The use of historic prices not only gives this illusion of profits or losses arising from changes outside the actual production process (capital gains and losses, or as Marx sets out, later, and in Capital III, Chapter 6, the release or tie up of capital, whereby capital is transformed into revenue, or vice versa) but also gives misleading calculations for the rate of profit. The yarn producer might have paid €10 for cotton, its historic price, but would be badly misled if they proceeded on this basis. The rise in the value of yarn from €30 to €40 does not represent an additional €10 of self-expansion of capital-value. It represents, in fact, the reality that, although the historic price of the cotton, consumed in its production, was only €10, its value was actually €20. This was not a self-expansion of value, but merely a change in the value of the cotton, arising from a change in productivity. That becomes apparent when the yarn producer, having sold the yarn comes to replace the consumed cotton. As described above, out of the €40, they must now spend €20, to replace the cotton, alongside the €10 to replace labour-power. The actual amount of profit, they obtain, equal to the amount of surplus value produced, which has not changed, is still €10. On the basis of the use of historic prices, it created the illusion that €20 of profit was created, even though the surplus value remained €10, so that on this basis, labour is not the only source of profit. It also then appeared that, the historic cost of the capital was €20, with profit of €20, so that the rate of profit was 100%.
But, as Marx describes, in various places, the real measure of the self expansion of the capital, is the extent to which it enables it to accumulate. If the rate of profit really were 100%, it should enable the capital to employ twice as much cotton, and twice as much labour, as before. As Marx says, capital is a social relation between capital and wage-labour, and its expansion is an expansion of this relation. But, it's quite clear that this capital cannot double in size. Previously, €10 of profit enabled the capital to expand by 50%. It could employ 150 kilos of cotton, and €15 of labour-power. But, now out of the €40 received for the yarn, €20 is used to replace the 100 kilos of cotton, and €10 is used to replace labour-power, leaving €10 for accumulation. With the price of cotton now at €0.20 per kilo, the €10 of profit can only buy an additional 33.3%, alongside 33.3% more labour-power. The actual rate of profit, therefore, rather than doubling, has, in fact, fallen from 50% to 33.3%.
In the coming chapters, we will see how Marx explains that the use of historic prices confuses Ramsay into this belief that additional profit arises from these changes in the price of constant capital, which are, in fact, an illusion, based upon capital gains or losses. It would only be true that, in the example above, the rise in the value of the cotton results in additional “profit”, if, as Ramsay does, and as the Temporal Single System Interpretation does, we assume that the capital is always liquidated, in full, i.e. converted into money, at the end of the year, and that production is not continuous and ongoing. In that case, the €10 of capital gain accruing to the yarn producer, could be pocketed in cash, with no requirement for them to have to reproduce their capital, and thereby to replace the cotton at its new higher value. But, that is not an analysis of capitalism, which is such a system based upon continuous and ongoing production. The circuit of industrial, capital, as Marx sets out, in Capital II, is not M - C ... P ... C` - M`, with rate of profit then being calculated as the change in M` relative to M, where in both cases M represents actual money prices paid. That is the circuit only of newly invested money-capital, or of capital that is being liquidated, i.e. where a firm is closing down. The circuit of industrial capital is rather P ... C` - M`. M - C ... P, where the value of P, and and of capital value throughout this circuit, is expressed not in money prices paid, but only in money equivalent terms of the capital value, at current reproduction cost, i.e. with money acting only as unit of account. Only on this basis can the self-expansion of the capital, be separated out from capital gains and losses, and an accurate measurement of the rate of profit be obtained. Marx gives the expanded form of this circuit of industrial capital as,
What the yarn producer obtained was a capital gain, not additional surplus value. They had originally paid €10 for cotton, and its value rose to €20. It is the potential for such capital gains that leads to speculation, whereby capitalists seek to identify commodities, or assets whose current market price they believe to be lower than their market value, or where specific market conditions are likely to lead to the market prices of these commodities or assets rising sharply above their current market value. However, such speculative capital gains are not profits. It does not represent a self-expansion of capital-value.
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