Theories of Surplus Value, Part II, Chapter 10 - Part 17

Ricardo's lack of clarity leaves him open to criticism by his opponents. Marx points out that Ricardo fails to distinguish between “absolute” or “real” value, as opposed to “relative value”, when he is discussing these effects. In other words, he fails to distinguish between value, which is labour, and whose quantity is labour-time, as against exchange-value, which is measured by how much of some other use value can be obtained in exchange for a given commodity. By equating value and exchange value, and then exchange value with the equilibrium price, or in Marx's terminology the price of production, Ricardo leaves open the door to Malthus, Torrens, and others to question the validity of the theory of value itself, because if the equilibrium price is no longer determined by labour-time alone, then neither is value.

“Malthus correctly remarks that the differences between the organic component parts of capital and the turnover periods of capitals in different branches of production develop simultaneously with the progress of production, so that one would arrive at Adam Smith’s standpoint, that the determination of value by labour-time was no longer applicable to “civilised” times.” (p 191) 

Rather than recognising this contradiction, and thereby dealing with the inadequacy of Ricardo's theory, his followers, such as James Mill, McCulloch and others, resorted to ever more “pitiful scholastic inventions, to make these phenomena consistent with the fundamental principle”. (p 191) 

Its not any rise or fall in wages, which explains the fact that prices of production differ from exchange values, but Ricardo's analysis in relation to the effect of changes in wages does have one positive consequence. It is that it shows that the vulgar conception that rises in wages causes a rise in prices is wrong.

Taking the example that Ricardo had used, the matter is quite simple, Marx says. If the starting point is that there is a 10% rate of profit, if wages rise, this may fall to 9%. The farmer's output has a value of £5,500. Previously, he laid out £5,000 of capital in the form of wages. His wage bill rises to £5045.87, and his profit falls to £454.13. The manufacturer has £5,500 of capital in machinery, and now lays out £5045.87 in wages, providing a profit on the latter of £454.13, the same as the farmer. But, he can now make only 9% on the fixed capital he advances, or £495 rather than £550. So, he now sells the commodity at £5,995 rather than £6,050. That is £5,500 value of the cotton goods plus £495 profit on the fixed capital.

So, a rise in wages here leaves the price of the farmer's goods the same, whilst the price of the cotton goods actually falls.

“The whole point of the matter is that if the manufacturer sold his commodity at the same value as before, he would make a higher profit than the average, because only the part of his capital that has been laid out in wages is directly affected by the rise in wages.” (p 192)

As Marx points out, what Ricardo's example shows is that if both capitals had the same organic composition, a rise in wages would not result in any rise in prices, only a fall in profits. For the manufacturer, here, a large part of the price of production is accounted for by the average profit, calculated on the fixed capital. Consequently, if the average rate of profit falls, because of a rise in wages, it has a disproportionate effect on the fall in the amount of profit included in the price of production. A similar effect applies in relation to capitals with different rates of turnover.

“If therefore this rate of profit falls or rises as a result of the rise or fall in wages, then the price of these commodities will fall or rise correspondingly—that is in accordance with that part of the price which results from the profit calculated upon the fixed capital. The same applies to “circulating capitals returnable at distant periods, and vice versa. (J.R. McCulloch [The Principles of Political Economy, Edinburgh, 1825, p. 300].)” (p 192) 

If capitals with a lower organic composition, or higher than average rate of turnover, continued to charge the higher prices, it would mean that their profits were higher than the average, which would result in additional capital entering the sphere. Supply would rise, and competition would then reduce prices and profits.

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