Variable Capital is the term Marx uses for the value of the labour-power consumed in the production of a commodity. As with constant capital, it is the current value of the labour-power consumed that forms the variable capital, not what the capitalist actually laid out in money wages. In fact, the real nature of the variable capital, as identified in the analysis of the Physiocrats, is that of the commodities required for the reproduction of labour-power. In other words, it is as though the capitalist has a stock of these commodities, which are paid to the workers as wages (and taken at the level of the system as a whole, the capitalist class DOES have such a stock). Wages are paid in money, simply as an intermediary. As with constant capital, this means that any individual capitalist can make a capital gain or loss as a result of what they actually lay out in money, as opposed to the value of the elements of capital they purchase with that money. For, the system as a whole these capital gains and losses cancel each other out, because capital gains can only be paid out of surplus value created within the system. Surplus value arises within the production process as a consequence of the exploitation of labour. It can neither be increased as a result of capital gains, nor reduced as a result of capital losses.
Suppose a capitalist has £2,000. They lay out £1,000 for constant capital in the form of cotton, and £1,000 to buy 10 hours of labour-power from 10 workers – 100 hours in total. If this capitalist is the average capitalist, who employs workers of the average type, and everything else remains the same, then we can say that this capitalist has laid out constant capital with a value of £1,000, and variable capital with a value of £1,000.
However, there are a number of reasons why this might not be the actual reality. For example, suppose the workers employed are not of the average kind. Setting aside any surplus value, if these 10 workers are below average, then although the capitalist has undoubtedly laid out £1,000 in money wages, the value they have created in the final product is not equal to £1,000. If the workers are slower than average, they will create fewer commodities than the average worker. If they are less skilful than the average worker, then they produce commodities that are of a lower quality, and have less use value than that created by the average worker. In short, although they will have worked as many hours as an average worker, and been paid as much in wages as an average worker, they will have incorporated less labour, and, therefore, less value in the product than the average worker. This is one reason, Marx says, why, for capital, piece rates are more suited to the needs of capital, because the worker only gets paid for each piece produced of the average quality.
If the individual capitalist bought labour-power that was sub-standard, and yet paid the market rate of wages for it, that is their own particular loss – a capital loss – whereas the capitalist that bought labour-power that was above average, and still only paid the market rate of wages for it, makes a capital gain. One has paid too much for the capital they bought, the other too little. Overall, it averages and cancels out. In looking at the reality of the situation, what we are concerned with then is not the actual money laid out, but the value of the capital consumed in the production process.
Similarly, Marx's determination of value is based on the amount of socially necessary labour required for production. But, capitalist production proceeds ahead of consumption, so it is always possible that labour-time is expended that was not socially necessary. An individual capitalist, or capitalists in general, may pay out money in wages for labour-power, which is not socially necessary. But, only that labour-power that WAS socially necessary can be counted as having been consumed in the production process, and entered into the value of the final product. Only the labour-power that was socially necessary constitutes variable capital. Once again that does not change how much the capitalist laid out in money wages. If they laid out more than was necessary, that is their individual mistake, and once again constitutes a capital loss, not a reduction of surplus value. It could not be a reduction in surplus value, because the labour expended in excess of what was socially necessary never constituted value, and therefore surplus value to begin with!
Again, as with constant capital, the value of variable capital can have changed in the period between the capitalist laying out wages, and the labour-power being consumed. This is all the more obviously the case, where the value of labour power changes dramatically, but wages remain unchanged, e.g. in periods of high inflation. If inflation is high and the prices of wage goods rise sharply then the value of labour power rises along with it. Marx’s analysis is based on these value relations not on monetary payments, which are mere phenomenal forms, a superficial reflection of the underlying value relations. It is the value of labour-power consumed that constitutes the variable capital, not the money paid out by the capitalist. Consequently, if wages do not rise in accordance with the rise in the value of labour-power they will fail to reflect the actual value relation.
In the above case, the capitalist will make a capital gain, because they have bought an element of capital for less than its value. On the other hand, Marx gives the example of workers working on piece rates, where a rise in productivity means that workers are able to produce many more pieces than previously. The workers will resist any attempt to reduce their payments per piece, and consequently wages will be above the value of labour-power. In that case, the capitalist will suffer a capital loss, because they are paying too much for the element of capital they have bought.
These differences can be significant where the commodity being produced requires a long production process, for example in shipbuilding, or the construction of something like a nuclear power station, which require several years for completion.
Marx calls it variable capital, because unlike constant capital, labour-power does not merely transfer its own value to the final product. In fact, it does not transfer its value at all. Variable-capital creates entirely new value. It is capital of a constant magnitude, (equal to the value of the labour-power consumed, which is itself equal to the value of the commodities required for its reproduction), which in the production process becomes capital of a variable magnitude. The amount of capital-value it creates is variable, dependent on the length and intensity of the working day. Moreover, the amount of surplus value it creates is also variable, and depends on a number of other factors.
Firstly, it depends on the proportion of the working day which is given over to necessary labour. That is the labour-time necessary to produce the necessary requirements of the worker. With any given length and intensity of working day, the shorter the time required for necessary labour, the more surplus labour, and therefore surplus value is created.
Secondly, it depends on the length of the working day. With a given intensity of labour, and given amount of time required for necessary labour, surplus labour and surplus value will increase as the length of the working day increases.
Thirdly, it depends on the intensity of the working day. With a given length of working day, and given number of hours required for necessary labour, surplus labour and surplus value will increase as the intensity of the working day increases. Intensity is not the same as productivity. Productivity is increase in output due to some improvement in technique, the introduction of some new machine etc. Intensity is how fast, the worker has to work, how little rest time they have between tasks etc. As Marx says, increasing intensity amounts to getting more hours of labour crammed into the same number of hours as previously less labour was undertaken.