The inverse wage-profit relationship
When Ricardo first exposed the fallacy of Smith’s “adding-up theory” in his Essay on Profits, the argument was conducted in terms of commodity (corn) wages, and the inverse relationship between the wage rate and the general rate of profits was derived by assuming a given technical environment, explicitly setting aside improvements in production methods (Ricardo 1951-73, IV: 12).
Prompted by objections raised by Malthus in subsequent debates, Ricardo developed a novel conceptualization of “real wages”, and in the first edition of the Principles presented the proposition that the rate of profits must always vary inversely with proportional wages. (A first allusion to the new concept can be found in a letter to Malthus of 14 October 1816; 1951-73, VII: 81).) Ricardo adopted this concept precisely because it enabled him, or so he thought, to demonstrate an inverse relationship between wages and the rate of profits even in a changing technical environment. Suppose, he argued, that with the same amount of labour annually expended, “by improvements in machinery and agriculture”, the whole produce of society is doubled, but that the portions going to rents, profits and wages are not increased proportionately:Of every hundred hats, coats, and quarters of corn produced, if
| The labourers had before.. | . 25 |
| The landlords... | 25 |
| And the capitalists... | 50 |
| 100: | |
| And if, after these commodities were double the quantity, of every 100 | |
| The labourers had only... | 22 |
| The landlords... | 22 |
| And the capitalists... | 56 |
| 100: | |
In that case I should say, that wage and rent had fallen and profits risen; though, in consequence of the abundance of commodities, the quantity paid to the labourer and landlord would have increased in the proportion of 25 to 44.
Wages are to be estimated by their real value, viz. by the quantity of labour and capital employed in producing them, and not by their nominal value either in coats, hats, money, or corn. (Ricardo 1951-73, I: 50)
As Ricardo stressed, his conceptualization of the “real value of wages” relied on the possibility of measuring the total produce in terms of a standard which is invariant with regard to changes in the distribution of income and in the productivity of labour. In terms of such a standard, Ricardo argued, the value of the social product is given by the total amount of labour expended (that is, by the total annual labour of society), and wages can accordingly be expressed as the proportion of the annual labour of the country which is devoted to the support of the labourers. This device was not merely another way of expressing the relative distribution of income. Ricardo rather conceived of it as an analytical concept that allowed him to assert, or so he thought, that the rate of profits depends only on proportional wages, even in changing technical environments (Ricardo 1951-73, I: 126, II: 252).
Ricardo’s numerical example quoted above is of interest also from another viewpoint, because it also contains a novel device by means of which the rate of profits can be ascertained as a physical ratio. Instead of supposing homogeneity between the capital advanced and the product in a single industry, as in the corn-ratio theory of the Essay on Profits, Ricardo now assumed homogeneity between product and capital in aggregate terms: the commodity composition of the surplus product is the same as the commodity composition of the social capital if the latter is assumed to consist only of the real wages bill. In this case the general rate of profits may again be conceived of in purely physical terms. In the example, of every 100 units produced of the three commodities - hats, coats, and quarters of corn - workers are paid 25 (or 22) units of each of them and landlords are also assumed to receive 25 (or 22) units; accordingly, profits consist of 50 (56) units of each commodity.
If capital is assumed to consist only of the real wages bill, the rate of profits can be determined independently of the problem of the valuation of the different commodities. It amounts to 50/25 = 2 (or 56/22 ≈ 2.55).By adopting the simplifying assumption that the advanced capital consists only of wages, or can be reduced to direct and indirect wages in a finite number of steps, Ricardo had abandoned the conceptualization of social production as a circular flow. This made him lose sight of the fact that the price of a commodity can never be fully resolved into wages and profits: however far back one carries the reduction to dated quantities of labour, there will always remain a commodity residue. Therefore the rate of profits will not tend towards infinity when wages are hypothetically reduced to zero, as it is the case with a unidirectional view of the production process. There is rather a finite maximum level of the rate of profits corresponding to zero wages. This implies that the rate of profits depends on two magnitudes instead of on only one - it depends on proportional wages and on the maximum rate of profits (for further details, see Gehrke and Kurz, 2006).