From the assumptions set out earlier, we have a total annual product of £25,000. The advanced capital turns over 10 times. The variable capital is £500, and so the amount of the annual product attributable to labour-power is £500 x 10 = £5,000.

In establishing the principles for analysing the turnover of the capital, surplus value had also been left out of the equation. Now, Marx introduces it into the analysis.

With a 100% rate of surplus value, £100, or 1 week of labour-power, produces £100 of surplus value. In a working period of 4 weeks, £400 is produced, and in a 50 week year, £5,000 of labour-power produces £5,000 of surplus value.

But, its clear why the rate of turnover is important here. The firm has spent £5,000 on wages, in the year, but to achieve this, it only had to advance £500 of capital. The other £4,500 of wages paid during the year came not from an advance of capital, but merely from the capital advanced being returned in the sale of the commodity, and laid out once more to buy replacement labour-power. The firm did not need £5,000 of capital to start business, to cover wages, but only £500.

Yet, from the £500 of capital advanced, to buy labour-power, that labour-power has created £5,000 of surplus-value. In other words, the annual rate of surplus value is not 100% but 1000%!

*“If we analyse this rate more closely, we find that it is equal to the rate of surplus-value produced by the advanced variable capital during one period of turnover, multiplied by the number of turnovers of the variable capital (which coincides with the number of turnovers of the entire circulating capital).” (p 299)*

So, the annual rate of surplus value is s x n/v, where v is the amount advanced for variable capital, s is the surplus value produced by it for the period advanced, and n is the number of times v is turned over in a year.

Similarly, the total amount of surplus value produced in a year, S, = v x (r/100)/ n, where r is the rate of surplus value. For example, £500 x 100/100 x 10 = £5,000.

Marx labels this first variable capital A. He then assumes another variable capital, B, of £5,000. That is ten times that of A. This capital is expended at the rate of £100 per week to buy labour-power, just as with A. This labour-power is exploited at exactly the same rate as A. So, each week, the £100 advanced for labour-power, produces £100 of surplus value, as did A. The difference here is that the product of B can only be sold at the end of the year. Consequently, instead of the advanced capital being repeatedly returned, so as to be laid out again, this capital turns over just once during the year.

In order to keep producing during the year, and even though only the same amount of labour-power is employed and exploited, B has to be £5,000 as opposed to £500 for A.

In a year, B has produced exactly the same amount as A, £25,000. B has produced exactly the same amount of surplus value as A, £5,000. The capital laid out in wages, for B, is exactly the same as for A, £5,000, and for materials too, £20,000. Yet, the annual rate of surplus value for B is only a tenth that of A. S £5,000 x n = 1/ v £5,000 = 100%.

*“This phenomenon creates the impression, at all events, that the rate of surplus-value depends not only on the quantity and intensity of exploitation of the labour-power set in motion by the variable capital, but besides on inexplicable influences arising from the process of circulation. And it has indeed been so interpreted, and has — if not in this its pure form, then at least in its more complicated and disguised form, that of the annual rate of profit — completely routed the Ricardian school since the beginning of the twenties.” (p 301)*

But, the reason is obvious. A required an advance of capital of only £500 whereas B required an advance of capital ten times the size, of £5,000. If B had been advanced on the same basis as A, then the rate of surplus value would be the same. But, then we would have £5,000 advanced for 5 weeks = £1,000 per week = £50,000 per year. The surplus-value would be £50,000.

*“Only the capital actually employed in the labour-power produces surplus-value and to it apply all laws relating to surplus-value, including therefore the law according to which the quantity of surplus-value, its rate being given, is determined by the relative magnitude of the variable capital.”*

*(p 301)*