Suppose there is a hat maker, Marx says. They allocate 50 c and 50 v. If the labour-time required to produce the hats is halved, then only 25 v is employed. Assume that 10 hats are produced, and that the profit per hat is 10%. Initially, £100 of capital is advanced, £10 of profit is made, and each hat sells for £11. Assuming each hat still sells for £11, the cost for the hats is now 50 + 25 = £75 = £7.50 each. The profit per hat is then £3.50 = 46.66%.
“As a result of the fall in value, the new natural price will therefore fall to such an extent that the price only yields 10 per cent profit. The fall in the value or in the labour-time necessary for the production of the commodity reveals itself in the fact that less labour-time is used for the same amount of commodity, hence also less paid labour-time, less wages and, consequently, the costs, the wages paid (i.e., the amount of wages; this does not presuppose a fall in the rate of wages) proportionately decline for the production of each individual commodity.” (p 213-4)
In other words, the cost-price/price of production would fall to £75 + 10% = £82.50, and the price per hat would be £8.25. The rate of wages for each worker remains the same. Less is advanced for wages only because less labour is employed, either because fewer workers are employed, or each worker works fewer hours.
It could have been that the value of the hats fell because the value of the constant capital fell. In other words, less labour-time was required to produce the material, tools etc. A fall in the value of these commodities can arise in two ways. Firstly, less labour-time can be required for their production, and this means that both less paid and unpaid labour is represented in the value of the commodity. If it requires 10 hours to produce 100 metres of cloth, and this divides into 5 hours required to reproduce labour-power, leaving 5 hours as surplus value, if the labour-time required to produce the 100 metres of cloth falls to 8 hours, it will still be the case that half this time is required to reproduce the consumed labour-power, so that it divides 4 hours paid and 4 hours unpaid labour. Secondly, there may be a rise in productivity, which raises the organic composition of capital, which results in a higher rate of surplus value, or alternatively there may be a fall in the rate of surplus value if wages rise.
This doesn't change the value of output, only the division of that value between wages and surplus value. However, although it doesn't change the value of output, it does change the value of individual commodities that comprise that output.
Suppose the capital comprises 550 c + 1000 v + 1000 s = 2500. This comprises 1000 units at £2.50 each. If productivity rises, 750 c + 500 c + 1250 s = 2500, the total value of output remains the same, but if now the total mass of output is 1500 units, the price per unit falls from £2.50 to £1.66.
“Although the value of the wage does not determine the value of the commodities, the value of the commodities (which enter into the consumption of the worker) determines the value of the wage.” (p 214-5)
The cost prices of commodities then rise or fall relative to each other as their values change. If productivity rises either less labour-time is required for the production of a particular commodity, or less labour-time is required for the production of the materials etc. that go into it.
“The absolute amount of labour employed on it has been reduced, hence also the amount of paid labour it contains and the amount of wages expended on it, even though the rate of wages has remained the same. If the commodity were sold at its former cost-price, then it would yield a higher profit than the general rate of profit, since formerly, this profit was equal to 10 per cent on the higher outlay. It would therefore be now more than 10 per cent on the diminished outlay. If on the contrary the productivity of labour decreases, the real values of the commodities rise. When the rate of profit is given—or, which is the same thing, the cost-prices are given—the relative rise or fall of the cost-prices is dependent on the rise or fall, the variation, in the real values of the commodities, As a result of this variation, new cost-prices or, as Ricardo says, following Smith, “new natural prices” take the place of the old.” (p 215)
So, in this schema, Ricardo identifies the natural price or cost price with the value of the commodity, and this value/cost-price provides the average profit. If, as above, the profit was higher than the average, because commodities were being sold at prices above these values, capital would migrate to these sectors, supply would rise, and market prices would fall.
Marx quotes Ricardo to this effect.
““Their price” (of monopolised commodities) “has no necessary connexion with their natural value: but the prices of commodities, which are subject to competition, …will ultimately depend …on [the] …cost of their production” (l.c., p. 465).” (p 215)
One consequence of this, Marx says, is that after Ricardo, a string of economists, like Say, could reject the labour theory of value, whilst continuing to argue that the cost of production is the regulator or prices.
“This whole blunder of Ricardo’s and the consequent erroneous exposition of rent etc., as well as the erroneous laws about the rate of profit etc. spring from his failure to distinguish between surplus-value and profit; and in general his treatment of definitions is crude and uncomprehending, just as that of the other economists.” (p 215-6)
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