Smith's Labour Theory of Value, as with that of Ricardo, and Marx, sets out that the value of commodities is determined by the labour-time required for their production. That labour-time comprises two components. Firstly, there is the labour-time required to reproduce the consumed constant capital (wear and tear, and materials) that Smith refers to as fixed capital, and then there is the labour currently expended to process that constant capital into new commodities. Only a part of this new value is returned to the worker as wages, equal to the value of their labour-power, whilst the rest, the surplus value/profit, remains in the hands of the capitalist, who also pays from it an amount for rent to the landlord, and interest to the money-lender.
A rise in wages does not change the amount of new value created. It changes only the proportion in which it is resolved into wages and profit. If we take Robinson Crusoe, he might labour for 10 hours, only 6 of which are required to produce what he needs to replace his labour-power, the other 4 hours constituting surplus labour, which he uses to produce additional means of production, so as, later, to increase his productivity. If he chooses to expend 8 hours out of the 10 producing things for his immediate consumption (a rise in his wage), this does not change the fact that he has still created 10 hours of new value. It simply changes the proportion into which that new value is divided into consumption and accumulation of means of production – necessary labour and surplus labour.
Smith, seeing that wages could not be equal to the new value created, but failing to distinguish labour-power from labour, abandoned the Labour Theory of Value, and, instead, developed a cost of production theory of value, by which the value of commodities was determined by the value of the factors of production used in their production. That is essentially the theory taken over by neoclassical, marginalist economics, and by Keynesian theory. On this basis, if wages rise, the cost of production rises, and so prices rise, and the supply curve shifts to the left.
Ricardo rejected Smith's cost of production theory, but also failed to distinguish between labour-power and labour, leaving him with a contradiction he simply ignored rather than resolving. Ricardo, however, as with his followers, also noted that, if wages rise, and consequently, profits fall, at some point, capital would stop being accumulated, and capitalists would introduce new labour-saving technologies, reducing the demand for labour-power, leading to unemployment, misery, and falling wages. This is the basis of social-democratic ideology, by which workers must always subordinate their interests to those of capital, so as to secure their longer-term interests.
Marx sets about destroying Proudhon's argument, in the same way he later destroyed the argument by Weston. He says,
“We deny all these assertions, except that two and two make four.” (p 154)
Reinforcing the analysis in A Contribution To The Critique of Political Economy, that inflation is a monetary phenomenon, resulting from the devaluation of the standard of prices. Marx notes,
“If the price of everything doubles at the same time as wages, there is no change in price, the only change is in terms.” (p 154)
In other words, there has been no change in values, and so no real change in prices, measured against a money commodity, such as gold. If all prices double, including wages, profits, rents, interest that can only be because the standard of price has been halved in value, for example, 0.5 grams of gold, not 1 gm., and with, then, double the quantity of such currency, put into circulation.
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