[b) Ricardo’s Mistakes Regarding the Influence of Colonial Trade, and Foreign Trade in General, on the Rate of Profit]
This effect, whereby some new high profit area is introduced, which, over time, acts to raise the general rate of profit, applies also to colonial trade. On this point, Adam Smith was correct, as against Ricardo. Because Ricardo conflates profit with surplus value, and the rate of profit with the rate of surplus value, he only sees the rate of profit being affected by things that affect wages. So, it's only in so far as foreign trade acts to reduce the price of food that Ricardo sees it reducing wages, and thereby raising the rate of profit.
“On this point, Ricardo always helps himself out with the phrase: But in the old trades the quantity of labour employed has nevertheless remained the same, and so have wages. The general rate of profit is, however, determined by the ratio of unpaid labour to paid labour and to the capital advanced not in this or that sphere of the economy, but in all spheres to which the capital may be freely transferred. The ratio may stay the same in nine-tenths; but if it alters in one-tenth, then the general rate of profit in the ten-tenths must change.” (p 436)
If capital from the home country can freely engage in activities in the colonies that enjoy a higher rate of profit, then the consequence will not only be that the excess profit enjoyed by capital, in the colonial market, will be competed away, but the movement of capital from the home market, to the colonial market, will raise prices and profits in the home market too. By this means, the rate of profit will be equalised between the two, but will now be equalised at this new higher level, resulting from the additional surplus value.
“Whenever there is an increase in the quantity of unpaid labour set in motion by a capital of a given size, the effect of competition can only be that capitals of equal size draw equal dividends, equal shares in this increased surplus-labour; but not that the dividend of each individual capital remains the same or is reduced to its former share in surplus-labour, despite the increase of surplus-labour in proportion to the total capital advanced.” (p 436)
For Adam Smith, the tendency for the rate of profit to fall arises from the accumulation of capital and a resultant increase in competition. There is an element of the old Physiocratic notions in Smith's theory, in that regard. Smith assumes that the accumulation of capital proceeds at a pace that exceeds the increase of the working-population. The consequence is that competition for labour (power) pushes wages higher, which causes profits to fall. Ricardo rejects this notion. His theory of the tendency for the rate of profit to fall is based on the idea that the working-class does increase in line with the accumulation of capital, and it is precisely this increase which causes the demand for agricultural products to rise, which leads to less fertile soil being cultivated, so that food prices rise, pushing up wages, and reducing profits, and also pushing up rents, which also thereby reduces profits.
Ricardo is then wrong on a number of counts. He is wrong that even where the rate of surplus value is rising this has no effect on the general rate of profit. Competition acts to spread this additional surplus value, so as to create a new, higher general rate of profit, not merely to reduce it to its previous level, as Ricardo believes. If that is his argument, he has no grounds for disagreeing with Smith's argument that competition acts to bring about a falling rate of profit. Ricardo is wrong to assume that the rate of profit can never rise or fall other than as a result of temporary deviations of market prices from the natural price, other than its natural, long-term decline, as a result of rising wages.
“And what is natural price? That price which is equal to the capital outlay plus the average profit. Thus one arrives again at the assumption that average profit can only fall or rise in the same way as the relative surplus-value.” (p 436)
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