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Organic Composition of Capital

The “organic composition of capital” is the ratio of the value of the materials and fixed costs (constant capital) embodied in production of a commodity to the value of the labour-power (variable capital) used in making it.

The “technical composition of capital” differs in that it refers to the proportions of concrete labour, rather than the value composition of capital.

“By composition of capital we mean the proportion of its active and passive components, i.e., of variable and constant capital. Two proportions enter into consideration under this heading. ... The first proportion rests on a technical basis, and must be regarded as given at a certain stage of development of the productive forces. A definite quantity of labour-power represented by a definite number of labourers is required to produce a definite quantity of products in, say, one day, and – what is self-evident – thereby to consume productively, i.e., to set in motion, a definite quantity of means of production, machinery, raw materials, etc.” [Capital Volume III, Chapter 8]

By “variable capital” Marx meant that proportion of capital which is invested in wages, in the purchase of labour-power. He calls this capital “variable” because it is this proportion of capital which, if it is used wisely may produce a new, surplus value in the course of the labour process, over and above the “necessary labour time” which constitutes the value of labour power.

The “constant capital” refers to that proportion of capital invested in the materials and components purchased but then embodied in the product when it is sold, and the materials, tools, machinery etc., which are used up, bit by bit in the course of production, and which for all intents in purposes are the same as the materials materially incorporated into the products. These materials must be renewed when they are used up or obsolete.

When these proportions are taken with respect to their concrete “use-values”, then Marx calls this the technical composition of capital, as defined above. When the proportion is calculated on the basis of values, Marx calls this the organic composition of capital:

“The difference between the technical composition and the value composition is manifested in each branch of industry in that the value-relation of the two portions of capital may vary while the technical composition is constant, and the value-relation may remain the same while the technical composition varies. ... The value-composition of capital, inasmuch as it is determined by, and reflects, its technical composition, is called the organic composition of capital.” [Capital Volume III, Chapter 8]

Surplus Value and Profit

If a certain quantity of constant capital, c, and variable capital, v, are invested in a productive process, then at the end of a cycle of reproduction these values will have renewed themselves, but in addition, if the labour power of the employees has used to at least the social average of usefulness, there will a surplus-value, s.

Marx expresses this symbolically as: c + v → c + v + s.

On the basis of this conception, the rate of profit for the individual capitalist who got into the game of profiteering by investing (c + v) at the beginning of the cycle of reproduction, and made a profit of s, the rate of profit is s/(c + v). This rate of profit is the ratio which affects the individual unit of capital, as opposed to the rate of surplus value, s/v, which characterises the proportion of value expropriated by the capitalist class as a whole.

The organic composition of capital, c/v, measures the difference between the rate of surplus value, s/v, and the rate of profit, s/(c + v) – the higher the organic composition of capital, i.e., the more capital-intensive the industry, the lower the rate of profit.

Tendency of Organic Composition to Rise

The organic composition of capital inevitably rises over time. For example, if the workers produce twice as much and therefore turn over twice as much material in the same time, this reduces the cost per product but reduces the proportion of wages in the total value of the product. Likewise, if an expensive machine is introduced to replace wages costs, the same effect is achieved.

Some claim that the dominance of services and knowledge and communications industries today means that the organic composition of capital is reduced. However, the labour process always produces a material outcome. Service industries and knowledge industries and so on produce a material effect, but as part of a whole social division of labour, and the observation made by Marx may retain its validity in relation to the social process of production taken as a whole, rather than just looking at one part.