Marx describes the fundamental basis for the general or average rate of profit, which is that it is the total surplus value produced, measured against the total social capital advanced. On this basis, each separate capital is entitled to a share of the total surplus value, in the same proportion as that individual capital stands in relation to the total social capital. In short, it is entitled to receive the average rate of profit, irrespective of how much or how little surplus value that particular capital produces.

*“Each capital, therefore, in each particular branch, represents a*

**portion**of a total capital of the same**organic composition**, both as regards constant and variable capital, and circulating and fixed capital. As such a portion, it draws its dividends from the surplus-value created by the aggregate capital, in accordance with its size. The surplus-value thus distributed, the amount of surplus-value which falls to the share of a block of capital of given size, for example £100, during a given period of time, for example one year, constitutes the**average profit**or the**general rate of profit**, and as such it enters into the costs of production of every sphere of production.” (p 433)
The point about

*“during a given period of time”*, is important, because of the fact that different capitals turn over at different rates, and it is this fact, as Marx sets out in*Capital II*, that leads to the distinction between the rate of surplus value and annual rate of surplus value, and consequently to the distinction between the rate of profit and annual rate of profit, and thereby to the average annual or general rate of profit.*“If this share [per 100] is 15, then the usual profit equals 15 per cent and the cost-price is £115. It can be less if, for instance, only a part of the capital advanced enters as wear and tear into the process of the creation of value. But it is always equal to the capital consumed +15 [per cent], the average profit on the capital advanced. If in one case £100 entered into the product and in another only £50, then in the first case the cost-price would be 100+15=115 and in the second case it would be 50+15=65; thus both capitals would have sold their commodities at*

**the same cost-price**, i.e., at a price which yielded the same rate of profit to both.” (p 433-4)
In other words,

*the annual rate of profit*is calculated on the*total advanced capital*. This capital includes*the full value of any fixed capital*, even though only a portion of the value of this fixed capital enters into the value of the output in the year. It is calculated on this full value for the simple reason that, as*fixed capital*, it must be present, in its entirety, for production to take place. If a capitalist spends £1 million on a factory, no production can take place without the entire factory being there for it to take place in. The fact that the factory might be expected to last for 100 years, and so only transfers £10,000 of value per year, does not change matters. The capitalist has still*advanced*this £1 million of capital that otherwise could have been used in some other activity, and thereby been producing profit.
But, the difference is important in discussing the difference between

*the rate of profit*, which is the same thing as the*profit margin*, which is*p/k*, or*p/(c+v)*, as against*the annual rate of profit*, which is*s x n/C*, where s is the surplus value produced in one turnover period, n is the number of turnovers of the circulating capital in a year, and C is the total advanced capital for one turnover period. As Marx sets out here, the average rate of profit is 15%. The 15% is calculated on the total advanced capital, which in both cases, is taken to be £100, and so produces £15 profit. As Marx describes, if, in one case, all of the £100 of capital is laid out and consumed during the year, the*cost of production*, c + v, or k, is equal to £100, and adding in the £15 average annual profit gives a*price of production*of £115. The rate of profit, or*profit margin*is similarly 15%. However, in the second case, some of the advanced capital is*fixed capital*, which only transfers some of its value to the year's output as*wear and tear*. Suppose the capital is comprised £75 fixed capital, £15 materials, and £10 labour-power. If the fixed capital loses a third of its value, as wear and tear, the cost of production is then 25 (d) + £15 (c) + £10 (v) = £50. But, this capital has advanced capital in total of £100, and is still entitled to the average 15% profit, and thereby of £15. Adding this £15 of profit to the*cost of production*of £50 then gives a*price of production*of £65, and the*rate of profit/profit margin*is now 30%.
How can this come about? Well, as stated above, it is clear that a capitalist who has to

*advance*the £75 of capital as*fixed capital*will still expect to obtain the average 15% profit on the whole of this capital, even though it is not fully consumed during the year. If not, they will either not engage in this line of business to start with, or else they will move their capital to other spheres where they can obtain this rate of profit on their entire capital. This movement of capital between spheres, so that it produces an*average rate of profit*, on the*total advanced capital*and not just the*capital consumed*in the year's production, thereby raises or lowers the level of supply of commodities in each sphere, and thereby adjusts the prices of these commodities to the appropriate*price of production*.*“It is evident, that the emergence, realisation, creation of the*

**general rate of profit**necessitates the**transformation of values**into**cost-prices**that are**different**from these values. Ricardo on the contrary assumes the identity of values and cost-prices, because he confuses the rate of profit with the rate of surplus-value. Hence he has not the faintest notion of the general change which takes place in the**prices**of commodities, in the course of the establishment of a general rate of profit, before there can be any talk of a general rate of profit. He accepts this rate of profit as something pre-existent which, therefore, even plays a part in his determination of**value**.” (p 434)
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