Its necessary to examine Marx's arguments, here, carefully, as with the same arguments in relation to appreciation, depreciation, release and tie-up of capital, as set out in Capital III, Chapter 6. Timing plays a crucial role, in these discussions. It makes a considerable difference whether the price of raw materials, used in the production of a commodity, rises before or after that commodity has been sold. If the price of the raw materials rises before the commodity is sold, then this will increase the value of the commodity, and thereby affect its market price. If the commodity has been sold, and converted into potential money-capital, before the raw materials price rises, it will have been too late to have affected its value. So, now, the money-capital will be insufficient to reproduce the quantity of consumed raw material. For production to continue on the same scale, more capital would have to be employed. There would be a tie-up of capital, i.e. a portion of output that would have gone to revenue, now has to go to reproduce consumed capital. The opposite applies were the price of raw material to fall. There would then be a release of capital, similar to that described above. Capital would be converted into revenue.
“Let us [now] consider the manufacturer. Let us assume that he has laid out £100 in cotton twist and made a profit of £20. The product therefore amounts to £120. It is assumed that £80 out of the outlay of £100 has been paid for cotton. If the price of cotton falls by half, he will now need to spend only £40 on the cotton and £20 on the rest, that is £60 in all (instead of £100) and the profit will be £20 as previously, the total product will amount to £80 (if he does not increase the scale of his production). £40 thus remains in his pocket.” (p 344)
So, its obvious again, here, that for Marx, in examining the process of social reproduction, and accumulation, it is the current reproduction cost, and not the historic cost, that is the basis for calculating the rate of profit. As he repeats, on numerous occasions, in Capital and Theories of Surplus Value, a fall in material prices acts to reduce the value of the end product, because the value of the consumed raw material is reduced retrospectively.
If we take the example above, then, if the price of cotton fell to £40, before the yarn is sold, then the value of the yarn itself would have fallen from £120 to £80. The manufacturer, in selling the yarn, would then, with this £80 have £40 to replace the consumed cotton, £20 to replace wages, leaving them with the same £20 profit. They would then, in this case, not have the £40 release of capital, but their £20 profit now represents 20/60 = 33.33% rate of profit on the capital of £60, as opposed to their previous 20% rate of profit. The rise in their rate of profit is the result of the fall in the value of cotton. If all of the profit were accumulated, it would enable production to expand by a third rather than a fifth. If, however, the price of cotton fell, after the yarn is sold, the manufacturer has already ideally replaced the cotton, at its old value of £80, but they now only have to spend £40 to actually replace it.
“Thus it is not the fact that the farmer replaces his seed corn in kind which is the key, for the manufacturer buys his cotton and does not replace it out of his own product. What this phenomenon amounts to is this: release of a portion of the capital previously tied up in constant capital, or the conversion of a portion of the capital into revenue. If exactly the same amount of capital is laid out in the reproduction process as previously, then it is the same as if additional capital had been employed on the old scale of production. This is therefore a kind of accumulation which arises from the increased productivity of those branches of industry which supply the productive ingredients of capital.” (p 344-5)
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