Marx demonstrates conclusively, here, that his calculation of the rate of profit and annual rate of profit is calculated on the basis of the value, i.e. current reproduction cost, of the physical components of capital consumed in (rate of profit), or advanced to (annual rate of profit) production. It is not based upon the historical prices paid for the commodities that comprise that capital. He illustrates this by examining the effect of the wear and tear of the fixed capital, of the coal producer, on the annual rate of profit, which is the basis for the calculation of the average rate of profit. In the first year, £100 of capital is advanced - £50 fixed capital, £50 wages. The £50 of surplus value, thereby, produces a 50% annual rate of profit. However, in Year 2, the fixed capital has lost £5 of its value in wear and tear, so that only the residual value of £45 is advanced, along with £50 of variable-capital. As this £50 of variable-capital continues to produce £50 of surplus value, the annual rate of profit, thereby, rises to 50/95 = 52.63%.
“Thus there can be no doubt that in the case of all capitals employing a great deal of fixed capital—provided the scale of production remains unchanged—the rate of profit must rise in proportion as the value of the machinery, the fixed capital, declines annually, because wear and tear has already been taken into account. If the coal producer sells his coal at the same price throughout the ten years, then his rate of profit must be higher in the second year than it was in the first and so forth.” (p 388-9)
This is very significant in offsetting the capital losses that firms can experience as a result of depreciation, particularly moral depreciation of their capital. Depreciation and wear and tear are two entirely different phenomena. Wear and tear occurs within the labour process, as a proportion of the use value of fixed capital, and so of its value, is transferred to the end product, and thereby reproduced in the value of that end product. Deprecation occurs outside the labour process, and so it is not recovered in the value of the end product (the exception being, as Marx sets out in Capital II, in agriculture, where machinery is necessarily left unused for part of the year, and so represents an equivalent of necessary waste, such as cotton dust in textile production.)
The more intensively or extensively a capital can use its fixed capital, and thereby recover its value (from wear and tear), in the value of final output, the more it can protect itself from capital losses arising from the depreciation of that capital. Suppose a firm has just bought a machine for £1,000, whose lifespan is 10 years at average usage. It loses £100 a year in wear and tear, which is recovered in the value of its output. However, if a year later the value of such a machine falls to £50, because it becomes cheaper to produce, or a new machine that is twice as productive is introduced, the firm will lose £500 of capital value, due to this moral depreciation. It will be unable to recover this £500 of value, in the value of its output. It will only be able to transfer £50 of value of wear and tear to its end product.
However, if the firm had been using its machine for five years, before this depreciation occurs, its actual value would already have been reduced to £500 anyway, as a result of wear and tear. Or it might have achieved the same condition if it used the machine twice as intensively as normal, so that its lifespan would be reduced to 5 years, and it would have been transferring £200 of wear and tear per year, thereby transferring £500 in 2.5 years. In the earlier example, the coal miner saw his rate of profit rise each year, because he sold his output at the same price, realising the same amount of profit, but on a steadily declining value of advanced capital, due to annual wear and tear. But, the alternative would have been to reduce the price of his output, so as to continue to make the same annual rate of profit, whilst, thereby undercutting his competitors.
In the same way, after Year 5, when the current value of his fixed capital has fallen to £500, it could transfer £50 as wear and tear to output value, rather than £100, and still make 50% annual rate of profit. So, if some new coal producer entered production, with a new machine with a value of £500, the original coal producer, could sell their output at the same price, whilst still making the same annual rate of profit, as the new entrant. That is why capitals with a lot of fixed capital like to use it as extensively and intensively as possible, so that its value is transferred in the shortest possible time, as wear and tear, and thereby recovered in the value of output, and so protecting themselves against capital losses due to depreciation. Such firms use shift systems, weekend working and so on, to ensure that machines are kept running, buildings are kept occupied and so on.
Marx describes it like this.
“This extra profit may be equalised also as a result of the fact that—apart from wear and tear—the value of fixed capital falls in the course of time, because it has to compete with new, more recently invented, better machinery. On the other hand this rising rate of profit, which results naturally from wear and tear, makes it possible for the declining value of the fixed capital to compete with newer, better machinery, the full value of which has still to be taken into account. Finally, the coal producer sold his coal more cheaply [at the end of the second year], on the basis of the following calculation: 50 on 100 means 50 per cent profit, 50 per cent on 95 comes to 47½ ; if therefore he sold the same quantity of coal [not for 105 but] for 102½—then he would have sold it more cheaply than the man whose machinery, for example, began to operate only in the current year. Large installations of fixed capital presuppose possession of large amounts of capital. And since these big owners of capital dominate the market, it appears that only for this reason their enterprises yield surplus profit (rent). In the case of agriculture, this rent derives from working relatively fertile land, but here we are dealing with a case where relatively cheaper machinery is utilised.}” (p 389)
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