The Rate of Surplus Value

The rate of surplus value, also termed the rate of exploitation, is the ratio of surplus value to the variable capital laid out to produce it. According to Marx, it is the true measure of the degree to which surplus value is being extracted, because, unlike the rate of profit, it measures surplus value only against the source of that surplus value. The rate of profit measures surplus value not just against the labour-power that produces it, but also against the constant capital, so the rate of profit must always be less than the rate of surplus value. The rate of profit is favoured by the capitalists, and by their apologists, because it disguises the source of the surplus value, and gives the appearance that profit is produced by all of the capital employed.

In fact, Marx points out, because an increase in fixed constant capital is often associated with at least a relative decline in the quantity of labour-power employed, it is often portrayed as though it is the fixed constant capital rather than the variable capital that is the source of profits.

The rate of surplus value is given by s/v x 100, where s is the surplus value, and v is the variable capital. The rate of profit is given by s/(c + v) x 100, where c is the constant capital. Here the value of the commodity is given by c + v + s. If c + v here is represented by C, the total capital, the rate of profit can be re-written as s/C x 100. In addition, C here is the cost of production. Because, as Marx points out, capitalists only introduce new machines if they cost less than the paid labour they replace, an increase in c, reflecting an increase in machinery, that causes a larger fall in v, at the level of the individual firm, appears to result in an increase in profits, due to the additional constant capital.

That is because the individual firm continues to sell its output at the market price. If we put numbers to the above this can be seen. Suppose, we have c made up of fixed capital, in the shape of tools, that amount to £100, and materials (circulating constant capital) that amount to £400, and we have labour-power of £2,000. If the tools are fully used up during the year, the cost price of the year's output is £100 + £400 + £2,000 = £2,500. If the rate of surplus value is 50%, then this means that the surplus value is 2000 x .50 = £1,000. The selling price of the output is then £3,500, and the rate of profit is 1000/2500 = 40%.

Assuming that this is the average composition for the industry, and that the commodity sells at its value, the market value of this output will then be £3,500. This firm will continue to sell its output at this price. However, if we assume it introduces a new machine the effect can be seen. Suppose, it replaces its existing tools with a machine that costs £600, which also replaces half of the existing workers. In that case, the firm's costs are £600 fixed capital + £400 materials + £1,000 labour-power = £2,000. But, the firm continues to sell this output at the market price of £3,500, so its profit is now £1,500, rather than £1,000. It appears that this profit has been created by the additional fixed constant capital employed.

In fact, however, this is an illusion. The additional fixed constant capital has not created additional profit, it has simply reduced the costs of this particular capital. The individual value of its output is now lower than the social value of the output. As soon as this machine is used by all other firm's in this industry, the appearance of the additional profit disappears, because the individual value, and social value are once more the same. Assuming that the output of the industry continues to sell at its value, we would have:

fixed capital £600 + circulating constant capital £400 + labour-power £1,000 = cost price £2,000. If the rate of surplus value remains at 50%, the surplus value would then be only £500, giving a market value of £2500. The rate of profit falls from 40% to 25%, despite the fact that the rate of surplus value for the industry is unchanged. Moreover, the total capital employed has fallen from £2,500 to only £2,000. The reason the rate of profit has fallen, is that, although the rate of surplus value remains constant, the amount of variable capital employed has fallen, so the total mass of surplus value has fallen, and has fallen by a greater proportion than the fall in the total capital employed. The important elements here then in deciding the amount of profit, and the rate of profit, is the rate of surplus value, and the mass of variable capital employed.

If we take the individual firm above, its variable capital is £1,000, whilst the surplus value it appropriates is £1,500. In other words, its rate of surplus value has risen from 50% to 150%. Marx argues that, in such cases, it is as though the value produced by the particular labour-power has trebled, or that it has become the equivalent of complex labour. At the same time that the value produced by this labour has risen, the value of the labour-power itself has not changed, and this results in the rise in the rate of surplus value.

“The exceptionally productive labour operates as intensified labour; it creates in equal periods of time greater values than average social labour of the same kind. (See Ch. I. Sect 2. p. 44.) But our capitalist still continues to pay as before only five shillings as the value of a day’s labour-power. Hence, instead of 10 hours, the labourer need now work only 7½ hours, in order to reproduce this value. His surplus-labour is, therefore, increased by 2½ hours, and the surplus-value he produces grows from one, into three shillings. Hence, the capitalist who applies the improved method of production, appropriates to surplus-labour a greater portion of the working day, than the other capitalists in the same trade. He does individually, what the whole body of capitalists engaged in producing relative surplus-value, do collectively. On the other hand, however, this extra surplus-value vanishes, so soon as the new method of production has become general, and has consequently caused the difference between the individual value of the cheapened commodity and its social value to vanish. The law of the determination of value by labour-time, a law which brings under its sway the individual capitalist who applies the new method of production, by compelling him to sell his goods under their social value, this same law, acting as a coercive law of competition, forces his competitors to adopt the new method.”

Capital I, Chapter 12

Marx makes the point that a similar situation arises with labour-power considered at an international level. If, for example, Britain's textile industry employs lots of machinery that raises the productivity of British workers, whereas the textile industry in India (which in 1800 accounted for 25% of global textile production) continues to be based on handicraft and manufacturing, then the global price of textiles may continue to be determined by the lower level, higher value production. But, as with the example above, the British production would churn out much larger quantities of textiles, with less labour employed, and so with a lower individual value. It would be as though the British workers labour was higher value, complex labour, compared with the labour of the Indian worker.

“But the law of value in its international application is yet more modified by the fact that on the world-market the more productive national labour reckons also as the more intense, so long as the more productive nation is not compelled by competition to lower the selling price of its commodities to the level of their value. 

In proportion as capitalist production is developed in a country, in the same proportion do the national intensity and productivity of labour there rise above the international level. The different quantities of commodities of the same kind, produced in different countries in the same working-time, have, therefore, unequal international values, which are expressed in different prices, i.e., in sums of money varying according to international values. The relative value of money will, therefore, be less in the nation with more developed capitalist mode of production than in the nation with less developed. It follows, then, that the nominal wages, the equivalent of labour-power expressed in money, will also be higher in the first nation than in the second; which does not at all prove that this holds also for the real wages, i.e., for the means of subsistence placed at the disposal of the labourer. 

But even apart from these relative differences of the value of money in different countries, it will be found, frequently, that the daily or weekly, &tc., wage in the first nation is higher than in the second, whilst the relative price of labour, i.e., the price of labour as compared both with surplus-value and with the value of the product, stands higher in the second than in the first.”

(Capital I, Chapter 22) 

The consequence of this is that, even though the Indian worker may be paid much lower wages than the British worker, the British worker would have a higher rate of exploitation, they would produce more surplus value, the price of Indian labour would then be higher. That is why, despite higher wages paid to workers in more developed economies, it is usually the case that the rate of profit, in these economies, is higher, because of the higher rate of surplus value, arising from the higher level of labour productivity. This is also why the majority of investment, from developed capitalist economies, goes not to less developed economies, but to other developed economies. It only becomes profitable to export capital to low wage economies, where the low wages can be combined with the same kind of high levels of productivity obtained in developed economies.

This same phenomena is also why workers, employed by large businesses, are often paid higher wages, and obtain better conditions, than workers employed by small, inefficient businesses. The higher rate of surplus value enables the firm to pay higher wages, and yet still obtain larger profits. As Marx and Adam Smith put it, wherever wages are low the price of labour (unit labour costs) is high, because the existence of low wages act as a disincentive for capital to invest in new machines and techniques that raise productivity. This comes down to the fundamental determinant of the rate of surplus value, which is the relation between the portion of the day which constitutes necessary labour, and that which constitutes surplus labour, which, in turn, is represented by the portion of the day during which labour produces the necessary product, and the portion during which it produces surplus product.

In every society, the Law of Value functions to ensure that not only is the production of each type of product undertaken with the least expenditure of labour, but the total labour-time of the society is expended in such a way as to maximise the use value produced. That is why agriculture in different parts of the world took on different forms and characteristics. A society that needs to meet its basic needs for food will focus its labour-time on the production of those types of foodstuff that it can produce most easily, given the particular conditions of climate, soil type, drainage and so on. By concentrating on those foodstuffs that provide the greatest nutrition for the least expenditure of social labour, the society, thereby, releases surplus labour-time that can be used for other purposes, and for the production of other products, which can be accumulated as means of production, thereby raising the level of social productivity.

A society which lives in an area that is dominated by mountains, for example, will require more labour-time to produce a given amount of wheat than one that lives in an area dominated by large prairies. The former will, therefore, find it more efficient to focus its labour-time on herding sheep as a food source, rather than growing wheat. In that way, less labour-time needs be expended to produce the food required to ensure the reproduction of labour-power, and the product produced over this amount constitutes a surplus product, as a product of labour, it has value, because value is labour.

The surplus product here then represents a surplus value, and this surplus value is also the basis for the wealth of the ruling class of the particular society. The ratio between the surplus labour and the necessary labour, is the same ratio as between the surplus product and the necessary product, and is equal to the rate of surplus value.

In Capital III, Chapter 10, examining the way a general rate of profit develops, along with the development of capitalist production, out of petty commodity production, Marx examines this form of the rate of surplus value. The non-capitalist, petty commodity producer sells their output at its exchange value rather than its price of production. All they are concerned with, Marx says, is to be able to recoup, in the price of the commodity, the value they have laid out in means of production, along with the value of the product of their own labour.

For similar reasons to those set out above, the Law of Value again here leads to an equalisation of the rate of surplus value. The small producer will have their day divided into necessary labour and surplus labour. This is true whether they are a direct producer who spends part of the day providing for their own consumption, and another part of the day producing a surplus product, or whether they are a small commodity producer, who spends part of the day producing a commodity, which they sell, in order to be able to buy the commodities required for their necessary consumption, and a further period during which they produce a surplus product, which they sell and thereby obtain a sum of surplus value, in money form.

If the particular small producer finds that they are producing a commodity whose value is such that they have to devote a greater portion of their working-day to meet their necessary requirements, than the average, they will tend to move to some different type of production which they can undertake more efficiently. In that way, although there is no process for bringing about an average rate of profit, as exists under capitalism, the Law of Value does operate, under petty commodity production, to bring about an equalisation of this rate of surplus value. This equalisation of the rate of surplus value applies also to capitalist production.

“The fact that capitals employing unequal amounts of living labour produce unequal amounts of surplus-value, presupposes at least to a certain extent that the degree of exploitation or the rate of surplus-value are the same, or that any existing differences in them are equalized by real or imaginary (conventional) grounds of compensation. This would assume competition among labourers and equalization through their continual migration from one sphere of production to another. Such a general rate of surplus-value — viewed as a tendency, like all other economic laws — has been assumed by us for the sake of theoretical simplification. But in reality it is an actual premise of the capitalist mode of production, although it is more or less obstructed by practical frictions causing more or less considerable local differences, such as the settlement laws for farm-labourers in Britain. But in theory it is assumed that the laws of capitalist production operate in their pure form. In reality there exists only approximation; but, this approximation is the greater, the more developed the capitalist mode of production and the less it is adulterated and amalgamated with survivals of former economic conditions. 

(Capital III, Chapter 10).

This is also the basis, under capitalism, for the increased extraction of surplus value via relative surplus value, rather than absolute surplus value.