Ricardo does not use the categories of constant and variable capital. He works, as Smith did, with the categories of fixed and circulating capital. Ricardo, therefore, notes that capitals that have large proportions of fixed capital see their prices fall when wages rise, whereas those that employ large amounts of labour see their prices rise. But, Ricardo considers such variation from values as merely an exception, “whereupon Malthus rightly remarks that in the progress of industry, the rule becomes the exception and the exception the rule.” (p 70)
But, Ricardo, in making this distinction, in relation to fixed and circulating capital, is also then drawn to the effect of the rate of turnover on the price of commodities. He notes that capitals with proportionally large amounts of fixed capital obtain the same annual rate of profit. Marx also explains this phenomenon in Capital III. The general annual rate of profit is calculated on the basis of the composite of the annual rate of profit of the total social capital, i.e. the annual rate of profit of each individual capital, or sphere of production. The annual rate of profit is calculated as the profit produced in a year, as a proportion of the advanced capital for one turnover period. The more such turnover periods in a year, the higher the annual rate of profit.
The advanced capital comprises the full value of the fixed capital, but only the circulating capital advanced in one turnover period, because whilst the value of the fixed capital is continually advanced to production, the circulating capital is continually being reproduced with each period of its turnover. A capital with a high proportion of fixed to circulating capital, therefore, will tend to have a higher value of advanced capital to profit than a capital that has a lower ratio of fixed to circulating capital. But, this is not the full story. Capitals with higher ratios of fixed to circulating capital will also tend to have higher levels of productivity, because the reason for the higher proportion of fixed capital is that machines have been introduced to replace labour. The higher levels of productivity means that the circulating capital turns over more quickly. The ratio of advanced fixed capital to circulating capital may be high, but that may not be the case in terms of the fixed capital relative to the laid out capital (i.e. the cost of production, c + v.) during the year, and consequently the profit produced during the year.
It's not the proportion of fixed capital to circulating capital that is decisive but the rate of turnover of the circulating capital. Taking the example from earlier, the car consisted of £2,000 fixed capital and £8,000 of circulating capital. The profit was £5,000. This represented an annual rate of profit of 50%, but, in terms of a rate of profit/profit margin, over the cost of production, of £8,200, it is 61%. However, suppose that the circulating capital of £8,000 turns over ten times during the year, so that 10 cars are produced. The laid out capital is then 10 x £8,000 = £80,000 plus £200 of wear and tear of fixed capital. The advanced capital remains £10,000, and so the profit remains £5,000, the average annual rate of profit, being 50%. So, the price of production of the ten cars is then £80,000 + £200 (cost of production) + £5,000 profit = £85,200, or £8,520 per car. Whilst the annual rate of profit remains 50%, the rate of profit/profit margin now falls to approximately 6.66%.
As productivity rises, and the rate of turnover of capital rises, so the rate of profit/profit margin falls, even as the annual rate of profit remains the same, or even rises. It was this phenomenon that Ricardo observes, but misunderstands as being a function of the ratio of fixed capital to circulating capital. As Marx describes in Capital III, the consequence is that those capitals that have a rate of turnover that is higher than that of the total social capital, have higher annual rates of profit than the average. This encourages more capital to accumulate in those spheres, which raises the level of supply of those commodities, pushing their market prices down towards their price of production. As with capitals with a lower than average organic composition, these capitals will have prices of production, which are lower than their exchange-value, and vice versa.
If we take something like a shipbuilder it takes several years to build a ship, and only when the ship is finished, and sold does the shipbuilder recover their capital plus their profit. If they advance £1 million of capital, which is laid out over this five years, this amounts to far more advanced capital than, say, a car maker, who may likewise lay out £1 million in that five years, but whose advanced capital may be only, say, £20,000, if they turnover their capital ten times a year, i.e. 10 x £20,000 = £200,000 for five years. In order for the shipbuilder and carmaker to both make the same annual rate of profit, the price of production of the former must be higher than the latter. But, once again, Ricardo, noting this phenomenon, only represents it as being an exception to the law of value.
“He has therefore presented the problem very one-sidedly. Had he expressed it in a general way, he would also have had a general solution.
But his great contribution remains: Ricardo has a notion that there is a difference between value and cost-price, and, in certain cases, even though he calls them exceptions to the law of value, he formulates the contradiction that capitals of unequal organic composition (that is, in the last analysis, capitals which do not exploit the same amount of living labour) yield equal surplus-value (profit) and—if one disregards the fact that a portion of the fixed capital enters into the labour process without entering into the process that creates value—equal values, commodities of equal value (or rather [of equal] cost-price, but he confuses this).” (p 71)
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