As all production requires land in one way or another, for example, a factory must be built on land, a withdrawal of land will lead to a rise in prices. In order for agricultural/primary product prices to be high enough to cover the absolute rent, under conditions where the organic composition of capital is higher than the average, therefore, it would be necessary for the amount of capital invested in that sphere to be much lower than it would otherwise have been.
If we have industrial capital comprised
c 50 + v 50 + s 25,
and agricultural capital comprised
c 60 + v 40 + s 20
this only tells us the percentage make-up of the capital, and not the actual size of the capital. Suppose that in both cases these represent also absolute amounts of capital. In order for the price of industrial products to fall from £125 to £122.50, the supply of these products must rise by 10%. In that case, the actual composition of this sphere would be
c 55 + v 55 + p 12.5 = 122.5.
Assume that initially 125 units were produced, with a value of £1 per unit. Then now, 10% more units are produced, i.e. 137.5 units. Although the value of each unit remains £1, the price per unit falls to £0.91. Similarly, if 10% of capital migrated from agriculture it would be comprised of
c 54 + v 36 + p 32.5 = 122.5.
Price per unit is then £1.09.
But, in that case, it would be obvious that too much capital had migrated, because the rate of profit in industry would be approximately 10%, whilst in agriculture it would be approximately 35%. An equilibrium point needs to be calculated based upon the average rate of profit per unit of output.
Similarly, therefore, if agricultural/primary product prices must be high enough to produce the average rate of profit, plus some amount of absolute rent, the supply of these products must be relatively curtailed, so as to bring about those higher prices. Less capital, therefore, must be employed in that sphere than were no payment of absolute rent required. At the same time, this capital is then invested in other spheres, which increases the supply of commodities in that production, reducing prices below what it would otherwise have been. The amount of capital that must move from one sphere to the other to bring about the required change in prices depends on the elasticity of demand in each sphere, but for that very reason, it may be that there is no equilibrium position that ensures that all of the invested capital can continue to be invested. In other words, more capital may have to move out of sphere I, to raise prices to the price of production, than can be absorbed in sphere A, without reducing prices below its price of production, or vice versa.
For ease of calculation, assume agricultural output (A) is 120 units, and industrial output (I) is 125 units, so that initially the price per unit of each is £1. In order that both spheres make the average rate of profit of 22.5%, the price per unit of I must be reduced, and the price per unit of A raised, and this can only arise if capital migrates from (A) to (I), lowering the supply of (A) and raising the supply of (I).
In each unit of I there is 0.4 c + 0.4 v + 0.2 s. In order to produce the average profit, the price must be comprised 0.4 c + 0.4 v = 0.8 k + 0.18 p. So, the price falls to $0.98 per unit. But, for the price to fall to this level, assume that supply must rise by 10% to 137.5 units. To effect that 10% more capital must be employed in I, so,
55 c + 55 v + 24.75 p = 134.75.
The £10 of capital that has migrated to I reduces the capital employed in A proportionally, so,
54 c + 36 v + 20.25 p = 110.25.
This is now represented by 108, rather than 120 units. So, the price per unit of A rises from £1 to £1.11.
The rise in supply of I to bring about the required fall in the unit price is a function of the elasticity of demand for I. This, in turn, dictates how much additional capital is required in I to bring about the increase in supply. The migration of this capital from A then causes a reduction in the supply of A. However, there is no connection between the price elasticity of demand in A to that in I. It may be though that if A and I are the only two spheres, this price elasticity of demand, is inversely correlated, but that would be to make the same error as with Say's Law. It assumes that these are, in fact the only two commodities, or spheres. As Marx demonstrates, in a money economy this is not true. Consumers always have the option of choosing the general commodity, money, over either A or I.
A 10% increase in supply of I might be required to reduce the unit price of I to the price of production of £0.98, but the corresponding 10% fall in the production of A might result in the price rising a lot or a little, depending upon how demand responds to any change in price. For example, supply falls from 120 units to 108 units. If demand was 120 units, at a price of £1 per unit, this excess demand over the supply of 108 units will cause the price to rise. The price of production per unit is £1.11. However, it might be the case that even as the price rises from £1 per unit to £1.05 per unit, the demand, at this new price, quickly erodes. Demand for A at £1.05 per unit might fall to say 105 units, so that although the supply of A has fallen, it is now in excess supply over the new demand, and the market price would fall. In that case, it would be impossible for capital in A to sell its output at the price of production, and thereby realise the average rate of profit.
On the other hand, suppose that A produces and supplies the 108 units, but the demand for its output is relatively inelastic. In other words, the demand falls by a smaller percentage than the percentage rise in price. In that case, at the price of production of £1.11, the demand might fall, but only say from 120 units to 115 units, so that demand exceeds supply, pushing the market price higher. In that case, A would continue to make realised profits higher than the average. What is more were this the case it would impact I, because the continued expenditure on A would reduce money demand for I. But, then this indicates that the elasticity of demand for I is not autonomous but also a function of demand for A, and vice versa. In fact, in this respect, A and I are substitute goods, and mutually determine the elasticity of demand for the other, but not in isolation, because of the demand also for the money commodity, in competition with both.
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