Marx’s wage theory is formally very much the same as Ricardo’s, although its implications are fundamentally different. Value of labour -p power is equated, by definition, to the value of the means of subsistence necessary for the maintenance of the labourer, and it is then argued that the price of labour (the rate of wages, that is) tends to conform to the value of labour supply.
Marx recognizes, as Ricardo does, that the nature and volume of goods that make up the subsistence of the labourer are themselves determined by the circumstances of a society. But with reference to a given stage of historical development, the minimum subsistence of labour is assumed to consist of a definite quantity of commodities. How, then, does it happen that the rate of wages tends to conform to this minimum subsistence? Marx explains this not in terms of a law of population growth, as Ricardo does indeed he has scant regard for the Malthusian law but in terms of what he calls ‘the reserve army of labour’.
So the labour supply is important. As soon as an economy leaves off the stage of primary accumulation, as soon, that is to say, as labour gets dissociated from capital and assumes the position of wage-earner to be employed by the capitalist, it becomes the business of the capitalist to keep down the rate of wages to subsistence level with a view to creating enough ‘surplus’ to maintain the rate of profit. With an unvarying wage-output ratio, the progress of accumulation carries with it the tendency to a falling rate of profits. This tendency can be suspended and the profit rate maintained if wages are prevented from rising with increasing productivity of labour consequent on accumulation.
The capitalist does it by resorting to one or the other of the following methods:
(a) varying the rate of accumulation;
(b) introducing technical improvements so as to substitute capital for labour; and
(c) creating monopoly power to suppress the demand for high wages.
Any of these methods leads to the creation of an industrial reserve army. An army of unemployed labourers is kept floating, so to speak, in the economy to be drawn upon as need arises, without any pressure for an upward revision of the wage rate.
Chronic unemployment is what keeps the wage rate down to the level of minimum subsistence, and it is this feature of a capitalist economy that renders the supply of labour perfectly elastic.