Several people have raised important questions about the materials of the first several parts of this extended essay and I thought it would be helpful to address some of them before continuing. The first thing to understand is that Smith, Ricardo, Marx, and the lesser political economists of the classical period all assumed more or less without argument that prices in the marketplace for commodities, for inputs into the production of commodities, and also for labor were regulated by competition in the absence of governmental rules fixing prices by fiat. They also assumed that entrepreneurs – what we would call capitalists – were motivated more or less single-mindedly by a pursuit of the greatest possible profit on the investments they made in their enterprises. This meant that they were assumed not to have traditional, religious, or personal preferences for one technique of production rather than another, the production of one commodity rather than another, or for the hiring of laborers of one racial, religious, or other character rather than another. The implication of these assumptions, which they all accepted without question, was that workers would go where they could get the highest wages, sellers in the market would sell to whomever offered the highest price, and capitalists would switch their investments from one line of production to another in so far as they could in pursuit of a higher rate of return on invested capital. They also assumed, without much discussion, that capitalists were rational calculators capable of figuring out, with available resources and techniques, how best to maximize their rate of return.
In addition, the classical political economists tended to suppose that there was one obviously best technique for the production of each commodity and that the information required by buyers, sellers, workers, and producers to make rationally self-interested decisions was readily available to all.
There were a number of implications of these pretty much unquestioned assumptions and they seem to have been obvious to Smith, Ricardo, and their fellow political economists. One implication was that capitalists would transfer their investments from one line of production to another solely as a consequence of their calculation of relative profitability rather than as a consequence of personal or family or national or religious or other traditions and preferences.
The second implication was that a rational capitalist would always take into account not only how much more his output sold for than was invested in the inputs of production but also how long the production process took. Profit was calculated as a percentage return on investment per annum. Thus, if one technique of production of a given commodity took three months from the start of the process until the commodity could be brought to market and sold whereas another technique involving, perhaps, tools and materials of the same cost, required six months brfore the commodity could be brought to market, a rational capitalist would take this into account and recognize that tying up his money in materials and tools for a longer period of time was more costly and therefore could only be justified by selling the output at a correspondingly higher price. This is what Smith had in mind when he observed that the “accumulation of stock” posed a problem for the Labor Theory of Natural Price.
Third, Smith, Ricardo, Marx, and the other early political economists took it for granted without much discussion that at any stage in the development of capitalism in each line of production there was one dominant technique that was obviously more profitable than the others and to which rational capitalists would gravitate. By the time Mark was writing, capitalist techniques of production had developed to the point at which this may not have been quite true but very little attention was paid to this fact.
Finally, although everybody knew that there were skilled craftsmen in certain lines of production whose labor was more productive and hence more valuable, not much thought was given to how to deal with the distinction between unskilled, semiskilled, and skilled labor. Marx at several points chooses simply to treat skilled labor as a multiple of unskilled labor, as though a skilled weaver could be treated as interchangeable with several unskilled weavers. This was clearly not true and eventually economists began to pay a great deal of attention to the issue of variations in levels of skill among workers, but it plays no important role in Marx’s theories, so I will ignore it here.
I hope this helps. Now let me continue with part four of my essay, which as promised will begin with a trip to the supermarket.