Surplus value is a concept created by Karl Marx in his critique of political economy, where its ultimate source is unpaid surplus labor performed by the worker for the capitalist, serving as a basis for capital accumulation.
The German equivalent word "Mehrwert" means simply value-added (an output measure of the net increase in product wealth), but in Marx's value theory, the extra or surplus-value has a specific meaning, namely the amount of the increase in the value of capital upon investment, i.e. the yield regardless of whether it takes the form of profit, interest or rent.
Marx himself regarded the reduction of profit, interest and rent income to surplus-value, and surplus value to surplus labour as one of his greatest theoretical achievements.
For Marx, the gigantic increase in wealth and population from the 19th century onwards was mainly due to the competitive striving to obtain maximum surplus-value from the employment of labor, resulting in an equally gigantic increase of productivity and capital resources. To the extent that increasingly the economic surplus is convertible into money and expressed in money, the amassment of wealth is possible on a larger and larger scale (see capital accumulation and surplus product).
In the Communist Manifesto, Marx and Engels wrote:
The problem of explaining the source of surplus value is expressed by Friedrich Engels 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 which, after deduction of costs (the leather, depreciation of the machine, etc.) leaves a residual, i.e. surplus value or profit.
The worker cannot capture this benefit directly because he has no claim to the means of production (e.g. the boot-making machine) or to its products, and his capacity to bargain over wages is restricted by laws and the supply/demand for wage labour. Hence the rise of trade unions which aim to create a more favourable bargaining position through collective action by workers.
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 the second world war, 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).
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 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. 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.
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.
One will often hear a Marxist talking about class struggle, but in reality there is a big difference between class conflict and class struggle. A class conflict may exist and fester for a long time, without classes being able and willing to organise any mass struggle actively. Employers may provoke a strategic fight in order to demolish workers' militancy in a critical area; or, mass revolts of workers are sparked off by moral outrage about some event, or because conditions have become intolerable. No easy generalisations are possible, especially because the moods, feelings and inclination to act of social classes can change very rapidly; bursts of mass action can take most people by surprise.
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.
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 although the rate of profit decreased by 0.2%. In other words, there's nearly one-fifth more income to disburse to the owners of the capital, although the rate of return fell slightly.
What this simplistic example really implies is that, provided market sales keep growing and business expands, a slight fall in the profit rate on capital may not be a point of concern. After all, capital assets have grown, but more importantly, the total volume of revenue that can be distributed has grown.
However, if the total profit volume created in a capitalist economy stops growing, this becomes a real problem (as highlighted by Henryk Grossman). Because in that case, profitability must fall across the board, and business income is reduced everywhere.
In some Marxist crisis theories (e.g. by Grossmann, Louis C. Fraina and Paul Mattick), the root cause of economic crisis is precisely that the growth of profit volume is eclipsed by the decline of the profit rate in production, the result being that the total profit volume that can be distributed stagnates or falls.
The overall implication is that market expansion is critical for the total volume of surplus-value that can be distributed as profit. Total business income can increase, even although the profit rate on capital invested falls, if markets keep growing. The logical outcome of that is globalisation, i.e. the systematic removal of all barriers to trade world-wide to facilitate market expansion.
In reality, of course, a substantial portion of tax money is also redistributed to private enterprise in the form of government contracts and subsidies. If that had not been the case, the tax take would never have been permitted to rise to a quarter or a third of gross product. Capitalists may therefore be in conflict among themselves about taxes, since what is a cost to some, is a source of profit to others. Marx never analysed all this in detail; but the concept of surplus value will apply mainly to taxes on gross income (personal and business income from production) and the trade in products & services. Estate duty for example rarely contains a surplus value component, although profit could be earned in the transfer of the estate.
Generally, Marx seems to have regarded taxation imposts as a "form" which disguised real product values. Apparently following this view, Ernest Mandel in his 1960 treatise Marxist Economic Theory refers to (indirect) taxes as "arbitrary additions to commodity prices". But this is something of a misnomer, and disregards that taxes become part of the normal cost-structure of production. In his later treatise on late capitalism, Mandel astonishingly hardly mentions the significance of taxation at all, a very serious omission from the point of view of the real world of modern capitalism since taxes can reach a magnitude of a third, or even half of GDP (see E. Mandel, Late Capitalism. London: Verso, 1975)
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).
Some self proclaimed Marxist thinkers like Geoffrey Pilling and Ira Gerstein have argued that surplus value "cannot be measured", but that was demonstrably not the view of Marx and Engels themselves. The real question was how accurately it could be measured, and this depended 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
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).
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".
A substantive, foundational criticism of Marx's concept of the surplus product and surplus-value was made by Harry W. Pearson in the 1950s in his essay, "The economy has no surplus". Another modern, more sophisticated critique of the concept is by Helen Boss (see references).
An alternative criticism is by Steve Keen, who argues that the economy does have a surplus, but that it can arise from numerous different sources. Specifically, he claims that "mathematics and Marx's philosophy confirm that surplus value - and hence profit - can be generated from any input to production" (Debunking Economics, p. 298). Thus Marx's view that economic value is a human attribution or comparison, and that only human labour can conserve, transfer and create value is rejected.
The most fundamental criticism of Marx's theory of value is offered by Austrian economics, which holds that the value is purely subjective, and cannot be derived from labor, surplus or otherwise. The labor itself can be productive, resulting in creation of goods which are desired by other people, or destructive, merely wasting resources on creation of goods nobody wants - this phenomenon was quite evident in the socialist economies. Thus, we can say if something has value only by observing voluntary exchange between people. When such exchange is prevented, there is no way to tell if the labor is creative or destructive, and so it is impossible to direct the efforts towards creation of value. This impossibility of economic calculation was famously proposed by Ludwig von Mises in 1929 as the reason for imminent failure of socialist economies, in stark contrast to predictions of Marx's theory.
A typical textbook-type example of an alternative interpretation to Marx's is provided by Lester Thurow. "In a capitalistic society", he argues in an Concise Encyclopedia of Economics article, "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 economics -no knowledge of "markets in general" is required to participate in markets.