Ricardo knew that a rise in wages does not result in a rise in prices. It results, instead, in a fall in profits. However, he says, even if a rise in wages did result in a corresponding rise in prices, it would not change the validity of his thesis that the rise in wages causes a fall in profits. He says,
“But if it were otherwise, if the prices of commodities were permanently raised by high wages, the proposition would not be less true, which asserts that high wages invariably affect the employers of labour, by depriving them of a portion of their real profits.” (p 464)
If wages paid in the production of hats, hosiery and shoes rose by £10, and the price of those commodities correspondingly rose, by £10, Ricardo says, the position would be no better than had each not raised their prices.
“If the hosier sold his stockings for £110 instead of £100, his profits would be precisely the same money amount as before; but as he would obtain in exchange for this equal sum, one-tenth less of hats, shoes and every other commodity, and as he could with his former amount of savings” (that is with the same capital) “employ fewer labourers at the increased wages, and purchase fewer raw materials at the increased prices, he would be in no better situation than if his money profits had been really diminished in amount, and every thing had remained at its former price” (l.c., p. 129).” (p 464)
Here, Ricardo admits what previously he has not said, which is that not only is it necessary to employ more workers on less fertile land, to produce the same amount of output, but that, with higher wages, a given capital employs less labour, and, therefore, produces less output, value, and surplus value, which means also a lower rate of profit. But, Ricardo is also wrong in his argument about the effect of higher wages, and commodity prices. It's quite true that, if commodity producers all increase their prices, by the same amount, this cancels itself out in their exchanges with each other. But, as Marx points out in Capital III, the market does not just consist of capitalists and workers. The landlords and other rentiers, on fixed incomes, would have to pay these higher prices for commodities, and so this would represent a transfer of revenue from these other parasitic classes, to the productive-capitals.
“It makes no difference to the capitalist, if the price of hats etc. rises by 10 per cent, but the landlord would have to give up more of his rent. His rent may have risen for example, from £10 to £20. But he gets proportionately fewer hats etc. for his £20 than for the £10.” (p 465)
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