~420 words, ~3 min reading time
In this chapter, Marx considers the effects of variations in various prices on the rate of profit. First, raw materials. As one might expect, there is an inverse relationship between raw material prices and the rate of profit. Thus, low material prices are important to capitalists maintaining profit levels. Marx explains that this is true, even though changes in the prices of raw materials tend to be reflected in the price of the product. Because of competition, the change in cost is typically not fully reflected in the price of the final good. In the case of wages, higher wages tend to decrease both the rate of surplus value (which decreases the rate of profit), and also tend to decrease the capitalist’s scope of production – further decreasing profit. One of the more interesting observations Marx makes in this chapter is that there is a tendency in capitalism for the growth of the stock of machinery to run ahead of the ability of nature to produce nature-given factors (like agricultural goods, for example), and this creates imbalances that lead to cyclical fluctuations. Marx specifically considers cotton markets, showing how there was a repeated boom and bust in that industry in England through the mid-1800s.
Why It Matters
In this chapter, Marx hints that a good part of the instability of the capitalist system that he will explain later rests on the relationship between the prices of the factors of production and the rate of profit.
Where Marx Goes Wrong
From a modern mainstream or Austrian perspective, Marx’s analysis here isn’t “wrong” in one sense – but is wrong in another. On the one hand, from an individual firm’s perspective, Marx’s analysis of the effect of prices of factors on the rate of profit is fairly sound. But, from the perspective of the economy as a whole, we have the problem that the prices of factors of production are not exogenous. They depend on the (expected) price of the product. Value is then imputed back from the product to the factors that produce it. In mainstream terms, the demand for the factors of production is “derived” from the demand for the product. So, the causal analysis, if we’re trying to analyze the system as a whole, is backwards – UNLESS we’re considering cases where the price is changing because of a change in availability of the goods under consideration, but Marx isn’t very clear about that (though there are certainly places where he considers these cases).