Ricardo
Ricardo does not greatly progress relative to Smith on what capital is made of; very often he reasons as if capital advances consisted of wages only, and he inherits from Smith the mistake of conceiving the natural price as the sum of wages and profits (not rents, because the theory of differential rent allows him to exclude land rent from the natural price) forgetting about the value of the used-up non-wage capital: in the examples in which he discusses machines, these are produced by unassisted labour, are treated as if eternal (no depreciation), and use no non-wage circulating capital, so both their prices and the prices of their products still consist only of wages and profits.
However, he progresses on the determination of the rate of profits. He realizes the mistake of Smith on the competition of capitals: it had escaped Smith that, since he assumed - like Ricardo - that all savings get invested, aggregate demand equals aggregate income and there is no reason why increased production should make it more difficult to sell at the old prices. Ricardo is then left with the sole influence of the wage on the rate of profits, and concludes that a given wage determines the rate of profits and the two are inversely related. At first, according to Sraffa (1951), Ricardo reaches this conclusion avoiding the need to determine relative prices, by noting that, in agriculture, capital advances and product are sufficiently homogeneous (corn produced by corn, like in Smith) as to render the rate of profits a material ratio, univocally determined once the real wage and the no-rent land are given; the rate of profits in other sectors will adapt. However, after Malthus’s objection that wages include manufactures, Ricardo must face the problem of relative values; some examples in the Principles (Ricardo 1951-73, I: 50, 64-6) show that he continues to believe that the rate of profits can be seen as a material ratio (Kurz 2011); for the general case he determines it by adopting the labour theory of value as a sufficient approximation to actual exchange ratios. Ricardo knows that natural prices cannot be proportional to labours embodied (wages are advanced for different lengths of time in different productions), but he argues that the variations in relative prices caused by variations of the rate of profits are small, so one can neglect them. This neglect is further supported by a “compensation of deviations” argument implicit in Ricardo’s considerations on an “invariable measure of value” (see Sraffa 1951: xliv- xlv). Exchanges in proportion to labour embodied render the ratio on the right-hand side of the “surplus equation” ascertainable before r. Ricardo concludes that the rate of profits depends on “the proportion of the annual labour of the country devoted to the support of the labourers” (1951-73, IV: 49), as if capital consisted only of wages and the rate of profits were determined by:44 Handbook on the history of economic analysis
where total employment N is the labour embodied in the social product net of rent; V is the labour embodied in the capital advances, that is, in the wages (of productive labour); S = N - V is surplus labour, that is, the labour embodied in profits; S/V, the ratio of surplus labour to “necessary” labour, is what Marx will later call rate of exploitation; and Ricardo’s “proportion” is V/N which determines S/V = (N/V) - 1. A rise of real wages raises V/N and therefore reduces r. As to what keeps the “proportion” V/N less than 1 and therefore renders the rate of profits positive, Ricardo relies on the Malthusian population principle and appears less conscious than Smith of the importance of class coalitions and of the inferior bargaining power of workers vis-a-vis capitalists (he writes: “Like all other contracts, wages should be left to the fair and free competition of the market”, 1951-73, I: 105); but no contribution of capitalists to production or to value is recognized. Thus it will be obvious to Bortkiewicz (1906-07) that Ricardo shares with Marx the view that profits have their origin in the “deduction” of part of the product of labour.
Equation (1) is a simplification of Ricardo’s not fully consistent views. It treats all capital as wages advanced for one year, while Ricardo admits fixed capital; but he does not recognize the proportion of fixed to circulating capital as a further influence on the rate of profits besides the wage. Also, Ricardo correctly argues that only the production conditions of the “wage industries” (the ones that directly or indirectly produce the wage goods) influence the rate of profits; but then the “proportion” that determines r should not refer to the whole “annual labour”.