Surplus value

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Surplus value is a concept created by Karl Marx in his critique of political economy, where its ultimate source is unpaid surplus labor performed by the worker for the capitalist, serving as a basis for capital accumulation.

The German equivalent word "Mehrwert" means simply value-added (an output measure of the net increase in product wealth), but in Marx's value theory, the extra or surplus-value has a specific meaning, which is not the new value added to the output of products, but rather the amount of the increase in the value of capital upon investment, i.e. the yield or increment in value, regardless of whether it takes the form of profit, interest or rent.

Marx himself regarded the reduction of profit, interest and rent income to surplus-value, and surplus value to surplus labour as one of his greatest theoretical achievements.

For Marx, the gigantic increase in wealth and population from the 19th century onwards was mainly due to the competitive striving to obtain maximum surplus-value from the employment of labor, resulting in an equally gigantic increase of productivity and capital resources. To the extent that increasingly the economic surplus is convertible into money and expressed in money, the amassment of wealth is possible on a larger and larger scale (see capital accumulation and surplus product).

In the Communist Manifesto, Marx and Engels wrote:

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?

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Contents 1 Theory 2 Definition 3 Interpretations 4 Measures of the rate of surplus value 5 Equalization of rates of surplus value 6 Complicating factors in assessing surplus value 7 Origin in trade 8 Appropriation from production 9 Absolute vs. relative 10 Production versus realisation 11 Significance of the mass of surplus value 12 Surplus value and taxation 13 Surplus value and the circuits of capital 14 Measurement 15 Different concepts of surplus 16 Criticism 17 Morality and power of surplus value 18 See also 19 References 20 External links

[edit] Theory

The problem of explaining the source of surplus value is expressed by Friedrich Engels as follows:

"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?" ^[1]

Marx himself also put the problem as follows:

"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. [20] 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."^[2]

Marx's solution was to distinguish between labor-time worked and labor power. A worker who is sufficiently productive can produce an output value greater than what it costs to hire him. Although his wage seems to be based on hours worked, in an economic sense this wage does not reflect the full value of what the worker produces. Effectively it is not labour which the worker sells, but his capacity to work.

Imagine a worker who is hired for an hour and paid $10. Once in the capitalist's employ, the capitalist can have him operate a boot-making machine using which the worker produces $10 worth of work every fifteen minutes. Every hour, the capitalist receives $40 worth of work and only pays the worker $10, capturing the remaining $30 which, after deduction of costs (the leather, depreciation of the machine, etc.) leaves a residual, i.e. surplus value or profit.

The worker cannot capture this benefit directly because he has no claim to the means of production (e.g. the boot-making machine) or to its products, and his capacity to bargain over wages is restricted by laws and the supply/demand for wage labour. Hence the rise of trade unions which aim to create a more favourable bargaining position through collective action by workers.

[edit] Definition

Total surplus-value in an economy (Marx refers to the mass or volume of surplus-value) is basically equal to the sum of net distributed and undistributed profit, net interest, net rents, net tax on production and various net receipts associated with royalties, licensing, leasing, certain honorariums etc. (see also value product). Of course, the way generic profit income is grossed and netted in social accounting may differ somewhat from the way an individual business does that (see also Operating surplus).

Marx's own 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).

[edit] Interpretations

Surplus-value may be viewed in five ways:

• as a component of the new value product, which Marx himself defines as equal to the sum of labor costs in respect of capitalistically productive labor (variable capital) and surplus-value. In production, he argues, the workers produce a value equal to their wages plus an additional value, the surplus-value. They also transfer part of the value of fixed assets and materials to the new product, equal to economic depreciation (consumption of fixed capital) and intermediate goods used up (constant capital inputs). Labor costs and surplus-value are the monetary valuations of what Marx calls the necessary product and the surplus product, or paid labour and unpaid labour.

• Surplus-value can also be viewed as a flow of net income appropriated by the owners of capital in virtue of asset ownership, comprising both distributed personal income and undistributed business income. In the whole economy, this will include both income directly from production and property income.

• Surplus-value can be viewed as the source of society's accumulation fund or investment fund; part of it is re-invested, but part is appropriated as personal income, and used for consumptive purposes by the owners of capital assets (see capital accumulation); in exceptional circumstances, part of it may also be hoarded in some way). In this context, surplus value can also be measured as the increase in the value of the stock of capital assets through an accounting period, prior to distribution.

• Surplus-value can be viewed as a social relation of production, or as the monetary valuation of surplus-labour - a sort of "index" of the balance of power between social classes or nations in the process of the division of the social product.

• Surplus-value can, in a developed capitalist economy, be viewed also as an indicator of the level of social productivity that has been reached by a population.

[edit] Measures of the rate of surplus value

According to Marx's theory of exploitation, living labour at an adequate level of productivity is able to create and conserve more value than it costs the employer to buy; which is exactly the economic reason why the employer buys it, i.e. to preserve and augment the value of the capital at his command. Thus, the surplus-labour is unpaid labour appropriated by employers in the form of work-time and outputs, on the basis that employers own and supply the means of production worked with. The commercial function of labour is only to conserve their value, add value to them, and transfer value.

According to Marx's labor theory of value, human labor is the only source of net new economic value, but is also indispensable for the conservation and transfer of economic value (maintenance and redistribution of capital assets). Asset revaluations according to this theory only redistribute claims to product-value which has already been created previously.

The rate of surplus-value in production is defined by Marx as the volume of surplus-value produced by the workforce divided by the variable capital (or labour-costs) expended to produce it (the ratio S/V). This is very roughly equivalent to the profits/wages ratio, though there is debate in Marxian economics about what exact profit and wage measures should be used. After all, total labour costs often involve far more than wage payments, and profits can be "grossed" and ""netted" in different ways.

Alternative measures Marx cites are:

• surplus value divided by the value of labour-power,

• surplus labour divided by necessary labour

• [the value of] unpaid labour divided by [the value of] paid labour, expressible in hours worked or money units

• the surplus product divided by necessary product. (see Das Kapital, vol. 1, chapter 28).

The five measures of the rate of surplus value mentioned do not all refer to the same thing exactly (see further rate of exploitation and surplus product). However, the basic meaning of the rate of surplus value is always the rate of exploitation of living labour-capacity, i.e. the net yield obtained from the employment of living labour. Marx usually assumed in his models that the rate of surplus-value would be the same in all industries, different rates being equalised to a general norm in an open market for capital and labour. In reality, this is probably not the case, i.e. the rates may vary.

Some authors have interpreted this "rate of exploitation" as a purely economic or commercial concept (in the sense of "labor utilisation", the use of a resource) while others see it primarily as a moral or political concept referring to the domination of a social class which commands labour in virtue of ownership of capital assets.

[edit] Equalization of rates of surplus value

Marx believed that the long-term historical tendency would be for differences in rates of surplus value between enterprises and economic sectors to level out:

"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.

^[3]

This is why he felt justified assuming a uniform rate of surplus value in his models of how surplus value would be shared out under competitive conditions.

[edit] Complicating factors in assessing surplus value

Complicating factors in assessing surplus-value are:

• 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;

• Backwardation of certain physical goods in which time and presence are drivers of price.

• employee and employer contributions to social security and health schemes (wage costs and total labour costs may not be equal);

• price inflation applying to wage goods, profit and capital goods;

• creative accounting and tax avoidance or evasion techniques which misrepresent how much value has really been created.

• income obtained from what Marx called "fictitious capital" or what now are often called "bubble" phenomena.

• unsold inventories of net outputs which contain surplus-value.

These phenomena often make it difficult to calculate what the real net wage income is, and what the real net profit income is; there may be a very significant difference between gross income and disposable income.

In modern society, the complexity of transactions can often seem almost impenetrable or opaque. People may become less concerned with issues of exploitation, rather their concern may just simply be with defending their entitlement to a secure real net income ("take home pay") from the work they do, or from any other source.

How the exchange between capital and labour happens to be viewed, depends greatly on the balance of power between employers and employees, and on the ability for all parties to the exchange to make gains from the trade in human labor. People would not usually trade unless they made a positive gain by it, but obviously the gains could be very unequally distributed among different parties to the trade. The more real net income capitalists and workers lose, the more concerned they become about fair exchange and exploitation.

[edit] Origin in trade

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. 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.

In ancient and feudal society, the ability to appropriate surplus-value from trade in commodities and capital was usually strongly regulated, and limited by the state and religious authorities; a universal market where almost everything could be bought and sold freely using money did not exist.

Originally, as Marx explicitly notes, commercial trade emerged at the boundaries of economic communities based on a non-capitalist mode of production, and it is only when commerce begins to dominate and regulate the bulk of production itself, that it becomes clearer that the ultimate source, or substance, of all surplus-value is really surplus-labour.

The processes whereby capitalist commerce conquers direct control of production (instigating the capitalist mode of production) are however very lengthy and complicated ones; all kinds of socio-economic obstacles ("market rigidities") must be cleared away, and new institutions created, before all the necessary factors of production can be freely bought and sold as inputs and outputs. A good example of that is modern China.

[edit] Appropriation from production

Both in Das Kapital and in preparatory manuscripts such as the Grundrisse and Results of the immediate process of production, Marx shows how commerce by stages transforms a non-capitalist production process into a capitalist production process, integrating it fully into markets, so that all inputs and outputs become marketed goods or services. When that process is complete, the whole of production has become simultaneously a labor process creating use-values and a valorisation process creating new value, and more specifically a surplus-value appropriated as net income (see also capital accumulation).

In fact, Marx argues that the whole purpose of production in this situation becomes the growth of capital, i.e. that production of output becomes conditional on capital accumulation. If production becomes unprofitable, capital will be withdrawn from production sooner or later.

This means, systemically, that the main driving force of capitalism becomes the quest to maximise the appropriation of surplus-value augmenting the stock of capital. The overriding motive behind efforts to economise resources and labor is to obtain the maximum possible increase in income and capital assets ("business growth"), and provide a steady or growing return on investment.

[edit] Absolute vs. relative

According to Marx, absolute surplus value is obtained by increasing the amount of time worked per worker in an accounting period. Marx talks mainly about the length of the working day or week, but in modern times the concern is about the number of hours worked per year.

In many parts of the world, as productivity rose, the working classes forced a reduction in the workweek, from 60 hours to 50, 40 or 35 hours; but casualisation and flexibilisation of working hours also permits higher paid workers to work less (a fact of concern to statesmen who worry about international competitiveness, i.e. if we don't work harder our country will lose business).

Relative surplus value is obtained mainly by

• reducing wages — this can only go to a certain point, because if wages fall bellow the ability of workers to purchase their means of subsistence, they will be unable to reproduce themselves and the capitalists will not be able to find sufficient labor power.

• reducing the cost of wage-goods by various means, so that wage increases can be curbed.

• increasing the productivity and intensity of labour generally, through mechanisation and rationalisation, yielding a bigger output per hour worked.

The attempt to extract more and more surplus-value from labor on the one side, and on the other side the resistance to this exploitation, are according to Marx at the core of the conflict between social classes, which is sometimes muted or hidden, but at other times erupts in open class warfare and class struggle.

One will often hear a Marxist talking about class struggle, but in reality there is a big difference between class conflict and class struggle. A class conflict may exist and fester for a long time, without classes being able and willing to organise any mass struggle actively. Employers may provoke a strategic fight in order to demolish workers' militancy in a critical area; or, mass revolts of workers are sparked off by moral outrage about some event, or because conditions have become intolerable. No easy generalisations are possible, especially because the moods, feelings and inclination to act of social classes can change very rapidly; bursts of mass action can take most people by surprise.

[edit] Production versus realisation

Marx distinguished sharply between value and price, in part because of the sharp distinction he draws between the production of surplus-value and the realisation of profit income. Output may be produced containing surplus-value (valorisation), but selling that output (realisation) is not at all an automatic process.

Until payment from sales is received, it is uncertain how much of the surplus-value produced will actually be realised as profit from sales. So, the magnitude of profit realised in the form of money and the magnitude of surplus-value produced in the form of products may differ greatly, depending on what happens to market prices and the vagaries of supply and demand fluctuations. This insight forms the basis of Marx's theory of market value, prices of production and the tendency of the rate of profit of different enterprises to be levelled out by competition.

In his published and unpublished manuscripts, Marx went into great detail to examine many different factors which could affect the production and realisation of surplus-value. He regarded this as crucial for the purpose of understanding the dynamics and dimensions of capitalist competition, not just business competition but also competition between capitalists and workers and among workers themselves. But his analysis did not go much beyond specifying some of the overall outcomes of the process.

His main conclusion though is that employers will aim to maximise the productivity of labour and economise on the use of labour, to reduce their unit-costs and maximise their net returns from sales at current market prices; at a given ruling market price for an output, every reduction of costs and every increase in productivity and sales turnover will increase profit income for that output. The main method is mechanisation, which raises the fixed capital outlay in investment.

In turn, this causes the unit-values of commodities to decline over time, and a decline of the average rate of profit in the sphere of production occurs, culminating in a crisis of capital accumulation, in which a sharp reduction in productive investments combines with mass unemployment, followed by an intensive rationalisation process of take-overs, mergers, fusions, and restructuring aiming to restore profitability.

[edit] Significance of the mass of surplus value

Most Marxist discussions focus on the rate of surplus value, but for businessmen, the growth of the mass of surplus-value, or the profit volume produced (denoted here as P) is just as important, or even more important. 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, starting off with K= 1 million and r = 10% where the profit rate declines by a constant 0.1% per annum:

• 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 although the rate of profit decreased by 0.2%. In other words, there's nearly one-fifth more income to disburse to the owners of the capital, although the rate of return fell slightly.

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 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 world-wide to facilitate market expansion.

[edit] Surplus value and taxation

In general, business leaders and investors are hostile to any attempts to encroach on total profit volume, especially those of government taxation. The lower taxes are, other things being equal, the bigger the mass of profit that can be distributed as income to private investors. It was tax revolts that originally were a powerful stimulus motivating the bourgeoisie to wrest state power from the feudal aristocracy at the beginning of the capitalist era.

In reality, of course, a substantial portion of tax money is also redistributed to private enterprise in the form of government contracts and subsidies. If that had not been the case, the tax take would never have been permitted to rise to a quarter or a third of gross product. Capitalists may therefore be in conflict among themselves about taxes, since what is a cost to some, is a source of profit to others. Marx never analysed all this in detail; but the concept of surplus value will apply mainly to taxes on gross income (personal and business income from production) and the trade in products & services. Estate duty for example rarely contains a surplus value component, although profit could be earned in the transfer of the estate.

Generally, Marx seems to have regarded taxation imposts as a "form" which disguised real product values. Apparently following this view, Ernest Mandel in his 1960 treatise Marxist Economic Theory refers to (indirect) taxes as "arbitrary additions to commodity prices". But this is something of a misnomer, and disregards that taxes become part of the normal cost-structure of production. In his later treatise on late capitalism, Mandel astonishingly hardly mentions the significance of taxation at all, a very serious omission from the point of view of the real world of modern capitalism since taxes can reach a magnitude of a third, or even half of GDP (see E. Mandel, Late Capitalism. London: Verso, 1975)

[edit] Surplus value and 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 of a surplus-value or profit.

It is true that Marx argues no net additions to value can be created through acts of exchange, economic value being an attribute of labour-products (previous or newly created) only. Nevertheless trading activity outside the sphere of production can obviously also yield a surplus-value which represents a transfer of value from one person, country or institution to another.

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 a surplus-value is obtained 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.