Marx then turns to those further complexities that arise from the fact that not all of the capital advanced enters into the value of the product, and that what is being calculated as a rate of profit is actually the annual rate of profit, and this is affected, as stated above, by the rate of turnover of the capital. An advanced capital of £100 that turns over five times a year produces five times as much profit as one that turns over once a year, and thereby produces a rate of of profit five times that of the latter.
“For in our calculation, above, we assumed that the whole of the constant capital which has been advanced, enters into the product, i.e., that it contains only the wear and tear of the fixed capital, for one year, for example (since we have to calculate the profit for the year). The values of the total product would otherwise be very different, whereas here they only change with the variable capital. Secondly, with a constant rate of surplus-value but varying periods of circulation, there would be greater differences in the amount of surplus-value created, relatively to the capital advanced. Leaving out of account any differences in variable capital, the amounts of the surplus-values would be proportionate to the amounts of the values created by the same capitals. The rate of profit would be even lower where a relatively large part of the constant capital consisted of fixed capital and considerably higher, where a relatively large part of the capital consisted of circulating capital. It would be highest where the variable capital was relatively large as compared with the constant capital and where the fixed portion of the latter was at the same time relatively small. If the ratio of circulating to fixed capital in the constant capital were the same in the different capitals, then the only determining factor would be the difference between variable and constant capital. If the ratio of variable to constant capital were the same, then it would be the difference between fixed and circulating capital, that is, only the difference within the constant capital itself.” (p 391)
This fact that the average profit to be added to the cost of production is actually the average annual profit, calculated on the whole of the advanced capital (fixed and circulating) is often overlooked. An advanced capital that consists of a proportionately large amount of fixed capital will attract a proportionally large mass of profits relative to the cost of production compared to one that employs proportionally less fixed capital, as Marx discusses in Capital III.
Suppose we take two capitals both of £10,000.
Capital
I
Fixed
Capital
|
Materials
|
Variable
Capital
|
Profit
10%
|
8000
|
1000
|
1000
|
1000
|
If the fixed capital suffers 10% wear and tear, the cost of production is 800 d + 1,000 c + 1,000 v = £2,800. The profit to be added is £1,000, which is 10% on the advanced capital of £10,000. But, this £1,000 of profit represents a rate of profit of 35.71%, on the £2,800 of capital laid-out, i.e. on the cost of production.
Capital
II
Fixed
Capital
|
Materials
|
Variable
Capital
|
Profit
10%
|
2000
|
4000
|
4000
|
1000
|
Now, the cost of production is 200 d + 4000 c + 4000 v = £8,200. Adding the profit of £1,000 now gives a price of production of £9,200. The rate of profit on the advanced capital of £10,000 remains 10%, but the rate of profit/profit margin on the laid out capital is now 12.20%.
Clearly, the capital that has a high proportion of fixed capital sees its price of production increased by much more than the capital with a lower proportion of fixed capital, and that is clearly because a large portion of the value of the fixed capital is not turned over. This, however, only examines the situation on the basis of comparative statics, and does not take account of the role of the fixed capital in raising productivity, and thereby itself bringing about a rise in the rate of turnover of the circulating capital, upon which the annual rate of profit is based. It's quite likely that a capital with a high proportion of fixed capital may have a high rate of turnover of capital, because the fixed capital may represent high levels of machinery, which raise levels of labour productivity. That means that the value of advanced circulating constant capital may remain constant, or even fall, whilst the value of the laid-out constant capital will rise sharply, as a result of being turned over many more times. And, as Marx sets out, in Capital III, the unit value of machines and other forms of fixed capital tends to fall proportionately more than does the value of materials, whilst this same rise in productivity, as a result of technological development, means that one machine may replace two older machines, and this new machine will not only be cheaper, but will also process two or more times as much material as previously was processed by the two older machines. Consequently, the value of fixed capital, and of wear and tear will progressively fall as a proportion of total output value, whilst the value of materials will progressively increase.
Engels set out a number of such examples, in Capital III, where such capitals with more fixed capital result in higher productivity, and rates of turnover. Suppose we take the first example, but assume that the circulating capital turns over five times during the year. The advanced capital remains £10,000, and thereby produces the average profit of £1,000 as before. So, now the total cost of production is £800 wear and tear, £1,000 x 5 = £5,000 materials, and £1,000 x 5 variable capital = £10,800. Adding the profit of £1,000 gives a price of production of £11,800, and now the rate of profit/profit margin is 9.26%.
If the output originally was 2,800 units, the price per unit was £1. Now output is 14,000 units and the price per unit is £0.84 per unit.
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