It was an inadequate understanding of the rate of profit, and the difference with the rate of surplus value, that led economists, like Torrens, to misunderstand the role of these prices in raising profits. On the basis of their practical experience, they saw reductions in these prices as leading to higher profits, and vice versa, whereas what they actually brought about was a rise in the rate of profit, which facilitated accumulation, and vice versa.
On the other hand, “economists like Ricardo [D. Ricardo, On the Principles of Political Economy, and Taxation, Third edition, London, 1821, pp. 131-138. — Ed.], who cling to general principles, do not recognise the influence of, say, world trade on the rate of profit.” (p 107)
That influence was the powerful impetus to lower prices that global trade could bring. That is why the industrialists sought free trade, and repeal of the Corn Laws. It was not just a reduction in the value of labour-power via a reduction in food prices that was sought. The textile industry itself used large quantities of flour as size.
“As far back as 1837, R. H. Greg calculated that the 100,000 power-looms and 250,000 hand-looms then operating in the cotton-mills of Great Britain annually consumed 41 million lbs of flour to smooth the warp. He added a third of this quantity for bleaching and other processes, and estimated the total annual value of the flour so consumed at £342,000 for the preceding ten years. A comparison with flour prices on the continent showed that the higher flour price forced upon manufacturers by corn tariffs alone amounted to £170,000 per year. Greg estimated the sum at a minimum of £200,000 for 1837 and cited a firm for which the flour price difference amounted to £1,000 annually.” (p 107)
The rate of profit, as determined previously, is calculated on the total capital advanced, i.e. on the whole of the fixed capital plus the circulating constant capital and variable capital. However, because the fixed capital only conveys the value of its wear and tear to the commodity, whilst the raw material conveys all its value at once, to the commodity, the latter has a far more significant effect on the price.
Marx demonstrates here that he understood the principle of price elasticity of demand. He writes,
“But it is evident — although we merely mention it in passing, since we here still assume that commodities are sold at their values, so that price fluctuations caused by competition do not as yet concern us — that the expansion or contraction of the market depends on the price of the individual commodity and is inversely proportional to the rise or fall of this price. It actually develops, therefore, that the price of the product does not rise in proportion to that of the raw material, and that it does not fall in proportion to that of raw material. Consequently, the rate of profit falls lower in one instance, and rises higher in the other than would have been the case if products were sold at their value.” (p 108)
In other words, when the price of the raw material rises, this raises the price of the commodity. But, a higher price causes demand to fall. When commodities exchanged at their values – which Engels cites in the Appendix to have been between 10,000 B.C. and the 15th century – this would have simply resulted in a contraction of supply. But, under capitalist competition, this may not be the case. In that event, suppliers may absorb some of the additional cost of the raw materials themselves. How much can be passed on depends on the price elasticity of demand for the particular commodity. This is a function of the transition to prices of production and market prices.
In addition, although the quantity and value of fixed capital, and particularly machinery, grows, as labour productivity grows, - and indeed in the case of machinery is a means of the growth of that productivity – it does not grow as rapidly as labour productivity. The higher labour productivity, as well as scientific development, ensures that better machines are produced that do the work of many older machines, that they last longer, and that their value, particularly measured against their output falls sharply.
Even where more fixed capital is employed, therefore, the value of that fixed capital can fall bringing with it a corresponding rise in the rate of profit. But, alongside that rise, in the productivity of labour, and of the machines comes a huge expansion of the raw material processed.
“The value of raw material, therefore, forms an ever-growing component of the value of the commodity-product in proportion to the development of the productivity of labour, not only because it passes wholly into this latter value, but also because in every aliquot part of the aggregate product the portion representing depreciation of machinery and the portion formed by the newly added labour — both continually decrease. Owing to this falling tendency, the other portion of the value representing raw material increases proportionally, unless this increase is counterbalanced by a proportionate decrease in the value of the raw material arising from the growing productivity of the labour employed in its own production.” (p 108-9)
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