As Marx sets out in “Value, Price and Profit”, the consequence of such a profits squeeze, where the increased wages go into additional demand for wage goods, is that the initial rise in prices of wage goods, leads to higher profits, in that sphere, and lower profits in luxury goods production, where demand falls, as capitalists and other exploiters have less profits, rents and interest to spend on such consumption. (See: Value, Price and Profit, Chapter II)
Given that workers have a higher propensity to consume, than capitalists, demand rises proportionally more in the wage goods sector. Firms in this sector are driven by competition to meet the additional demand. As the supply of wage goods then rises their prices fall back. That is the process seen in the Summer phase of the long wave cycle, and, as wages rise further, and squeeze profits, but capital is driven to increase the pace of investment so as to meet the increased demand for wage goods, so the demand for money-capital more and more exceeds the supply so that interest rates rise, speculative bubbles in financial and property markets get burst, and productive-capital asserts its necessary dominance over fictitious capital.
Marx quotes the author of “An Inquiry into those Principles, respecting the Nature of Demand and the Necessity of Consumption, lately advocated by Mr. Malthus etc”, who describes this process of the increase in demand for necessaries relative to luxuries. The same author then goes on to describe the Ricardian view of the process.
““At all events, then, the increased price of corn was not the original cause of that rise of wages which made profits fall, but, on the contrary, the rise of wages was the cause of the increased price of corn at first, and the nature of land, yielding less and less proportional returns to increased tillage, made part of that increase of price permanent, prevented a complete reaction from taking place through the principle of population” (loc. cit., p. 23).” (p 313)
In other words, the rise in demand causes a rise in market price, but the additional demand can only be met, in the long-term, by bringing into cultivation less fertile land, so that food prices rise permanently. Marx, following Anderson, showed why this proposition is false. There can be a progression to more fertile, rather than less fertile land; changes in technology make all land more productive, and so on.
“Hodgskin and the author of The Source and Remedy etc. since they explain the fall of profits by the impossibility of living labour to fulfil the demands of compound interest, and although they do not analyse this, are much nearer the truth than Smith and Ricardo, who explain the fall of profits by the rise in wages, one of them, [by the rise in] real and nominal wages, the other [by the rise in] nominal wages, with rather a decrease of real wages. Hodgskin and all the other proletarian opponents have enough common sense to emphasise the fact that the proportional number of those who live on profit has increased with the development of capital.” (p 313)
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