Capital, Volume Three: The Process of Capitalist Production as a Whole by Karl Marx

Let the average composition of social capital be 80c + 20v, and the profit 20%. The rate of surplus-value is then 100%. A general increase of wages, all else remaining the same, is tantamount to a reduction in the rate of surplus-value. In the case of average capital, profit and surplus-value are identical. Let wages rise 25%. Then the same quantity of labour, formerly set in motion with 20, will cost 25. We shall then have a turnover value of 80c + 25v + 15p, instead of 80c + 20v + 20p. As before, the labour set in motion by the variable capital produces a value of 40. If v rises from 20 to 25, the surplus s, or p, will amount to only 15. The profit of 15 on a capital of 105 is 14 2/7%, and this would be the new average rate of profit. Since the price of production of commodities produced by the average capital coincides with their value, the price of production of these commodities would have remained unchanged. A wage increase would therefore have caused a drop in profit, but no change in the value and price of the commodities. Formerly, as long as the average profit was 20%, the price of production of commodities produced in one period of turnover was equal to their cost-price plus a profit of 20% on this cost-price, therefore = k + kp' = k + 20k/100. In this formula k is a variable magnitude, changing in accordance with the value of the means of production that go into the commodities, and with the amount of depreciation given up by the fixed capital to the product. The price of production would then amount to k + 14 2/7 k/100. Let us now select a capital, whose composition is lower than the original composition of the average social capital of 80c + 20v (which has now changed into 76 4/21c + 23 17/21v); say, 50c + 50v. In this case, the price of production of the annual product before the wage increase would have been 50c + 50v + 20p = 120, assuming for the sake of simplicity that the entire fixed capital passes through depreciation into the product and that the period of turnover is the same as in the first case. For the same quantity of labour set in motion a wage increase of 25% means an increase of the variable capital from 50 to 62 1/2 . If the annual product were sold at the former price of production of 120, this would give us 50c + 62 1/2 v + 7 1/2 p, or a rate of profit of 6 2/3 %. But the new average rate of profit is 14 2/7%, and since we assume all other circumstances to remain the same, the capital of 50c + 62 1/2 v must also make this profit. Now a capital of 112 1/2 makes a profit of 16 1/14 at a rate of profit of 14 2/7%. Therefore, the price of production of the commodities produced by this capital is now 50c + 62 1/2 v + 16 1/4 p = 128 8/14. Owing to a wage rise of 255, the price of production of the same quantity of the same commodities, therefore, has here risen from 120 to 128 8/14, or more than 7%.

Conversely, suppose we take a sphere of production of a higher composition than the average capital; say, 92c + 8v. The original average profit in this case would still be 20, and if we again assume that the entire fixed capital passes into the annual product and that the period of turnover is the same as in cases I and II, the price of production of the commodity is here also 120.