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Surplus value is the difference between the value of a worker's labour and and what she or he gets paid. This difference goes to her employer, and his reason for carrying on the business is to obtain it – ie., to appropriate surplus value.

In the simple case of agriculture with inexpensive instruments on unimproved land, the surplus value is simply the difference between the crop produced by the labourers and the portion of it that is returned to them as payment for their work. This can be easily visualised in physical terms. For example, in the model corn economy of the classical economists, if the harvest is 1000 bushels and 600 bushels is given to the field hands for their sustenance, then the surplus value is 400 bushels – which goes to the lord or hiring farmer.

Surplus value model redone

Surplus value in a simple corn economy, on unimproved land, using inexpensive implements of production.

In industries where there are tools and other inputs to production that are not of negligible value, and where the workers are not paid `in kind', with the same physical commodity that they produce, the situation is not so simple but the same underlying principle applies. If we carry through the cost of the tools and other inputs to production, and subtract it from the output, and if we reckon the output and the wages in value terms rather than physical quantity terms such as bushels, it will generally be seen that the workers produce more than they receive – ie., they produce surplus value.

In modern economies, surplus value forms a sizeable portion of the total output. For example, a few years ago, Duncan Foley estimated the rate of surplus value in the U.S. economy to be 1.5, meaning that the surplus value was 1.5 times the amount paid in wages.[1]

Karl Marx considered the pursuit of surplus value by capitalists to be the driving force behind the capitalist economy.

Theory

A more formal statement of surplus value is that surplus value is the amount by which the value of the output of capitalist production exceeds the value of the input materials and labour costs.

 surplus value   =   output value  -  input value


                                          value of     value
                 =   output value  -  (   material  +  paid to  )
                                          input        labour
   

In conventional symbols, this is:


      S          =       Y         -  (    C        +     V     ) 



                                [ C stands for constant capital, 
                                  Marx's term for material inputs;
                                  and V stands for variable capital,
                                  his term for payments to labour. ]

Surplus value constitutes the income of the capitalist class. It is taken by them on the rationale that their ownership of the productive apparatus entitles them to the full value of its output after costs are paid. Labour is not regarded as having a similar fundamental claim on the output; it is paid whatever is necessary for its survival and reproduction as an efficient body of workers, plus a possible, contingent payment reflecting its bargaining success or purely optional generosity by the capitalist.

The net output of society is thus divided into two parts: S, the surplus value, which goes to the capitalists; and V, the variable capital, which goes to the workers. The ratio of these amounts, S:V, is called the rate of surplus value, and indicates the relative strength of the two sides in the contest for the `division of the spoils', the contest over who benefits from society's economic output.

If we assume that the capitalists make no significant contribution to production, that the workers do everything and the capitalists are purely parasitic, then the rate of surplus value (S:V) also indicates the degree of exploitation of the workers by the capitalists; ie., the proportion in which the workers' labour and life energies are bled off by the parasitic, unproductive capitalists. For this reason, the rate of surplus value is often also called the `rate of exploitation', and is conventionally abbreviated as e.

rate of surplus value  or  rate of exploitation :

                          S
                   e  =  ---
                          V

The assumption of pure capitalist parasitism can be challenged. Capitalists usually invest a portion of their acquired surplus value to expand production, and the resulting increase in output can, at least potentially, benefit workers as well as capitalists (although it may not). In this scenario, some of the surplus value goes, indirectly, to the workers' benefit. A second challenge to the parasitism assumption is that capitalists sometimes perform managerial functions that are useful to production. This challenge, however, can be accomodated within the pure parasitism model by separating the capitalist's managerial activity from her activity as a capitalist: when she is managing, she is regarded as a labourer; when she is coupon clipping, playing with her moneybags, etc., she is regarded as a capitalist. Thus one and the same person can exist partly on both sides of the worker capitalist divide. This softens the hard edges of the exploitation picture somewhat, with the capitalist being regarded as super-remunerated part-time labourer rather than pure parasite.

Despite these reservations, most socialists would agree that productive workers in capitalism receive a much smaller piece of the pie than they would in a fair and rational system; in other words they are significantly exploited and the rate of surplus value, s/v, is a telling statistic.

Another significance of the rate of surplus value is as an indicator of the economy's excess capacity:[2] its ability to expand production and its ability to fund ancilliary unproductive activities: the military adventures, cathedral erections, stylistic gyrations, political furors, and philosophical effervescences that flicker around the iron core of modern industrial utopia. If we assume that workers are paid only enough to reproduce them with the degree of health and effectiveness necessary for the maintenance of steady-state production – in other words, what is loosely referred to as a subsistence wage – and if we again assume that capitalists do nothing useful; then, recalling the equation

 Y  =  S + C + V

we see that S represents everything not necessary for the maintenance of steady-state production; in other words, everything available for other purposes.[3]

The capitalist class spends the surplus value on three things. This has already been partly explained in passing but it is good to list them clearly here:

  1. Consumption. The acquisition of the necessities and niceties to which the members of the capitalist class are accustomed or attracted.
  2. Maintenance of the non-productive economy. This includes maintenance of the police, state, and ideological apparatus that secures the capitalists in their privileged position. It also includes the often mutually confounding activities typical of trade and finance, performed by money managers and marketers, bankers and brokers, analysts and adjusters, salespeople, corporate raiders, lawyers, lobbyists, headhunters, hatchet-men, advertisers, arbitragers, and similar hardworking denizens of the rat race and the status treadmill, earnestly striving all for success and their competitors' failure.
  3. New investment. The capitalist class usually spends some of the surplus value to obtain new or better instruments of production, and to increase the quantity of materials, and sometimes of labour, used in conjunction with them, all with a view to increasing the outflow of production, and therefore of surplus value, in the future. This process is known as expanded reproduction of capital, and the increase in the amount of capital is called capital accumulation. Expanded reproduction and accumulation are funded out of surplus value. (Simple reproduction, which is the maintenance of production at just its present level, requires no funding from surplus value because input costs – labour, replacement of stocks, and replacement of depreciated equipment – are by definition subtracted from output value to obtain surplus value.)


Pursuit of surplus value drives capitalism

Karl Marx considered the pursuit of surplus value to be the driving force of the capitalist economy: the reason capitalists do things is to get surplus value.

‘Accumulate, accumulate, accumulate! That is Moses and the prophets.’ — Marx
The reasons a capitalist might want more surplus value include the desire for a more luxurious lifestyle, the pursuit of power for its own sake, and the pursuit of money for its own sake. On the latter pursuit (of money) Marx speculated that it sometimes takes the form of an irrational addiction facilitated by money's abstractness. It is hard to know when one has enough money.

One vicious feature of competition and the market is that in theory, if even one capitalist seeks to maximise the size of her capital, all others must follow suit or be driven out of business or swallowed by her. This is a result of economies of scale, and of `market imperfections' that accrue to the advantage of the big player (monopoly advantages, political clout, social influence). By this logic, capitals are locked in a Darwinian struggle with each other, in which size is a survival advantage. The result has been the explosive accumulation of the last 200 years.

"The bourgeoisie, during its rule of scarce one hundred years, has created more massive and more colossal productive forces than have all preceding generations together. Subjection of Nature's forces to man, machinery, application of chemistry to industry and agriculture, steam-navigation, railways, electric telegraphs, clearing of whole continents for cultivation, canalisation of rivers, whole populations conjured out of the ground -- what earlier century had even a presentiment that such productive forces slumbered in the lap of social labor? -- Marx and Engels, Communist Manifesto

While this has greatly increased the productive forces at the command of homo sapiens, propelled technique to dizzying heights, and increased the material wellbeing of people in the `have' countries, the fact that size, rather than other attributes such as social usefulness or environmental sustainability, is the prime evolutionary imperative for capital has led to great failings in overall economic rationality (macro efficiency), justice, the actualisation of human potential, and our relation to other species and the natural environment. Marx's position was that the manic pursuit of surplus value does more good than harm up to a certain historical point, but beyond that point the forces of production are better managed on a different principle (socialism).

 

History of the concept of surplus value

Before Marx, British socialists such as Hodgskin (1825) and Bray (1839) extended the models of political economist David Ricardo to develop a theory that workers are inevitably exploited under capitalism. The idea of surplus value was implicit in their theory.[4]

"The fund for the maintenance of the idle is the surplus produce of the labour of the industrious." (P Ravenstone, A few Doubts as to the Correctness of Some Opinions Generally Entertained on the Subjects of Population and Political Economy. London, England, 1821.)
"Profits are purely and simply a portion of the product of labour which the capitalist, without any right other than that conferred upon him by law, takes for himself." (T Hodgskin, Labour Defended Against the Claims of Capital. London, England, 1825.)

The French socialist Pierre-Joseph Proudhon spoke of surplus value and considered it to be basically theft by the capitalist.[5]

Marx, who developed his economic theory out of classical economics, especially that of Adam Smith and David Ricardo, grappled with the problem of accounting for the difference betweeen the output and input values of production. The labour theory of value, used by Ricardo and Marx, holds that labour is the only creator of value. Therefore the increase in value cannot be attributed to the instruments and materials used. It must be due to labour; but if labour is paid less than the value it creates, is this not a case of cheating in trade? of paying less for an input factor than its value? Marx and Ricardo ruled out cheating as an explanation because although it might enrich the cheater, it would impoverish the victim by an equal amount and thus null out in society-wide aggregate; it could not explain how society as a whole gains value from production. Marx's solution was to say that the value of labour is not what labour contributes but what labour costs to produce: the cost of food, housing, clothes, etc. necessary in order that labourers can exist and be functional.

"Whence comes this surplus-value? It cannot come either from the buyer buying the commodities under their value, or from the seller selling them above their value. For in both cases the gains and the losses of each individual cancel each other, as each individual is in turn buyer and seller. Nor can it come from cheating, for though cheating can enrich one person at the expense of another, it cannot increase the total sum possessed by both, and therefore cannot augment the sum of the values in circulation. (...) This problem must be solved, and it must be solved in a purely economic way, excluding all cheating and the intervention of any force — the problem being: how is it possible constantly to sell dearer than one has bought, even on the hypothesis that equal values are always exchanged for equal values?"

— Engels, Anti-Duhring, chap. 19[6]

"If the exchange-value of a product equals the labour-time contained in the product, then the exchange-value of a working day is equal to the product it yields, in other words, wages must be equal to the product of labour. But in fact the opposite is true. Ergo, this objection amounts to the problem, -- how does production on the basis of exchange-value solely determined by labour-time lead to the result that the exchange-value of labour is less than the exchange-value of its product? This problem is solved in our analysis of capital." — Marx, Contrib. Critique of Pol. Econ., ch 1.[7]

By the labour theory of value, the value of that food, housing, clothing, etc. is the labour time necessary to produce it; so we have that the value of labour is the labour time necessary to produce labour. (This is consistent with the treatment of labour as a commodity, the value of a commodity being the labour time necessary to produce that commodity.) It follows that if the labour time necessary to produce labour is less than the time that that labour can subsequently work; that is, if the cost of producing labour is less than the value that labour can produce, then there is an opportunity to obtain a gain in value – a surplus value – by employing labour. It is this opportunity that the capitalist seizes.

Marx called the capacity of a person to do work her labour-power. As hypothesized above, its value is the value needed to produce it. Surplus value, then, can be expressed as the difference between the value of labour-power and the value produced by labour. Another way of conceiving this is that the value of labour-power is the exchange value of the labourer's services and the time worked by her is their use value. With labour-power as with any other commodity, the capitalist pays the exchange value and obtains the use value.

By the above logic, Marx was able to formally square the existence of capitalist profits with certain conventional ideas about value and fair trade held by the bourgeoisie of his time. That is, he showed that the appropriation of surplus value does not violate those ideas. Whether it might violate other tenets of bourgois ideology – ie., whether that ideology might contain a contradiction in this regard – is debatable. And whether the appropriation of surplus value might violate another ethics – say, a socialist ethics – is of course yet another matter.

 

Surplus product and surplus labour

Surplus product is the actual physical output – tons of steel, bushels of corn, etc. – in excess of what is needed to replace inputs of production materials and workers' consumption goods. Surplus value is the value of the surplus product. (The reason we often think in value terms rather than about physical product directly is that the items that comprise the physical product are usually not commensurable – a kilogram of steel is not the same as a kilogram of corn – so we cannot arrive at a single, unified measure or number that expresses physical output. This is analytically awkward. However, by assigning each different commodity a value which supposedly expresses its economic significance, we can treat different commodities together mathematically [comparing, adding, etc.] which is analytically convenient.)

Surplus labour is the labour that produces the surplus product. It can be measured in hours. If we hold a Marxian labour theory of value, then surplus labour (measured in hours of average socially necessary labour) corresponds exactly to surplus value. In Capital, volume I, Marx used the picturesque device of dividing the worker's work day up, conceptually, into two periods, during the first of which she produces the value that will be returned to her as wages, and during the second of which she produces the value that will go to the capitalist. The worker in effect works so many hours for herself and so many for the capitalist. The ratio of the two periods is exactly the same as the rate of exploitation. It is in the worker's interest to minimise the time she works for the capitalist – the surplus labour time – and the capitalists interest to maximise it.

"The history of capitalist production can be seen as the history of struggle over attempts by capital to increase, and attempts by the working class to resist increases in, the rate of surplus value" — Susan Himmelweit[8]

Absolute and relative surplus value

These terms actually refer to changes in the rate of surplus value. Absolute surplus value is an increase in surplus value obtained by increasing the time period worked without increasing the payment for it; eg., lengthening the working day without raising the daily wage. Another example would be taking away a worker's paid lunch break.

Relative surplus value is an increase in surplus value obtained by increasing the physical amount of commodity produced by the worker while keeping labour time the same and the wage initially the same. This can be achieved by driving the labourer harder or by introducing more efficient instruments of production or more efficient work routines. The initial effect of relative surplus value is to yeild super profits to the firm introducing the innovation. As the innovation becomes global, however, the price of the commodity falls to reflect the fact that less labour time is required to produce a given amount of it. As a result the means of subsistence become cheaper and the wage can be reduced while still enabling the worker to obtain the same amount of (now cheaper) means of subsistence as before. In other words, the real wage stays the same but the wage relative to society's total output falls.

The diagrams below show the effects of absolute and relative surplus value on necessary and surplus labour times (necessary labour time meaning here the labour time needed to produce the worker's wage goods).


                                   labour time

                     ╔═══════════════════╦═══════════════════╗
             before  ║     necessary     ║      surplus      ║
Absolute             ╚═══════════════════╩═══════════════════╝
surplus
value                ╔═══════════════════╦═════════════════════════════╗
             after   ║     necessary     ║           surplus           ║
                     ╚═══════════════════╩═════════════════════════════╝




                     ╔═══════════════════╦═══════════════════╗
             before  ║     necessary     ║      surplus      ║
Relative             ╚═══════════════════╩═══════════════════╝
surplus
value                ╔══════════════╦════════════════════════╗ 
             after   ║  necessary   ║        surplus         ║
          (long term)╚══════════════╩════════════════════════╝

karl Marx's account of absolute and relative surplus value appears in Capital, v. 1, ch. 16: `Absolute and Relative Surplus Value'.


Equalization of rates of surplus value

Competition between capitalists for labourers, and between labourers for jobs, creates a tendency for the wage, and consequently the rate of surplus value, to be the same in all industries or sectors of an economy. At the abstract level, Marxian economics usually treats this tendency as being fully realised, ie., the rate of surplus value as being equal in all sectors.

"If capitals that set in motion unequal quantities of living labour produce unequal amounts of surplus-value, this assumes that the level of exploitation of labour, or the rate of surplus-value, is the same, at least to a certain extent, or that the distinctions that exist here are balanced out by real or imaginary (conventional) grounds of compensation. This assumes competition among workers, and an equalization that takes place by their constant migration between one sphere of production and another. We assume a general rate of surplus value of this kind, as a tendency, like all economic laws, as a theoretical simplification; but in any case this is in practice an actual presupposition of the capitalist mode of production, even if inhibited to a greater or lesser extent by practical frictions that produce more or less significant local differences, such as the settlement laws for agricultural labourers in England, for example. In theory, we assume that the laws of the capitalist mode of production develop in their pure form. In reality, this is only an approximation; but that approximation is all the more exact, the more the capitalist mode of production is developed and the less it is adulterated by survivals of earlier economic conditions with which it is amalgamated " - Capital Vol. 3, ch. 10, Pelican edition p. 275.


Logically, the equalisation of the rate of surplus value results if

  1. the wage rate is equalised, and
  2. the labour theory of value holds.

This is because the LTV equates value-added to labour time expended; and the equalised wage rate means labour time expended is in the same proportion to wages in all sectors. Value-added is then in the same proportion to wages in all sectors. It follows easily that the surplus-value, being simply their difference (value-added - wages) must be in the same proportion to each of them in all sectors: s/v = same in all sectors.


Argument for invariance of rate of surplus-value
1. wage rate, v/tsame in all sectors(by competition-justified assumption).
2. value-added, a∝ t(by LTV).
3.v/asame in all sectors.
4. s= a - v(by definition).
5. s/v = (v - a)/v = 1 - a/vsame in all sectors.
Q.E.D.


Competition and the migration of workers from one sector to another in pursuit of the best rate of pay is seen as the justification of the first assumption (wage equalisation), at least for unskilled labour. Skilled labour is accommodated for by regarding it as a multiple of unskilled, providing value proportionate to the extra pay received. (This leaves v/a unchanged in the argument above.) Whether the second assumption is reasonable has been discussed in several works.[9]

Marx believed that the long-term historical tendency would be for rates of surplus value to equalise, as commodification became ever more dominant, non-capitalist relations in the economy became ever less significant, and thus observed phenomena ever more closely to approximate the predictions of a "pure" theory of capitalism.[10]

"As far as the many variations in the exploitation of labour between different sphers of production are concerned, Adam Smith has already shown fully enough how they cancel one another out through all kinds of compensations, either real or accepted by prejudice, and how therefore they do not need to be taken into account in investigating the general conditions, as they are only apparent and evanescent (The Wealth of Nations, Bk. 1, Ch. 10). Other distinctions, for example in the level of wages, depend in large measure on the distinction between simple and complex labour... and although they make the lot of the workers in different spheres of production very unequal, they in no way affect the degree of exploitation of labour in these various spheres. if the work of a goldmsmith is paid at a higher rate than that of a day labourer, for example, the former's surplus labour also produces a correspondingly greater surplus-value than does that of the latter. And even though the equalization of wages and working hours between one sphere of production and another, or between different capitals invested in the same sphere of production, comes up against all kinds of local obstacles, the advance of capitalist production and the progressive subordination of all economic relations to this mode of production tends nevertheless to bring this process to fruition. Important as a study of frictions of this kind is for any specialist work on wages, they are still accidental and inessential as far as the general investigation of capitalist production is concerned and can therefore be ignored. In a general analysis of the present kind, it is assumed throughout that actual conditions correspond to their concept, or, and this amounts to the same thing, actual conditions are depicted only insofar as they express their general type." - Marx, Capital Vol. 3, ch. 8, Pelican edition p. 241-242.

At a less abstract, more concrete level (eg in Capital', volume III), Marx accounted for surplus value being shared out at unequal rates between the capitalists in an economy. (See, for example, transformation problem.

Marcus's dialectics

This section presents some of the ideas of the Marxist theorist Lyn Marcus on production, surplus, and the philosophical underpinnings of value theory.

`In Marx's Law of Value, one obtains the first approximation of the value of current production by subdividing the total productive labor of an economy into its principal constituents. We shall ignore the agricultural population, in order to simplify our illustration, and divide the remaining nonagricultural population into two main categories. The principal category is the members of the total population whose households normatively produce the productive labor of society – in the sense of effecting useful material alterations of nature. The residual category includes, in capitalist society, capitalists themselves, bureaucrats of all sorts, police forces, military forces, clerks, professionals, and "service workers." The current productive labour force, derived from the working-class population, is treated as "input" to the productive process. "Output" (still arbitrarily excluding agriculture) is divided into the following categories.

`A certain portion of the total output is consumed in maintenance of the productive equipotential of nature (including materials, machinery, and other man-altered aspects of nature). This portion determines the category of Constant Capital (constant, that is, from the standpoint of the productive process itself). Another portion of the total output is consumed by the entire working-class population (not merely by employed labor or the families of employed labor). The magnitude of this portion is determined by the quality of consumption and leisure (e.g., education) necessary to reproduce the entire labor force at the technological-cultural "level" necessary for today's and tomorrow's production. (By "tomorrow," we signify here the visible horizon of advances in technological development affecting the employment of present and developing generations of workers.) This portion of the output determines Variable Capital (again from the standpoint of the productive forces). These two components of total output correspond to the current direct costs of simply perpetuating the whole of total current production for present conditions.

`The residue of the output is therefore relatively "free energy" from the standpoint of simple reproduction of existing productive processes. This portion determines the category of Surplus Value. However, not all of this category of output is available for development. It is from this portion of total output that the economy obtains the consumption of not only capitalists themselves, but bureaucrats, military personnel, police forces, clerks, professionals, "service workers," and the like. Capitalists' Consumption includes not only personal consumption, but also the "capital goods" consumption associated with the activities of these persons (such as military equipment, office equipment, office buildings, and the like).

`Since these portions of productive output correspond to portions of the labor-force input, we can derive the formula S/(C + V) as a general expression for the "free energy" ratio of the society or, in other words, for the rate of potential expansion of the society with respect to both quality and sheer magnitude. Note that this ratio is not a ratio of products, but but of the labor force. It expresses a population's power to reproduce itself in terms of the proportions of that part of the population's activity which represents its productive labor. The ratio S/(C + V) thus expresses man's [sic] relationship to nature, his social-reproductive powers, or his productivity in the sense of social-reproductive powers, not the conventional definition of productivity.' -- (Lyn Marcus, Dialectical Economics, 1975, pp 4-5.)

An important feature of Marcus's approach and dialectical approaches in general is that they seek to look "behind" the apparent, empirical, phenomena to see underlying factors. A feature of the above excerpt is that he is looking "behind" empirical output-of-production data to see labor behind it. Another example of this looking-behind things is in his approach to population studies:

`Some readers will protest our insistence that the fundamental, vicious fallacy of most population models is their attempt to define population growth in terms of simple numbers of individuals. "That's ridiculous," a leading zero-growth advocate at one university protested, "I can count them: one, two, three, ...: Even so, we insist that such reductionist practices are epistemologically absurd even for models of plant and lower animal populations, and lead to devastating blunders when applied to populations. The quantum to be measured in human population studies is individuals of definite reproductive power, a notion related to marx's concept of labor-power, which involves "extrauterine gestation" and other considerations.' -- (Ibid, p xiii.)

This is related to Marcus's employment of concepts of becoming that were stressed by Renaissance and Enlightenment thinkers including Descartes and Kant, and, later, by Hegel and Marx. Marcus sees the concepts as having regretably fallen into disuse and miscomprehension because of the present dominance of the Humean, empiricist mode of thinking. As an example, if we consider infinity using the concept of becoming, "rather than defining perfection and infinity as a succession of fixed occurrences, rather than conceiving of these as a succession of discrete events which apocalyptically, asymptotically converge on a predetermined maximal value, the infinite must be seen as as the immediate aspect of current development that expresses an energizing, determining principle of self-development." (Ibid., p ix.)

While all this may seem arcane and tangential, at issue is what Marx meant by value (and surplus value), and whether those concepts are valid. These questions have been the subject of enormous debate (see, for example, Labour theory of value, and Transformation problem).

Profit, interest, rent

Surplus value comes to the capitalist in one of three forms: profit, interest or rent. Although all surplus value is generated in labour-employing productive enterprise, usually not all of it remains long in the hands of the owner(s) of that enterprise because they must distribute some of it to other capitalists in the form of interest and rent. The owner of a factory, for instance, may have to pay ground rent on the land on which her buildings stand, and may have to borrow money to obtain materials of production. Thus the net profit of a firm usually understates its surplus value flow because rent and interest are prior deductions.

The state obtains some of the social surplus

Marx's discussion focuses mainly on profit, interest and rent, largely ignoring taxation and royalty-type fees which were proportionally very small components of the national income when he lived. Over the last 150 years, however, the role of the state in the economy increased in almost every country in the world. Around 1850, the average share of government spending in GDP in the advanced capitalist economies was around 5%; in 1870, a bit above 8%; on the eve of World War I, just under 10%; just before the outbreak of World War II, around 20%; by 1950, nearly 30%; and today the average is around 35-40%. (see for example Alan Turner Peacock, "The growth of public expenditure", in Encyclopedia of Public Choice", Springer 2003, pp. 594-597).

The tax paid by a productive enterprise appears as a deduction from its profit margin, so the state's revenue appears to be a portion of surplus value that the firm hands over to the state. It may be argued that not all of this tax revenue should be regarded as surplus value, however, because the state will spend a portion of it on programs that benefit the working class (such as state-funded health care, and income supports such as social assistance) and that portion, since it goes to the working class, should properly be counted not as surplus value but as variable capital that is paid by the firm to the workers through the intermediacy of the state. The validity of this argument depends on whether or not one holds a subsistence theory of wages. If one does, then the argument is invalid, because any state benefit to workers merely means that firms will lower their wage payments to the workers by the same amount, keeping workers at the subsistence level. The firm's saving in wages will exactly offset the amount it pays to the state for worker benefits, so its surplus-value acquisition is undiminished. The degree to which this is true; ie., the degree to which state-to-worker benefits are a substitute for, rather than a supplement to, wages, is a matter for empirical investigation. It might be remarked that if they are merely a substitute, then the social-democratic program of seeking such benefits is pointless – or perhaps even harmful because it obscures the fundamental antinomy between worker and capital, making it appear to the workers as though they are in a `socialist' or `socialised' system.

Some finer distinctions

Price is not value

Surplus value is a value. Consequently, if one holds a Marxian labour theory of value, the most natural unit to measure surplus value in is the unit of labour time – say, hours. However, one also sees surplus value stated in monetary units – ¥, €, £, $, etc. – and in fact Marx himself often did this, for example in volume I of Capital. Unfortunately, stating surplus value in monetary units risks confusion and can trip up the unwary. This is because monetary units, strictly, express price not value, and price, while being strongly influenced by value also deviates from it because of various secondary influences. These include interfirm variation in labour:nonlabour cost ratio (see transformation problem), the effect of noncapitalist elements in the economy (state, household, peasant, volunteer, environmental, feudal holdovers, etc.), and growth- or crisis-induced disequilibria. The reason Marx could speak of values as prices in Volume I of Capital is that he was there working at a high level of abstraction, outlining what might be called the pure logic of capital.[11] At that level of abstraction, the difference between value and price disappears. Where Marx there describes the finances of particular, usually hypothetical firms, he is presenting them as microcosms, or `typical cases': concrete, easy-to-understand embodiments of the abstract, generalised behavior of the system. This is permissible.
"Surplus-value and the rate of surplus-value are... the invisible essence to be investigated, whereas the rate of profit and hence the form of surplus-value as profit are visible surface phenomena" - Karl Marx, Capital Vol. 3, Pelican edition, p. 134

However, when we move to the consideration of actual firms in the actual economy, we must be aware that prices, which include all figures given in money terms in firms' financial statements, represent values only roughly. It is possible to calculate something that looks like surplus value for a firm by subtracting monetary costs from its revenues, but this is very imprecise. At the national levl, Marxist economists do sometimes try to estimate the surplus value produced in a country from its national accounts data (which is in money units). At this level of aggregation, some of the deviations of price from value average out.

Profit is not surplus value

Although surplus value is most readily apparent in the profit of a productive enterprise, the two are not in general equal. It has already been mentioned that any rent, interest, and some or all of the tax paid by an enterprise also come from surplus value, so clearly profit is only a partial measure of surplus value. Another thing that needs to be considered is that not all of the value (and surplus value) produced by a firm will necessarily be realised in the form of a sale. Unsold inventory yeilds no profit to the firm. Similarly, if inventory has to be dumped at a cut rate and also is never sold at value in subsequent transactions then a portion of its value is never realised (although its use-value may be).

If we are considering rates of profit and surplus value, a further difference is that the rate of profit is equal to the profit divided by the total costs (labour and materials of production [m.p.]) whereas the the rate of surplus value is equal to the surplus value divided by the labour cost only. This causes enterprises that employ high levels of m.p. compared to labour (eg., the high-tech sector) to have rates of surplus value much higher than their rates of profit.

rate of profit         rate of surplus value

      p                         S
π = -----                  e = ---
    C + V                       V


           Where π is rate of profit;
                 p    profit;
                 C    constant capital (m.p.);
                 V    variable capital (labour);
                 e    rate of surplus value;
                 S    surplus value.

Note that even if p and S are equal, the presence of
constant capital in the formula for π distinguishes
the formulae.

Finally we must consider the manner in which profit and surplus value are stated. Profit is most often stated in monetary units. This is not obligatory; it can be stated as a value if one desires, and one can speak of the value of the profit realisd by a firm. (In general, any economic quantity can be looked at both as a value or as a price; the Marxist economist Junankar expresses this by saying we can operate analytically in the `value domain' or the `price domain'.) But, for the reasons stated in #Price is not value above, we should be careful not to mix price and value measurements indiscriminately. If profit expressed as a price is equated with surplus value expressd as a value, we have an additional source of potential error.

Do capitalists seek to maximise profit or surplus value?

Although Marx spoke of the pursuit of surplus value as being the motivating force of capitalism, at the level of specifics it may be that what capitalists consciously seek to maximise is profit. An increase in the rate of surplus value is a necessary consequence, in most cases[12] of an increase in the rate of profit, but may not be the direct objective of the capitalist.

Do they seek to maximise the mass or the rate?

Most Marxist discussions focus on the rate of surplus value, but for businessmen, the growth of the mass of surplus-value, or the gross profit volume produced (denoted here as P) is just as important, or even more important. After all, according to US Internal Revenue Service statistics, the money paid out to corporate officers is equal to about one-third of that paid out to ordinary employees. The growth of P depends on the growth of the volume of output in an accounting period, and the volume of sales turnover.

We can illustrate the point with a simplified example. If:

  • K = total capital invested
  • P = total net profit volume realised
  • r = the rate of profit (i.e. P/K),

and assuming (perhaps unrealistically) that a sum equal to P is reinvested (with or without the aid of credit) with zero price inflation, we can construct a series of annual business results. We take K to be 1 million at the start, and say that r is 10% initially but declines by a constant 0.1% per annum thereafter:

  • year 1: K = 1,000,000; P = 100,000; r = 10%
  • year 2: K = 1,100,000; P = 108,900; r = 9.9%
  • year 3: K = 1,208,900; P = 118,472; r = 9.8%

We see here that within two years at least, an 18.5% increase in annual profit volume has occurred, even though the rate of profit decreased by 0.2%. In other words, there's nearly one-fifth more income to disperse among the owners of the capital, although the rate of profit return slightly fell .

What this simplistic example really implies is that, provided market sales keep growing and business expands, a slight fall in the profit rate on capital may not be a point of concern. After all, capital assets have grown, but more importantly, the total volume of revenue that can be distributed has grown.

However, if the total profit volume created in a capitalist economy stops growing, this becomes a real problem (as highlighted by Henryk Grossman). Because in that case, profitability must fall across the board, and business income is reduced everywhere.

In some Marxist crisis theories (e.g. by Henryk Grossmann, Louis C. Fraina and Paul Mattick), the root cause of economic crisis is precisely that the growth of profit volume is eclipsed by the decline of the profit rate in production, the result being that the total profit volume that can be distributed stagnates or falls.

The overall implication is that market expansion is critical for the total volume of surplus-value that can be distributed as profit. Total business income can increase, even although the profit rate on capital invested falls, if markets keep growing. The logical outcome of that is globalisation, i.e. the systematic removal of all barriers to trade worldwide to facilitate market expansion.


Complicating factors in assessing surplus-value

It is not easy to calculate surplus value. This is partly because firms and governments gather and report data according to their own purposes and not for the purpose of Marxist analysis. As a result, the categories and definitions they use fit only roughly our needs for value analysis.

Other complicating factors in assessing surplus-value are:

  • price inflation applying to wage goods, profit and capital goods;
  • Backwardation of certain physical goods in which time and presence are drivers of price.
  • creative accounting and tax avoidance or evasion techniques which misrepresent how much value has really been created.
  • Government, business, and other financial data may include or exclude items at variance with real business practice. Some types of transactions are disregarded, while imputations are made for other transactions. Almost always tax data is the main source of generic profit estimates, but tax data typically understate true profitability.
  • income obtained from what Marx called "fictitious capital" or what now are often called "bubble" phenomena.
  • If profit is measured as the sum of value added and gains in fixed capital, it is ignored that profit income includes more than value added, and capital asets include more than fixed assets. It is desirable to look at a variety of different data measures and sources (national accounts data, tax data, direct surveys, company reports and circumstantial evidence).
  • state intermediation, where profit and wage income is taxed on the one side, and supplemented on the other with subsidies and grants of various kinds. (See `The state obtains some of the social surplus ', above.)
  • unsold inventories of net outputs which contain surplus-value. (See `Profit is not surplus value', above.)

Relation to the circuits of capital

Generally, Marx focused in Das Kapital on the new surplus-value generated by production, and the distribution of this surplus value. In this way, he aimed to reveal the "origin of the wealth of nations" given a capitalist mode of production. However, in any real economy, a distinction must be drawn between the primary circuit of capital, and the secondary circuits. To some extent, national accounts also do this.

The primary circuit refers to the incomes and products generated and distributed from productive activity (reflected by GDP). The secondary circuits refer to trade, transfers and transactions occurring outside that sphere, which can also generate incomes, and these incomes may also involve the realisation (although not the production) of surplus-value or profit. Surplus value realised in trading activity outside the sphere of production represents a transfer of value from one person, country or institution to another – value initially created in the productive sphere but then transferred out of it into the finacial or trading circuits.

A very simple example would be if somebody sold a second-hand asset at a profit. This transaction is not recorded in gross product measures (after all, it isn't new production), nevertheless the person obtains surplus-value from it. Another example would be capital gains from property sales. Marx occasionally refers to this kind of profit as profit upon alienation, alienation being used here in the juridical, not sociological sense. By implication, if we just focused on surplus-value newly created in production, we would underestimate total surplus-values realised as income in a country. This becomes obvious if we compare census estimates of income & expenditure with GDP data.

This is another reason why surplus-value produced and surplus-value realised are two different things, although this point is largely ignored in the economics literature. But it becomes highly important when the real growth of production stagnates, and a growing portion of capital shifts out of the sphere of production in search of surplus-value from other deals.

Nowadays the volume of world trade grows significantly faster than GDP, suggesting to Marxian economists such as Samir Amin that surplus-value realised from commercial trade (representing to a large extent a transfer of value by intermediaries between producers and consumers) grows faster than surplus-value realised directly from production.

Thus, if we took the final price of a good (the cost to the final consumer) and analysed the cost structure of that good, we might find that, over a period of time, the direct producers get less income and intermediaries between producers and consumers (traders) get more income from it. This suggests that the proportion of nonproductive labour is increasing relative to productive labour in the economy. A nonproductive trading sector can assert itself if it has control over the access to a good, asset, or resource. But it also bears remembering that a large nonproductive sector can be sustained only if labour productivity and the rate of surplus value are high in the productive sector. The implication is that at present we have highly productive sectors employing a small part of the population supplying most of society's value while the majority of the population are engaged in relatively unessential work.

The above analysis also illustrates a paradoxical feature of surplus value which is that it may be realised more plentifully within inefficient markets - markets in which transparency and competition are low. Sentence was taken from Wikipedia, `Surplus value'. No other source was cited there.

Measurement

The first attempt to measure the rate of surplus-value was by Marx himself in chapter 9 of Das Kapital, using factory data of a spinning mill supplied by Friedrich Engels (though Marx credits "a Manchester spinner"). Both in published and unpublished manuscripts, Marx examines variables affecting the rate and mass of surplus-value in detail.

Since pioneering studies by Marxian economists like Eugen Varga, Charles Bettelheim, Joseph Gillmann, Edward Wolff and Shane Mage, there have been numerous attempts by Marxian economists to measure the trend in surplus-value statistically using national accounts data. The most convincing modern attempt is probably that of Professors Anwar Shaikh & Ahmet Tonak (Measuring the Wealth of Nations: The Political Economy of National Accounts, 1996)[13]

Ascertaining trends in surplus value may be less problematic than ascertainig its absolute amount because errors, eg., in converting from national accounts to Marxian categories, may be fairly consistent throughout the time period considered and thus not invalidate obsevations of change.

It has been claimed that most time series of different profit measures from different sources show the same historical trends (see e.g. the research by Dumenil & Levy).

The Marxian mathematicians Emmanuel Farjoun and Moshé Machover argue that "even if the rate of surplus value has changed by 10-20% over a hundred years, the real problem [to explain] is why it has changed so little" (quoted from The Laws of Chaos; A Probabilistic Approach to Political Economy (1983), p. 192). The answer to that question must, in part, be sought in artifacts (statistical distortion effects) of data collection procedures. Mathematical extrapolations are ultimately based on the data available, but that data itself may be fragmentary and not the "complete picture".

Different conceptions

Paul Baran and Paul Sweezy's treatment of "economic surplus" in Monopoly Capitalism (New York 1966, p. 9 and elsewhere), and Piero Sraffa's treatment of "physical surplus" are similar or related to Marx's but not identical.

Origin in trade

Most of this article deals with surplus value as it appears in the present, fairly mature capitalist economy; however surplus-value is not a fixed category but a dialectical, developing one, because the forms in which new value is created and appropriated, and the way the burdens of productive work are shifted between strata of the population, change over time. There is obviously a big difference between simple commodity producers exchanging agricultural surpluses in a village market, and "fast money" in today's global money markets.

Historically, Marx argues, surplus-value originated outside production in the first commercial forms of exchange - usury, merchant, rentier and bank capital and their associated lending operations. In fact, when Marx first introduces the concept of surplus value in Das Kapital, chapter 4, it is in the context of an analysis of "buying commodities in order to sell them at a profit", which he denotes as M-C-M' (see: Capital Vol. 1, Penguin ed., p. 251). Thus, the first forms of surplus-value include (leaving aside extortion and robbery etc.) profits from simple commodity production, merchants' profit from "buying cheap and selling dear" or unequal exchange, certain types of rent imposed on production, and interest on loans extended by financiers, bankers and usurers. In Europe, "share" certificates of the joint-stock type date from the 16th century, although in some or other form share-type financial obligations already existed much earlier. [Is this really surplus value? -- Communpedia ed.]

Morality and power of surplus value

A typical textbook-type example of an alternative interpretation to Marx's is provided by Lester Thurow. He argues in an Concise Encyclopedia of Economics article[2]: "In a capitalistic society, profits - and losses - hold center stage." But what, he asks, explains profits?

There are five reasons for profit, according to Thurow:

  • capitalists are willing to delay their own personal gratification, and profit is their reward.
  • some profits are a return to those who take risks.
  • some profits are a return to organizational ability, enterprise, and entrepreneurial energy
  • some profits are economic rents - a firm that has a monopoly in producing some product or service can set a price higher than would be set in a competitive market and, thus, earn higher than normal returns.
  • some profits are due to market imperfections - they arise when goods are traded above their competitive equilibrium price.

The problem here is that Thurow doesn't really provide an objective explanation of profits so much as a moral justification for profits, i.e. as a legitimate entitlement or claim, in return for the supply of capital.

Thurow goes on to note that "When it comes to actually measuring profits, some difficult accounting issues arise." Why? Because after deduction of costs from gross income, "It is hard to say exactly how much must be reinvested to maintain the size of the capital stock". Ultimately, Thurow implies, the tax department is the arbiter of the profit volume, because it determines depreciation allowances and other costs which capitalists may annually deduct in calculating taxable gross income.

This is obviously a theory very different from Marx's. In Thurow's theory, the aim of business is to maintain the capital stock. In Marx's theory, competition, desire and market fluctuations create the striving and pressure to increase the capital stock; the whole aim of capitalist production is capital accumulation, i.e. business growth maximising net income. Marx argues there is no evidence that the profit accruing to capitalist owners is quantitatively connected to the "productive contribution" of the capital they own. In practice, within the capitalist firm, no standard procedure exists for measuring such a "productive contribution" and for distributing the residual income accordingly.

In Thurow's theory, profit is mainly just "something that happens" when costs are deducted from sales, or else a justly deserved income. For Marx, increasing profits is, at least in the longer term, the "bottom line" of business behaviour: the quest for obtaining extra surplus-value, and the incomes obtained from it, are what guides capitalist development (in modern language, "creating maximum shareholder value").

That quest, Marx notes, always involves a power relationship between different social classes and nations, inasmuch as attempts are made to force other people to pay for costs as much as possible, while maximising one's own entitlement or claims to income from economic activity. The clash of economic interests that invariably results, implies that the battle for surplus value will always involve an irreducible moral dimension; the whole process rests on complex system of negotiations, dealing and bargaining in which reasons for claims to wealth are asserted, usually within a legal framework and sometimes through wars. Underneath it all, Marx argues, was an exploitative relationship.

That was the main reason why, Marx argues, the real sources of surplus-value were shrouded or obscured by ideology, and why Marx thought that political economy merited a critique. Quite simply, economics proved unable to theorise capitalism as a social system, at least not without moral biases intruding in the very definition of its conceptual distinctions. Hence, even the most simple economic concepts were often riddled with contradictions. But market trade could function fine, even if the theory of markets was false; all that was required was an agreed and legally enforceable accounting system. On this point, Marx probably would have agreed with Austrian school economics -no knowledge of "markets in general" is required to participate in markets.

See also

References

  1. Duncan Foley, Understanding Capital. His figures are for 1983.
  2. Excess capacity not in the sense of unused forces of production (idle plant and equipment), but output in excess of fundamental needs.
  3. It must be admitted that some kinds of activities that are here treated as unproductive (eg., the police) are necessary for capitalist production because, eg., they keep the workers from rebelling. But they would not be necessary in a system with the same forces of production but ideal, noncapitalist relations of production. We believe that at present, socialist relations of production would be much closer to the ideal than the existing capitalist ones.
  4. "Basing their analysis on Ricardo's theories, Colqunhunn's statistics and contemporary evidence of popular distress, they developed the concepts of capitalist exploitation and, implicitly, of surplus value." -- Burkitt (1984), p 34.
  5. [1].
  6. Marxists Internet Archive
  7. Marxists Internet Archive
  8. Susan Himmelweit, 'Surplus value', in Tom Bottomore, A Dictionary of Marxist Thought, p 474.
  9. Roncaglia, A. 1974: 'Thr Reproduction of complex to simple labour'.
    Rowthorn, R. 1980: Capitalism, Conflict amd Inflation: Essays in Political Economy.
    Tortajada, R. 1977: 'A Note on the Reduction of Complex Labour to Simple Labour'.
    All cited in Himmelweit, Susan, 'Surplus Value', in Tom Bottomore, ed., A Dictionary of Marxist Thought, 1983.
  10. Robert Albritton, Economics Transformed, op cit.
  11. Robert Albritton (Economics Transformed, 2007, f.n., p. 5) refers to Marx's subject in the abstract parts of Capital I by various terms: the `theory of capital's inner logic', `theory of capital's deep structure', `dialectics of capital', or `theory of a purely capitalist society'. At this level, commodification and reification are complete, and non-capitalist influences and worker resistance are zero. This level must be connected to real world events via mid-level and historically specific (low-level) analyses.
  12. An increase in the rate of profit (π) that is due to technical innovation does not increase the rate of surplus value if it occurrs in a luxury-goods industry. But an increase in π due to a reduction in the real wage, and increases in π due to technical innovation in the wage-goods sector, increase the rate of surplus value. According to Susan Himmelweit, ('Surplus value', in Tom Bottomore, A Dictionary of Marxist Thought) increases in π due to technical innovation in capital-goods industries that feed wage-goods industries will also increase the rate of surplus value.
  13. $48 from Cambridge University Press, according to their catalogue. This is not a free preview of their book: www.cambridge.org/us/catalogue/catalogue.asp?isbn=0521564794

Further reading

Asterisk (*) denotes work used directly as a source in writing this article.

On paper

  • Bray, J F, 1839. Labour's Wrongs and Labour's Remedies: or the Age of Might and the Age of Right. Leeds, England.
  • * Burkitt, Brian, 1984. Radical Political Economy. Brighton, Sussex, England.
  • Hodgskin, T, 1825. Labour Defended Aainst the Claims of Capital. London, England.


  • Paul A. Baran, The Political Economy of Growth.
  • Helen Boss, Theories of surplus and transfer : parasites and producers in economic thought. Boston: Hyman, 1990.
  • G.A. Cohen (1988), History, Labour and Freedom: Themes from Marx, Oxford University Press
  • Anders Danielson, The economic surplus : theory, measurement, applications. Westport, Connecticut: Praeger, 1994.
  • John B. Davis (ed), The economic surplus in advanced economies. Aldershot, Hants, England/Brookfield, Vt., USA : Elgar, 1992.
  • Emmanuel Farjoun and Moshe Machover, Laws of Chaos; A .Probabilistic Approach to Political Economy, London: Verso, 1983. *Michal Kalecki, "The Determinants of Profits", in Selected Essays on the Dynamics of the Capitalist Economy 1933-1970.
  • Shane Mage, The Law of the Falling Tendency of the Rate of Profit; Its Place in the Marxian Theoretical System and Relevance to the US Economy. Phd Thesis, Columbia University, 1963
  • Ernest Mandel, Marxist Economic Theory, Vol. 1 and Late Capitalism.
  • Harry W. Pearson, "The economy has no surplus" in "Trade and market in the early empires. Economies in history and theory", edited by Karl Polanyi, Conrad M. Arensberg and Harry W. Pearson (New York/London: The Free Press: Collier-Macmillan, 1957).
  • Anwar Shaikh & Ahmet Tonak, Measuring the Wealth of Nations
  • Piero Sraffa, Production of Commodities by means of commodities.

On the internet

Template:Marxist & Communist phraseology


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