This situation in agriculture is a special case in relation to the effect of a fall in the value of constant capital, because of the fact that a part of the output is used to reproduce the constant capital in kind. If we look at things on the basis of the historic cost, the farmer has used 20 tons of seed, which had a value of £40. They spend £40 on fertiliser, and pay £40 in wages. That is £120 in total. They finance this out of the proceeds of the previous year's harvest when the price of corn was £2 per ton, meaning they had to sell 60 tons to provide the capital consumed in the current year.
Marx says the situation becomes clearer if we assume that the farmer is going to sell up at the end of the current year. This is not a valid assumption, as Marx later describes, though it is one used in effect by Ramsay, and by the proponents of historic pricing, and which leads to their errors. What the assumption does do is to illustrate where the illusion of the additional £20 profit comes from. Because the value of grain has fallen from £2 to £1 per ton, in order to recover this £120 of capital laid out, the farmer would, indeed, now have to sell 120 out of their 200 tons of production. That would leave them with a surplus product of 80 tons, with a value of £80, as opposed to the surplus product of 100 tons, and profit of £100 previously calculated.
In Capital II, Marx, in analysing the circuit of industrial capital, demonstrates that it is actually comprised of three different circuits; the circuits of money-capital, productive-capital and commodity-capital. Unlike previous modes of production, these three circuits are not separate, contiguous circuits occurring one after another. Marx demonstrate that they are a circuit of one single capital that is simultaneously in each of these different phases. He demonstrates that the circuit M – C ...P … C` - M` is only the circuit of newly invested money-capital, or, as in the example here, capital that is leaving production. The circuit of existing capital is P … C` - M`.M – C … P.
The significance of that is illustrated here. The reason that 120 tons of grain has to be sold, here, is to replace the money-capital outlay – historic cost – of the farmer. That leaves just 80 tons of surplus product, a profit of £80. If the process of social reproduction is viewed in this way, whereby, at the end of each year, the money-capital outlay must be recovered, that the process then stops, and starts again in the new year, with money-capital again being advanced for the purchase of productive-capital, then the use of historic prices as the basis for calculating the rate of profit is valid. The comparison of one year as against another becomes an exercise in comparative statics. However, as Marx has shown, this has absolutely nothing to do with the way capitalism works!
Marx's assumption is one of continuous and continuing production, not one in which capital is repeatedly liquidated, at the end of each year, pending reinvestment. That kind of stop-start production sequence is typical of pre-capitalist commodity production and exchange, not of industrial capitalism. If we return to the farmer, as soon as we remove this assumption of them liquidating their capital, the real situation becomes clear. They need to sell 40 tons of grain to raise the £40 required to reproduce their consumed fertiliser; and they need to sell 40 tons to raise the £40 required to reproduce the labour-power. The reason they must sell 40 tons for this purpose, whereas previously they only needed to sell 20 tons, is that the unit value of a ton of grain has halved from £2 to £1 per ton. Put another way, the exchange value of grain has halved relative to money, fertiliser and labour-power. Or to phrase it another way, the money price of grain, fertiliser price of grain and labour-power price of grain has doubled. The seed price of grain has not doubled, because the seed and the grain are one and the same use value, and contrary to the argument of the proponents of historic pricing, have the same value. So, to reproduce their seed, they only need to take 20 tons from their output to do so. That means a total of 100 tons (£100) is actually required to reproduce the consumed capital, not 120 tons, which is what would be required were the farmer considered to be completely liquidating their capital, or seeking to reproduce the historic cost of that capital. That means that, on the basis of Marx's assumption of continuing production, and the use of value, i.e. current reproduction costs, as opposed to historic cost, the farmer has a surplus product of 100 tons, left over, after having reproduced their consumed capital, with a value of £100.
As Marx puts it,
“Altogether he must now lay out 100 quarters, compared to 60 quarters previously; but he need not lay out 120 quarters, the amount corresponding to the depreciation of the corn, because the 20 quarters used [as seed] which were worth £40, are replaced by 20 [quarters] (since in this context only their use-value matters) which are worth [£] 20. So evidently he has made a gain of these 20 qrs., now worth £20. His surplus is therefore not £80 but £100, not 80 qrs., but 100. (Expressed in quarters of the old value, not 40 quarters but 50.) This is an unquestionable fact, and if the market price does not fall as a result of abundance, the farmer can sell 20 quarters more at the new value, thus gaining £20.” (p 343-4)
As Marx says, here, this is not additional surplus value, it is an additional profit arising from the release of capital, and its conversion to revenue. The example and analysis, here, by Marx, therefore, also relates back to Adam Smith's “absurd dogma” that the value of output resolves entirely into revenues, whereas Marx has shown that it resolves into revenue and capital, i.e. into the new value created by labour that divides into v + s, and into the value of the consumed constant capital that must be reproduced on a like for like basis, out of current production, and thereby valued at current reproduction costs. The output cannot resolve entirely into revenues, precisely because a portion of output is not available for consumption. It must instead replace consumed means of production. If social productivity rises, then the current value of that portion will fall, so that capital is released to become revenue – and also the rate of profit will rise. If social productivity falls then this portion will grow, and capital will be tied up (a portion of what would have been revenue has to be used to replace capital) – and the rate of profit will also fall.
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