Marx demonstrates that both these arguments are wrong as explanations of the tendency for the rate of profit to fall, and, as reasons for some ultimate collapse of capitalism, are certainly wrong. Both, however, may be explanations for short-term squeezes on profits, resulting from what amounts to an overproduction of capital. Firstly, Smith is right that, at times (extensive accumulation) capital accumulates faster than the labour supply/social working-day, so, first, absolute surplus value stops growing, then relative surplus value stops growing, and, as wages rise relative surplus value shrinks. But, this is a temporary not permanent phenomenon. As Marx says,
“A distinction must he made here. When Adam Smith explains the fall in the rate of profit from an over-abundance of capital, an accumulation of capital, he is speaking of a permanent effect and this is wrong. As against this, the transitory over-abundance of capital, over-production and crises are something different. Permanent crises do not exist.”
Ricardo is right that labour supply expands to meet the needs of capital. It draws in latent reserves, but, as Marx describes, in response to the squeeze on profits due to labour shortages, it introduces labour-saving machines that creates a relative surplus population. It is precisely this cycle of extensive accumulation, labour shortage, rising wages, squeeze on profits, innovation, intensive accumulation, relative surplus population, falling wages, rising profits, extensive accumulation that creates the periodicity of the long wave cycle, and its periods of prosperity, boom, crisis and stagnation.
Ricardo is wrong in thinking that, because capital adjusts to these labour shortages, in the longer term, they do not result in a crisis of overproduction of capital in the short-term. Similarly, in the short-term, a rapid accumulation of capital may result in diminishing returns – rises in short-run marginal costs. The sharp rise in primary product prices at the start of each long wave uptrend is evidence of that. However, Ricardo is wrong in believing that this is a cause of a continual fall in the rate of profit, again for the reasons Marx describes.
As Anderson showed, there is no long-term diminishing returns in agriculture/primary production, as productivity continues to rise. Malthus population theory, on which Ricardo's argument is based, is bunk, as are modern day environmentalist and catastrophist equivalents. New lands are brought into cultivation, and often, on virgin soils, they are naturally more fertile than existing lands. But, also, new technologies raise productivity on all lands, so that, contrary to Malthus and Ricardo, agricultural production rises faster than population, and food and agricultural prices fall in the longer term. That means that wages fall and profits can rise.
In contrast to Smith and Ricardo, who see, not an overproduction of commodities, but a long-term overproduction of capital, as capital expands without limit, Sismondi sees an overproduction of commodities, in the short-term, which must make the accumulation of capital impossible. The only way of avoiding this is via export of these overproduced commodities, thereby, requiring foreign markets. It is the same argument as put by the Narodniks.
Lenin, in fact, makes no distinction between an overproduction of commodities, and an overproduction of capital. But, Marx and Engels do make this distinction. As Marx says, the followers of Ricardo tried to argue that whilst a generalised overproduction of commodities is not possible, an overproduction of capital was. Others, as Ricardo says, argued that an overproduction of capital was not possible, but an overproduction of commodities was. As Marx notes, an overproduction of capital is always an overproduction of commodities, because the elements of capital are composed of commodities. But, that does not mean that there may not be a separate overproduction of commodities irrespective of any overproduction of capital. For one thing, not all commodities are produced capitalistically, and, as Marx sets out, in Theories of Surplus Value, Chapter 17, as soon as money comes into existence, so as to separate production and consumption, value and use value, supply and demand, the potential for the overproduction of commodities arises.
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