Marx, then, sets out the ideas contained in Chapter 11 of Capital III, where he examines the effect of a general rise in wages and fall in the average rate of profit, on prices. This shows that, as early as 1846, Marx had resolved the question of the transformation of exchange-values into prices of production. In Chapter 11, Marx sets out why a rise in wages and fall in average profits, affects capitals with different compositions, in different ways. A capital with a high organic composition sees its cost of production (c + v) rise by less than a capital with a low organic composition, because the former employs relatively less labour. In order that the latter obtains the new average profit, it must obtain higher market prices for its commodities, whereas the former must see the price of production for its commodities fall, because the fall in its average profit is greater than the rise in its wage bill. The means by which this comes about is a reallocation of capital into those spheres with a high organic composition/increased supply, and a reduction in the capital employed in spheres with a low organic composition.
“... a general rise in wages can never produce a more or less general rise in the price of goods. Actually, if every industry employed the same number of workers in relation to fixed capital or to the instruments used, a general rise in wages would produce a general fall in profits and the current price of goods would undergo no alteration.” (p 154)
That is the condition Marx sets out in Capital III, Chapter 11, in relation to those capitals of average composition.
“But as the relation of manual labour to fixed capital is not the same in different industries, all the industries which employ a relatively greater mass of capital and fewer workers, will be forced sooner or later to lower the price of their goods. In the opposite case, in which the price of their goods is not lowered, their profit will rise above the common rate of profits. Machines are not wage-earners. Therefore, the general rise in wages will affect less those industries, which, compared with the others, employ more machines than workers. But as competition always tends to level the rate of profits, those profits which rise above the average rate cannot but be transitory. Thus, apart from a few fluctuations, a general rise in wages will lead, not as M. Proudhon says, to a general increase in prices, but to a partial fall – that is a fall in the current price of the goods that are made chiefly with the help of machines.” (p 154)
In fact, in the 20th century, as I have set out, elsewhere, central banks respond to a rise in wages that squeezes profits, by increasing liquidity, and devaluing the standard of prices, so that firms can all raise prices to protect profits, thereby, creating an inflationary spiral.
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