As Marx describes, in Capital III, Chapter 6, if the value of cotton falls, then the value of yarn falls, including the value of yarn produced prior to the fall in the value of cotton. It is the labour-time required for reproduction that determines value, not historic costs. However, if the yarn has just been sold, at its former, higher price, before cotton is bought to replace that consumed, a smaller proportion of that price of the yarn is now required to replace the consumed cotton. There is a release of constant capital, which may be used for additional consumption/revenue, or else additional capital accumulation.
But, even if the yarn is sold at its new, lower price, this does not change the amount of surplus value produced by the spinners. If they produced £1,000 of surplus value before, they still do now. If, previously, a kilo of cotton was £10, the £1,000 of surplus value would have bought an additional 100 kilos, but, if cotton falls to £7.50, the £1,000 buys an additional 133 kilos. In other words, there is a rise in the rate of profit, and capacity to increase the capital.
One problem that faces capital, as described in Capital III, Chapter 15, is that, even when surplus value has been pumped out of the workers, this is only the first part of the process. It is necessary to realise that surplus value embodied in the commodities by selling them at their values. It requires adequate demand for those commodities. But, as Marx describes, in Theories of Surplus Value, Chapter 17 and 20, if the production of knives increases, or similarly wages rise, so that more knives can be bought, it does not mean that the demand for these knives will, in fact, rise or rise enough. Knives could then be overproduced and have to be sold at reduced prices, possibly resulting in losses.
At times, when wages have risen, and workers have bought many wage goods in greater quantities, they may be harder to convince to buy even more of them at prices that realise the produced surplus value. Their marginal propensity to consume may fall, and their savings rise. It is not under-consumption, as their consumption continues to rise, but at a slower pace, and slower than the increase in supply, leading to overproduction.
The problem of realising produced surplus value can be resolved if the value of commodities, previously out of the reach of workers, falls to a level whereby they can now afford them. Instead of workers increasing savings, they, then, create demand for these new types of commodities that were previously luxuries, and now become incorporated into the basket of wage goods. As the market for these commodities expands, capital migrates from old, established spheres into these new lines of production.
But, at the time, workers may not provide the demand for these new types of production. Consumption of wage goods may not expand. Theoretically, capital can compensate by using surplus value to accumulate additional productive-capital. However, ultimately, the purpose of production remains not only the production of, but realisation of profit, which requires consumption. Simply compensating for inadequate demand for consumption goods, by increasing demand for producer goods, only exacerbates the problem of realisation.
It is one reason that Malthus proposed that under-consumption be remedied by having the landed aristocracy appropriate more in rents, so that it could spend these revenues unproductively, and so enable the capitalists to realise the profits. Keynes, basically copied Malthus' solution a century later, but used the state as the buyer rather than the landlords. In both cases, it amounts to capital resolving the problem of realisation by handing over a greater portion of profits so that others can provide additional demand, i.e. no solution at all.
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