Capital Vol. III Part II
Conversion of Profit into Average Profit

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 62. If the annual product were sold at the former price of production of 120, this would give us 50c + 62v + 7p, 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 + 16p = 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 or . 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 37, and consequently the advanced total capital to 50c + 37 v = 87. If we apply the new rate of profit of 26 6/19% to this, we get 100:26 6/19 = 87:23 1/38. The same mass of commodities which formerly cost 120, now costs 87 + 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.

Notes

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.