the rates of wages and profits are at levels which leave both the labourers and the firm, if not exactly content, not so discontented that they are prepared to fight or take political action to change the status quo.</p>
<p>One of the big questions of economics is the extent to which that conclusion carries over to real economies with – among other things – many kinds of goods produced, capital goods, complex production functions often exhibiting diminishing returns to labour, money, international trade, and technological innovation.  Very broadly speaking, orthodox neoclassical theory tends to the view that wages and profits are to a considerable degree determined within the economic system, in particular by the  respective <a href="https://en.wikipedia.org/wiki/Marginal_revenue_productivity_theory_of_wages" rel="nofollow noreferrer">marginal productivities</a> of labour and capital.  Another school of thought, influenced by <a href="https://www.marxists.org/archive/marx/works/1844/manuscripts/wages.htm" rel="nofollow noreferrer">Marx</a> and <a href="https://en.wikipedia.org/wiki/Piero_Sraffa" rel="nofollow noreferrer">Sraffa</a>, and perhaps best represented by the Cambridge (England) side in the so-called <a href="https://en.wikipedia.org/wiki/Cambridge_capital_controversy#:%7E:text=The%20Cambridge%20capital%20controversy%2C%20sometimes,lasted%20well%20into%20the%201960s." rel="nofollow noreferrer">Cambridge Capital Controversy</a>, tends to the view that, even within large, complex, modern economies, the determination of wages and profits involves quite a large element of industrial relations, class struggle and politics.</p>
<p>So your apparently simple question leads to some deep issues.</p>
<p>Having said all that it may be advisable to point out that consideration of very simple economies such as above, fascinating as it may be, is unlikely to form part of the syllabus of a typical introductory economics course or to help in completing such a course.</p>

CC BY-SA 4.0
2024-10-19T08:02:31.143Z
Thank you for your reply. I too came up with the same solution at first, but I soon found out about the other problem relating to the fixed cost and profit, as you have pointed out.  Then what is the way out of this? Do I need to add other institutions in the model? Or is there any alternate way to price the product? Why I am insisting on it is because if this model, which I believe is the simplest economy that can be imagined (please do comment on this too if possible), cannot be made to work then what can be the simplest economy that will work?
TatEco
CC BY-SA 4.0
2024-10-15T11:26:29.033Z
2024-10-20T21:25:17.170Z
2024-10-20T21:25:17.170Z
Adam Bailey
<p>First of all, let me clarify that I am very new to economics and have just started studying the subject (both micro and macro). So please bear with me if you feel that the question is naive or stupid.</p>
<p><strong>Let us consider a hypothetical economy.</strong></p>
<p><strong>i) There is only one firm.</strong></p>
<p><strong>ii) The people of the economy all work for this single firm.</strong></p>
<p><strong>iii) The firm produces one good, say bread, which is required for the sustenance of the workers (who are also the people of that economy).</strong></p>
<p><strong>iv) One person needs one unit of bread every day for his/her sustenance.</strong></p>
<p><strong>v) The only source of income for the people of this economy (all of whom work for this firm) is the wages given out by the firm for the production of bread and all workers get the same wages.</strong></p>
<p><strong>vi) No foreign trade is there.</strong></p>
<p>Now the question is <strong>how will the firm fix the price of one unit of bread so that people who are also the workers of the firm can buy it and at the same time the firm makes profits.</strong></p>
<p>You can use some concrete figures for the prices as has been used by me and they are as follows.</p>
<p>Say the fixed costs of producing one unit of bread (everything except the wages) are all bundled up into one unit and that is $1.00.</p>
<p>The firm wants to make a profit of say $1.00 on every unit of bread.</p>
<p>The firm fixes the wages at $0.50 per unit of bread.</p>
<p>The means the price of one unit of bread will be $2.50
, which is way above the daily wage of dollar 0.50/bread.</p>
<p><strong>I simply couldn't figure out a way to make this economy work which amounts to people (or the workers) being able to buy bread and the firm making profits.</strong></p>
<p><strong>So, is this economy viable?</strong> If so, what is the way out of this apparent paradox. If not, please provide rectifications to the model. Any advice is welcome.</p>

CC BY-SA 4.0
2024-10-15T07:31:18.873Z
Your setup makes no sense. Total income needs to equal production. But you are neglecting firm profits as a source of income. If the $2 of profit per bread is not spent on bread, then the only equilibrium is indeed 0 production.
jpfeifer
CC BY-SA 4.0
2024-10-19T08:10:00.683Z
Thank you @jpfeifer for your comment. Will you please tell me how you are calculating this equilibrium and the 0 production? Can the profits solve the problem and how? By my understanding, even if you are giving the profit of $1 to the owner, even he cannot buy the bread. But I was mostly thinking about the wages. But if you can tell me a way out of this, like if I needed to add any other institutions or if the pricing can be done differently, it will be very helpful. And if this cannot be the simplest self-contained economy then how to make it one?
TatEco
<macroeconomics><classical-economics>
Is this given hypothetical two sector economy viable?
TatEco
# Is this given hypothetical two sector economy viable?

(Asked by: username_0 on 2024-10-15)

First of all, let me clarify that I am very new to economics and have just started studying the subject (both micro and macro). So please bear with me if you feel that the question is naive or stupid.

**Let us consider a hypothetical economy.**

**i) There is only one firm.**

**ii) The people of the economy all work for this single firm.**

**iii) The firm produces one good, say bread, which is required for the sustenance of the workers (who are also the people of that economy).**

**iv) One person needs one unit of bread every day for his/her sustenance.**

**v) The only source of income for the people of this economy (all of whom work for this firm) is the wages given out by the firm for the production of bread and all workers get the same wages.**

**vi) No foreign trade is there.**

Now the question is **how will the firm fix the price of one unit of bread so that people who are also the workers of the firm can buy it and at the same time the firm makes profits.**

You can use some concrete figures for the prices as has been used by me and they are as follows.

Say the fixed costs of producing one unit of bread (everything except the wages) are all bundled up into one unit and that is $1.00.

The firm wants to make a profit of say $1.00 on every unit of bread.

The firm fixes the wages at $0.50 per unit of bread.

The means the price of one unit of bread will be $2.50
, which is way above the daily wage of dollar 0.50/bread.

**I simply couldn't figure out a way to make this economy work which amounts to people (or the workers) being able to buy bread and the firm making profits.**

**So, is this economy viable?** If so, what is the way out of this apparent paradox. If not, please provide rectifications to the model. Any advice is welcome.

**Tags:** macroeconomics, classical-economics
> **Comments:**
> **username_1**: Your setup makes no sense. Total income needs to equal production. But you are neglecting firm profits as a source of income. If the $2 of profit per bread is not spent on bread, then the only equilibrium is indeed 0 production.  
> **username_0**: Thank you @jpfeifer for your comment. Will you please tell me how you are calculating this equilibrium and the 0 production? Can the profits solve the problem and how? By my understanding, even if you are giving the profit of $1 to the owner, even he cannot buy the bread. But I was mostly thinking about the wages. But if you can tell me a way out of this, like if I needed to add any other institutions or if the pricing can be done differently, it will be very helpful. And if this cannot be the simplest self-contained economy then how to make it one?  

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## 1 answers

### Answer by username_2 on 2024-10-15. Score: 1 | Accepted answer

You say that a price of \$2.50 is way above the daily wage, but you haven't specified the daily wage, you've specified the wage per unit of bread (produced, I assume) at \$0.50. Suppose the productivity of labour is 6 units of bread per day. Then the daily wage will be \$3 and the price of \$2.50 will be affordable.

To that extent, the economy is viable if labour productivity exceeds 5 units per day, although there remain other issues, such as what the fixed costs consist of and, as jpfeifer's comment points out, what the profits are spent on.

**Edit: Oct 20, 2024**

I will try to specify a very simple economic system which will ‘work’, in the sense you have indicated, with scope for profits and use of those profits. It has some features in common with systems set out by Sraffa in his [Production of Commodities by Means of Commodities (1960)](http://pombo.free.fr/sraffa60.pdf), although his simplest system had two basic products, wheat and iron.

There is one firm, which effectively is the government, and one produced (physical) good, wheat. Production of one unit of wheat requires $L$ units of labour days and $S$ units of seed (retained by the firm from previous production): $0. There are no fixed costs.

The system is in steady state: in particular output and labour are constant over time.

There is no money, so the question of the price of wheat and the wage in money terms does not arise. The wages of the wheat labourers are paid in kind (wheat) at a rate of $W$ units of wheat per day. The labour cost of producing a unit of wheat is therefore $LW$.

The rate of profit is $R$ units of wheat per unit of wheat produced. Thus:

$$R=1 – LW -S\quad(1)$$

Unless profits are zero, a second sector uses labour paid out of the firm’s profit to provide services (eg servants, police, clergy). The services require no non-labour inputs, and are entirely controlled by the firm (never purchased by labourers). The wheat-labourers and services-labourers have distinct skills and cannot substitute for each other.

The minimum subsistence requirement per labourer per day is $U$ units. If the wage exceeds the subsistence minimum it is used for extra wheat consumption.

To confirm that output and income are equal, we must measure both in terms of units of wheat. Suppose $N$ units of wheat are produced per day. To find total output per day, we must add the output of services, which depends on the rate of profit. Since the services are not marketed, they can only be valued at cost, which is the cost of the labour funded from the firm’s profit, ie $NR$. So total output per day is $N+NR$.

Income consists of the wages of wheat-labourers $NLW$, the seed retained by the firm $NS$, the firm’s profit $NR$ and the wages of the service-labourers, also $NR$. The inclusion of $NR$ twice is not a double-counting error: it is quite normal in the context of the circular flow of income that income to one party is spent on output from another party and so constitutes income again to the latter. Using (1) above the first three terms sum to $N$, and total income per day is therefore also $N+NR$.

For this economy to be viable for the labourers and for the firm, the daily wages must at least equal the subsistence level, and the rate of profit must at least be non-negative. As we have seen in (1) above, the conditions of the system determine a relation between the rate of profit and the wages of the wheat-labourers. For the extreme case of wheat-labourer wages at subsistence level the rate of profit $R\_{max}$ is:

$$R\_{max}=1-LU-S\quad(2)$$

At the other extreme, with zero profits (and therefore no service sector), the wheat-labourer wage $W\_{max}$ is:

$$W\_{max}=(1-S)/L\quad(3)$$

It should be explained that the profit-wage relation (1) is not intended to show what will happen to profits if the wage changes, or vice versa. Its only purpose is to identify possible combinations of profits and wages in different possible steady states. Thus the question ‘What happens to the wages of the services-labourers if the rate of profits falls to nil?’ does not arise: if profits are nil then they always have been nil and there have never been any labourers providing services.

So the ranges of possible values of profits and wheat-labourer wages are:

$$0\leq R\leq 1-LU-S\quad(4)$$

$$1\leq W \leq (1-S)/L\quad(5)$$

What then determines the actual rates of wages and profits within these limits? The answer is that nothing *in the system* determines them. We could of course add an assumption of profit maximisation and infer that wages of wheat-labourers must be at the subsistence minimum. But once we ask whether that would really be feasible – whether the firm could maintain wages at that minimum level without provoking disruptive protests or even rebellion – we are no longer in the realms of economics but rather in that of politics or sociology. More likely, if the system really is in steady state, the rates of wages and profits are at levels which leave both the labourers and the firm, if not exactly content, not so discontented that they are prepared to fight or take political action to change the status quo.

One of the big questions of economics is the extent to which that conclusion carries over to real economies with – among other things – many kinds of goods produced, capital goods, complex production functions often exhibiting diminishing returns to labour, money, international trade, and technological innovation. Very broadly speaking, orthodox neoclassical theory tends to the view that wages and profits are to a considerable degree determined within the economic system, in particular by the respective [marginal productivities](https://en.wikipedia.org/wiki/Marginal_revenue_productivity_theory_of_wages) of labour and capital. Another school of thought, influenced by [Marx](https://www.marxists.org/archive/marx/works/1844/manuscripts/wages.htm) and [Sraffa](https://en.wikipedia.org/wiki/Piero_Sraffa), and perhaps best represented by the Cambridge (England) side in the so-called [Cambridge Capital Controversy](https://en.wikipedia.org/wiki/Cambridge_capital_controversy#:%7E:text=The%20Cambridge%20capital%20controversy%2C%20sometimes,lasted%20well%20into%20the%201960s.), tends to the view that, even within large, complex, modern economies, the determination of wages and profits involves quite a large element of industrial relations, class struggle and politics.

So your apparently simple question leads to some deep issues.

Having said all that it may be advisable to point out that consideration of very simple economies such as above, fascinating as it may be, is unlikely to form part of the syllabus of a typical introductory economics course or to help in completing such a course.

> **Comments:**
> **username_0**: Thank you for your reply. I too came up with the same solution at first, but I soon found out about the other problem relating to the fixed cost and profit, as you have pointed out.  Then what is the way out of this? Do I need to add other institutions in the model? Or is there any alternate way to price the product? Why I am insisting on it is because if this model, which I believe is the simplest economy that can be imagined (please do comment on this too if possible), cannot be made to work then what can be the simplest economy that will work?  

---

