Surplus value facts for kids

In Marxian economics, surplus value is a key idea that helps explain how profit is made in a capitalist system. It's the difference between the money a product sells for and the actual cost to make it. This includes the cost of materials, machinery, and what workers are paid.

The idea of surplus value was first talked about by thinkers like William Thompson in 1824. However, it was Karl Marx who really developed and made the idea famous. Marx's term for it was "Mehrwert", which means "more worth" or "value added".

According to Marx, surplus value is the new value that workers create beyond what they are paid for their own work. This extra value is then taken by the business owner (the capitalist) as profit when the products are sold. Marx believed that the huge increase in wealth and population since the 1800s was largely because businesses tried to get the most surplus value from their workers. This led to a massive increase in how much could be produced and how much capital (money and assets) was available.

Where Did the Idea of Surplus Value Come From?

Even before Marx, in the 1700s, French thinkers called physiocrats wrote about extra value taken from workers. They called it "net product." Adam Smith also used this term. Later, in the 1800s, a group called the Ricardian socialists started using the term "surplus value." William Thompson first used the exact phrase "surplus value" in 1824.

Thompson wrote about two ways to measure the value of work. Workers would want enough to cover their living costs and support themselves. But business owners would want all the extra value created by using machines or capital. They felt this extra value, the "surplus value," was their reward for being smart and investing their money.

William Godwin and Charles Hall also helped develop these early ideas. Some people think Marx just copied Thompson's ideas. However, Friedrich Engels, Marx's friend, strongly disagreed.

Many people agree that while others started the idea, Marx greatly expanded on it. For example, John Spargo said in 1906 that "What is original in Marx is the explanation of the manner in which surplus value is produced."

Johann Karl Rodbertus also developed a theory of surplus value in the 1830s and 1840s. He even claimed he had the idea before Marx. But Engels, in the preface to Marx's book Capital, Volume II, argued for Marx's priority.

Marx first wrote about his ideas on surplus value in his 1857–58 writings. He then focused on it in his 1862–63 manuscript Theories of Surplus Value, which later became Capital, Volume IV. It's also a big part of his most famous book, Capital, Volume I (1867).

How Surplus Value Works

Friedrich Engels explained the main puzzle of surplus value: "Where does this extra value come from? It can't come from buying things for less than they're worth, or selling them for more. Because if everyone does that, the gains and losses cancel out. It also can't come from cheating, because cheating just moves wealth around, it doesn't create more of it. This problem must be solved in a purely economic way, without cheating or force. The question is: how can you always sell for more than you bought, even if equal values are always traded?"

Marx's answer involved two main points:

• He separated the idea of the time a worker spends working from their labor power (their ability to work).
• He also distinguished between absolute surplus value and relative surplus value.

A worker who is very productive can create more value than what it costs to hire them. Even though their wage seems based on hours worked, it doesn't show the full value of what they produce. Marx said workers don't sell their labor, but their ability to work.

Absolute Surplus Value

Imagine a worker who is paid $10 an hour. The business owner hires them. In that hour, the worker uses a boot-making machine and produces $40 worth of boots. The owner paid the worker $10, but got $40 worth of work. This means the owner gained $30 in gross income. If the owner then subtracts $20 for materials (like leather) and machine wear, they are left with $10. So, for spending $30, the owner gets an extra $10. This extra $10 is the surplus value.

This "simple" way of getting surplus value is called absolute surplus value. The worker can't get this extra benefit directly because they don't own the machines or the products. Also, their ability to ask for higher wages is limited by laws and how many other people are looking for work. Early labor groups tried to form unions to bargain for a share of these profits and limit how long people had to work.

Relative Surplus Value

Relative surplus value is different. It's not created in just one factory. It comes from changes across many businesses and industries. This happens when the time needed to produce things is reduced, which changes the value of a worker's labor power.

For example, if new technology or new ways of working make workers more productive, or if the cost of things workers need to live (like food or clothes) goes down, then less work time is needed to produce those things. This lowers the value of labor power. When this happens, the business owner gets more profit, which is called relative surplus value. This increases the overall rate of surplus value in the economy.

Marx explained: "The surplus-value made by making the workday longer, I call absolute surplus-value. On the other hand, the surplus-value that comes from making the necessary work-time shorter, and from changing the lengths of the two parts of the workday, I call relative surplus-value."

He added that for the value of labor power to fall, the increase in productivity must happen in industries that make things workers need to live. It also happens if the cost of tools and raw materials used to make those necessities goes down.

What is Total Surplus Value?

The total surplus value in an economy is basically the sum of all net profits, net interest, net rents, net tax on production, and other payments like royalties or licensing fees.

Marx mainly focused on profit, interest, and rent because taxes and royalty fees were very small parts of a country's income in his time. However, today, governments play a much bigger role. For example, in the 1850s, government spending was about 5% of a country's total economic output (GDP). Today, it's around 35–40%.

How Rates of Surplus Value Become Equal

Marx believed that over time, the differences in surplus value rates between different businesses and industries would tend to even out. This happens because workers can move between different jobs and industries, creating competition among them.

He wrote in Capital Vol. 3 that if businesses using different amounts of human labor produce different amounts of surplus value, it means the level of worker exploitation (the rate of surplus value) is somewhat similar. This is because workers compete and move between different jobs. Marx assumed a general rate of surplus value in his models, seeing it as a tendency, like all economic laws.

Taking Surplus Value from Production

Marx argued that as trade grows, non-capitalist ways of producing things slowly become capitalist. This means everything used and produced becomes something that can be bought or sold in markets. When this process is complete, all production becomes about creating useful things (use-values) and also about creating new value, especially surplus value that becomes net income.

Marx believed that the main goal of production in this system becomes the growth of capital. This means making things only happens if it helps capital grow. If a business stops being profitable, money will be taken out of it.

This means the main driving force of capitalism is the search for the most surplus value to increase capital. The main reason to save resources and labor is to get the biggest possible increase in income and assets (what we call "business growth"). This also provides a steady or growing return on investments.

Absolute vs. Relative Surplus Value (Revisited)

To recap:

• Absolute surplus value is gained by making workers work more hours. Marx talked about longer workdays or workweeks. Today, it might mean more hours worked per year.
• Relative surplus value is gained by:

* Lowering wages. This can only go so far, because workers need enough money to live. * Making the goods workers buy cheaper. * Making labor more productive and intense, often through machines and better organization. This means more output per hour worked.

Marx believed that the constant effort to get more and more surplus value from workers, and the workers' resistance to this, is at the heart of the conflict between social classes. This conflict can be quiet or can lead to open struggles.

Production vs. Realization

Marx made a clear difference between value and price. He also distinguished between producing surplus value and making profit income. A product might be produced with surplus value, but selling it (making it real) is not automatic.

Until a product is sold and paid for, it's not certain how much of the produced surplus value will actually become profit. So, the amount of profit made (in money) and the amount of surplus value produced (in products) can be very different. This depends on market prices and how supply and demand change. This idea is key to Marx's theory of market value and how competition tends to make profit rates similar across different businesses.

Marx studied many factors that could affect how surplus value is produced and made real. He thought this was crucial to understand how capitalism works and how businesses, capitalists, and workers compete.

His main conclusion was that employers will try to make workers as productive as possible and use less labor. This helps them lower costs and get the most profit from sales at current market prices. If the market price for a product stays the same, any reduction in costs, increase in productivity, or increase in sales will boost profit. The main way to do this is through mechanization (using more machines), which means more investment in fixed capital.

This, in turn, causes the value of goods to drop over time. It also leads to a decline of the average rate of profit in production. This can lead to a crisis where there's less investment and more unemployment. Then, businesses might merge or restructure to try and make profits rise again.

Surplus Value and Taxes

Business leaders usually don't like taxes that reduce their total profit. Lower taxes generally mean more profit can go to private investors. Historically, "tax revolts" were a big reason why the middle class (bourgeoisie) fought for power against the old noble families (aristocracy) at the start of capitalism.

However, a lot of tax money also goes back to private businesses through government contracts and subsidies. So, capitalists might disagree about taxes, because what's a cost for some is a profit for others. Marx didn't go into great detail about this. But the idea of surplus value mainly applies to taxes on income (personal and business) and on the sale of products and services.

Marx seemed to think that taxes just "disguised" the real value of products. Some later Marxists, like Ernest Mandel, even called indirect taxes "arbitrary additions to commodity prices." But this isn't quite right, because taxes become a normal part of production costs.

How Surplus Value is Measured

Marx himself tried to measure the rate of surplus value in his book Das Kapital, using factory data.

Many Marxian economists have tried to measure surplus value using national economic data. This research often involves changing official economic numbers to fit Marx's categories. The goal is to estimate trends in things like the rate of surplus value, the amount of capital compared to labor, the rate of profit, and how much profit is reinvested.

Some Marxian mathematicians, like Emmanuel Farjoun and Moshé Machover, have noted that even if the rate of surplus value has changed only a little over a hundred years, the real question is why it hasn't changed more. Part of the answer might be in how the data is collected.

Different Ideas About Surplus Value

In more modern Marxist thinking, some economists like Paul A. Baran use the term "economic surplus" instead of Marx's surplus value. Baran and Paul Sweezy defined economic surplus as "the difference between what a society produces and the costs of producing it." How costs are valued here is very important.

In these theories, the "surplus product" and "surplus value" are seen as the same, and value and price are also seen as identical. But the distribution of this surplus is often separated from its production. Marx, however, insisted that how wealth is distributed depends on the social conditions where it is produced, especially who owns what.

In Capital Vol. 3, Marx strongly argued that "the specific economic form, in which unpaid surplus labour is taken from direct producers, determines the relationship of rulers and ruled." He believed this relationship comes directly from how things are produced and then affects it. This forms the entire economic community and its political structure. He said it's always the direct relationship between those who own the means of production and the direct producers that shows the deepest secret of the entire social structure.

This is a big idea about the basic social relationships of giving, getting, taking, and receiving in human society. It also looks at how these relationships affect how work and wealth are shared. It's a starting point for understanding social order and social change.

Morality and Power

Some economists offer different explanations for profits. For example, Lester Thurow lists five reasons for profit:

• Business owners are willing to wait for their rewards.
• Some profits are a reward for taking risks.
• Some profits come from good organization, enterprise, and entrepreneurial energy.
• Some profits are "economic rents," meaning a company with a monopoly can charge higher prices.
• Some profits come from "market imperfections," where goods are traded above their fair competitive price.

Thurow's ideas are more about justifying profits as a fair reward for providing capital. He also says that "since the industrial revolution... there have been essentially no successful economies that have not taken advantage of the profit motive." But what counts as "success" can be debated.

Thurow also notes that measuring profits is hard because it's difficult to know exactly how much money must be reinvested to keep the business's capital the same size. He suggests that tax departments often decide the profit amount by setting rules for what costs businesses can deduct.

This is very different from Marx's theory. Thurow implies the goal is to maintain capital. Marx argued that competition and market changes create a drive to increase capital. For Marx, the whole point of capitalist production is capital accumulation (business growth) to maximize net income. Marx believed there's no proof that the profit owners get is directly linked to the "productive contribution" of their capital.

For Thurow, profit is just "something that happens" when costs are subtracted from sales, or it's a deserved income. For Marx, increasing profits is the main goal of business. The search for more surplus value and the income from it guides capitalist development (what we now call "creating maximum shareholder value").

Marx noted that this search always involves a power relationship between different social classes and nations. People try to make others pay for costs as much as possible, while maximizing their own claims to income. This clash of economic interests means the battle for surplus value always has a moral side. The whole process relies on complex negotiations and bargaining, usually within legal rules, and sometimes even through wars. Marx argued that underneath it all was an exploitative relationship.

This was why Marx believed the real sources of surplus value were often hidden by ideology. He thought that political economy needed a "critique" because it often failed to explain capitalism as a social system without moral biases. Even simple economic ideas were full of contradictions. But market trade could still work fine, even if the theory of markets was flawed. All that was needed was an agreed and legally enforced accounting system.

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