Theories of Surplus Value, Part II, Chapter 8 - Part 48

The reason that this higher annual rate of profit appears as a lower profit margin is precisely because this mass of profit is spread across a larger mass of output. It is important, because it is the annual rate of profit which is the basis of the general rate of profit, and the determinant, therefore, of the allocation of capital between different spheres, but also because it is the annual rate of profit which determines the potential for accumulation, and economic growth, not the rate of profit.

Consider the position of two types of capital. On the one hand, a shipbuilder, which takes five years to build a ship and turnover its capital. It lays out £10 million in capital over the five years, and enjoys a 100% rate of profit, selling the ship for £20 million. In order to double production, to two ships, it must advance all of this £20 million.

Now consider a capital producing furniture. It lays out £10 million over 5 years too. But, it turns over its capital 4 times a year. So, it turns over £0.5 million every three months. It only ever advances £0.5 million of capital. If this capital enjoys a 20% rate of profit over the five years, it would produce just £2 million in profit, during that time, or £0.4 million p.a. But, this £0.4 million of profit p.a. represents an annual rate of profit of 80%, as against the 20% rate of profit.

However, if at that point,i.e. at the end of five years, it decided to accumulate these profits, it could quadruple its production, despite only obtaining a fifth of the rate of profit of the first capital. In other words, it requires £0.5 million of capital to be advanced for a turnover period. If it uses its £2 million of profits, therefore, it can quadruple the amount of materials and labour-power it buys, and thereby quadruple its production. At the end of the three months turnover period, it would sell this output, and thereby reproduce its capital, so as to produce again at the same level, in the next three months and so on. 

In fact, by quadrupling its output in this way, it would also increase the rate of turnover of its capital, thereby increasing its annual rate of profit, and enabling an even greater expansion of its production.

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