“... the level of the rate of profit is likewise a magnitude held within certain specific limits determined by the value of commodities. It is the ratio of the total surplus-value to the total social capital advanced in production. If this capital = 500 (say millions) and the surplus-value = 100, then 20% constitutes the absolute limit of the rate of profit.” (p 860)
As demonstrated previously, in examining the transformation of exchange value into prices of production, this total social surplus value is allocated across the total social capital, so that each individual sphere of capital obtains the average rate of profit. Those spheres with a low organic composition of capital, and which thereby produce a lot of surplus value, and enjoy a high rate of profit, thereby attract capital. The additional capital increases supply of these commodities, relative to their demand, so market prices for these commodities fall, until they reach a level whereby the profit has fallen to an amount that only produces the average rate. Similarly, those spheres which have a higher than average rate of turnover of capital, have a higher than average rate of profit, and similarly attract capital.
By contrast, industries with high organic compositions of capital, or lower than average rates of turnover of capital, produce less surplus value and have a low rate of profit. Capital leaves these industries in search of the higher rate of profit elsewhere. As a result, supply of these commodities falls relative to their demand. The market price thereby rises until it reaches a level whereby the profit made is equal to the average rate.
This average rate of profit is equalised for the capital advanced, not the capital laid out. In other words, as Marx specifies it is the average annual rate of profit. The advanced capital depends upon the size of the fixed capital, and the rate of turnover of the circulating capital, as Marx sets out in Chapter 9.
If the average rate of profit is 10%, then a capital which comprises 10,000 fixed capital plus 2,000 circulating constant capital, plus 2,000 variable capital would obtain a profit of 10% on this advanced capital of 14,000 (assuming the circulating capital turns over once), which is £1,400. If the fixed capital transfers 10% of its value as wear and tear, per year, the cost of production is 1,000 + 2,000 + 2,000, the profit of 1,400 then gives a price of production of £6,400, and the profit margin, p/k, is 1400/5000 = 28%.
A capital with 5000 fixed capital, 7,000 circulating constant capital and 2000 variable capital would similarly advance 14,000, and obtain £1,400 of profit. But, its laid out capital/cost of production is 500 + 7000 + 2000 = 9500. Adding in its share of the total social surplus value of £1,400, gives a price of production of £10,900, and its profit margin is 1400/9500 = 14.74%.
“Instead of the value of a commodity being equal to the capital consumed in its production plus the surplus-value contained in it, its price of production is now equal to the capital, C, consumed in its production plus the surplus-value falling to its share as a result of the general rate of profit, for instance 20% on the capital advanced in its production, counting both the consumed and the merely employed capital. But this additional amount of 20% is itself determined by the surplus-value created by the total social capital and its relation to the value of this capital; and for this reason it is 20% and not 10 or 100. The transformation of values into prices of production, then, does not remove the limits on profit, but merely alters its distribution among the various particular capitals which make up the social capital, i.e., it distributes it uniformly among them in the proportion in which they form parts of the value of this total capital.” (p 860)
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