Disintegration of the Ricardian School
1. [Robert Torrens]
[a) Smith and Ricardo on the Relation Between the Average Rate of Profit and the Law of Value]
Marx examines, here, the responses of various writers to the observation that the law of value appears incompatible with an average rate of profit.
“Adam Smith has noted this fact. Its connection with the theory of value which he put forward caused him no pangs of conscience—especially since in addition to what one might call his esoteric theory, he advanced many others, and could recall one or another at his pleasure.” (p 69)
The only significance for Smith is in his opposition to the idea that profit is equivalent to the wages of superintendence. Smith shows that the rate of profit results in higher profits, wherever more capital is advanced, whether that capital is advanced for the employment of large quantities of labour or small quantities of labour, and large amounts of fixed capital or expensive materials. But, Smith has no objective basis for determining the rate of profit. In his labour theory of value, he uncovers the source of surplus value in production, but his explanation of why the capitalist is able to appropriate this surplus value comes down to supply and demand. In other words, for Smith, the price of labour is low, and the price of capital high, because capital is scarce, relative to labour, so that competition reduces the price of capital, and raises the price of labour, as capital accumulates faster than the labour supply, so that the rate of profit is continually reduced.
Ricardo never questions the origin of surplus value, and equates the rate of surplus value with the rate of profit. He simply assumes the existence of an average rate of profit that arises from competition, as capital moves from low profit to high profit spheres. This can explain why, and how, an average rate of profit is formed, but it does not explain why this rate should be 20% rather than 200%.
“Nevertheless, in considering value (in Chapter I of the Principles) he is the first to reflect at all on the relationship between the determination of the value of commodities and the phenomenon that capitals of equal size yield equal profits.” (p 69)
Ricardo, like Smith, can argue that commodities sell at a profit, because they sell at their value, as opposed to the Mercantilists, or those like Malthus that argued that profit was a surcharge placed on top of the cost of production. But, this then raises the question of what constitutes the cost of production. For Smith, Ricardo and Marx, profit constitutes a part of the cost of production for two reasons. Firstly, the surplus value itself represents labour that has been expended in the production of the commodity. Considered from the standpoint of society, this labour that constitutes the surplus value represents a cost of production. It is only not a cost of production for the capitalist, who obtains this surplus labour for free.
But, the profit constitutes a cost of production for a second reason – that unless the capitalist obtains this unpaid labour, in the shape of the average profit, they will not advance their capital, and produce the commodity. Its on this basis that throughout Theories of Surplus Value, Marx refers to the “cost-price” of commodities as the capital laid out for their production plus the average profit, or what, in Capital III, he refers to as the price of production.
Marx also notes the difference between advanced capital as against laid-out capital, in this determination of the price of production, and it also plays a role in Ricardo's attempt to reconcile the contradiction he faced.
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