Adam Smith says the rate of profit falls, because of growing capital accumulation, causing increasing competition. Ricardo replies no, competition reduces excess profits to the average, but not to below the average. Smith's argument is only possible if the demand for labour-power exceeds the supply, causing wages to rise, and profits to fall. It would mean that both nominal and real wages constantly rose. Marx comments,
“Ricardo is not an optimist who believes such fairy-tales.” (p 438)
Ricardo believes the rate of surplus value and rate of profit are the same. So, the tendency for the rate of profit to fall can only be explained by a tendency for the rate of surplus value to fall. So, what might cause that? Well, if we assume, as Ricardo does, that the length of the working-day is fixed, it can only be as a result of the portion of the working-day that constitutes necessary or paid labour increasing, and the portion of the day constituting surplus labour decreasing. But, that seems a problem, because, as Ricardo himself concludes, the growth of capitalist production goes hand in hand with a rise in productivity, which progressively reduces the value of commodities, including all those required for the reproduction of labour-power, and this should then result in the opposite conclusion, i.e. the surplus labour increases, and along with it, the rate of surplus value. Ricardo concludes that this fall in the value of industrial commodities must be outweighed by the rise in the price of food, as the population grows, and the cost of food production, on ever less fertile soil increases.
“This happens because agriculture is becoming less productive. This is the same presupposition which, according to Ricardo’s interpretation, explains the existence and growth of rent. The continuous fall in profits is thus bound up with the continuous rise in the rate of rent. I have already shown that Ricardo’s view of rent is wrong. This then cuts out one of the grounds for his explanation of the fall in the rate of profits. But secondly, it rests on the false assumption that the rate of surplus-value and the rate of profit are identical, that therefore a fall in the rate of profit is identical with a fall in the rate of surplus-value, which in fact could only be explained in Ricardo’s way. And this puts an end to his theory.” (p 438-9)
As Marx has set out, in Capital III, the rate of profit has this long-term tendency to fall, not because the rate of surplus value falls, but because it rises. Higher levels of productivity mean that a given mass of labour (variable-capital, v) processes an increasing mass of material (constant capital, c) and so the organic composition of capital, c:v, rises. Suppose 10 workers are paid £100, for a day's labour, and the rate of surplus value is 50%, so they produce £50 of surplus value. They process 100 kilos of cotton with a value of £100 into yarn. The composition of the capital is then 100:100 = 1:1. It is comprised:-
100 c + 100 v + 50 s = 250. s` = 50%, r` = 25%.
If now productivity rises, so that the workers necessaries are produced in less time, so the value of labour-power falls, this does not change the amount of new value the ten workers produce in a day, but it affects the way this new value is divided. If we assume that the rise in productivity means that workers process 100% more cotton, we might have:-
c 200 + v 90 + s 60 = 350, s` = 66.6%, r` = 20.7%.
So, the rate of surplus value rises, from 50% to 66.6%, but the rate of profit has fallen from 25% to 20.7%. The mass of profit has risen from 50 to 60, but the rate of profit has fallen. As Marx puts it,
“The rate of profit falls, although the rate of surplus-value remains the same or rises, because the proportion of variable capital to constant capital decreases with the development of the productive power of labour. The rate of profit thus falls, not because labour becomes less productive, but because it becomes more productive. Not because the worker is less exploited, but because he is more exploited, whether the absolute surplus-time grows or, when the state prevents this, the relative surplus-time grows, for capitalist production is inseparable from falling relative value of labour.” (p 439)
Ricardo's theory of the tendency for the rate of profit to fall then rests upon two false assumptions; firstly that the existence and increase in rent is determined by diminishing returns in agriculture; and secondly that the rate of profit is equal to the rate of surplus value, and so only rises or falls in inverse proportion to the rise or fall of wages.
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