As set out in the introduction, as as Marx and Engels described, in Capital III, in periods of boom, and the initial period of crisis and over-exuberance, the amount of such credit automatically expands, and does so whilst the currency supply is not correspondingly curtailed, leading to an inflation of prices. But, in such conditions, workers are also in a strong position, due to labour shortages. They respond to rising prices by demanding higher wages. Keen not to have a strike, firms concede higher wages, confident that they can pass on the higher cost in higher prices. So sets in a price-wage spiral.
It does not matter that, in these conditions of relative labour shortages, it may be that it is wages that rise first, as firms compete for available labour, by bidding up wages. As Marx sets out, these higher wages do not raise the cost of production of commodities from the perspective of society. In other words, they do not change the amount of social labour-time required for their production. The higher wages only change the proportions in which that value of the commodity is resolved.
If the value of a metre of cloth is comprised of 10 hours for constant capital, and 10 hours for current labour, its value is 20 hours of labour. If there is no change in productivity, its value will remain 20 hours of labour, whether the 10 hours of current labour resolves into 2 hours for wages and 8 hours for profits, or into 8 hours for wages, and 2 hours for profits. That, of course, is not how the capitalist sees it, because they only see cost of production from their own individual perspective, not that of society as a whole. For them, the cost of production is what they must lay out as capital, with their profit also being an additional cost of production that must be met in exchange for them providing that capital.
A rise in wages does not cause a rise in the value/social cost of production of commodities, and so does not cause a rise in prices. It cannot be the cause of an inflationary spiral. However, because the capitalist sees things only from their own perspective, they see rising wages as a rise in the cost of production, and so, rather than it resulting in a reduction in their profits – the amount of free labour they get from the worker – they see it as the basis of a need to raise their prices. Indeed, because they calculate their profits as a percentage markup on these costs of production, they see it as the basis for raising prices by more than that increase in wages.
But, raising prices is not something in the gift of the individual capitalist, because prices are values expressed in money. The value of the commodity, despite the capitalist's perception, has not changed, and, if the value of money/standard of prices remains constant, it would be impossible for capitalists to raise prices. They would have to accept a fall in the general rate of profit. As Marx sets out, in Capital III, Chapter 11, this fall in the general rate of profit, would cause some prices to rise and others to fall, whilst others remained constant. The prices of commodities where the organic composition of capital is high would fall (capital would move to their production), would rise where the organic composition was low (capital would move out of their production) and would remain the same in spheres of average composition. Overall, there would be no change in the general level of prices.
Similarly, as Marx sets out in this pamphlet, a rise in wages/fall in profit, would cause a rise in demand for wage goods, and fall in demand for luxury goods. The prices of the former would rise, and the latter fall. However, higher prices in the former leads to higher profits, attracting additional capital, raising supply and so fall back in prices. The lower prices in the latter results in lower profits, egress of capital, fall in supply and a rise back in prices.
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