In the same way that the circuit of productive-capital is P … P, so the circuit of commodity-capital is C` - C`. In the former, a quantity of productive-capital is reproduced as an equal quantity of productive-capital, and in the latter a quantity of commodity-capital is reproduced as an equal quantity of commodity-capital. This is the basis of simple reproduction, and out of the surplus value, m, then arises the potential for accumulation, and expanded reproduction. This is true whether this commodity-capital is that of the producer or the merchant.
Commodity-capital takes on an independent existence as merchant capital, because, for the producer, it is not productive, i.e. it does not produce additional surplus value. For them, it is simply a necessary cost which must be endured, in order to realise the value of their product, and, thereby, the surplus value embodied within it. The merchant offers to them the potential to reduce these costs, and thereby, to increase the mass of realised profit. The merchant is able to reduce these costs, because they specialise in this function, but also, because each merchant takes over the commodity-capital of many different producers, they can operate on a much larger scale than any individual producer, thereby obtaining economies of scale.
Of course, if the merchant paid producers the full value of their output, including the surplus value, the merchant themselves would not be able to make a profit, unless they sold commodities at prices above their exchange-value. In order to make it worthwhile, the merchant capitalist must be able to make the average industrial profit, the same as the productive-capitalist. The productive-capital in calculating the average industrial profit must themselves take into consideration all of the capital they advance, including that advanced as part of the circulation period. So, the fact that this capital takes on independent form does not really change this condition. Marx sets out in Capital III, Chapter 17, the way that when all of this capital is included in the denominator in calculating the average industrial profit, it is necessarily a much lower percentage than where just the advanced productive-capital is taken into consideration. But, on this basis, the productive capital sells their output to the merchant at its cost of production plus this average profit (price of production), whilst the merchant buys the commodities at this price, and then adds the average rate of profit to its own advanced capital, to give their own final selling price to the consumer.
Marx gives the following example. He assumes a total advanced social capital of £900 million. Comprising £720 million c and £180 million v. By this means he avoids the problem of distinguishing exchange-values and prices of production. He assumes a rate of surplus value of 100%, giving total profit of $180 million, and rate of profit of 20%. The total value of the commodity-capital is then £1,080 million. However, he then assumes that there is an additional £100 million of merchant capital, giving a total advanced social capital of £1,000 million. In that case, the average annual rate of profit cannot be 20%, but must fall to 18%. Its important to note, here, that this £100 million of additional capital is not for commercial expenses such as shops, storage, wages etc.(i.e. constant and variable capital) but is only the capital the merchant advances for the purchase of commodities from producers. In other words, if they advance £100 million, and buy all of the output of the producers, their capital must turn over several times during the year.
“It is possible that additional costs (costs of circulation) may enter into the commodities after their purchase and before their sale, and it is also possible that this may not happen. If such costs should occur, it is plain that the excess of the selling price over the purchase price would not be all profit. To simplify the analysis, we shall assume at this point that no such costs occur.”
(Capital III, Chapter 17)
As Marx says, the productive-capital, commodity-capital and money-capital are not separate capitals, but the same industrial capital existing simultaneously in these different forms. On the basis of Marx's example, he starts with an assumption of no circulation time, no time when the capital exists as commodity-capital or money-capital, but goes straight from being productive-capital to being metamorphosed back into productive-capital. He then introduces a circulation period, when the capital exists as commodity-capital. This circulation time equals a tenth of the total turnover period for the capital, the production time consisting of nine-tenths of the turnover time. One way of looking at this, therefore, is to consider that if £900 million represents the capital advanced for 90% of the turnover period, then the capital advanced for the whole turnover period must be £1,000 million. However, neither money-capital nor commodity-capital produce additional value or surplus value. It is only the £900 million of productive-capital that constitutes the cost of production of the output, and which produces surplus value. Put another way, the annual rate of profit, which is what determines the general rate of industrial profit, has been reduced from 20% to 18%, i.e. by a tenth, because the actual turnover period of the industrial capital has risen, because now the output must spend a period of time as commodity-capital, during which it produces no additional surplus value. It is similar to if the production time rises, because the length of time that products like wine require to ferment and so on, is increased.
The merchant capital simply takes on this function, equal to where the productive-capitalist must hold a portion of their total capital as unproductive commodity-capital or money-capital, during the circulation period. This merchant capital also will not be advanced unless it obtains the average rate of profit. If, however, we take the total social advanced capital of £1,000 million, then the available £180 million of profit represents an 18% rate of profit. So, if the productive-capital adds 18% to its cost of production, that equals profit of £162 million, and that gives a price of production for its output of £1,062 million. It sells these commodities to the merchant capitalist. The merchant now adds 18% profit to the £100 million capital they have advanced, equals £18 million, so that they now sell the commodities for £1,062 + £18 million = £1.080 million. As the merchant capitalist advances £100 million of capital, its clear that their capital must turn over 10.62 times during the year. Later Marx demonstrates that, because the merchant capital must take the industrial profit and rate of profit as given, the more times their capital turns over, the lower the profit margin/rate of profit obtained, and so the lower the unit selling price of commodities, in order to obtain the average annual rate of profit.
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