## Formation of a General Rate of Profit (Average Rate of Profit) and Transformation of the Values of Commodities into Prices of Production

The organic composition of capital depends on its technical composition and on the relative values of the constant and variable capital. The composition is expressed in percentage terms. By assuming a constant rate of surplus value, the effects of changes in the organic composition, on the rate of profit, can be determined. Of course, in practice, the rate of surplus value cannot be held constant, because the same factors that lead to a change in the organic composition of capital also result in changes in the rate of surplus value.

If we have a capital made up in such percentage terms:-

c 80 + v 20 + s 20; s' = 100%, C = 100, r' = 20%.

But, the constant capital here comprises both fixed and circulating capital. It is only the latter plus the wear and tear component of the fixed capital, plus the variable capital that comprises the cost-price of the commodity. In order to determine that we would need to know the absolute rather than percentage values involved. For example, the above might be:-

£240 fixed capital + £80 circulating constant capital + £80 variable capital + £80 surplus value.

Of the fixed capital, 10% might constitute wear and tear. So, then:-

d 24 + c 80 + v 80 + s 80 = 264.

The cost price would be £184.

“But since this circumstance has absolutely no bearing on the rate of profit, and hence, in the present analysis, we shall assume, for the sake of simplicity, that the constant capital is everywhere uniformly and entirely transferred to the annual product of the capitals. It is further assumed that the capitals in the different spheres of production annually realise the same quantities of surplus-value proportionate to the magnitude of their variable parts. For the present, therefore, we disregard the difference which may be produced in this respect by variations in the duration of turnovers.” (p 154)

Marx demonstrates this with a table of 5 different capitals with different organic compositions, and the same s', and correspondingly different rates of profit.

 Capitals Rate ofSurplus-Value Surplus-Value Value ofProduct Rate ofProfit I. 80c + 20v 100% 20 120 20% II. 70c + 30v 100% 30 130 30% III. 60c + 40v 100% 40 140 40% IV. 85c + 15v 100% 15 115 15% V. 95c + 5v 100% 5 105 5%

In fact, as he says, we could consider these five separate capitals as merely departments within a single enterprise. In that case, the total capital of all five would be the single capital of the firm, the total surplus value, produced by all departments would constitute the firm's profit, and relating it to the firm's capital would give the rate of profit.

Marx seems to have forgotten that he began by saying that, for the purpose of analysis, he would assume that all of the constant capital, “is everywhere uniformly and entirely transferred to the annual product of the capitals”, because he comments,

“But to avoid entirely erroneous conclusions it must not be assumed that all cost-prices = 100.” (p 155)

In other words, he's pointing out that part of the constant capital here comprises fixed capital, only the wear and tear of which enters the cost-price. Emphasising this point, he sets out another table in which the constant capital, in each case, comprises a varying amount of fixed and circulating constant capital. The amount of fixed capital to circulating constant capital, affects the cost-price, but not the rate of profit, because the latter is calculated on the total capital advanced.

By adding the average profit to the cost-price, in each case, we obtain the price of production for that commodity. At that price, each capital advanced, of the same size, obtains the same average rate of profit. Some prices will be above, and some below the respective exchange values of the commodities, but necessarily, the sum of these prices equals the sum of exchange values. The prices above cancel out those below the exchange value.

That is shown in the next table.
 Capitals Rate ofSurplus-Value Surplus-Value Rate ofProfit Usedup c Selling Price Cost-Price I. 80c + 20v 100% 20 20% 50 90 70 II. 70c + 30v 100% 30 30% 51 111 81 III. 60c + 40v 100% 40 40% 51 131 91 IV. 85c + 15v 100% 15 15% 40 70 55 V. 95c + 5v 100% 5 5% 10 20 15 390c + 110v — 110 110% — — — Total 78c + 22v — 22 22% — — — Average
The differences depend on the organic composition of capital. A capital with a high organic composition will produce less surplus value than the average, because it will employ proportionately less labour-power – the source of surplus value. As a result, the exchange value of its product will be lower, because it contains proportionately less surplus value. The opposite is true for capitals with low organic compositions. It should be noted here that the selling price comprises the cost price (c + v plus the wear and tear of fixed capital) plus the surplus value, whereas the rate of profit is calculated on the total capital advanced, i.e. including the whole of the fixed capital.