The importance of the relation of fixed capital to circulating capital resides in its effect on the rate of turnover of capital. By increasing the rate of turnover, it increases the amount of surplus value for any given mass of advanced capital. Where the turnover period is prolonged, the opposite occurs.
“It is clear first of all that the difference between fixed and circulating capital can affect surplus-value (apart from the differences in the mass of living labour employed, i.e., differences which are related to the ratio of variable to constant capital) only insofar as it affects the turnover of the total capital. It is therefore necessary to investigate how the turnover affects surplus-value. Two factors are obviously closely connected with it: 1) surplus-value cannot be accumulated, reconverted into capital, so rapidly (so often); 2) the capital advanced must increase both to continue to employ the same number of workers, etc., and because the advances of money which the capitalist makes to himself to cover his own consumption costs must extend over a longer period. These factors are important in connection with profit. Here, however, it is, to begin, with, only necessary to examine how they affect surplus-value. One must moreover always clearly distinguish between these two factors.” (p 389-90)
In other words, suppose £100 of capital is laid out, during the year, and turns over just once. It produces £10 of surplus value, so that the rate of profit is 10%. The amount of surplus value is a function of the total labour exploited during the year. Suppose then that the capital now turns over twice during the year. £100 of capital continues to be laid out, and the same quantity of labour is thereby exploited, producing the same £10 of surplus value. However, now only £50 of capital is advanced (but turned over twice) to produce this £10 of surplus value, so the annual rate of profit doubles to 20%, even though the amount of surplus value has remained constant.
“The rate of profit is not simply the surplus-value calculated on the capital advanced, but the mass of surplus-value realised within a given period, that is, in a definite period of circulation. Insofar as the difference between fixed and circulating capital affects the mass of surplus-value which a particular capital yields within a given period, it affects the rate of profit. Two aspects must be taken into consideration: firstly, the difference in the size of the capital advanced (relative to the surplus-value realised) and secondly, the difference in the length of time for which these advances have to be made before they are returned with a surplus.” (p 390)
So, if we take a capital of £100, which produces £10 of profit, the rate of profit is 10%. But, this rate of profit is itself essentially meaningless. In the same way, if I borrow £1,000, and I'm told the interest to be paid is only 1%, it makes a big difference whether this 1% interest is for a day, a week, a month or a year. After ten days, if I go to pay off the loan, I might be shocked to find that I owe, not £1,010, but £1,100. That's not 1%, but 10%, I might protest, only to be told that the 1% was per day, not for the duration of the loan.
The rate of profit, like the rate of interest, or the rate of surplus value, is only meaningful if it is for a given period of time, such as for a year. In the same way that lenders have to quote an annual percentage rate of interest, so the rate of profit is only meaningful in determining the average rate of profit etc., if it is calculated on the basis of profit produced in a year by a given amount of advanced capital. If £100 of capital, advanced for a month, produces £10 of profit, so producing a 10% rate of profit, this £100 of advanced capital produces £120 of profit in a year, so that the annual rate of profit is 120%. because the average rate of profit is based upon this annual rate of profit, this is why the rate of profit/profit margin on commodities produced by capitals that turn over quickly is low, whereas the profit margin on commodities where the capital turns over slowly is high.
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