Surplus value
Encyclopedia
Surplus value is a concept used famously by Karl Marx
in his critique of political economy
. Although Marx did not himself invent the term, he developed the concept. It refers roughly to the new value created by workers in excess of their own labour-cost, a value which Marx said was appropriated by the capitalist as gross profit, and which is the basis of capital accumulation
.
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:
as follows:
Marx himself also put the problem as follows:
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 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 Thus, for an outlay of capital of $30, the capitalist obtains a surplus value of $10; his capital has not only been replaced by the operation, but also has increased by $10.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. Hence the rise of trade unions which aim to create a more favourable bargaining position through collective action by workers.
, 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).
, 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:
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 capital 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.
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.
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.
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.
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
.
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.
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:
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
.
, in part because of the sharp distinction he draws between the production of surplus-value and the realisation of profit income (see also value-form
). 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.
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:
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:
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.
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. 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 on 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)
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.
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. That is, control over the access to a good, asset or resource as such may increasingly become a very important factor in realising a surplus-value. In the worst case, this amounts to parasitism
or extortion
. This analysis illustrates a key feature of surplus value which is that it accumulated by the owners of capital only within inefficient markets because only inefficient markets - i.e. those in which transparency and competition are low - have profit margins large enough to facilitate capital accumulation. Ironically, profitable - meaning inefficient - markets have difficulty meeting the definition a free market
because a free market is to some extent defined as an efficient one: one in which goods or services are exchanged without coercion or fraud, or in other words with competition (to prevent monopolistic coercion) and transparency (to prevent fraud).
, 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.
Some Marxian economists argue that Marx thought the possibility of measuring surplus value depends on the publicly available data. We can develop statistical indicators of trends, without mistakenly conflating data with the real thing they represent, or postulating "perfect measurements or perfect data" in the empiricist manner. If theory is not disciplined by valid data, it becomes metaphysical
, rather than being scientific.
Since the 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 http://www.cambridge.org/us/catalogue/catalogue.asp?isbn=0521564794.
Usually this type of research involves reworking the components of the official measures of gross output and capital outlays to approximate Marxian categories, in order to estimate empirically the trends in the ratios thought important in the Marxian explanation of capital accumulation
and economic growth
: the rate of surplus-value, the organic composition of capital
, the rate of profit
, the rate of increase in the capital stock, and the rate of reinvestment of realised surplus-value in production.
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".
Experienced financial analysts are, however, liable to shake their heads at these kinds of Marxian empirical estimates from official data. As regards total profit volume, statisticians use survey data, administrative records, and tax data to estimate it, consistent with a standard definition of gross product and capital transactions. But this 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.
Or, if the rate of profit is measured as a ratio between the total profit component in value added
and fixed capital
, what is ignored is that capital assets include more than fixed assets, and that profit income includes more than the value added
component. So to assess profit volume or profitability, really the problem has to be looked at using a variety of different measures and a variety of difference sources (national accounts data, tax data, direct surveys, company reports and circumstantial evidence).
As against that, it can also be shown statistically that most time series of different profit measures from different sources will show the same historical trends (see e.g. the research by Dumenil & Levy).
for example substitutes the concept of "economic surplus
" for Marx's surplus value. In a joint work, Paul Baran and Paul Sweezy
define the economic surplus as "the difference between what a society produces and the costs of producing it" (Monopoly Capitalism, New York 1966, p. 9). Much depends here on how the costs are valued, and which costs are taken into account. Piero Sraffa
also refers to a "physical surplus" with a similar meaning, calculated according to the relationship between prices of physical inputs and outputs.
In these theories, surplus product
and surplus value are equated, while value and price are identical, but the distribution of the surplus tends to be separated theoretically from its production; whereas Marx insists that the distribution of wealth is governed by the social conditions in which it is produced, especially by property relations giving entitlement to products, incomes and assets (see also relations of production
).
In Capital Vol. 3, Marx insists strongly that
This is a substantive - if abstract - thesis about the basic social relations involved in giving and getting, taking and receiving in human society
, and their consequences for the way work and wealth is shared out. It suggests a starting point for an inquiry into the problem of social order
and social change
. But obviously it is only a starting point, not the whole story, which would include all the "variations and gradations".
. He argues in an Concise Encyclopedia of Economics articlehttp://www.econlib.org/library/Enc/Profits.html: "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:
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.
He adds that "Attempts have been made to organize productive societies without the profit motive (...) [but] since the industrial revolution... there have been essentially no successful economies that have not taken advantage of the profit motive." The problem here is again a moral
judgement, dependent on what you mean by success. Some societies using the profit motive were ruined; profit is no guarantee of success, although you can say that it has powerfully stimulated economic growth.
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.
Karl Marx
Karl Heinrich Marx was a German philosopher, economist, sociologist, historian, journalist, and revolutionary socialist. His ideas played a significant role in the development of social science and the socialist political movement...
in his critique of political economy
Political economy
Political economy originally was the term for studying production, buying, and selling, and their relations with law, custom, and government, as well as with the distribution of national income and wealth, including through the budget process. Political economy originated in moral philosophy...
. Although Marx did not himself invent the term, he developed the concept. It refers roughly to the new value created by workers in excess of their own labour-cost, a value which Marx said was appropriated by the capitalist as gross profit, and which is the basis of capital accumulation
Capital accumulation
The accumulation of capital refers to the gathering or amassing of objects of value; the increase in wealth through concentration; or the creation of wealth. Capital is money or a financial asset invested for the purpose of making more money...
.
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
Capital accumulation
The accumulation of capital refers to the gathering or amassing of objects of value; the increase in wealth through concentration; or the creation of wealth. Capital is money or a financial asset invested for the purpose of making more money...
and surplus product
Surplus product
Surplus product is a concept explicitly theorised by Karl Marx in his critique of political economy. Marx first began to work out his idea of surplus product in his 1844 notes on James Mill's Elements of political economy...
).
In the Communist Manifesto, Marx and Engels wrote:
Theory
The problem of explaining the source of surplus value is expressed by Friedrich EngelsFriedrich Engels
Friedrich Engels was a German industrialist, social scientist, author, political theorist, philosopher, and father of Marxist theory, alongside Karl Marx. In 1845 he published The Condition of the Working Class in England, based on personal observations and research...
as follows:
Marx himself also put the problem as follows:
Marx's solution was to distinguish between labor-time worked and labor power
Labor power
Labour power is a crucial concept used by Karl Marx in his critique of capitalist political economy. He regarded labour power as the most important of the productive forces of human beings. Labour power can be simply defined as work-capacity, the ability to do work...
. 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 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. Hence the rise of trade unions which aim to create a more favourable bargaining position through collective action by workers.
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 profitProfit (economics)
In economics, the term profit has two related but distinct meanings. Normal profit represents the total opportunity costs of a venture to an entrepreneur or investor, whilst economic profit In economics, the term profit has two related but distinct meanings. Normal profit represents the total...
, net interest
Interest
Interest is a fee paid by a borrower of assets to the owner as a form of compensation for the use of the assets. It is most commonly the price paid for the use of borrowed money, or money earned by deposited funds....
, net rents, net tax
Tax
To tax is to impose a financial charge or other levy upon a taxpayer by a state or the functional equivalent of a state such that failure to pay is punishable by law. Taxes are also imposed by many subnational entities...
on production and various net receipts associated with royalties
Royalties
Royalties are usage-based payments made by one party to another for the right to ongoing use of an asset, sometimes an intellectual property...
, licensing, leasing, certain honorariums etc. (see also value product
Value product
The value product is an economic concept formulated by Karl Marx in his critique of political economy during the 1860s, and used in Marxian social accounting theory for capitalist economies...
).
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
Operating surplus
Operating surplus is an accounting concept used in national accounts statistics Operating surplus is an accounting concept used in national accounts statistics Operating surplus is an accounting concept used in national accounts statistics (such as United Nations System of National Accounts (UNSNA)...
).
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
World War I
World War I , which was predominantly called the World War or the Great War from its occurrence until 1939, and the First World War or World War I thereafter, was a major war centred in Europe that began on 28 July 1914 and lasted until 11 November 1918...
, just under 10%; just before the outbreak of World War II
World War II
World War II, or the Second World War , was a global conflict lasting from 1939 to 1945, involving most of the world's nations—including all of the great powers—eventually forming two opposing military alliances: the Allies and the Axis...
, 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).
Interpretations
Surplus-value may be viewed in five ways:- As a component of the new value productValue productThe value product is an economic concept formulated by Karl Marx in his critique of political economy during the 1860s, and used in Marxian social accounting theory for capitalist economies...
, 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 goodsIntermediate consumptionIntermediate consumption is an economic concept used in national accounts, such as the United Nations System of National Accounts , the US National Income and Product Accounts and the European System of Accounts .Conceptually, the aggregate "intermediate consumption" is equal to the amount of the...
used up (constant capitalConstant capitalConstant capital , is a concept created by Karl Marx and used in Marxian political economy. It refers to one of the forms of capital invested in production, which contrasts with variable capital...
inputs). Labor costs and surplus-value are the monetary valuations of what Marx calls the necessary product and the surplus productSurplus productSurplus product is a concept explicitly theorised by Karl Marx in his critique of political economy. Marx first began to work out his idea of surplus product in his 1844 notes on James Mill's Elements of political economy...
, or paid labour and unpaid labour. - Surplus-value can also be viewed as a flowStock and flowEconomics, business, accounting, and related fields often distinguish between quantities that are stocks and those that are flows. These differ in their units of measurement. A stock variable is measured at one specific time, and represents a quantity existing at that point in time , which may have...
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 accumulationCapital accumulationThe accumulation of capital refers to the gathering or amassing of objects of value; the increase in wealth through concentration; or the creation of wealth. Capital is money or a financial asset invested for the purpose of making more money...
); 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 stockStock and flowEconomics, business, accounting, and related fields often distinguish between quantities that are stocks and those that are flows. These differ in their units of measurement. A stock variable is measured at one specific time, and represents a quantity existing at that point in time , which may have...
of capital assets through an accounting period, prior to distribution. - Surplus-value can be viewed as a social relation of productionRelations of productionRelations of production is a concept frequently used by Karl Marx and Friedrich Engels in their theory of historical materialism, and in Das Kapital...
, 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 productivityProductivityProductivity is a measure of the efficiency of production. Productivity is a ratio of what is produced to what is required to produce it. Usually this ratio is in the form of an average, expressing the total output divided by the total input...
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.
Measures of the rate of surplus value
According to Marx's theory of exploitationExploitation
This article discusses the term exploitation in the meaning of using something in an unjust or cruel manner.- As unjust benefit :In political economy, economics, and sociology, exploitation involves a persistent social relationship in which certain persons are being mistreated or unfairly used for...
, 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
Means of production
Means of production refers to physical, non-human inputs used in production—the factories, machines, and tools used to produce wealth — along with both infrastructural capital and natural capital. This includes the classical factors of production minus financial capital and minus human capital...
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
Labor theory of value
The labor theories of value are heterodox economic theories of value which argue that the value of a commodity is related to the labor needed to produce or obtain that commodity. The concept is most often associated with Marxian economics...
, 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
Marxian economics
Marxian economics refers to economic theories on the functioning of capitalism based on the works of Karl Marx. Adherents of Marxian economics, particularly in academia, distinguish it from Marxism as a political ideology and sociological theory, arguing that Marx's approach to understanding the...
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-powerLabor powerLabour power is a crucial concept used by Karl Marx in his critique of capitalist political economy. He regarded labour power as the most important of the productive forces of human beings. Labour power can be simply defined as work-capacity, the ability to do work...
, - surplus labourSurplus labourSurplus labour is a concept used by Karl Marx in his critique of political economy. It means labour performed in excess of the labour necessary to produce the means of livelihood of the worker . According to Marxian economics, surplus labour is usually "unpaid 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 productSurplus productSurplus product is a concept explicitly theorised by Karl Marx in his critique of political economy. Marx first began to work out his idea of surplus product in his 1844 notes on James Mill's Elements of political economy...
divided by necessary product. (see Das KapitalDas KapitalDas Kapital, Kritik der politischen Ökonomie , by Karl Marx, is a critical analysis of capitalism as political economy, meant to reveal the economic laws of the capitalist mode of production, and how it was the precursor of the socialist mode of production.- Themes :In Capital: Critique of...
, 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
Surplus product
Surplus product is a concept explicitly theorised by Karl Marx in his critique of political economy. Marx first began to work out his idea of surplus product in his 1844 notes on James Mill's Elements of political economy...
). However, the basic meaning of the rate of surplus value is always the rate of exploitation of living labour-capacity, i.e. the net capital 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
Commerce
While business refers to the value-creating activities of an organization for profit, commerce means the whole system of an economy that constitutes an environment for business. The system includes legal, economic, political, social, cultural, and technological systems that are in operation in any...
concept (in the sense of "labor utilisation", the use of a resource) while others see it primarily as a moral
Moral
A moral is a message conveyed or a lesson to be learned from a story or event. The moral may be left to the hearer, reader or viewer to determine for themselves, or may be explicitly encapsulated in a maxim...
or political concept referring to the domination of a social class which commands labour in virtue of ownership of capital assets.
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, as he explains in two places in Capital Vol. 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.
Complicating factors in assessing surplus-value
Complicating factors in assessing surplus-value are:- stateState (polity)A state is an organized political community, living under a government. States may be sovereign and may enjoy a monopoly on the legal initiation of force and are not dependent on, or subject to any other power or state. Many states are federated states which participate in a federal union...
intermediation, where profitProfit (accounting)In accounting, profit can be considered to be the difference between the purchase price and the costs of bringing to market whatever it is that is accounted as an enterprise in terms of the component costs of delivered goods and/or services and any operating or other expenses.-Definition:There are...
and wageWageA wage is a compensation, usually financial, received by workers in exchange for their labor.Compensation in terms of wages is given to workers and compensation in terms of salary is given to employees...
income is taxTaxTo tax is to impose a financial charge or other levy upon a taxpayer by a state or the functional equivalent of a state such that failure to pay is punishable by law. Taxes are also imposed by many subnational entities...
ed on the one side, and supplemented on the other with subsidies and grants of various kinds; - BackwardationBackwardationNormal backwardation, also sometimes called backwardation, is the market condition wherein the price of a forward or futures contract is trading below the expected spot price at contract maturity. The resulting futures or forward curve would typically be downward sloping , since contracts for...
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 inflationInflationIn economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time.When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation also reflects an erosion in the purchasing power of money – a...
applying to wage goods, profit and capital goods; - creative accountingCreative accountingCreative accounting and earnings management are euphemisms referring to accounting practices that may follow the letter of the rules of standard accounting practices, but certainly deviate from the spirit of those rules...
and taxTaxTo tax is to impose a financial charge or other levy upon a taxpayer by a state or the functional equivalent of a state such that failure to pay is punishable by law. Taxes are also imposed by many subnational entities...
avoidance or evasion techniques which misrepresent how much value has really been created. - income obtained from what Marx called "fictitious capitalFictitious capitalFictitious capital is a concept used by Karl Marx in his critique of political economy. It is introduced in chapter 29 of the third volume of Capital. Fictitious capital contrasts with what Marx calls "real capital" which is capital actually invested in physical means of production and workers, and...
" 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.
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. In fact, when Marx first introduces the concept of surplus value in Das Kapital
Das Kapital
Das Kapital, Kritik der politischen Ökonomie , by Karl Marx, is a critical analysis of capitalism as political economy, meant to reveal the economic laws of the capitalist mode of production, and how it was the precursor of the socialist mode of production.- Themes :In Capital: Critique of...
, 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
Commodity
In economics, a commodity is the generic term for any marketable item produced to satisfy wants or needs. Economic commodities comprise goods and services....
production, merchants' profit from "buying cheap and selling dear" or unequal exchange
Unequal exchange
Unequal exchange is a much disputed concept which is used primarily in Marxist economics, but also in ecological economics, to denote forms of exploitation hidden in or underwriting trade...
, certain types of rent imposed on production, and interest
Interest
Interest is a fee paid by a borrower of assets to the owner as a form of compensation for the use of the assets. It is most commonly the price paid for the use of borrowed money, or money earned by deposited funds....
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
Trade
Trade is the transfer of ownership of goods and services from one person or entity to another. Trade is sometimes loosely called commerce or financial transaction or barter. A network that allows trade is called a market. The original form of trade was barter, the direct exchange of goods and...
emerged at the boundaries of economic communities based on a non-capitalist mode of production
Mode of production
In the writings of Karl Marx and the Marxist theory of historical materialism, a mode of production is a specific combination of:...
, and it is only when commerce
Commerce
While business refers to the value-creating activities of an organization for profit, commerce means the whole system of an economy that constitutes an environment for business. The system includes legal, economic, political, social, cultural, and technological systems that are in operation in any...
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
Capitalist mode of production
In Marx's critique of political economy, the capitalist mode of production is the production system of capitalist societies, which began in Europe in the 16th century, grew rapidly in Western Europe from the end of the 18th century, and later extended to most of the world...
) 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
Factors of production
In economics, factors of production means inputs and finished goods means output. Input determines the quantity of output i.e. output depends upon input. Input is the starting point and output is the end point of production process and such input-output relationship is called a production function...
can be freely bought and sold as inputs and outputs. A good example of that is modern China
China
Chinese civilization may refer to:* China for more general discussion of the country.* Chinese culture* Greater China, the transnational community of ethnic Chinese.* History of China* Sinosphere, the area historically affected by Chinese culture...
.
Appropriation from production
Both in Das KapitalDas Kapital
Das Kapital, Kritik der politischen Ökonomie , by Karl Marx, is a critical analysis of capitalism as political economy, meant to reveal the economic laws of the capitalist mode of production, and how it was the precursor of the socialist mode of production.- Themes :In Capital: Critique of...
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
Use value
Use value or value in use is the utility of consuming a good; the want-satisfying power of a good or service in classical political economy. In Marx's critique of political economy, any labor-product has a value and a use-value, and if it is traded as a commodity in markets, it additionally has an...
and a valorisation
Valorisation
The valorisation or valorization of capital is a theoretical concept created by Karl Marx in his critique of political economy. The German original term is "Verwertung" but this is difficult to translate, and often wrongly rendered as "realisation of capital", "creation of surplus-value" or...
process creating new value, and more specifically a surplus-value appropriated as net income (see also capital accumulation
Capital accumulation
The accumulation of capital refers to the gathering or amassing of objects of value; the increase in wealth through concentration; or the creation of wealth. Capital is money or a financial asset invested for the purpose of making more money...
).
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
Capital accumulation
The accumulation of capital refers to the gathering or amassing of objects of value; the increase in wealth through concentration; or the creation of wealth. Capital is money or a financial asset invested for the purpose of making more money...
. 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.
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 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 powerLabor powerLabour power is a crucial concept used by Karl Marx in his critique of capitalist political economy. He regarded labour power as the most important of the productive forces of human beings. Labour power can be simply defined as work-capacity, the ability to do work...
. - 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
Class struggle
Class struggle is the active expression of a class conflict looked at from any kind of socialist perspective. Karl Marx and Friedrich Engels wrote "The [written] history of all hitherto existing society is the history of class struggle"....
.
Production versus realisation
Marx distinguished sharply between value and pricePrice
-Definition:In ordinary usage, price is the quantity of payment or compensation given by one party to another in return for goods or services.In modern economies, prices are generally expressed in units of some form of currency...
, in part because of the sharp distinction he draws between the production of surplus-value and the realisation of profit income (see also value-form
Value-form
The value-form or form of value is a concept in Karl Marx’s critique of the political economy. It refers to a socially attributed characteristic of a commodity which contrasts with its tangible use-value or utility .The concept is introduced in the first chapter of Das Kapital where Marx argues...
). Output may be produced containing surplus-value (valorisation
Valorisation
The valorisation or valorization of capital is a theoretical concept created by Karl Marx in his critique of political economy. The German original term is "Verwertung" but this is difficult to translate, and often wrongly rendered as "realisation of capital", "creation of surplus-value" or...
), 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
Prices of production
Prices of production refers to a concept in Karl Marx's critique of political economy. It is introduced in the third volume of Das Kapital, where Marx considers the operation of capitalist production as the unity of a production process and a circulation process involving commodities, money and...
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
Competition
Competition is a contest between individuals, groups, animals, etc. for territory, a niche, or a location of resources. It arises whenever two and only two strive for a goal which cannot be shared. Competition occurs naturally between living organisms which co-exist in the same environment. For...
, 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
Fixed capital
Fixed capital is a concept in economics and accounting, first theoretically analysed in some depth by the economist David Ricardo. It refers to any kind of real or physical capital that is not used up in the production of a product and is contrasted with circulating capital such as raw materials,...
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
Tendency of the rate of profit to fall
The tendency of the rate of profit to fall is a hypothesis in economics and political economy, most famously expounded by Karl Marx in chapter 13 of Das Kapital Vol. 3. It was generally accepted in the 19th century...
in the sphere of production occurs, culminating in a crisis of capital accumulation
Capital accumulation
The accumulation of capital refers to the gathering or amassing of objects of value; the increase in wealth through concentration; or the creation of wealth. Capital is money or a financial asset invested for the purpose of making more money...
, 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.
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 gross profit volume produced (denoted here as P) is just as important, or even more important. After all, according to US Internal Revenue ServiceInternal Revenue Service
The Internal Revenue Service is the revenue service of the United States federal government. The agency is a bureau of the Department of the Treasury, and is under the immediate direction of the Commissioner of Internal Revenue...
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, 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 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
Henryk Grossman
Henryk Grossmanalternative spelling: Henryk Grossmann , was a Polish-German economist and historian of Jewish descent....
). 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
Louis C. Fraina
Louis C. Fraina was a founding member of the American Communist Party in 1919. After running afoul of the Communist International in 1921 over the alleged misappropriation of funds, Fraina left the organized radical movement, emerging in 1930 as a left wing public intellectual by the name of Lewis...
and Paul Mattick
Paul Mattick
Paul Mattick Sr. was a Marxist political writer and social revolutionary, whose thought can be placed within the council communist and left communist traditions...
), 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.
Relation to 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 bourgeoisieBourgeoisie
In sociology and political science, bourgeoisie describes a range of groups across history. In the Western world, between the late 18th century and the present day, the bourgeoisie is a social class "characterized by their ownership of capital and their related culture." A member of the...
to wrest state power from the feudal aristocracy
Aristocracy
Aristocracy , is a form of government in which a few elite citizens rule. The term derives from the Greek aristokratia, meaning "rule of the best". In origin in Ancient Greece, it was conceived of as rule by the best qualified citizens, and contrasted with monarchy...
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. 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 on 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
Ernest Mandel
Ernest Ezra Mandel, also known by various pseudonyms such as Ernest Germain, Pierre Gousset, Henri Vallin, Walter , was a revolutionary Marxist theorist.-Life:...
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
Late capitalism
"Late capitalism" is a term used by neo-Marxists to refer to capitalism from about 1945 onwards, with the implication that it is a historically limited stage rather than an eternal feature of all future human society. Postwar German sociologists needed a term to describe contemporary society...
, 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)
Relation to the circuits of capital
Generally, Marx focused in Das KapitalDas Kapital
Das Kapital, Kritik der politischen Ökonomie , by Karl Marx, is a critical analysis of capitalism as political economy, meant to reveal the economic laws of the capitalist mode of production, and how it was the precursor of the socialist mode of production.- Themes :In Capital: Critique of...
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
Capitalist mode of production
In Marx's critique of political economy, the capitalist mode of production is the production system of capitalist societies, which began in Europe in the 16th century, grew rapidly in Western Europe from the end of the 18th century, and later extended to most of the world...
. 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
National accounts
National accounts or national account systems are the implementation of complete and consistent accounting techniques for measuring the economic activity of a nation. These include detailed underlying measures that rely on double-entry accounting...
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
Alienation (property law)
Alienation, in property law, is the capacity for a piece of property or a property right to be sold or otherwise transferred from one party to another. Although property is generally deemed to be alienable, it may be subject to restraints on 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
Trade
Trade is the transfer of ownership of goods and services from one person or entity to another. Trade is sometimes loosely called commerce or financial transaction or barter. A network that allows trade is called a market. The original form of trade was barter, the direct exchange of goods and...
grows significantly faster than GDP, suggesting to Marxian economists such as Samir Amin
Samir Amin
Samir Amin is an Egyptian economist. He currently lives in Dakar, Senegal.- Biography :Samir Amin was born in Cairo, the son of an Egyptian father and a French mother . He spent his childhood and youth in Port Said; there he attended a French High School, leaving in 1947 with a Baccalauréat...
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. That is, control over the access to a good, asset or resource as such may increasingly become a very important factor in realising a surplus-value. In the worst case, this amounts to parasitism
Parasitism
Parasitism is a type of symbiotic relationship between organisms of different species where one organism, the parasite, benefits at the expense of the other, the host. Traditionally parasite referred to organisms with lifestages that needed more than one host . These are now called macroparasites...
or extortion
Extortion
Extortion is a criminal offence which occurs when a person unlawfully obtains either money, property or services from a person, entity, or institution, through coercion. Refraining from doing harm is sometimes euphemistically called protection. Extortion is commonly practiced by organized crime...
. This analysis illustrates a key feature of surplus value which is that it accumulated by the owners of capital only within inefficient markets because only inefficient markets - i.e. those in which transparency and competition are low - have profit margins large enough to facilitate capital accumulation. Ironically, profitable - meaning inefficient - markets have difficulty meeting the definition a free market
Free market
A free market is a competitive market where prices are determined by supply and demand. However, the term is also commonly used for markets in which economic intervention and regulation by the state is limited to tax collection, and enforcement of private ownership and contracts...
because a free market is to some extent defined as an efficient one: one in which goods or services are exchanged without coercion or fraud, or in other words with competition (to prevent monopolistic coercion) and transparency (to prevent fraud).
Measurement
The first attempt to measure the rate of surplus-value in money-units was by Marx himself in chapter 9 of Das KapitalDas Kapital
Das Kapital, Kritik der politischen Ökonomie , by Karl Marx, is a critical analysis of capitalism as political economy, meant to reveal the economic laws of the capitalist mode of production, and how it was the precursor of the socialist mode of production.- Themes :In Capital: Critique of...
, using factory data of a spinning mill supplied by Friedrich Engels
Friedrich Engels
Friedrich Engels was a German industrialist, social scientist, author, political theorist, philosopher, and father of Marxist theory, alongside Karl Marx. In 1845 he published The Condition of the Working Class in England, based on personal observations and research...
(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.
Some Marxian economists argue that Marx thought the possibility of measuring surplus value depends on the publicly available data. We can develop statistical indicators of trends, without mistakenly conflating data with the real thing they represent, or postulating "perfect measurements or perfect data" in the empiricist manner. If theory is not disciplined by valid data, it becomes metaphysical
Metaphysics
Metaphysics is a branch of philosophy concerned with explaining the fundamental nature of being and the world, although the term is not easily defined. Traditionally, metaphysics attempts to answer two basic questions in the broadest possible terms:...
, rather than being scientific.
Since the pioneering studies by Marxian economists like Eugen Varga
Eugen Varga
Eugen Samuilovich Varga was a Marxist economist of Hungarian origin.He studied philosophy and economic geography at the University of Budapest. In 1906, he started writing in socialist and academic journals, mainly on economic subjects, but also on other topics...
, Charles Bettelheim
Charles Bettelheim
Charles Bettelheim was a French economist and historian, founder of the Center for the Study of Modes of Industrialization at the Sorbonne), economic advisor to the governments of several developing countries during the period of decolonization...
, 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
Anwar Shaikh (economist)
Anwar M. Shaikh is an American economist, and currently Professor of Economics at the Graduate Faculty of The New School in New York City. His work in political economy has focused on the economic theory and empirical patterns of developed capitalism. He has written on international trade,...
& Ahmet Tonak http://www.cambridge.org/us/catalogue/catalogue.asp?isbn=0521564794.
Usually this type of research involves reworking the components of the official measures of gross output and capital outlays to approximate Marxian categories, in order to estimate empirically the trends in the ratios thought important in the Marxian explanation of capital accumulation
Capital accumulation
The accumulation of capital refers to the gathering or amassing of objects of value; the increase in wealth through concentration; or the creation of wealth. Capital is money or a financial asset invested for the purpose of making more money...
and economic growth
Economic growth
In economics, economic growth is defined as the increasing capacity of the economy to satisfy the wants of goods and services of the members of society. Economic growth is enabled by increases in productivity, which lowers the inputs for a given amount of output. Lowered costs increase demand...
: the rate of surplus-value, the organic composition of capital
Organic composition of capital
The organic composition of capital is a concept created by Karl Marx in his critique of political economy and used in Marxian economics as a theoretical alternative to neo-classical concepts of factors of production, production functions, capital productivity and capital-output ratios. Marx first...
, the rate of profit
Rate of profit
In economics and finance, the profit rate is the relative profitability of an investment project, of a capitalist enterprise, or of the capitalist economy as a whole...
, the rate of increase in the capital stock, and the rate of reinvestment of realised surplus-value in production.
The Marxian mathematicians Emmanuel Farjoun and Moshé Machover
Moshé Machover
Moshé Machover is a mathematician, philosopher, and socialist activist, noted for his writings against Zionism. Born to a Jewish family in Tel Aviv, then part of the British Mandate of Palestine, Machover moved to Britain in 1968 where he became a naturalised citizen...
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".
Experienced financial analysts are, however, liable to shake their heads at these kinds of Marxian empirical estimates from official data. As regards total profit volume, statisticians use survey data, administrative records, and tax data to estimate it, consistent with a standard definition of gross product and capital transactions. But this 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.
Or, if the rate of profit is measured as a ratio between the total profit component in value added
Value added
In economics, the difference between the sale price and the production cost of a product is the value added per unit. Summing value added per unit over all units sold is total value added. Total value added is equivalent to Revenue less Outside Purchases...
and fixed capital
Fixed capital
Fixed capital is a concept in economics and accounting, first theoretically analysed in some depth by the economist David Ricardo. It refers to any kind of real or physical capital that is not used up in the production of a product and is contrasted with circulating capital such as raw materials,...
, what is ignored is that capital assets include more than fixed assets, and that profit income includes more than the value added
Value added
In economics, the difference between the sale price and the production cost of a product is the value added per unit. Summing value added per unit over all units sold is total value added. Total value added is equivalent to Revenue less Outside Purchases...
component. So to assess profit volume or profitability, really the problem has to be looked at using a variety of different measures and a variety of difference sources (national accounts data, tax data, direct surveys, company reports and circumstantial evidence).
As against that, it can also be shown statistically that most time series of different profit measures from different sources will show the same historical trends (see e.g. the research by Dumenil & Levy).
Different conceptions
In neo-Marxist thought, Paul A. BaranPaul A. Baran
Paul Alexander Baran was an American economist known for his Marxist views. In 1951 Baran was promoted to full professor at Stanford University and Baran was the only tenured Marxist economist in the United States until his death in 1964...
for example substitutes the concept of "economic surplus
Economic surplus
In mainstream economics, economic surplus refers to two related quantities. Consumer surplus or consumers' surplus is the monetary gain obtained by consumers because they are able to purchase a product for a price that is less than the highest price that they would be willing to pay...
" for Marx's surplus value. In a joint work, Paul Baran and Paul Sweezy
Paul Sweezy
Paul Marlor Sweezy was a Marxist economist, political activist, publisher, and founding editor of the long-running magazine Monthly Review...
define the economic surplus as "the difference between what a society produces and the costs of producing it" (Monopoly Capitalism, New York 1966, p. 9). Much depends here on how the costs are valued, and which costs are taken into account. Piero Sraffa
Piero Sraffa
Piero Sraffa was an influential Italian economist whose book Production of Commodities by Means of Commodities is taken as founding the Neo-Ricardian school of Economics.- Early life :...
also refers to a "physical surplus" with a similar meaning, calculated according to the relationship between prices of physical inputs and outputs.
In these theories, surplus product
Surplus product
Surplus product is a concept explicitly theorised by Karl Marx in his critique of political economy. Marx first began to work out his idea of surplus product in his 1844 notes on James Mill's Elements of political economy...
and surplus value are equated, while value and price are identical, but the distribution of the surplus tends to be separated theoretically from its production; whereas Marx insists that the distribution of wealth is governed by the social conditions in which it is produced, especially by property relations giving entitlement to products, incomes and assets (see also relations of production
Relations of production
Relations of production is a concept frequently used by Karl Marx and Friedrich Engels in their theory of historical materialism, and in Das Kapital...
).
In Capital Vol. 3, Marx insists strongly that
This is a substantive - if abstract - thesis about the basic social relations involved in giving and getting, taking and receiving in human society
Society
A society, or a human society, is a group of people related to each other through persistent relations, or a large social grouping sharing the same geographical or virtual territory, subject to the same political authority and dominant cultural expectations...
, and their consequences for the way work and wealth is shared out. It suggests a starting point for an inquiry into the problem of social order
Social order
Social order is a concept used in sociology, history and other social sciences. It refers to a set of linked social structures, social institutions and social practices which conserve, maintain and enforce "normal" ways of relating and behaving....
and social change
Social change
Social change refers to an alteration in the social order of a society. It may refer to the notion of social progress or sociocultural evolution, the philosophical idea that society moves forward by dialectical or evolutionary means. It may refer to a paradigmatic change in the socio-economic...
. But obviously it is only a starting point, not the whole story, which would include all the "variations and gradations".
Morality and power of surplus value
A typical textbook-type example of an alternative interpretation to Marx's is provided by Lester ThurowLester Thurow
Lester Carl Thurow is a former dean of the MIT Sloan School of Management and author of books on economic topics. Thurow was born in Livingston, Montana.-Education:...
. He argues in an Concise Encyclopedia of Economics articlehttp://www.econlib.org/library/Enc/Profits.html: "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
Explanation
An explanation is a set of statements constructed to describe a set of facts which clarifies the causes, context, and consequencesof those facts....
of profits so much as a moral
Moral
A moral is a message conveyed or a lesson to be learned from a story or event. The moral may be left to the hearer, reader or viewer to determine for themselves, or may be explicitly encapsulated in a maxim...
justification
Justify
Justify or Justified may refer to:* Justification , a kind of typographic alignment- In music :* "Justify", a song by The Red Jumpsuit Apparatus* "Justify" , a song by The Rasmus...
for profits, i.e. as a legitimate entitlement or claim, in return for the supply of capital.
He adds that "Attempts have been made to organize productive societies without the profit motive (...) [but] since the industrial revolution... there have been essentially no successful economies that have not taken advantage of the profit motive." The problem here is again a moral
Moral
A moral is a message conveyed or a lesson to be learned from a story or event. The moral may be left to the hearer, reader or viewer to determine for themselves, or may be explicitly encapsulated in a maxim...
judgement, dependent on what you mean by success. Some societies using the profit motive were ruined; profit is no guarantee of success, although you can say that it has powerfully stimulated economic growth.
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
Tax
To tax is to impose a financial charge or other levy upon a taxpayer by a state or the functional equivalent of a state such that failure to pay is punishable by law. Taxes are also imposed by many subnational entities...
department is the arbiter of the profit volume, because it determines depreciation
Depreciation
Depreciation refers to two very different but related concepts:# the decrease in value of assets , and# the allocation of the cost of assets to periods in which the assets are used ....
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
Competition
Competition is a contest between individuals, groups, animals, etc. for territory, a niche, or a location of resources. It arises whenever two and only two strive for a goal which cannot be shared. Competition occurs naturally between living organisms which co-exist in the same environment. For...
, desire and market
Market
A market is one of many varieties of systems, institutions, procedures, social relations and infrastructures whereby parties engage in exchange. While parties may exchange goods and services by barter, most markets rely on sellers offering their goods or services in exchange for money from buyers...
fluctuations create the striving and pressure to increase the capital stock; the whole aim of capitalist production is capital accumulation
Capital accumulation
The accumulation of capital refers to the gathering or amassing of objects of value; the increase in wealth through concentration; or the creation of wealth. Capital is money or a financial asset invested for the purpose of making more money...
, 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
Power (sociology)
Power is a measurement of an entity's ability to control its environment, including the behavior of other entities. The term authority is often used for power perceived as legitimate by the social structure. Power can be seen as evil or unjust, but the exercise of power is accepted as endemic to...
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
Moral
A moral is a message conveyed or a lesson to be learned from a story or event. The moral may be left to the hearer, reader or viewer to determine for themselves, or may be explicitly encapsulated in a maxim...
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
Ideology
An ideology is a set of ideas that constitutes one's goals, expectations, and actions. An ideology can be thought of as a comprehensive vision, as a way of looking at things , as in common sense and several philosophical tendencies , or a set of ideas proposed by the dominant class of a society to...
, and why Marx thought that political economy
Political economy
Political economy originally was the term for studying production, buying, and selling, and their relations with law, custom, and government, as well as with the distribution of national income and wealth, including through the budget process. Political economy originated in moral philosophy...
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.