Of course, this differentiation of the rate of profit from the annual rate of profit, and the effect on the price of production operates in the opposite direction too. In the example given, the second capital, as a result of the £75 of fixed capital represented a larger advanced capital than the laid-out capital, or cost of production, for the year, but the opposite is also true. If we take that same example, it might be that the £15 of materials, and the £10 of labour-power are advanced in the production of commodities, which are produced and sold, and the capital consumed in their production reproduced every four weeks. In that case, a total capital amounting to £25 of wear and tear, plus 13 x £15 materials, and 13 times £10 of labour-power will have been laid out. In total, the cost of production will be £25 + £195 + £130 = £350. But, the same £15 of average profit on the advanced capital of £100 is all that this capital can claim. The price of production will then be £365, and the rate of profit/profit margin will be only 4.29%.
The consequence of this, as Marx describes, is not only that the price of production of commodities is a function of the organic composition of capital, but that it is also a function of these widely diverging rates of turnover of capital. Not only is it the case that those capitals with a higher than average organic composition have prices of production greater than their exchange-value, because their share of profit is greater than their production of surplus value, but those capitals whose rate of turnover is lower than the average also have prices of production higher than their exchange value, and obtain more profit than the surplus value they produce.
This is the main feature of the establishment of an average annual rate of profit, and the creation thereby of prices of production which differ widely from the exchange value of commodities. It is the determining factor in the allocation of capital, because it means that capital is allocated away from the low annual rate of profit spheres into the high annual rate of profit spheres, which results in the formation of these prices of production. Its what Marx means when he says that the law of the tendency for the rate of profit to fall, where the organic composition of capital is higher (or rate of turnover is lower) is the most important law for capital. Yet, Ricardo misses all of this, and is focussed only on the incidental movement of prices from the average rate due to fluctuations in supply and demand.
“Having postulated the general rate of profit, he only concerns himself with the exceptional modifications in prices which are necessary for the maintenance, for the continued existence of this general rate of profit. He does not realise at all that in order to create the general rate of profit values must first be transformed into cost-prices and that therefore, when he presupposes a general rate of profit, he is no longer dealing directly with the values of commodities.” (p 434)
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