7. John Stuart Mill [Unsuccessful Attempts to Deduce the Ricardian Theory of the Inverse Proportionality Between the Rate of Profit and the Level of Wages Directly from the Law of Value]
[a) Confusion of the Rate of Surplus-value with the Rate of Profit. Elements of the Conception of “Profit upon Alienation”. Confused Conception of the “Profits Advanced” by the Capitalist]
Marx says that John Stuart Mill's, “Essays on some Unsettled Questions of Political Economy”, (1844) contains all that is original in his writing. It contrasts with his much more extensive “Principles of Political Economy with some of their Applications to Social Philosophy” (1848).
In Essay IV , in the former, titled, “On Profits and Interest”, Mill writes,
““Tools and materials, like other things, have originally cost nothing but labour… The labour employed in making the tools and materials being added to the labour afterwards employed in working up the materials by the aid of tools, the sum total gives the whole of the labour employed in the production of the completed commodity… To replace capital, is to replace nothing but the wages of the labour employed” ([John Stuart Mill, Essays on some Unsettled Questions of Political Economy, London, 1844,] p. 94).” (p 190)
“This itself is quite wrong,” Marx responds, for the reasons described previously, in relation to the error of Smith's “absurd dogma” that the value of commodities resolves entirely into revenues. But, Mill's argument, here, is wrong, also, because the employed labour is not at all equal only to the wages, but to the wages and profit.
“To replace capital means to replace the labour for which the capitalist pays (wages) and the labour for which he does not pay but which he nevertheless sells (profit). Mr. Mill is here confusing “employed labour” and that portion of the employed labour which is paid for by the capitalist who employs it. This confusion is itself no recommendation for his understanding of the Ricardian theory, which he claims to teach.” (p 190-1)
And, as previously described, in dealing with Smith's “absurd dogma” inherited by Ricardo, and subsequent economists, that the value of commodities resolves entirely into revenues, whilst the value of the constant capital that is also consumed can be attributable to labour, at some point, it cannot all be attributable to current living labour, and this distinction is significant, because,
“... though each part of it can be reduced to previous labour and therefore one can imagine that at some time it represented profit or wages or both, but once it exists as constant capital, one part of it—for example, seeds, etc.—can no longer be transformed into profit or wages.” (p 191)
That is for the reason previously set out that once revenue has been congealed into constant capital, that constant capital must itself be continually reproduced out of current production, if social production is to continue on the same scale. This is also why, for Marx, the rate of profit has to be calculated on this current reproduction cost, and not on the basis of historic prices. That portion of social production now required to reproduce that constant capital can only then serve in that function, thereby precluding its allocation to any form of revenue. In fact, as Marx shows in subsequent chapters, and also in Capital III, Chapter 6, this is, actually only true in relation to the physical capital that must be reproduced on a "like for like basis", and so in value terms only applies where social productivity remains constant. Marx also describes this situation in Capital III, Chapter 49.
Where social productivity rises, so that the value of those use values that must be reproduced falls, it results in a release of capital, which does then take the form of an appearance of additional profit, although this is merely an illusion, as Marx shows in relation to this confusion by Ramsay. The opposite occurs where rather than this physical capital being depreciated, a fall in productivity results in an appreciation of the physical capital, so that what would previously have been appropriated as revenue (profit) must now be tied up as capital to replace the consumed capital on a like for like basis. This phenomena also results in capital gains (where the stock of capital is appreciated), and capital losses (where the stock of capital is depreciated) - the same phenomena results in capital losses/gains for the holders of money-capital - which Ramsay, and the proponents of historic pricing are led to confuse with profits and losses, and leads them to arrive at false conclusions in relation to the calculation of the rate of profit.
Marx says,
“Mill does not distinguish surplus-value from profit. He therefore declares that the rate of profit (and this is correct for the surplus-value which has already been transformed into profit) is equal to the ratio of the price of the product to the price of its means of production (labour included). (See pp. 92-93.) At the same time he seeks to deduce the laws governing the rate of profit directly from the Ricardian law, in which Ricardo confuses surplus-value and profit, [and to prove] that “profits depend upon wages; rising as wages fall, and falling as wages rise”[p.94].” (p 191)
The comment by Marx,
“ and this is correct for the surplus-value which has already been transformed into profit”,
is not quite right, for the reasons Marx himself sets out in the following paragraphs. The rate of profit is not equal to the price of the product in proportion to the cost of production, but to the profit as a proportion of the cost of production. Marx's comment, that it is correct for the surplus value that has been transformed into profit, is intended to make the distinction between surplus value as an element of the exchange-value of a commodity, and profit as a component of the price of production of a commodity. The two things are different and distinct, and the failure to make that distinction, by Ricardo, and his followers, is what led them into error, and the ultimate dissolution of the Ricardian School.
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