Ricardo, in his presentation, assumes that raw material prices fall, in general, and so, Marx says, this would mean a rise in the general rate of profit, and not just in one industry. The fall in the value of material raises the rate of profit, so that both more material, and more labour to process it, can be set in motion, with a consequent rise in output, and of surplus value. Its strange that Ricardo doesn't realise this, Marx says, because when the situation is reversed, so that the prices of the commodities that form the productive-capital rise, he does understand the effect. In fact, it is the effect of these rising prices that form the basis of Ricardo's theory of the falling rate of profit.
Marx quotes Ricardo from Chapter VI of his “Principles”, “On Profits”. Ricardo assumes that worse land is brought into cultivation to meet the needs of producing necessaries. Ricardo's theory of a falling rate of profit, which also led him to fear that, ultimately, profit would disappear, and capitalism could collapse, is based on the assumption that industrial production and productivity expands faster than agricultural productivity. The consequence is that more land has to be brought into production to provide the additional supplies of food and raw material. Because Ricardo starts from an assumption that the best land is used first, he assumes that additional land brought into use must be of a lower quality. The consequence is that the price of necessaries rise, and so does differential rent. The higher price of necessaries increases the value of labour (power), and so wages. As wages rise, profit (surplus value) is reduced. Because Ricardo equates surplus value with profit, this creates an inevitable process by which the rate of profit must continually fall.
Ricardo argues that this would also cause the prices of raw materials to rise, but Marx points out that this does not follow, and that “cotton may very well fall in price, so can silk and even wool and linen, although the price of corn may be rising.” (p 429) A farmer employing ten men would see their profit fall, because the value produced by them would be, say, £720, but now more in wages would have to be paid out of it. Marx quotes Ricardo's further argument,
““But the rate of profits will fall still more, because the capital of the farmer … consists in a great measure of raw produce, such as his corn and hay-ricks, his unthreshed wheat and barley, his horses and cows, which would all rise in price in consequence of the rise of produce. His absolute profits would fall from £480 to £445 15s.; but if from the cause which I have just stated, his capital should rise from £3,000 to £3,200, the rate of his profits would, when corn was at £5 2s. 10d., be under 14 per cent.
“If a manufacturer had also employed £3,000 in his business, he would be obliged in consequence of the rise of wages, to increase his capital, in order to be enabled to carry on the same business. If his commodities sold before for £720 they would continue to sell at the same price; but the wages of labour, which were before £240, would rise when corn was at £5 2s. 10d., to £274 5s. In the first case he would have a balance of £480 as profit on £ 3,000, in the second he would have a profit only of £445 15s., on an increased capital, and therefore his profits would conform to the altered rate of those of the farmer” (l.c., pp. 116–17).” (p 429-30)
So, as Marx says, Ricardo, in his argument here, does distinguish between the amount of absolute profit, equal to the surplus value, and the rate of profit, measured against the total capital advanced. What is more, he shows that the rate of profit falls by more than just the fall in the rate of surplus value, precisely because it is measured not just against the variable capital (wages) but against also the constant capital, whose value has also risen. And, indeed, had the variable capital and the rate and mass of surplus value not changed at all, the rate of profit would have fallen, because the value of the constant capital had risen, and so the value of the total advanced capital would have risen.
“The reverse result, i.e., a rise in the rate of profit (as distinct from a rise in surplus-value or absolute profit), would take place in the first instance cited from him, where the value of the raw produce falls. It is evident, therefore, that rises and falls in the rate of profit may also be brought about by circumstances other than the rise and fall in the absolute profit and the rise and fall in its rate, reckoned on the capital laid out in wages.” (p 430)
Marx quotes Ricardo's comment,
““Articles of jewellery, of iron, of plate, and of copper, would not rise, because none of the raw produce from the surface of the earth enters into their composition” (l. c., p. 117),” (p 430)
He means here agricultural production. But, Marx adds, although the prices would not rise, the rate of profit, in this sphere, would rise above the others. That is because, in the jewellery production, etc., it is only the rise in the variable capital that causes a rise in the capital advanced, whereas in the other spheres it is a rise in the variable and the constant capital that causes a rise in the advanced capital.
“In these passages, Ricardo himself throws overboard his whole theory of profit, which is based on the false identification of the rate of surplus-value with the rate of profit.” (p 430)
Ricardo says,
““In every case, agricultural, as well as manufacturing profits are lowered by a rise in the price of raw produce, if it be accompanied by a rise of wages” (l. c., pp. 113–14).” (p 430)
However, from what he has said, its clear that even if wages did not rise, the rate of profit would fall, because of the rise in the value of raw materials, and thereby of the constant capital.
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