Effects of General Wage Fluctuations on Prices of Production
If the average composition of the social capital is 80 c + 20 v, with a 100% rate of surplus value, then we have 80 c + 20 v + 20 s = 120, s' = 100%, r' = 20%. If we examine a capital that coincides with the social average, then its price of production will be equal to these values. Now, if wages rise by 25%, this, as we've seen previously, does not change the amount of the new value created. It only changes the way this new value is distributed between capital and labour. The new value produced continues to be equal to 40. But, now wages rise from 20 to 25, and capital must advance this larger sum as variable capital. We then have:-
80 c + 25 v + 15 s = 120, s' = 15/25 = 60%, r' = 15/105 = 14.29%
So, the value of these commodities has not changed. The labour-time required for their production has not changed. The price of production of these commodities has not changed. What has changed is the proportion of the new value created, which must now go to buying labour-power. The cost-price of the commodities has risen from 80 + 20 to 80 + 25, whilst the surplus value produced has fallen from 20 to 15. The fall in the amount of surplus value produced, together with the rise in the cost-price, and therefore, capital advanced, to produce the surplus value, results in the fall in the rate of profit from 20% to 14.29%.
But, this capital is equal to the composition of the average social capital. If its rate of profit has fallen to 14.29%, then the average rate of profit has fallen to that level too. That means that this will impact the prices of production for those capitals whose composition is either above or below the social average.
In terms of percentages, the composition of the average social capital is now 76.2 c + 23.8 v. If we take a capital that is lower than this social average, we can see the consequence of the increase in wages. Take a capital composed 50 c + 50 v. Previously, its price of production would have been 50 + 50 + 20 = 120. We assume here that all of the fixed capital is consumed, and that the capital turns over just once during a year. As a result of the wage increase, the variable capital laid out rises from 50 to 62.5. If the price of production remained as 120, we would have c 50 + v 62.5 + p 7.5. That gives a rate of profit of 6.66%.
The new average rate of profit is, however, 14.29%. Prices in this sphere must then rise. The only means by which this can occur is if supply declines. If prices simply rose, demand would fall. That would mean that there was an excess of supply over demand forcing prices down again. So, supply must fall to bring about a new equilibrium, with this lower level of demand at the new higher price.
Marx is wrong then when he says,
“Therefore, the price of production of the commodities produced by this capital is now 50 c + 62½ v + 16¼ p= 128 8/14. Owing to a wage rise of 25%, the price of production of the same quantity of the same commodities, therefore, has here risen from 120 to 128 8/14, or more than 7%.” (p 201)
It is impossible, all other things being equal, for “the same quantity of the same commodities” to sell at this new higher price, precisely because the new higher price will result in a fall in demand for those commodities.
The new price of production will be 50 c + 62.5 v, cost price = 112.5 + p = 14.29% = 16.08, so a price of production of 128.58. But, the percentage composition of the capital here hides the fact that this capital itself will be smaller, and will produce fewer commodities than before the wage rise. The increase in price is approximately 7%. If the elasticity of demand is such that a 1% rise in price causes a 1% fall in demand, then demand for these commodities will fall by 7%. As a result, supply would have to fall by 7%, which means that 7% less constant capital would be used, and the amount of labour-power bought would fall by 7%.
Suppose, now we take a capital with a higher composition than the average, e.g. 92 c + 8 v. With the same assumptions, its price of production will also be 120. After the wage rise, v rises from 8 to 10. The cost price rises, from 100 to 102. If the price of production was still 120, this would mean c 92 + v 10 + p 18. That would give a rate of profit of 18/102 = 17.65%. But, the average is 14.29%. That means the price of production must fall to bring the profit rate down to the average. The only way this can happen is if the level of supply increases. The price of production to reach the average must be c 92 + v 10 + p 14.58 = 116.58.
Once again the percentage composition of the capital hides the fact that in order to bring this about the amount of capital itself must increase, just as in the former case, the amount of capital had to fall. The fall in price from 120 to 116.58 here causes demand to rise, and for the price to be stable, supply must rise to meet it.
We see here the objective material reality, which lies behind the different attitudes of capital of different sizes and compositions to wage rises. Capitals with a lower than average composition of capital, usually the smaller, more backward capitals, are badly affected by any wage rise. It causes their cost-price to rise by a larger amount, and, therefore, causes their profit to fall by a larger amount. When they come to increase their prices to restore an average rate of profit, they are hit by a large fall in demand for their commodities. So wage rises in these sectors lead to a sharper contraction of capital.
But, for the bigger more advanced capitals, which generally have a higher organic composition, the opposite is true. Because, wages form a smaller proportion of their cost-price, any wage rise has a smaller effect on increasing the cost-price, and on the reduction in their profits. In fact, the consequence is that they enjoy a higher than average rate of profit as a result of the increase in wages, which results in an influx of capital. That reduces prices, but as a consequence causes demand to rise. In fact, because more capital is now employed in this sphere, even at the lower average rate of profit, it may be the case that in terms of the absolute amount, the volume of profit rises above where it was before the wage increase!
Suppose, previously £100 million was employed in this sphere, with a 20% rate of profit bringing in £20 million of profit. After the wage rise, but now with the consequent reduction in market price, which raises demand, £150 million of capital is employed. But, £150 million at the now lower rate of profit of 14.29% brings in £21.435 million of profit. This is what Marx refers to elsewhere, when he says that the tendency for the rate of profit to fall really only affects the plethora of small capitals, because for these big capitals, the fall in the rate of profit is often compensated by the rise in the actual volume of profit.
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