I have dealt with this question of cost of production theory of value, elsewhere, and Marx deals with it, at length, in Capital III. The important distinction that can be summarised here, is between the real social cost of production/value, and the cost of production to the capitalist. The social cost of production of a commodity is the socially necessary labour-time required for its reproduction. In other words, if 100 hours of labour are required to produce the materials and fixed capital consumed in its production, and 100 hours are required to transform the materials into the end product, its value/social cost of production is 200 hours. However, the capitalist pays, in wages, only the equivalent of 50 hours, obtaining 50 hours of surplus value.
When the capitalist looks at the cost of production they see first what they must lay out as capital, i.e. the 100 hours for material and wear and tear of fixed capital, plus the 50 hours in wages. The 50 hours of surplus value/profit they see as the amount they add on to this cost of production, as being the amount required for them to supply the capital. So, the amount of profit, were this to be the case, is itself determined by the average rate of profit, and so if the amount they have to lay out as capital rises, so they would expect to add a larger amount of profit, so that the price of the commodity rises.
The rate of profit, above, is 33.3%. If the value of materials etc., rose to 150 hours, and wages to 75 hours = 225, then, this cost of production theory suggests that profit would rise to 75 hours, giving a price of 300. But, this is false. The increased value of materials is passed into the value of the end product – provided its sold after the change – but it has no effect on the surplus value, which is purely determined by the amount of surplus labour undertaken. So leaving aside any change in wages, here, the surplus value would remain 50, and the rate of profit would fall to 50/(150 +50) = 25%. But, if wages rise to 75, this does not change the amount of new value created. So, surplus value would fall to 25, and the rate of profit would fall to 25/(150 + 75) = 11.11%.
Moreover, if the value of commodities is determined on the basis of this cost of production theory of value, the value of the commodities that comprise the constant capital (materials and fixed capital) is also calculated in that way, so that, ultimately, what we have is value determined solely by wages. No wonder the idea has become so readily accepted that inflation is a result of rising wages, because this false theory has a long history within the labour movement itself.
“The determination of the value of commodities by wages, which in Adam Smith still appeared frequently side by side with its determination by labour-time, has been banned from scientific political economy since Ricardo, and nowadays survives only in vulgar economics. It is precisely the shallowest sycophants of the existing capitalist order of society who preach the determination of value by wages, and who constantly describe the profit of the capitalist as also a higher sort of wages, as the wages of abstinence (the reward to the capitalist for not playing ducks and drakes with his capital), as the premium on risk, as the wages of management, etc. Herr Dühring differs from them only in declaring that profit is robbery. In other words, Herr Dühring bases his socialism directly on the doctrines of the worst kind of vulgar economics. And his socialism is worth just as much as this vulgar economics. The two stand and fall together.” (p 247)
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