A Problem
Classical Political Economists all agreed that there could be only one rate of profit in the economy. If there were a higher rate of profit in one industry than another, investors would shift their capital into the high-profit industry, depressing its price and its profit rate, and out of the low-profit industry, raising its price and profit rate, until the rates of profit were equal. This is the law of the equalization of the rate of profit.
Now suppose we have two industries. In both industries, the rate of exploitation is 100%, that is, s=v -- half of the value created by the labor day is appropriated by the employer, so s/v=1. One industry, baking, has an organic composition of capital of 1/2; that is, its wage bill is half as large as its non-labor costs. Therefore, for baking, the rate of profit is
(1)(1/3)=33.3%
For the other industry, brewing, the organic composition of capital is 1/10, that is, the wage bill is only one-tenth of the nonwage costs. The rate of profit in the brewing industry is
(1)(1/11)=9%.
The law of the equal rate of profit is violated! Notice what this means: capital will flow out of brewing and into baking. The price of beer will rise and that of bread will fall. As a result, the price of beer will be above its labor value, and the price of bread will be below its labor value.
Marx had discovered that, in general, the law of an equal rate of profit logically contradicts the labor theory of value! If organic compositions of capital can vary from one industry to another -- and it is clear that they did and do -- and if profits are equalized -- no-one doubted or doubts that profits are equalized in a competitive system -- the value in exchange has to deviate systematically from the labor embodied in the commodity.
Certainly, that is a major reason why modern economics has moved away from the labor theory of value. As a theory of "value in exchange" or relative prices, it can only be approximately correct. Chicago economist George Stigler -- no fan of Karl Marx but something of a fan of the Classical Political Economists -- calculated that the labor theory could account for 93% of the differences of relative prices in the U. S. in the 1940's. And the remaining 7% could reflect many different causes, no one of which amounts for more than a percent or two. (Some of the differences would presumably be random). So the labor theory is not entirely wrong. But, in a modern economy with a wide range of organic compositions of capital, the labor theory cannot be the whole story.
A Problem
