At the start of the circuit of industrial capital, a given mass of physical capital is advanced. If we take the production of yarn, for example, a given quantity of cotton is advanced, a certain quantity of machinery, and of labour-power. The production process occurs, and out of it comes a quantity of yarn. It is impossible to rationally compare the quantities of cotton, machinery and labour-power put into this process to the quantity of yarn that comes out of it, because these are completely different use values. That is why Marx assigns money equivalents to the values of these different inputs and outputs so that such a comparison can be made. The point is also to illustrate the process of reproduction. These money equivalents of the respective values indicate how this process results in the physical use values themselves being reproduced along with their respective values, and how this also results in expanded reproduction.
In Capital I, Marx sets out how the physical quantities of the inputs that went into the production of yarn can also be represented as quantities of yarn coming out of this process. But, of course, this procedure requires that we base these calculations on values, i.e. current reproduction costs, and not on historic prices, or current selling prices. In the example, in the link provided, 20 kilos of yarn has a value of 10 hours. Given the values of the inputs required for its production:
9.52 kilos of yarn representing cotton = 4.76 hours
0.96 kilos of yarn representing spindle = 0.48 hours
4.76 kilos of yarn representing labour-power = 2.38 hours
4.76 kilos of yarn representing surplus value = 2.38 hours
To put it another way, if we were to be comparing quantities of the same use value, it is as though 15.24 kilos of yarn went into the production process, and 20 kilos of yarn came out of it.
On this basis, all of the physical inputs of the yarn can be reproduced, so that social reproduction, on the same scale, can occur. If we assume simple reproduction, so that the capitalist requires all of the surplus value to cover their own unproductive consumption, then social reproduction continues, and both the physical inputs, and the value required for their purchase is reproduced. However, if the value of cotton rises, after the production process begins, the sale of 9.52 kilos of yarn would no longer reproduce the cotton required for production to continue on the same scale, unless this higher value of cotton is reflected in the value of the yarn. Similarly, if the value of cotton falls, then unless the value of yarn falls, more value would be produced than is required for the inputs to be reproduced. It would appear that an additional profit had been created, even though the surplus value created by labour has not changed. That would then imply that The Labour Theory of Value had broken down. The value of the yarn would no longer be determined by the labour-time required for its reproduction, i.e. the labour required to produce the means of production, and the labour required to process them into yarn. It would also imply that labour was not the only creator of surplus value, because the value of the yarn would now exceed the value of the inputs, plus the surplus value created by labour, meaning an additional surplus value had arisen from elsewhere.
That is why Marx does not use historic prices, which lead to these distortions and undermining of the labour theory of value, but instead uses values, and their money equivalent. Of course, the value of cotton could rise after the yarn has been sold, but prior to the resultant money-capital having been metamorphosed into productive-capital. In that case, the money-capital now in the hands of the capitalist would be insufficient to reproduce the consumed cotton. They would have to use some of their profit or add additional capital, to make up the difference. In other words, there would be a tie-up of capital. Similarly, if the price of cotton fell there would be a release of capital. But, this simply places the capitalist in the same position as any other capitalist entering this line of production for the first time. Where the price of cotton rises, they would see that they need to have a greater quantity of capital tied up, in order to engage in production, and vice versa where the price of cotton fell. For the capitalist employing capital for the first time in this sphere, it does not appear that they have lost profit, or that the amount of profit to be made is lower. It simply appears that they must employ a greater quantity of capital, and that, therefore, the profit now represents a lower rate as against this greater amount of capital. Similarly, a fall in the value of inputs does not appear to them as creating a greater quantity of profit, simply that they need to advance a smaller value of capital, and that, therefore, the profit represents a higher rate of profit, as against this lower value of advanced capital.
As Marx sets out in Theories of Surplus Value, Chapter 22, this tie-up and release of capital that appears as either a fall or an increase in the amount of profit, from the perspective of the already employed capital, confused Ramsay, and it similarly confuses the proponents of the use of historic prices, when it comes to calculating the rate of profit.
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