Marx continues, considering the argument about higher wages. Those proposing this argument say,
“This causes a greater demand for commodities on the part of the labourers. This, in turn, leads to a rise in the price of commodities.—Or it is said: If wages rise, the capitalists raise the prices of their commodities.—In either case, the general rise in wages causes a rise in commodity prices. Hence a greater amount of money is needed for the circulation of the commodities, no matter how the rise in prices is explained.” (p 344)
Marx easily dismisses this argument. Higher wages will mean workers demand more necessities, and might demand new commodities, and this may cause their price to rise, in the short-term. But, the fall in surplus-value means capitalists have less money to spend on luxuries. The fall in their demand causes their prices to fall. Profits for producing necessities rises, and for producing luxuries fall. That means more capital will move to producing necessities and less to producing luxuries. This continues until the rate of profit is equalised in both sectors again. The consequence is that the supply of necessaries rises, and so their prices fall back to the original level, and the supply of luxuries falls, pushing the prices of luxuries back up to their original level.
The overall price level has not changed, but more social labour-time is now devoted to producing necessities, and less to luxuries.
Alternatively, workers themselves may spend some of their higher wages on luxuries. In that case, they exert less pressure on the demand for necessities, and simply replace the demand for luxuries that previously came from capitalists.
“More luxuries than before are consumed by labourers, and relatively fewer by capitalists. Voilà tout. After some oscillations the value of the mass of circulating commodities is the same as before. As for the momentary fluctuations, they will not have any other effect than to throw unemployed money-capital into domestic circulation, capital which hitherto sought employment in speculative deals on the stock-exchange or in foreign countries.” (p 344)
Part of the argument, of those who believe that wages determine prices, is that price is comprised of the costs of production – primarily here wages – plus an amount of profit. So, if wages rise, prices rise as a result. But, again, this is not true as Marx shows.
Firstly, if capitalists could simply increase prices at will, in that way, they would do so whether wages had risen or not. But, capitalists cannot simply raise prices. Conversely, wages would never rise when commodity prices fell, and
“The capitalist class would never resist the trades’ unions, if it could always and under all circumstances do what it is now doing by way of exception, under definite, special, so to say local, circumstances, to wit, avail itself of every rise in wages in order to raise prices of commodities much higher yet and thus pocket greater profits.” (p 344)
The argument that higher wages cause inflation, “is a bugbear set up by the capitalists and their economic sycophants.” (p 344)
The basis of the argument rests on three foundations. Firstly, the money put in circulation is determined by the total value of commodities to be circulated. If more commodities are to be circulated, or if the same number of commodities are circulated, but their value has risen, then more money has to be thrown into circulation. The latter would be the case if productivity had fallen, or if, for example, there had been a bad harvest, pushing up food and raw material prices. This increase in money would then mean that all prices, including wages, might rise.
“The effect is then confused with the cause. Wages rise (although the rise is rare, and proportional only in exceptional cases) with the rising prices of the necessities of life. Wage advances are the consequence, not the cause, of advances in the prices of commodities.” (p 345)
Secondly, a rise in some wages might cause a rise in some prices. Whether or not this is possible depends on a number of factors, such as the price elasticity of demand of the products concerned. Products that are inelastic can enjoy a rise in price without a damaging fall in demand, and vice versa. Whether a product has inelastic demand or not depends on a range of factors such as whether its a necessity, if it has substitutes, how much competition there is between suppliers, and so on. But, also, for some products, wages comprise a small element of costs, so a wage rise might be easily absorbed. Later, in Capital III, Marx demonstrates why it is that, in fact, a general rise in wages will cause the prices of commodities that have a higher than average organic composition of capital, to fall rather than rise.
But, in any case, the consequence of a rise in some prices here is a fall in the prices of other goods, as effective demand rises for one and falls for the other. Finally,
“In the case of a general rise in wages the price of the produced commodities rises in branches of industry where the variable capital preponderates, but falls on the other hand in branches where the constant, or fixed, capital preponderates.” (p 346)
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