In other words, in those spheres producing necessaries, although increased demand enables higher wage costs to be passed on, and the amount of profit maintained, the rate of profit still falls. If first, we have c 100 + v 50 + s 50, the rate of profit is 33.3%. If wages rise to 100, we have c 100 + v 100 + s 50, and a rate of profit of 25%. But, in those spheres producing luxury goods, they could not raise prices, seeing them fall, and so would see not just a fall in their rate of profit, but also in their amount of profit. That would inevitably have further consequences. Indeed, as the price of necessaries rise, because capitalists also consume necessaries, this reduces the amount of their revenue available for luxury consumption too.
“Capital and labour would be transferred from the less remunerative to the more remunerative branches; and this process of transfer would go on until the supply in the one department of industry would have risen proportionately to the increased demand, and would have sunk in the other departments according to the decreased demand. This change effected, the general rate of profit would again be equalized in the different branches. As the whole derangement originally arose from a mere change in the proportion of the demand for, and supply of, different commodities, the cause ceasing, the effect would cease, and PRICES would return to their former level and equilibrium. Instead of being limited to some branches of industry, the fall in the rate of profit consequent upon the rise of wages would have become general.” (p 17-18)
There would have been no change in the total amount of production, but simply a change in its composition, with more necessaries produced, and fewer luxuries, reflecting the change in the proportion of wages and profits. Marx makes the point that, even if a country produces only necessaries, this does not change this fundamental reality, arising from distribution. In such a country, the capitalists would simply exchange part of their profits for imported luxuries, by exporting necessaries. A fall in profits, and rise in wages means more domestically produced necessaries are consumed by workers, leaving less to be exported in exchange for luxuries to be consumed by capitalists.
“The general rise in the rate of wages would, therefore, after a temporary disturbance of market prices, only result in a general fall of the rate of profit without any permanent change in the prices of commodities.” (p 18)
Marx also notes that, by assuming that all the extra wages are spent on necessaries, that is the most favourable case for Weston.
“If the surplus wages were spent upon articles formerly not entering into the consumption of the working men, the real increase of their purchasing power would need no proof. Being, however, only derived from an advance of wages, that increase of their purchasing power must exactly correspond to the decrease of the purchasing power of the capitalists. The aggregate demand for commodities would, therefore, not increase, but the constituent parts of that demand would change. The increasing demand on the one side would be counterbalanced by the decreasing demand on the other side. Thus the aggregate demand remaining stationary, no change whatever could take place in the market prices of commodities.” (p 18-19)
In other words, if wages rise and profits fall, workers may not increase their demand for necessaries, and so necessaries' price do not rise. But, then, the profits of capitalists producing necessaries would fall, so they, as well as the capitalists producing luxuries have less to spend on luxuries. Whilst the demand for luxuries from workers rises, profits fall by an equal amount, causing demand for luxuries from capitalists to fall by an equal amount. In fact, in Capital II, Marx sets out that it is precisely in such periods that demand for former luxury goods from workers does rise, and this forms part of the process described by The Civilising Mission of Capital, and means by which the historical and cultural component part of the value of labour-power is transformed.
“You arrive, therefore, at this dilemma: Either the surplus wages are equally spent upon all articles of consumption — then the expansion of demand on the part of the working class must be compensated by the contraction of demand on the part of the capitalist class — or the surplus wages are only spent upon some articles whose market prices will temporarily rise. The consequent rise in the rate of profit in some, and the consequent fall in the rate of profit in other branches of industry will produce a change in the distribution of capital and labour, going on until the supply is brought up to the increased demand in the one department of industry, and brought down to the diminished demand in the other departments of industry. On the one supposition there will occur no change in the prices of commodities. On the other supposition, after some fluctuations of market prices, the exchangeable values of commodities will subside to the former level. On both suppositions the general rise in the rate of wages will ultimately result in nothing else but a general fall in the rate of profit.” (p 19-20)
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