The competition-of-capitals doctrine and the wage-profit relationship

The wage-profit relationship is usually linked up with Ricardo and his notion of “proportional wages” (Principles, Chapters I, VI and passim). This relationship is based on Ricardo’s theory of value and supports his diminishing-returns-to-agriculture theory of the falling rate of profit. A wage-profit relationship, however, exists also in the Wealth of Nations (Book I, Chapter IX and passim). Here it is related to the alternative competition-of-capitals theory of the falling rate of profit which in turn is based on Smith’s different theory of value. The purpose of this chapter is to reconstruct Smith's competition-of-capitals doctrine. This reconstruction, however, is not intended to provide a faithful assembly of what Smith actually wrote or a 'rational' view of what he must have thought in this connection. Rather, it is to extract from his faulty exposition and with the benefit of hindsight what is necessary to make Smith's doctrine consistent with his system of thought and vision of the future in order to determine whether, or to what extent,Ricardo's dissatisfaction is justified. This reconstruction will be based on the fragmentary statements by which the doctrine is presented in the Wealth of Nations and will try to highlight not only some of the ambiguities incorporated in these statements but also the links between these statements and other crucial parts of Smith's system of thought. This purpose will be achieved by considering the Malthus-Ricardo disputes on the falling rate of profit as well as their relevance for understanding the impact of growth on wages and profits in past and modern economies.