What Marx illustrates is that when this illusion of a fall or a rise in the amount of profit is removed, it remains a fact that a rise in the value of inputs, results in a rise in the value of outputs, but also results in a fall in the rate of profit, and vice versa. As Marx sets out in Capital III, Chapter 49,
“This entire portion of constant capital consumed in production must be replaced in kind. Assuming all other circumstances, particularly the productive power of labour, to remain unchanged, this portion requires the same amount of labour for its replacement as before, i.e., it must be replaced by an equivalent value. If not, then reproduction itself cannot take place on the former scale...
In so far as reproduction obtains on the same scale, every consumed element of constant capital must be replaced in kind by a new specimen of the same kind, if not in quantity and form, then at least in effectiveness. If the productiveness of labour remains the same, then this replacement in kind implies replacing the same value which the constant capital had in its old form. But should the productiveness of labour increase, so that the same material elements may be reproduced with less labour, then a smaller portion of the value of the product can completely replace the constant part in kind. The excess may then be employed to form new additional capital or a larger portion of the product may be given the form of articles of consumption, or the surplus-labour may be reduced. On the other hand, should the productiveness of labour decrease, then a larger portion of the product must be used for the replacement of the former capital, and the surplus-product decreases.”
In other words, if we take the example above, if the value of cotton doubles to 9.52 hours, after it has entered into production, the total value of yarn also rises by an equivalent 4.76 hours to 14.76 hours. As Marx says in Capital III, Chapter 6,
“If the price of raw material, for instance of cotton, rises, then the price of cotton goods — both semi-finished goods like yarn and finished goods like cotton fabrics — manufactured while cotton was cheaper, rises also. So does the value of the unprocessed cotton held in stock, and of the cotton in the process of manufacture. The latter because it comes to represent more labour-time in retrospect and thus adds more than its original value to the product which it enters, and more than the capitalist paid for it.
Hence, if the price of raw materials rises, and there is a considerable quantity of available finished commodities in the market, no matter what the stage of their manufacture, the value of these commodities rises, thereby enhancing the value of the existing capital. The same is true for the supply of raw materials, etc., in the hands of the producer.”
Taking the example, no matter what the historic price paid for the cotton by the yarn producer, a rise in the value of cotton brings about a rise in the value of the yarn to be sold by the yarn producer. Its value rises to 14.76 hours. Yet, there is no change in the surplus value produced by the yarn producer's workers, which remains at 2.38 hours. This 2.38 hours of surplus labour represented a rate of profit of 2.38/7.62 = 31.23%. But, now, although the value of yarn rises, the rate of profit falls to 2.38/12.38 = 19.22%. This also shows that, in terms of social reproduction, of the reproduction and expansion of material balances, it is reduced; a greater proportion of output, and output value has to be used to reproduce the consumed capital, and similarly the surplus value now accumulates a smaller amount of additional capital.
The physical productive-capital, thereby, produces a quantity of output that now constitutes commodity-capital. In the example above 20 kilos of yarn. Using, Marx's method of measuring, using values represented as their money equivalents, if we take 1 hour of labour as equal to £1, then the value of this 20 kilos of yarn is £10. If, the value of cotton rises to £9.52, the value of yarn rises to £14.76. The capitalist, however, must now sell this yarn, whether its value is £10 or £14.76, and doing so involves further costs. These additional costs do not add value to the yarn, and so represent a deduction from the profit obtained by the producer. In addition, because capitalist production is continuous, the capitalist cannot wait until they have sold the yarn, before replacing their consumed productive-capital. As Marx sets out in Capital II, Chapter 15, productive-capitalists must have enough productive capital to cover their production during the circulation period. This is the point Marx makes that the capital is simultaneously in all of its forms of existence, as productive-capital, commodity-capital and money-capital.
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