Cited by English economist David Ricardo (1772-1823) and German political economist Karl Marx (1818-1883), surplus value describes the surplus derived from the use of a factor of production over its cost.
Marx noted that an employee works more hours than is necessary to provide basic subsistence for himself and his family, thereby creating a surplus, or profit.
Also see: theories of profits
K Marx, Capital, vols I-III (Harmondsworth, 1976-81)
The concept of surplus value originated in Ricardian socialism, with the term “surplus value” itself being coined by William Thompson in 1824.
Two measures of the value of this use, here present themselves; the measure of the laborer, and the measure of the capitalist. The measure of the laborer consists in the contribution of such sums as would replace the waste and value of the capital by the time it would be consumed, with such added compensation to the owner and superintendent of it as would support him in equal comfort with the more actively employed productive laborers. The measure of the capitalist, on the contrary, would be the additional value produced by the same quantity of labor in consequence of the use of the machinery or other capital; the whole of such surplus value to be enjoyed by the capitalist for his superior intelligence and skill in accumulating and advancing to the laborers his capital or the use of it.— William Thompson, An Inquiry into the Principles of the Distribution of Wealth (1824), p. 128 (2nd ed.), emphasis added
William Godwin and Charles Hall are also credited as earlier developers of the concept. Early authors also used the terms “surplus labor” and “surplus produce” (in Marx’s language, surplus product), which have distinct meanings in Marxian economics: surplus labor produces surplus product, which has surplus value. Some authors consider Marx as completely borrowing from Thompson, notably Anton Menger:
… Marx is completely under the influence of the earlier English socialists, and more particularly of William Thompson. … [T]he whole theory of surplus value, its conception, its name, and the estimates of its amounts are borrowed in all essentials from Thompson’s writings.
Cf. Marx, Das Kapital, English trans. 1887, pp. 156, 194, 289, with Thompson, Distribution of Wealth, p. 163; 2nd ed. p. 125. … The real discovers of the theory of surplus value are Godwin, Hall, and especially W. Thompson.— Anton Menger, The Right to the Whole Produce of Labour (1886), p. 101
This claim of priority has been vigorously contested, notably in an article by Friedrich Engels, completed by Karl Kautsky and published anonymously in 1887, reacting to and criticizing Menger in a review of his The Right to the Whole Produce of Labour, arguing that there is nothing in common but the term “surplus value” itself.
An intermediate position acknowledges the early development by Ricardian socialists and others, but credits Marx with substantial development. For example:[a]
What is original in Marx is the explanation of the manner in which surplus value is produced.— John Spargo, Socialism (1906)
Johann Karl Rodbertus developed a theory of surplus value in the 1830s and 1840s, notably in Zur Erkenntnis unserer staatswirthschaftlichen Zustände (Toward an appreciation of our economic circumstances, 1842), and claimed earlier priority to Marx, specifically to have “shown practically in the same way as Marx, only more briefly and clearly, the source of the surplus value of the capitalists”. The debate, taking the side of Marx’s priority, is detailed in the Preface to Capital, Volume II by Engels.
Marx first elaborated his doctrine of surplus value in 1857–58 manuscripts of A Contribution to the Critique of Political Economy (1859), following earlier developments in his 1840s writings. It forms the subject of his 1862–63 manuscript Theories of Surplus Value (which was subsequently published as Capital, Volume IV), and features in his Capital, Volume I (1867).
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?”
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 per hour. Once in the capitalist’s employ, the capitalist can have him operate a boot-making machine with which the worker produces $10 worth of work every 15 minutes. Every hour, the capitalist receives $40 worth of work and only pays the worker $10, capturing the remaining $30 as gross revenue. Once the capitalist has deducted fixed and variable operating costs of (say) $20 (leather, depreciation of the machine, etc.), he is left with $10. Thus, for an outlay of capital of $30, the capitalist obtains a surplus value of $10; his capital has not only been replaced by the operation, but also has increased by $10.
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.
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 has increased in almost every country in the world. Around 1850, the average share of government spending in GDP (See also Government spending) 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).
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 may be viewed in five ways:
- 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 the working population, i.e. the net amount of value it can produce with its labour in excess of its own consumption requirements.
Equalization of rates
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, as Marx explains in two places in Capital Vol. 3:
“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. 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.
Hence, he assumed a uniform rate of surplus value in his models of how surplus value would be shared out under competitive conditions.
Appropriation from production
Both in Das Kapital and in preparatory manuscripts such as the Grundrisse and Results of the immediate process of production, Marx asserts that 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, according to Marx, 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).
Marx contends 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.
The implication is 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 would thus be to obtain the maximum possible increase in income and capital assets (“business growth”), and provide a steady or growing return on investment.
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 workweek decreased from 60 hours to 50, 40 or 35 hours.
Relative surplus value is obtained mainly by:
- reducing wages — this can only go to a certain point, because if wages fall below 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.