Ricardo makes a statement that is clearly false, and illustrates his confusion, in relation to the rate of profit and rate of surplus value. He says,
““Suppose the price of silks, velvets, furniture, and any other commodities, not required by the labourer, to rise in consequence of more labour being expended on them, would not that affect profits? Certainly not: for nothing can affect profits but a rise in wages; silks and velvets are not consumed by the labourer, and therefore cannot raise wages” (l. c., p. 118).” (p 430-1)
But, its clear that the rate of profit, in these spheres, would fall, because the cost of the raw materials, used in their production, would have risen, even if wages did not. Moreover, if the rate of profit, in these spheres fell, capital would gradually leave them, and migrate to higher profit areas. The increased supply of commodities, in these other areas, would then reduce the prices of these commodities, and thereby reduce the rate of profit in these remaining spheres.
“Such a nominal rise in prices does not directly affect the rate of profit, but the distribution of profit.” (p 431)
Marx quotes Ricardo again, where he returns to the question of the rate of profit as its affected by a rise in the price of agricultural produce. A farmer, because a large part of their stock of capital consists of these commodities, (their commodity-capital), that has risen in price, would, thereby, benefit from a capital gain, resulting from the increase in the value of that capital. If corn rose from £4 to £12, Ricardo says, this would probably go along with a rise in the exchange value of the farmer's capital from £3,000 to £6,000. If profit was £180, that would be 6% on the original capital of £3,000, but the actual rate of profit, he says would be only 3%, because the current value of the capital has risen to £6,000, and £180 is only 3% on that sum.
If a new farmer entered production, they would need £6,000 of capital, and they would only make £180, or 3%, profit on it. Others, in trades which employed these agricultural products, such as brewers, distilleries, clothiers, and linen producers, would be in a similar position that they would benefit from a capital gain (appreciation as opposed to depreciation) in the value of their stock of materials, but would also see a fall in their rate of profit, on the basis of this higher capital value. And, Marx again makes clear his own position in determining the rate of profit on the basis of the current reproduction cost of the capital, as against the proponents of the historic cost model. He writes,
“What is important here is only something of which Ricardo is not aware, namely, that he throws overboard his identification of profit with surplus-value and [admits] that the rate of profit can be affected by a variation in the value of the constant capital independently of the value of labour. Moreover, his illustration is only partially correct. The advantage which the farmer, clothier etc. would derive from the rise in price of the stock of commodities they have on hand and on the market, would of course cease as soon as they had sold these commodities. The increased value of their capital would similarly no longer represent a gain for them, when this capital was used up and had to be replaced. They would then all find themselves in the position of the new farmer cited by Ricardo himself, who would have to advance a capital of £6,000 in order to make a profit of 3 per cent. On the other hand, the jeweller, manufacturer of hardware, money-dealer etc.—although at first they would not [receive] any compensation for their losses—would realise a rate of profit of more than 3 per cent, for only the capital laid out in wages would have risen in value whereas their constant capital remained unchanged.” (p 431-2)
And, Marx makes a further point relevant to this, which is that what is at issue is not only the division of value of the product of labour, between wages and profit, but the division of this value between capital and revenue. If the value of the means of production rises, then, as Marx says in Capital III, these use values still have to be physically replaced on a like for like basis. The fact that their value has risen, by definition means that a greater proportion of current production, of current social labour-time, has to be devoted to their replacement. On the assumption even that the value of wage goods has not changed, therefore, the amount of current production available as surplus product falls, the amount of current social-labour-time left over as surplus labour-time falls, and so necessarily on the basis of a calculation of the rate of profit according to current reproduction costs, the rate of profit must fall. As Marx puts it,
“One further point of importance in connection with this compensation of the falling profit by the rise in value of the capital, mentioned by Ricardo, is that for the capitalist—and generally, as far as the division of the product of annual labour is concerned—it is a question not only of the distribution of the product among the various shareholders in the revenue, but also of the division of this product into capital and revenue.” (p 432)
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