Theories of Surplus Value, Part II, Chapter 10 - Part 36

Smith goes on here to basically give an account of a falling rate of profit deriving from diminishing returns. As the population rises, less fertile soil is brought into cultivation, the cost of production rise, causing wages to rise. As wages rise, profits are squeezed.

“This is one of the foundations of the Ricardian explanation of why profits fall, although it is presented in a different way. On the whole, Smith explains everything here by the competition between capitals; as capitals grow, profit falls and as they diminish, profit grows, and accordingly wages rise or fall conversely.” (p 228) 

Describing the highest and lowest rates of profit, Smith says the highest is such that sucks up all of what would have gone to rent, and leaves only what is left to pay the bare minimum to labour. The lowest rate must always at least compensate for the occasional losses that might be incurred. But, nowhere does Smith define what a natural rate of profit is, or how it might be calculated. Yet, as with a natural rate of wages, such a calculation is necessary, in order to determine from it the cost of production, and so value of commodities, according to his theory.

On the basis of this theory, Smith also explains how a country like Britain might be more competitive than others, despite high wages. The high wages that derive from a high demand for labour might be compensated by a lower rate of profit, so that the price of British commodities remain lower than those of its competitors. The low rate of profit might itself be compensated by a high volume of sales, so that the mass of profit is large.

Smith treats profit here like a surcharge. Its similar to the discussion Marx undertakes in Capital III, in relation to Merchant's Profit. There, Marx deals with the idea that merchants might choose to apply a lower profit margin in order to sell a higher volume of commodities. That is the wrong way round, Marx says. The commercial profit is set by the average rate of profit, and the profit margin for the merchant is then determined by the rate of turnover of their capital.

A high rate of profit, Smith argues, raises prices more than does high wages. If wages of workers producing linen rise by a few pence this only raises the price of linen by this increase in the wage bill, divided by the amount of linen produced. But, if the rate of profit rises by 5%, he says, this additional charge goes on to every commodity used at every stage of production.

“At the end of this chapter Adam Smith also tells us the source of the whole notion, that the price of the commodity, or its value, is made up out of the values of wages and profits—namely, the amis du commerce, the faithful practitioners of competition:

“Our merchants and master-manufacturers complain much of the bad effects of high wages in raising the price, and thereby lessening the sale of their goods, both at home and abroad. They say nothing concerning the bad effects of high profits. They are silent with regard to the pernicious effects of their own gains. They complain only of those of other people” ([O.U.P., Vol. 1, p. 110; Garnier,] l.c., p. 201).(p 230)

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