Section V.—: Remarks on Mr. Ricardo’s Theory of Profits.

According to Mr. Ricardo profits are regulated by wages, and are high or low in proportion as wages are low or high; or as he has expressed himself more fully in another part of his chapter on profits,

“In all countries, and at all times, profits depend upon the quantity of labour requisite to provide necessaries for the labourers on that land, or with that capital which yields no rent.”

It is here understood, that there are no other advances except those of wages; and, under these circumstances, the necessaries required to pay ten labourers must have required fewer than ten labourers to produce them, or there would have been no profits. It is further obvious that the profits upon the produce necessary to pay the wages of ten labourers must depend upon the difference between the whole produce, and that portion of it which is required to pay the number of labourers, whether nine, eight, seven, or any other proportion actually employed to produce the wages of the whole ten.

Mr. Ricardo’s proposition therefore will be found to be essentially the same as if he had said that profits are determined by the proportion of the produce which goes to pay the wages of the labour which obtained it. And so far this theory is quite correct. But in its application he combines with it two assumptions, which being unfounded renders it as a whole essentially erroneous. He assumes,

1st. That the commodities which have cost in their production the same quantity of labour will on an average always be of the same value. And

2ndly. That the value of the same quantity of labour varies in proportion to the share of the produce which goes to pay the labourer; and the varying value of this labour being thus taken out of the supposed constant value of the produce obtained by them, the remainder determines the rate of profits.

If these assumptions were well founded the theory would be correct. But it has been shewn, in the 4th section of the 2nd chapter, that commodities which have cost in their production the same quantity of labour, or the same value of capital, are subject to great variations of value, owing to the varying rate and varying quantity of profits which must be added to the quantity of accumulated and immediate labour employed upon them, in order to make up their value.

And it has further been shewn in the 6th section of the same chapter that, however variable may be the quantity or proportion of produce awarded to each labourer, the value of that quantity or proportion will always be the same.

It is clear then that profits must be regulated upon a principle essentially different from that stated by Mr. Ricardo, and that instead of being determined by the varying value of a certain quantity of labour employed, compared with the given value of the commodity produced, they will be determined by the varying value of the commodity produced compared with the given value of the certain quantity of labour employed.

This conclusion will appear strikingly obvious, if we adopt that supposition respecting the mode of procuring the precious metals which would certainly maintain them most strictly of the same value, that is, if we suppose them to be procured by a uniform quantity of unassisted labour without any advances in the shape of capital beyond the necessaries of a single day. That the precious metals would in this case retain, more completely than in any other, the same value cannot be denied, as the quantity of labour actually employed in their production, and the quantity of labour they would command would be the same. But in this case, as was before stated, the money price of labour must remain permanently the same. We cannot however for a moment imagine that this impossibility of a rise or fall in the money price of labour could in any respect impede or interrupt the natural career of profits. The continued accumulation of capital and increasing difficulty of procuring subsistence would unquestionably lower profits. All commodities, in the production of which the same quantity of labour continued to be employed, but with the assistance of capitals of various kinds and amount, would fall in price, and just in proportion to the degree in which the price of the commodity had before been affected by profits; and with regard to corn, in the production of which more labour would be necessary, this article would rise in money price just to that point which would so reduce corn wages as to retard the progress of population in proportion to the diminution of effectual demand; and thus all the effects upon profits, attributed by Mr. Ricardo to a rise of money wages, would take place while money wages and the value of money remained precisely the same. It is obvious that, in this case, profits can only be regulated by the principle of competition, or of demand and supply, which would determine the degree in which the prices of commodities would fall; and their prices, compared with the uniform price of labour, would regulate the rate of profits.

If however instead of supposing gold to be obtained by immediate labour alone in the way here stated, we suppose with Mr. Ricardo that it is obtained by fixed and circulating capitals in certain proportions, it will be found (as we have before intimated) that the state of prices and the rise of labour, contemplated by him in the progress of cultivation, are owing to a fall in the value of money, and not to a rise in the value of labour.

As a further illustration of this point so essential to a just theory of profits, let us suppose a country supplied with gold by a mine of its own, from which the same quantity of metal could always be obtained by the same quantity of labour with the same value of other capital; and further let us suppose, that at a particular period the accumulation of capital was increasing faster than the effectual demand for the produce at its former price; under these circumstances, let us consider what would be the consequences on the prices of commodities and labour. It is obvious that all those commodities which continued to be obtained by the same quantity of labour with the same value of other capital would fall in value from the abundance of the supply; and gold among the rest becoming more abundant, a different division of the produce would take place between the labourers and the capitalists; a smaller proportion of it would go to pay profits, and a larger proportion to pay wages. Profits therefore would fall, and the money wages of labour would rise. And the question is whether the rise in the money wages of labour ought to be considered as a rise in the value of labour, or a fall in the value of money. Mr. Ricardo considers it a rise in the value of labour, and has founded all his calculations in his chapters on rent, wages, and profits, on this assumption. If indeed the value of the produce of the same quantity of labour, or of labour and capital, were to remain the same, which is what he supposes, then it would be quite true that if a larger proportion of this produce went to pay the wages of labour, the value of labour would rise. But if the value of the produce falls, then the circumstance of a larger proportion of the produce going to pay the wages of labour by no means implies that the value of labour has risen. It only implies that the labourer receives a larger quantity of an article which has fallen in value. And that in the present case the article has fallen in value may with certainty be inferred both from the state of the supply compared with the demand, and the elementary costs of its production. It has been assumed that the supply is comparatively more abundant than before, on account of the increase of capital, although the productiveness of labour has remained the same. This must necessarily occasion a fall of profits, and this fall will be permanent if the same competition of capital continues. But if the rate of profits has fallen the elementary costs of production have fallen. In this case, the conditions of the supply of a certain quantity of gold are the advance of the same quantity of labour, with the same value of other capital, as before, and a less remuneration for profits. Consequently the elementary cost of gold to the purchaser is less than before.

If it be said, as Mr. Ricardo says, that a greater quantity of labour is required to produce the corn which pays the wages of the labourer, this may be conceded; but as a proportionate fall of profits is found to have taken place, the diminution of the element of profits balances the increase of the element of labour, leaving the value of labour the same as before, while its increased price is occasioned by the fall in the value of money. And that the value of money must have fallen is further evident from the conclusions of Mr. Ricardo himself, quite independently of the measure which I have applied to it. According to his theory the prices of manufactured commodities, which have not been produced by improved machinery, will, in the progress of cultivation, remain nearly the same, while labour and all raw products will rise. If therefore we measure the value of money by its general power of purchasing, its fall is decidedly established. Of a certain mass of objects it purchases the same quantity as before; of a much larger mass of objects it purchases a smaller quantity.

If then in the system of Mr. Ricardo commodities obtained by the same quantity of labour appear to be of the same value, it is only because he has adopted as his measure a money, which from the nature of its composition as consisting in part of profits, necessarily varies with the variations in the values of the very commodities which it is intended to measure.

But in reference to the great limiting principle, which in his system is the only one which regulates profits, namely the increasing difficulty of procuring food from the soil, it merely in fact determines the range of possible profits; how high they may by possibility rise, and how low they may by possibility fall. It is indeed always ready to act; and, if not overcome by countervailing facilities, will necessarily lower the rate of profits on the land, from which it will be extended to all other departments of industry. But even then it always operates according to the laws of demand and supply and competition.

The specific reason why profits must fall as the land becomes more and more exhausted is, that from the intrinsic nature of necessaries, and of the soil from which they are procured, the demand for them and their price cannot possibly go on increasing in proportion to the expense of producing them. Though the value of a given quantity of produce rises on account of the increased quantity of labour required to obtain it, yet the value of the diminished produce of the same quantity of labour, or its efficiency in setting fresh labourers to work necessarily falls from the state of the demand and supply. The boundary to the further value of and effectual demand for corn, lies clear and distinct before us. Putting importation out of the question, it is precisely when the produce of the last land taken into cultivation will but just replace the capital and support the population employed in cultivating it. Profits must then be at their lowest theoretical limit. In their progress towards this point, the continued accumulation of capital will always have a tendency to lower them; and at no one period can they ever be higher than the state of the land, under all the circumstances, will admit.

They may be much lower, however, as was before stated, from an abundant supply of capital compared with the demand for produce, while the soil is still rich. Practically they are very rarely so high as the actual state of the land combined with the smallest possible quantity of food awarded to the labourer would admit of; and very rarely so low as not to allow the means of further accumulation.

What would be the effects upon the profits of stock of any given increase of capital, or even of any given increase of the labour necessary to produce a certain quantity of corn, it would be quite impossible to say before hand. In the case of a mere increase of capital, however large, it has appeared that circumstances might occur to prevent any fall of profits for a great length of time. And, even in the case of an increase in the quantity of labour necessary to produce corn, it would depend entirely upon the principles of demand and supply and competition, whether the increase in the price of corn would be such as to throw almost the whole of the increased difficulty of production upon the labourer, or upon the capitalist, or again such as to divide the loss more equally between them, which is what generally happens.

No theory of profits therefore can approach towards correctness, which attempts to get rid of the principle of demand and supply and competition.