Capital, Volume III
Chapter 11. Effects of General Wage Fluctuations on Prices of Production
Let the average composition of social capital be 80c + 20v, and the profit 20%. The rate of surplus-value is then 100%. A general increase of wages, all else remaining the same, is tantamount to a reduction in the rate of surplus-value. In the case of average capital, profit and surplus-value are identical. Let wages rise 25%. Then the same quantity of labour, formerly set in motion with 20, will cost 25. We shall then have a turnover value of 80c + 25v + 15p, instead of 80c + 20v + 20p. As before, the labour set in motion by the variable capital produces a value of 40. If v rises from 20 to 25, the surplus s, or p, will amount to only 15. The profit of 15 on a capital of 105 is 14 2/7%, and this would be the new average rate of profit. Since the price of production of commodities produced by the average capital coincides with their value, the price of production of these commodities would have remained unchanged. A wage increase would therefore have caused a drop in profit, but no change in the value and price of the commodities. Formerly, as long as the average profit was 20%, the price of production of commodities produced in one period of turnover was equal to their cost-price plus a profit of 20% on this cost-price, therefore = k + kp' = k + 20k/100. In this formula k is a variable magnitude, changing in accordance with the value of the means of production that go into the commodities, and with the amount of depreciation given up by the fixed capital to the product. The price of production would then amount to k + 14 2/7 k/100. Let us now select a capital, whose composition is lower than the original composition of the average social capital of 80c + 20v (which has now changed into 76 4/21c + 23 17/21v); say, 50c + 50v. In this case, the price of production of the annual product before the wage increase would have been 50c + 50v + 20p = 120, assuming for the sake of simplicity that the entire fixed capital passes through depreciation into the product and that the period of turnover is the same as in the first case. For the same quantity of labour set in motion a wage increase of 25% means an increase of the variable capital from 50 to 62½. If the annual product were sold at the former price of production of 120, this would give us 50c + 62½v + 7½p, or a rate of profit of 6⅔%. But the new average rate of profit is 14 2/7%, and since we assume all other circumstances to remain the same, the capital of 50c + 62½ v must also make this profit. Now a capital of 112½ makes a profit of 16 1/14 at a rate of profit of 14 2/7%. Therefore, the price of production of the commodities produced by this capital is now 50c + 62½ v + 16¼p = 128 8/14. Owing to a wage rise of 255, the price of production of the same quantity of the same commodities, therefore, has here risen from 120 to 128 8/14, or more than 7%.
Conversely, suppose we take a sphere of production of a higher composition than the average capital; say, 92c + 8v. The original average profit in this case would still be 20, and if we again assume that the entire fixed capital passes into the annual product and that the period of turnover is the same as in cases I and II, the price of production of the commodity is here also 120.
Owing to the rise in wages of 25% the variable capital for the same quantity of labour rises from 8 to 10, the cost-price of the commodities from 100 to 102, while the average rate of profit falls from 20% to 14 2/7%. But 100:14 2/7 = 102:14 4/7. The profit now falling to the share of 102 is therefore 14 4/7. For this reason, the total product sells at k + kp' = 102 + 14 4/7 = 116 4/7. The price of production has therefore fallen from 120 to 116 4/7, or 3 3/7.
Consequently, if wages are raised 25%: 1) the price of production of the commodities of a capital of average social composition does not change; 2) the price of production of the commodities of a capital of lower composition rises, but not in proportion to the fall in profit; 3) the price of production of the commodities of a capital of higher composition falls, but also not in the same proportion as profit.
Since the price of production of the commodities of the average capital remained the same, equal to the value of the product, the sum of the prices of production of the products of all capitals remained the same as well, and equal to the sum total of the values produced by the aggregate capital. The increase on one side and the decrease on the other balance for the aggregate capital on the level of the average social capital.
If the price of production rises in case II and falls in case III, these opposite effects alone, which are brought about by a fall in the rate of surplus-value or by a general wage increase, show that this cannot be a matter of compensation in the price for the rise in wages, since the fall in the price of production in case III cannot compensate the capitalist for the fall in profit, and since the rise of the price in case II does not prevent a fall in profit. Rather, in either case, whether the price rises or falls, the profit remains the same as that of the average capital, in which case the price remains unchanged. It is the same average profit which has fallen by 5 5/7, or somewhat over 25%, in the case of II as well as III. It follows from this that if the price did not rise in II and fall in III, II would have to sell below and III above the new reduced average profit. It is self-evident that, depending on whether 50, 25, or 10 per 100 units of capital are laid out for wages, the effect of a wage increase on a capitalist who has invested 1/10 of his capital in wages must be quite different from that on one who has invested ¼ or ½. An increase in the price of production on the one side, a fall on the other, depending on a capital being below or above the average social composition, occurs solely by virtue of the process of levelling the profit to the new reduced average profit.
How would a general reduction in wages, and a corresponding general rise of the rate of profit, and thus of the average profit, now affect the prices of production of commodities produced by capitals deviating in opposite directions from the average social composition? We have but to reverse the foregoing exposition to obtain the result (which Ricardo fails to analyse).
I. Average capital = 80c + 20v = 100; rate of surplus-value = 100%; price of production=value of commodities = 80c + 20v + 20p = 120; rate of profit = 20%. Suppose wages fall by one-fourth. Then the same constant capital is set in motion by 15v, instead of 20v. Then the value of commodities = 80c + 15v + 25p = 120. The quantity of labour performed by v remains unchanged, except that the value newly created by it is distributed differently between the capitalist and the labourer. The surplus-value rises from 20 to 25 and the rate of surplus-value from 20/20 to 25/15, or from 100% to 166⅔%. The profit on 95 now = 25, so that the rate of profit per 100 = 26 6/19. The new composition of the capital in per cent is now 84 4/19c + 15 15/19v = 100.
II. Lower composition. Originally 50c + 50v, as above. Due to the fall of wages by one-fourth v is reduced to 37½, and consequently the advanced total capital to 50c + 37½ v = 87½. If we apply the new rate of profit of 26 6/19% to this, we get 100:26 6/19 = 87½:23 1/38. The same mass of commodities which formerly cost 120, now costs 87½ + 23 1/38 = 110 10/19, this being a price reduction of almost 10%.
III. Higher composition. Originally 92c + 8v = 100. The reduction of wages by one-fourth reduces 8v to 6v, and the total capital to 98. Consequently, 100:26 6/19 = 98:25 16/19. The price of production of the commodity, formerly 100 + 20 = 120, is now, after the fall in wages, 98 + 25 15/19 = 123 15/19, this being a rise of almost 4.
It is evident, therefore, that we have but to follow the same development in the opposite direction with the appropriate modifications; that a general reduction of wages is attended by a general rise of surplus-value, of the rate of surplus-value and, other circumstances remaining the same, of the rate of profit, even if expressed in a different proportion; a fall in the prices of production for commodities produced by capitals of lower composition, and a rise in the prices of production for commodities produced by capitals of higher composition. The result is just the reverse of that observed for a general rise of wages.[1] In both cases — rise or fall of wages — it is assumed that the working-day remains the same, and also the prices of the means of subsistence. In these circumstances a fall in wages is possible only if they stood higher than the normal price of labour, or if they are depressed below this price. The way in which the matter is modified if the rise or fall of wages is due to a change in value, and consequently the price of production of commodities usually consumed by the labourer, will be analysed at some length in the part dealing with ground-rent. At this point, however, the following remarks are to be made once and for all:
Should the rise or fall in wages be due to a change in the value of the necessities of life, a modification of the foregoing findings can take place only to the extent that commodities, whose change of price raises or lowers the variable capital, also go into the constant capital as constituent elements and therefore affect more than just the wages alone. But if they affect only wages, the above analysis contains all that needs to be said.
In this entire chapter, the establishment of the general rate of profit and the average profit, and consequently, the transmutation of values into prices of production, are assumed as given. The question merely was, how a general rise or fall in wages affected the assumed prices of production of commodities. This is but a very secondary question compared with the other important points analysed in this part. But it is the only relevant question treated by Ricardo, and, as we shall see, he treated it one-sidedly and unsatisfactorily.
1. It is very peculiar that Ricardo [On the Principles of Political Economy, and Taxation, Third edition, London, 1821, pp. 36-41.— Ed.] (who naturally proceeds differently from us, since he did not understand the levelling of values to prices of production) did not once consider this eventuality, but only the first case, that of a wage rise and its influence on the prices of production of commodities. And the servum pecus imitatorum [Horace, Epistles, Book I, Epistle 19.— Ed.] did not even attempt to make this extremely self-evident, actually tautological, practical application.
Chapter 12. Supplementary Remarks
I. Causes Implying a Change in the Price of Production
There are just two causes that can change the price of production of a commodity:
First. A change in the general rate of profit. This can solely be due to a change in the average rate of surplus-value, or, if the average rate of surplus-value remains the same, to a change in the ratio of the sum of the appropriated surplus-values to the sum of the advanced total social capital.
If the change in the rate of surplus-value is not due to a depression of wages below normal, or their rise above normal — and movements of that kind are to be regarded merely as oscillations — it can only occur either through a rise, or fall, in the value of labour-power, the one being just as impossible as the other unless there is a change in the productivity of the labour producing means of subsistence, i.e., in the value of commodities consumed by the labourer.
Or, through a change in the proportion of the sum of appropriated surplus-values to the advanced total capital of society. Since the change in this case is not caused by the rate of surplus-value, it must be caused by the total capital, or rather its constant part. The mass of this part, technically considered, increases or decreases in proportion to the quantity of labour-power bought by the variable capital, and the mass of its value thus increases or decreases with the increase or decrease of its own mass. It also increases or decreases, therefore, proportionately to the mass of the value of the variable capital. If the same labour sets more constant capital in motion, it has become more productive. If the reverse, then less productive. Thus, there has been a change in the productivity of labour, and there must have occurred a change in the value of certain commodities.
The following law, then, applies to both cases: If the price of production of a commodity changes in consequence of a change in the general rate of profit, its own value may have remained unchanged. However, a change must have occurred in the value of other commodities.
Second. The general rate of profit remains unchanged. In this case the price of production of a commodity can change only if its own value has changed. This may be due to more, or less, labour being required to reproduce the commodity in question, either because of a change in the productivity of labour which produces this commodity in its final form, or of the labour which produces those commodities that go into its production. The price of production of cotton yarn may fall, either because raw cotton is produced cheaper than before, or because the labour of spinning has become more productive due to improved machinery.
The price of production, as we have seen, = k + p, equal to cost-price plus profit. This, however, = k + kp', in which k, the cost-price, is a variable magnitude, which changes for different spheres of production and is everywhere equal to the value of the constant and variable capital consumed in the production of the commodity, and p' is the average rate of profit in percentage form. If k = 200, and p' = 20%, the price of production k + kp' = 200 + 200 × 20/100 = 200 + 40 = 240. This price of production may clearly remain the same, in spite of a change in the value of the commodities.
All changes in the price of production of commodities are reduced, in the last analysis, to changes in value. But not all changes in the value of commodities need express themselves in changes in the price of production. The price of production is not determined by the value of any one commodity alone, but by the aggregate value of all commodities. A change in commodity A may therefore be balanced by an opposite change in commodity B, so that the general relation remains the same.
II. Price of Production of Commodities of Average Composition
We have seen how a deviation in prices of production from values arises from: 1) adding the average profit instead of the surplus-value contained in a commodity to is cost-price; 2) the price of production, which so deviates from the value of a commodity, entering into the cost-price of other commodities as one of its elements, so that the cost-price of a commodity may already contain a deviation from value in those means of production consumed by it, quite aside from a deviation of its own which may arise through a difference between the average profit and the surplus-value.
It is therefore possible that even the cost-price of commodities produced by capitals of average composition may differ from the sum of the values of the elements which make up this component of their price of production. Suppose, the average composition is 80c + 20v. Now, it is possible that in the actual capitals of this composition 80c may be greater or smaller than the value of c, i.e., the constant capital, because this c may be made up of commodities whose price of production differs from their value. In the same way, 20v might diverge from its value if the consumption of the wage includes commodities whose price of production diverges from their value; in which case the labourer would work a longer, or shorter, time to buy them back (to replace them) and would thus perform more, or less, necessary labour than would be required if the price of production of such necessities of life coincided with their value.
However, this possibility does not detract in the least from the correctness of the theorems demonstrated which hold for commodities of average composition. The quantity of profit falling to these commodities is equal to the quantity of surplus-value contained in them. For instance, in a capital of the given composition 80c + 20v, the most important thing in determining surplus-value is not whether these figures are expressions of actual values, but how they are related to one another, i.e., whether v = l/5 of the total capital, and c = 4/5. Whenever this is the case, the surplus-value produced by v is, as was assumed, equal to the average profit. On the other hand, since it equals the average profit, the price of production = cost-price plus profit = k + p = k + s; i.e., in practice it is equal to the value of the commodity. This implies that a rise or fall in wages would not change the price of production, k + p, any more than it would change the value of the commodities, and would merely effect a corresponding opposite movement, a fall or a rise, in the rate of profit. For if a rise or fall of wages were here to bring about a change in the price of commodities, the rate of profit in these spheres of average composition would rise above, or fall below, the level prevailing in other spheres. The sphere of average composition maintains the same level of profit as the other spheres only so long as the price remains unchanged. The practical result is therefore the same as it would be if its products were sold at their real value. For if commodities are sold at their actual values, it is evident that, other conditions being equal, a rise, or fall, in wages will cause a corresponding fall or rise in profit, but no change in the value of commodities, and that under all circumstances a rise or fall in wages can never affect the value of commodities, but only the magnitude of the surplus-value.
III. The Capitalist's Grounds for Compensating
It has been said that competition levels the rates of profit of the different spheres of production into an average rate of profit and thereby turns the values of the products of these different spheres into prices of production. This occurs through the continual transfer of capital from one sphere to another, in which, for the moment, the profit happens to lie above average. The fluctuations of profit caused by the cycle of fat and lean years succeeding one another in any given branch of industry within given periods must, however, receive due consideration. This incessant outflow and inflow of capital between the different spheres of production creates trends of rise and fall in the rate of profit, which equalise one another more or less and thus have a tendency to reduce the rate of profit everywhere to the same common and general level.
This movement of capitals is primarily caused by the level of market-prices, which lift profits above the general average in one place and depress them below it in another. Merchant's capital is left out of consideration as it is irrelevant at this point, for we know from the sudden paroxysms of speculation appearing in certain popular articles that it can withdraw masses of capital from one line of business with extraordinary rapidity and throw them with equal rapidity into another. Yet with respect to each sphere of actual production — industry, agriculture, mining, etc. — the transfer of capital from one sphere to another offers considerable difficulties, particularly on account of the existing fixed capital. Experience shows, moreover, that if a branch of industry, such as, say, the cotton industry, yields unusually high profits at one period, it makes very little profit, or even suffers losses, at another, so that in a certain cycle of years the average profit is much the same as in other branches. And capital soon learns to take this experience into account.
What competition does not show, however, is the determination of value, which dominates the movement of production; and the values that lie beneath the prices of production and that determine them in the last instance. Competition, on the other hand, shows: 1) the average profits, which are independent of the organic composition of capital in the different spheres of production, and therefore also of the mass of living labour appropriated by any given capital in any given sphere of exploitation; 2) the rise and fall of prices of production caused by changes in the level of wages, a phenomenon which at first glance completely contradicts the value relation of commodities; 3) the fluctuations of market-prices, which reduce the average market-price of commodities in a given period of time, not to the market-value, but to a very different market-price of production, which diverges considerably from this market-value. All these phenomena seem to contradict the determination of value by labour-time as much as the nature of surplus-value consisting of unpaid surplus-labour. Thus everything appears reversed in competition. The final pattern of economic relations as seen on the surface, in their real existence and consequently in the conceptions by which the bearers and agents of these relations seek to understand them, is very much different from, and indeed quite the reverse of, their inner but concealed essential pattern and the conception corresponding to it.
Further. As soon as capitalist production reaches a certain level of development, the equalisation of the different rates of profit in individual spheres to general rate of profit no longer proceeds solely through the play of attraction and repulsion, by which market-prices attract or repel capital. After average prices, and their corresponding market-prices, become stable for a time it reaches the consciousness of the individual capitalists that this equalisation balances definite differences, so that they include these in their mutual calculations. The differences exist in the mind of the capitalists and are taken into account as grounds for compensating.
Average profit is the basic conception, the conception that capitals of equal magnitude must yield equal profits in equal time spans. This, again, is based on the conception that the capital in each sphere of production must share pro rata to its magnitude in the total surplus-value squeezed out of the labourers by the total social capital; or, that every individual capital should be regarded merely as a part of the total social capital, and every capitalist actually as a shareholder in the total social enterprise, each sharing in the total profit pro rata to the magnitude of his share of capital.
This conception serves as a basis for the capitalist's calculations, for instance, that a capital whose turnover is slower than another's, because its commodities take longer to be produced, or because they are sold in remoter markets, nevertheless charges the profit it loses in this way, and compensates itself by raising the price. Or else, that investments of capital in lines exposed to greater hazards, for instance in shipping, are compensated by higher prices. As soon as capitalist production, and with it the insurance business, are developed, the hazards are, in effect, made equal for all spheres of production (cf. Corbet); but the more hazardous lines pay higher insurance rates, and recover them in the prices of their commodities. In practice all this means that every circumstance, which renders one line of production — and all of them are considered equally necessary within certain limits — less profitable, and another more profitable, is taken into account once and for all as valid ground for compensation, without always requiring the renewed action of competition to justify the motives or factors for calculating this compensation. The capitalist simply forgets — or rather fails to see, because competition does not point it out to him — that all these grounds for compensation mutually advanced by capitalists in calculating the prices of commodities of different lines of production merely come down to the fact that they all have an equal claim, pro rata to the magnitude of their respective capitals, to the common loot, the total surplus-value. It rather seems to them that since the profit pocketed by them differs from the surplus-value they appropriated, these grounds for compensation do not level out their participation in the total surplus-value, but create the profit itself, which seems to be derived from the additions made on one or another ground to the cost-price of their commodities.
In other respects the statements made in Chapter VII concerning the capitalists' assumptions as to the source of surplus-value, apply also to average profit. The present case appears different only in so far as a saving in cost-price depends on individual business acumen, alertness, etc., assuming the market-price of commodities and the exploitation of labour to be given.