In other words, higher productivity means that where previously 100 units of labour processed 10,000 units of material, a technical composition of 1:100, 100 units of labour now processes 20,000 units of material, 1:200. This same rise of productivity may mean that the price of material falls, from £1 per unit to £0.75 per unit. Where previously the 100 units of labour had an exchange-value of £100, and the materials an exchange- value of £10,000 (an organic composition of 1:100) this now becomes £100 and £15,000, giving an organic composition of 1:150.
But, as Marx sets out later, in his critique of Ricardo's Theory of the Law of The Falling Rate of Profit, the rate of profit may fall, in the short term for the opposite reason. In other words, instead of rising productivity causing a higher technical composition, the organic composition may rise because of a higher value composition of capital. If 100 units of labour continue to process 10,000 units of material, as before, but the price of material rises to £1.20 per unit, the organic composition of capital will rise from 1:100 to 1: 120.
Moreover, where productivity is rising, the rate of profit may fall as the rate of surplus value rises, because the rate of surplus value rises by a smaller proportion than the mass of labour employed falls, so less surplus value itself is produced relative to the capital laid out to produce it. But, the rate of profit may again also fall for the opposite reason, which is that productivity is not rising, or is not rising fast enough to compensate for the increased demand for materials and labour-power, so that the market prices of these inputs rises.
Consequently, even as productivity rises and boom conditions exist of higher profits, those very conditions cause the demand for materials and labour-power to rise causing material prices and wages to rise. As Marx sets out in Capital III, Chapter 6, firms may not be able to pass on sharply higher material prices, and so absorb that cost out of their profits. Similarly, higher wages reduce the mass and rate of surplus value, and so also the rate of profit. These are the conditions that Marx describes in Capital III, Chapter 6, and 15, and later in Chapter 17 of Theories of Surplus Value, and elsewhere, as leading to the squeeze on profits, which results in an increased propensity for crises of overproduction. But, these are the opposite conditions to those that Marx sets out as being the basis for the Law of the Tendency for the Rate of Profit to Fall.
“Ricardo does not differentiate between these cases. Except in these cases (that is where the rate of profit, although constant, falls relatively because of the differential rents of the capital employed on the more fertile types of land or where the general ratio of constant to variable capital alters as a result of the increased productivity of industry and hence increases the excess of value of agricultural products above their average price) the rate of rent can only rise if the rate of profit falls without industry becoming more productive. This is, however, only possible if wages rise or if raw material rises in value as a result of the lower productivity of agriculture. In this case both the fall in the rate of profit and the rise in the level of rent are brought about by the same cause—the decrease in the productivity of agriculture and of the capital employed in agriculture.” (p 109)
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