And this highlights a further problem that Marx discusses in Chapter 6 of Capital III, in relation to price rises, which thereby cause a squeeze on profits, which creates the potential for crises. The rise in the price of inputs, of constant capital, is reproduced in the value of the finished product. That is different from the variable-capital, which is not transferred to the value of the finished product. The variable capital is only reproduced out of the new value created by the labour, and then only if this new value is greater than the value of that labour-power. A rise in the value of labour-power, or wages, does not, therefore, increase the value of the finished product, but simply reduces the proportion of the new value created that goes to surplus value.
So:
c 1000 + v 1000 + s 1000 = 3000, and
c 1000 + v 1100 + s 900 = 3000, whereas
c 1100 + v 1000 + s 1000 = 3100.
But, as Marx sets out in Capital III, Chapter 6, this rise in the value of the commodity, say yarn, as a result of a rise in the price of flax, necessarily implies a reduction in the demand for yarn. And, because market prices, as opposed to exchange-values, are a function of the interaction between demand and supply, the reduction in demand implies a fall in the market price of yarn, and with it a reduction in profit from yarn production that would only be corrected by a reduction in the capital employed in that sphere. However, that poses further problems, because such a reduction in capital cannot occur immediately. For any single yarn producer, efficient production means production on a large scale, using all of their fixed capital to the maximum degree. No individual yarn producer can, thereby, reduce their output, and continue producing efficiently. The consequence is that production continues at the same level, and, in order to sell all the output, the price must continue to be somewhere between 3000 and 3100. In other words, the rise in the price of flax cannot all be passed on, and is instead taken out of the surplus value, so that the profit is squeezed.
“If he wanted to raise [the price of] the total product, not only by [the amount necessary to cover the increase in] the price of the flax, but to such an extent that the same quantity of yarn would yield him the same profit as before, then the demand —which is already falling as a result of the rising price of the raw material of the yarn—would fall still further because of the artificial rise due to the higher profit. Although the average rate of profit is given, it is not possible in such cases to raise the price in this way.” (p 385)
And, as Marx sets out in Capital III, Chapter 6, in times of boom, when the demand for such inputs may rise sharply, causing input prices to spike, this inability to pass on this higher cost into the final product price can be the cause of a crisis.
“If the price of raw material rises, it may be impossible to make it good fully out of the price of the commodities after wages are deducted. Violent price fluctuations therefore cause interruptions, great collisions, even catastrophes, in the process of reproduction. It is especially agricultural produce proper, i. e., raw materials taken from organic nature, which — leaving aside the credit system for the present — is subject to such fluctuations of value in consequence of changing yields, etc... This is therefore one of the elements of these fluctuations in the price of raw materials. A second element, mentioned at this point only for the sake of completeness — since competition and the credit system are still outside the scope of our analysis — is this: It is, in the nature of things that vegetable and animal substances whose growth and production are subject to certain organic laws and bound up with definite natural time periods, cannot be suddenly augmented in the same degree as, for instance, machines and other fixed capital, or coal, ore, etc., whose reproduction can, provided the natural conditions do not change, be rapidly accomplished in an industrially developed country. It is therefore quite possible, and under a developed system of capitalist production even inevitable, that the production and increase of the portion of constant capital consisting of fixed capital, machinery, etc., should considerably outstrip the portion consisting of organic raw materials, so that demand for the latter grows more rapidly than their supply, causing their price to rise. Rising prices actually cause 1) these raw materials to be shipped from greater distances, since the mounting prices suffice to cover greater freight rates; 2) an increase in their production, which circumstance, however, will probably not, for natural reasons, multiply the quantity of products until the following year; 3) the use of various previously unused substitutes and greater utilisation of waste. When this rise of prices begins to exert a marked influence on production and supply it indicates in most cases that the turning point has been reached at which demand drops on account of the protracted rise in the price of the raw material and of all commodities of which it is an element, causing a reaction in the price of raw material.”
(Capital III, Chapter 6)
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