An Analytical Foundation of the Classical View of Long-Period Prices with Differential Profit Rates

The uniformity of the profit rates has been justified by the modern literature on long-period positions on the ground of the working of free capital mobility across sectors. However, classical economists allow for profit rates differentials also in case of absence of barriers to entry, because of specific factors affecting the investment behavior of producers in industries. We develop a linear multisectoral model in which differential profit rates are determined by such ‘idiosyncratic’ factors. We provide conditions ensuring the uniformity of the profit rates in the long-run.