Capital III, Chapter 6 - Part 5

The increase in the price of raw materials brings about a fall in the general rate of profit, in the same way that the removal of tariffs and the fall of material prices, brought about a rise in the rate of profit. But, for individual capitalists, or even whole industries, producing those raw materials, the increase in value may compensate for the lower rate of profit. But, again, this is an effect of specific market conditions rather than underlying value relations.

“Without entering into the detailed effects of competition, we might state for the sake of thoroughness that 1) if available supplies of raw material are considerable, they tend to counteract the price increase which occurred at the place of their origin; 2) if the semi-finished and finished goods press very heavily upon the market, their price is thereby prevented from rising proportionately to the price of their raw materials. 

The reverse takes place when the price of raw material falls. Other circumstances remaining the same, this increases the rate of profit. The commodities in the market, the articles in the process of production, and the available supplies of raw material, depreciate in value and thereby counteract the attendant rise in the rate of profit.” (p 112)

In other words, we have here essentially a modification of the Law of Value in line with the price elasticity of demand. Raw material prices rise, but the extent of supply of commodities already in the market means that competition prevents the prices of those commodities rising in line with their higher value. If prices rise, demand subsides, forcing prices down again. Consequently, the smaller the supply of commodities waiting for sale, the more pronounced is the effect of any price changes. Nor does it really matter, from this perspective, what the cause of the price change is. The assumption is that commodities still exchange at their values and that demand and supply are in balance and remain so.

But, it is just the same if the price of raw materials falls due to some specific market conditions that create an excess supply over demand, as if the value of those materials fall. The result is the same. Indeed, later, in examining the historical process by which commodities ceased exchanging at their values, and began exchanging at prices of production, it will be seen that this process involves petty commodity producers selling their output at these exchange values, whilst buying inputs from capitalist producers at prices of production, with a consequent effect on the value of their own output.

“The present statements apply equally if prices rise or fall under the influence of the credit system, competition, etc., and not on account of fluctuations in value.”(p 113)

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