In Capital
III, Chapter 9, Marx describes the process of transformation of
exchange values into prices of production. The process is basically
to take the total social capital, and calculate an average rate of
profit on it, and then apply this average rate to the costprice
(laid out constant and variable capital plus wear and tear of fixed capital) to obtain a price of production. The process by which these
prices of production and an average rate of profit is established, is
via competition. Capital tends to move from areas where the rate of
profit on the advanced capital is low, and into those where it is
high. As a result, the supply of commodities in the former sphere
declines, and market prices rise, whilst supply of commodities in the
latter sphere rises, and market prices fall.
If cost
price is equal to k, and the rate of profit is p', the price of
production is k + kp'. Marx points out that this only applies,
however, where the advanced capital turns over just once during the
year. As, for individual spheres of capital, this is virtually never
the case, it is impossible to determine a price of production
mathematically on this basis, because the cost of production and the
advanced capital will always be different.
There is a
fairly simple solution to this problem. Marx points out that for the
total social capital, the problem of different rates of turnover does
not exist.
The
price of production for any individual sphere, however, can only be
calculated by taking the cost of production, and adding the average
profit calculated, not on this laidout capital, but on the advanced
capital. For example,
This
is clearly different than a price of production calculated as k +
kp', which would be, 410 + (410 x 10%) = 41, giving a price of
production of 451.
The
following table sets out how different rates of turnover affect the
mass of profit generated in each sphere, the rate of profit in each
sphere, the formation from this of the average rate of profit, and
the formation of prices of production for each sphere. The price of
production here is the price of the whole production not per unit.
Sphere

Fixed Capital

C

V

Wear & Tear

S

Rate of Turnover

Total
S

P' %

Price of Production

Profit Margin

1

60

20

20

6

20

3

60

60

172.25

37%

2

50

20

30

5

30

2

60

60

151.25

44%

3

40

20

40

4

40

1

40

40

110.25

72%

4

30

20

50

3

50

0.5

25

25

84.25

122%

Total

180

80

140

18

140

185

46.25

Its
assumed here that the fixed capital lasts on average for ten years,
thereby giving up 10% of its value each year as wear and tear, and
that the rate of surplus value is 100%. Because, the rate of
turnover in sphere 1 is 3 times per year, the total surplus value
produced in that sphere in a year is equal to 3 times the surplus
value produced in the turnover period, i.e. 3 x 20. The same applies
for each of the other spheres. In sphere 4, the advanced circulating
capital turns over once in 2 years, thereby only turning over 0.5
times in a year. This would be the case, for example in an industry
such as shipbuilding, where capital must be advanced for labourpower
and materials, during the whole of a twoyear period, whilst the ship
is being produced, and is only turned over, when at the end of that
period, the ship is finished and sold.
The
total social capital advanced is then equal to 400 (180 fixed capital + 80 circulating constant capital + 140 variable capital), and the total
surplus value produced during the year is 185, giving an average rate
of profit on the total advanced capital of 46.25%. The amount of
profit to be added in each sphere is then £46.25. However, as Marx
sets out above, this amount of profit is added to the cost of
production, not the advanced capital. The cost of production is the
advanced circulating capital, multiplied by the rate of turnover,
plus the wear and tear of fixed capital. In sphere 1, therefore,
this is (20 c + 20 v) x 3 = 120 + 6 = cost price of 126. Price of
production is then 126 + 46.25 = 172.25. In other words, it is the total laid out capital for the year, plus the wear and tear of fixed capital.
What
becomes clear here is that as the rate of turnover rises, the mass of
surplus value increases, and so the annual rate of profit for that sphere rises, but the profit margin is simultaneously
reduced, because this given mass of profit is spread across a larger
mass of laidout capital. This is, in fact, also the situation
described by Marx in Capital III, Chapter 18, dealing with the
effect of the turnover of Merchant Capital.
Marx
points out that the mass of profit accrued by merchant capital,
depends on the general rate of profit, and the mass of capital
advanced by the merchant capital. He then demonstrates that unlike
productivecapital, the mass of profit does not rise as the rate of
turnover of capital rises, because merchant capital can only share in
the surplus value actually produced by productivecapital.
Consequently, as the rate of turnover of the merchant capital rises,
so that the mass of laidout merchant capital rises, or put it
another way, its cost of sales, so this mass of surplus value is
spread across a greater mass of commodities, a greater cost of sales,
and so the profit margin per unit must fall.
But,
this is analogous to the situation described above where for the
year, the mass of surplus value is already determined, and what is
being compared is how this mass of surplus value is spread across the
laidout capital in each sphere, according to the different rates of
turnover.
Marx
writes,
(Capital III, Chapter 18)
This
is the same as the situation described above. It demonstrates that
in those spheres where the rate of turnover of capital is high, for
an average rate of profit to be established, and for prices of
production across the economy to be established on the basis of it,
the profit margin must be continually reduced.
If
we take Capital 4, in the original example, and assume that its
capital turns over 10 times faster, i.e. 5 times a year, as opposed
to 0.5 times, we obtain the following result, on the basis of the
previously calculated rate of profit. Its advanced capital remains
100, but its laidout capital, its cost of production for the year,
becomes 350 + 3 = 353. Adding in the average profit due to it, on
the basis of its advanced capital 46.25, this gives a price of
production of 399.25. But, if we calculate the profit margin for
this production it is 46.25/353 = 13%, which is significantly lower
than the original figure of 122%.
Obviously,
the other thing that occurs with an increased rate of turnover of
capital is that the actual volume of production also increases. If
we assume that an advanced capital of 100, produces 100 units of
output in each of the four cases, set out in the example, purely for
the purpose of elaborating this point, then the more times this
capital turns over, the more times it produces these 100 units during
the year. This necessarily affects the price per unit.
So,
Capital I produces 300 units per year, giving a price per unit of
£0.57 per unit; Capital 2 produces 200 units per year giving a price
per unit of £0.76; Capital 3 produces 100 units, giving a price of
£1.10 per unit; and Capital 4 produces 50 units resulting in a unit
price of £1.69.
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