Writing to his friend Engels in August, 1852, Marx jotted down what is perhaps the first attempt to summarize his views on the organic composition of capital, average rate of profit and rent. At this time, while Marx was juggling theoretically with enormous sums of capital in the library of the British Museum, his own financial condition was one of chronic crisis, owing to the outbreak of the American Civil War which had cut short even the small weekly remuneration he had been receiving for writing articles for the New York Tribune. "It is a real wonder," he says in his letter to Engels, "that under these conditions I can still continue working on new economic theories." The portion of this historic letter dealing with Marx's economic analysis was originally translated by Max Beer for the British Labor Monthly. It is now given here for the first time in the United States. It will be recognized by all students of Marxian economics as a profoundly important document, particularly as it shows the roots of Marx's differences with Ricardo and other bourgeois economists of the same school. -- The Workers Monthly, USA 1925
You know that I divide capital into two parts: (1) into constant capital (raw materials, machinery, buildings), and (2) into variable capital, or that part of capital which is spent on wages. Constant capital reappears in the value of the product. Variable capital contains less materialized value than the workman gives in labor back for it. Let us denote constant capital by the letter "c," and variable capital by the letter "y."
Suppose that the necessary labor (that is that part of the daily labor which is necessary for the reproduction of the wage) amounts to eight hours, and that the laborer works twelve hours, then he replaces the variable capital plus one half of it. This 50 per cent of excess labor I call surplus value.
You know further that I lay much stress on what I call the organic composition of capital, that is on the proportion of constant and variable capital, employed in the various trades. This ratio varies in the various trades. In highly developed textile industry, for instance, the ratio between constant and variable capital (c:v) is 80:20, in the tailoring business it is 50:50, in some very highly developed trades it is 90:10, in another trade it is, say 70:30. We see, then, that the organic composition of capital varies considerably. And as it is only variable capital which produces a surplus value or profit, since profit is nothing but the proportion of surplus value to the total capital advanced, then it theoretically follows that equal capital but with different organic compositions will produce unequal surplus values and therefore different rates of profit.
Suppose, as above, that the surplus labor is equal to 50 per cent. If, for instance, £1 value is the product of one working week, then the total wage bill of thirty laborers will be 20 and the value of the product of their labor 30. That is, the laborer receives two-thirds of a pound and he produces £1 value.
The amount of surplus value which a capital of 100 produces in different trades will vary according to the ratio in which capital is divided between its constant and variable elements. I denoted v 20, then the value of the product is equal to 110 (assuming, as above, 50 per cent surplus value or surplus labor). The mass of surplus value is equal to 10 per cent, likewise the rate of profit, that is £ 10 profit on a capital of £100, the total profit is £110. Take now the big tailoring trade, the organic composition is c 50, v 50, the surplus value 25, the total product £125. Take another trade, where the organic composition is c 70, v 30, the surplus value 15, the total product £ 115. Finally, take a trade where the organic composition is c 90, v 10, the surplus value 5, the total product of £105.
We have here, with the same exploitation of labor, for equal amounts of capital in different trades, very different amounts of surplus value, and hence very different rates of profit.
However, if we consider the four capital outlays as forming component parts of a single whole, we get an average rate of profit as follows:
This amounts to an average profit of 13% per cent.
The total capital (£400) considered as being the property of the capitalist class yields an average profit rate of 13%. And the capitalists are brothers. Competition, transfer of capital, or withdrawal of capital from one trade to the other renders it possible that capital outlays of equal magnitudes in different trades, despite their different organic compositions, yield the same average rate of profit. In other words, the capital outlay of any single manufacturing business yields an average profit rate, not according to the surplus value which it produces, but as an integral part of the total capital of the employing class. It is a share capital of a big concern, and its dividend is paid proportionately to its magnitude out of the total mass of surplus value the laboring class produces.
In order that each of the four capitals given in the illustration, I, II, III, IV, should earn the same average profit, they must each sell their goods at £113. I and IV sell above their value, II and III below their value.
The price fixed in that manner is equal to the expenses of capital plus the average profit, and it is this price which Adam Smith calls the natural price, cost price, etc. It is the average price to which competition between the different trades (by the transfer and withdrawal of capital) reduces the prices in the different trades. Competition, then, does not reduce the commodities to their values, but to their cost prices, which may be sometimes above, sometimes below, or on par with their values, according to the organic composition of the capitals, as was shown above.
Ricardo confuses value with cost price. He therefore believes that if absolute rent existed (that is, a rent independent of the different degrees of fertility of the soil) then agricultural produce, selling as it does above the cost price (that is, the.advanced capital plus the average profit), would likewise permanently stand above its value. Which, of course, would be inconsistent with the law of value. He therefore denies that there is such a thing as absolute rent and assumes only differential rent.
However, his identification of value of commodities and cost price of commodities is thoroughly wrong, and was traditionally accepted by him from Adam Smith. The facts of the matter are these: Assume the average organic at 50 per cent surplus value), then every £100 will emerge from the productive process with a surplus value or rate of profit of £10. Total £110.
Assume now that the average organic composition of agricultural capital is c 60, v 40. Then the product, at the same rate of exploitation (that is 50 per cent), will be £120, and the profit rate 20 per cent. If the farmer sells his agricultural produce at its value, he sells it for £120, and not for £110, its cost price, for which he would have to sell it if there were competition in land. But here the landlord comes in and takes from the farmer the £10 as absolute rent, or the difference between value and cost price.
Low organic composition (that is, relatively high variable capital) means really low development of the productivity of labor in any sphere of production. The organic composition of agricultural capital, which is, say c 60, v 40, while the composition of industrial capital is c 80, v 20, shows that agriculture has not attained to that degree of productivity which manufacture has reached. As soon as agricultural capital reaches the composition c 80, v 20, absolute rent will cease and there will but remain differential rent, which is but surplus profit, and which of course may also occur in certain manufactures as long as they enjoy special technical, topographical, or any other advantages. I shall deal with differential rent in my book, as I think that Ricardo's assumption of a constant deterioration of agriculture is devoid of all foundation.
With regard to my definition of cost prices as distinguished from value, I may remark that apart from the difference between constant and variable capital, which emerges from the immediate process of the production of capital, there is still to be considered the difference between fixed and circulating capital, which emerges from the process of the circulation of capital. But this would complicate matters here. I only desired to give you a right outline of my views about surplus value, cost price, rent, in criticism of Ricardo. But you will admit that by clearly considering the importance of the organic composition of capital a good many difficulties and problems easily solve themselves.