On average, capitals of equal size produce equal profits, irrespective of the organic composition, and irrespective of whether the constant capital comprises a large amount of fixed capital and small amount of circulating capital, or vice vice versa. Ricardo correctly observed this fact, but was unable to explain why this average rate of profit was 20%, rather than 200%, because he had no basis for objectively determining the amount of surplus value. He is left, thereby, explaining this profit only on the basis of an addition to costs, whose limit is determined purely by competition.
And, Ricardo's followers were thereby also led into all sorts of errors, because they were unable to connect this average rate of profit, via all of the intermediate stages, back to the surplus value, which is its objective basis.
“Ricardo realises that the rate of profit is not modified by those variations of the value of commodities which affect all parts of capital equally as, for example, variations in the value of money.” (p 427)
In this respect, Ricardo is superior to those modern Marxist economists, and the Austrian School, who attribute crises to the adoption of credit money, in place of gold. But, having made this observation, he should have concluded that the rate of profit is affected by variations in the value of commodities that do not affect all parts of capital equally, “that therefore variations in the rate of profit may occur while the value of labour remains unchanged, and that even the rate of profit may move in the opposite direction to variations in the value of labour. Above all, however, he should have kept in mind that here the surplus-product, or what is for him the same thing, surplus-value, or again the same thing, surplus-labour, when he is considering it sub specie profit, is not calculated in proportion to the variable capital alone, but in proportion to the total capital advanced.” (p 427)
Marx quotes from Ricardo's “Principles”, where he describes three different situations. In the first, Ricardo describes a situation where the value of money falls in half. The result is that the commodities produced by a capital double in price. But, by the same token, Ricardo says, the money price of the capital has also doubled. If the money price of the capital rises from £1,000 to £2,000, and the exchange-value of the output rises from £1200 to £2400, the money profit in the first case is £200 or 20%, whereas in the second case the money profit is £400, but this still represents only 20%. The fall in the value of money has made no difference.
In the second case, described by Ricardo, he says that if a given capital, as a result of some rise in productivity, is able to produce double the quantity of output, so that the value of this output remains unchanged, then this would also produce the same rate of profit. However, that does not necessarily follow, It could be that labour is replaced by a machine, which thereby raises the productivity of the remaining labour. As a result, the proportion of capital comprising constant capital may rise, and that representing variable capital fall. The mass of surplus value then falls, whilst the value of output may remain constant. But, with the same value of advanced capital, and a smaller mass of surplus value, the rate of profit would fall.
The third example, given by Ricardo, continues the previous two, so that a capital of a given value doubles its output, but the value of the output remains constant. At the same time, the value of money is halved, so that the money price of the output doubles, whilst the money value of the advanced capital also doubles, thereby leaving the rate of profit unchanged. Ricardo's formulation is not precise enough, Marx says, because, where Ricardo refers to the output as “produce” of the capital, he should say “surplus produce”, or surplus value.
“For the rate of profit is equal to the surplus produce (value) divided by the capital employed. Thus if the surplus produce is 10 and the capital 100, the rate of profit is 10/100, which equals 1/10, which equals 10 per cent. If however he means the total product, then the way he puts it is not accurate. In that case by proportion of the value of the produce to the value of capital, he evidently means nothing but the excess of the value of the commodity over the value of the capital advanced.” (p 428)
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