The Inverse Wage-Profit Relation and Profit-Rate Equalization

G. The Inverse Wage-Profit Relation and Profit-Rate Equalization

We return to the central question: “how is this equalisation of profits into a general rate of profit brought about, since it is obviously a result rather than a point of departure?” (MECW 37: 173), now introducing a disturbance into a system initially in equilibrium with uniform returns on capital. Analysis of the consequences of

a wage-rate change is very revealing since this particular disturbance entails the “inverse wage-profit relation” or Ricardo’s Fundamental Theorem on Distribution. Though Marx complained that “it is the only relevant question treated by Ricardo” and one that “he treated . . . one-sidedly and unsatisfactorily” (202), he proceeded entirely along Ricardian lines.

Marx isolates a commodity produced by capital of average organic composition, the price of which in terms of the monetary commodity will be unaffected by the assumed increase in the wage rate. In the case of this commodity the wage-rate increase implies an unambiguous fall in total profits and a new lower rate of profits emerges:

Let the average composition of social capital be 80 c + 20 v , 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 80 c + 25 v + 15 p instead of 80 c + 20 v + 20 p . 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

23 See Horverak 1988: 290–6. On aspects of the dynamics of competition in Marx, see also Nikaido

39 have caused a drop in profit, but no change in the value and price of the commodities

G. The Inverse Wage-Profit Relation and Profit-Rate Equalization

The lower profit rate of 14 2 7 % is next used to calculate the new prices of production throughout the system. In terms of Marx’s illustration, profit rates decline in all industries at the original prices following the supposed wage increase, from 20 to

6 % in the case of a particular commodity produced by capital of below-average composition, and from 20 to 17.6% in the converse case. But the new average profit rate is 14 2 7 % and Marx proceeds to recalculate the new equilibrium prices on the basis of this figure, the labor-intensive commodity rising and the capital-intensive commodity falling from their original levels.

In the particular example devised the labor-intensive commodity selected rises more than 7% in consequence of the 25% rise in the wage, whereas the capital- intensive commodity falls by only 2.8%. But Marx, in fact, generalizes solely on the basis of the constant price in the “average” case: “Since the price of production of the commodity 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” (200). And he further points out that since some prices rise and others fall, the wage increase clearly is not simply passed on, that it “cannot be a matter of compensation in the price for the rise of wages. . . . 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.” Here, of course, Marx is following Ricardo against Adam Smith on the effect of wage rate, since for Smith a wage increase is passed on to consumers at least in the case of manufactured goods.

We must now face a problem relating to the adjustment mechanism at play. In calculating the new equilibrium price-of-production in the case of a labor-intensive commodity, Marx summarized thus: “Owing to a wage rise of 25%, the price of production of the same quantity of the same commodities . . . has here risen from 120

to 128 8 14 or more than 7%” (199; emphasis added). This suggests that no output

24 See also a brief formulation to the effect that a wage change, since it implies constancy in the price of the commodity of average capital composition, indicates the inverse movement of

the profit rate: “This implies that a rise of fall in wages would not change k + p [the price of production], 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” (MECW 37: 205).

This procedure is questionable with respect to the implied permanence of the organic composition of the mean commodity. The problem – it applies also to the Ricardo scheme – is that when the wage increases the c /v ratio necessarily changes. For example, let the wage increase by 5% such that 80c + 20v becomes 80c + 25v; reduce both c and v by 5% to reduce the total to 100: (80c − 5% × 80) + (25v − 5% × 25) = 76c + 24v. Thus c /v falls from 4 to approximately 3 merely because of the wage increase, reflecting the circumstance that c /v can be regarded as a technological datum, with v a proxy for labor input, only if the wage is held

40 Value and Distribution

variations are envisaged to flow from the wage change, only recalculations of prices to incorporate a new general profit rate. Yet Marx also proceeds to say that “[a]n 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” (emphasis added). The illustration itself is, as we have seen, purely mechanical, entailing a “forecast” of the new equilibrium profit rate and new pattern of equilibrium prices that will emerge following the wage change; it is not an account of a “process” at work which brings about these new results and accordingly scarcely provides an adequate response to Marx’s own question: “How is this equalization of profits . . . brought about?” (above, p. 38). By focusing excessively on the value/price-of-production relationship he neglected to spell out the process of transition between equilibrium states. Thus he closes his Chapter 11: “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” (202; emphasis added). But by “the levelling the profit to the new reduced average profit,” Marx can only have intended a levelling working through “competition” – the subject of his previous chapter, whereby the new structure of prices comes into being as the consequence of capital movements between industries (given the pattern of demand). And had he bothered to spell out the details of the competitive adjustment process in line with that chapter it would have entailed an account of the following order. A general wage increase from the initial state of equilibrium reflecting uniform profit rates reduces the profit rate across the board at the original prices; but more sharply in “labor-intensive” than in “capital-intensive” industries; accordingly, reallocation of resources between sectors will be set in motion to re-establish a uniform return on capital throughout the economy. In the new equilibrium, the prices of commodities produced by labor-intensive processes will have risen relatively to those produced by capital-intensive processes, and the profit rate will again be equalized across the board at a lower level than in the initial equilibrium. This “Ricardian” analysis had been explicitly spelled out by McCulloch (McCulloch 1825: 303–4). The procedure in fact is precisely the same as that involved in the transition from non-equilibrium values to equilibrium cost prices characterizing the Transformation.