Surplus value
In Marxian economics, surplus value is the difference between the amount raised through a sale of a product and the amount it cost to the owner of that product to manufacture it: i.e. the amount raised through sale of the product minus the cost of the materials, plant and labour power. The concept originated in Ricardian socialism, with the term "surplus value" itself being coined by William Thompson in 1824; however, it was not consistently distinguished from the related concepts of surplus labor and surplus product. The concept was subsequently developed and popularized by Karl Marx. Marx's  formulation is the standard sense and the primary basis for further developments, though how much of Marx's concept is original and distinct from the Ricardian concept is disputed (see ). Marx's term is the German word ""Mehrwert"", which simply means value added (sales revenue minus the cost of materials used up), and is cognate to English "more worth". It is a major concept in Karl Marx's critique of political economy. Conventionally, value-added is equal to the sum of gross wage income and gross profit income. However, Marx uses the term "Mehrwert" to describe the yield, profit or  return on production capital invested, i.e. the amount of the increase in the value of capital. Hence, Marx's use of "Mehrwert" has always been translated as "surplus value", distinguishing it from "value-added". According to Marx's theory, surplus value is equal to the new value created by workers in excess of their own labor-cost, which is appropriated by the capitalist as profit when products are sold. Marx thought that 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). The concept is closely connected to producer surplus. Origin. By the Age of Enlightenment in the 18th century the French physiocrats were already writing on the surplus value that was being extracted from labor by," the employer, the owner, and all exploiters" although they used the term "net product". The concept of surplus value  continued to be developed under Adam Smith who also used the term "net product" while his successors the Ricardian socialists, began using the term "surplus value" decades later after its coinage by William Thompson in 1824. William Godwin and Charles Hall are also credited as earlier developers of the concept. Early authors also used the terms "surplus labor" and "surplus produce" (in Marx's language, surplus product), which have distinct meanings in Marxian economics: surplus labor "produces" surplus product, which has surplus value. Some authors consider Marx as completely borrowing from Thompson, notably Anton Menger: This claim of priority has  been vigorously contested, notably in an article by Friedrich Engels, completed by Karl Kautsky and published anonymously in 1887, reacting to and criticizing Menger in a review of his "The Right to the Whole Produce of Labour", arguing that there is nothing in common but the term "surplus value" itself. An intermediate position acknowledges the early development by Ricardian socialists and others, but credits Marx with substantial development. For example: Johann Karl Rodbertus developed a theory of surplus value in the 1830s and 1840s, notably in "Zur Erkenntnis unserer staatswirthschaftlichen Zustände" ("Toward an appreciation of our economic circumstances", 1842), and  claimed earlier priority to Marx, specifically to have "shown practically in the same way as Marx, only more briefly and clearly, the source of the surplus value of the capitalists". The debate, taking the side of Marx's priority, is detailed in the Preface to "Capital, Volume II" by Engels. Marx first elaborated his doctrine of surplus value in 1857–58 manuscripts of "A Contribution to the Critique of Political Economy" (1859), following earlier developments in his 1840s writings. It forms the subject of his 1862–63 manuscript "Theories of Surplus Value" (which was subsequently published as "Capital, Volume IV"), and features  in his "Capital, Volume I" (1867). Theory. The problem of explaining the source of surplus value is expressed by Friedrich Engels as follows: Marx's solution was first to distinguish between labor-time worked and labor power, and secondly to distinguish between "absolute surplus value" and "relative surplus value". A worker who is sufficiently productive can produce an output value greater than what it costs to hire him. Although his wage seems to be based on hours worked, in an economic sense this wage does not reflect the full value of what the worker produces. Effectively it is not labour  which the worker sells, but his capacity to work. Imagine a worker who is hired for an hour and paid $10 per hour. Once in the capitalist's employ, the capitalist can have him operate a boot-making machine with which the worker produces $10 worth of work every 15 minutes. Every hour, the capitalist receives $40 worth of work and only pays the worker $10, capturing the remaining $30 as gross revenue. Once the capitalist has deducted fixed and variable operating costs of (say) $20 (leather, depreciation of the machine, etc.), he is  left with $10. Thus, for an outlay of capital of $30, the capitalist obtains a surplus value of $10; his capital has not only been replaced by the operation, but also has increased by $10. This "simple" exploitation characterizes the realization of "absolute surplus value", which is then claimed by the capitalist. 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. This form of exploitation was well understood by pre-Marxian Socialists and left-wing followers of Ricardo, such as Proudhon, and by early labor organizers, who sought to unite workers in unions capable of collective bargaining, in order to gain a share of profits and limit the length of the working day. "Relative" surplus value is not created in a single enterprise or site of production. It arises instead from the total relation between multiple enterprises and multiple branches of industry when the necessary labor-time of production is reduced, effecting a change in the value of labor-power . For example, when new technology or new business practices increase the productivity of labor a capitalist already employs, or when the commodities necessary for workers' subsistence fall in value, the amount of socially necessary labor-time is decreased, the value of labor-power is reduced, and a relative surplus value is realized as profit for the capitalist, increasing the overall general rate of surplus value in the total economy. Definition. "Total" surplus-value in an economy (Marx refers to the "mass" or volume of surplus-value) is basically equal to the sum of net distributed and undistributed profit, net interest , net rents, net tax on production and various net receipts associated with royalties, licensing, leasing, certain honorariums etc. (see also value product). Of course, the way generic profit income is grossed and netted in social accounting may differ somewhat from the way an individual business does that (see also Operating surplus). Marx's own discussion focuses mainly on profit, interest and rent, largely ignoring taxation and royalty-type fees which were proportionally very small components of the national income when he lived. Over the last 150 years, however, the role of the state in the economy has increased in almost  every country in the world. Around 1850, the average share of government spending in GDP (See also Government spending) in the advanced capitalist economies was around 5%; in 1870, a bit above 8%; on the eve of World War I, just under 10%; just before the outbreak of World War II, around 20%; by 1950, nearly 30%; and today the average is around 35–40%. (see for example Alan Turner Peacock, "The growth of public expenditure", in "Encyclopedia of Public Choice", Springer 2003, pp. 594–597). Interpretations. Surplus-value may be viewed in five ways: Equalization of rates. Marx believed that the  long-term historical tendency would be for differences in rates of surplus value between enterprises and economic sectors to level out, as Marx explains in two places in "Capital" Vol. 3: Hence, he assumed a uniform rate of surplus value in his models of how surplus value would be shared out under competitive conditions. Appropriation from production. Both in Das Kapital and in preparatory manuscripts such as the "Grundrisse" and "Results of the immediate process of production", Marx asserts that commerce by stages transforms a non-capitalist production process into a capitalist production process, integrating it fully into markets, so  that all inputs and outputs become marketed goods or services. When that process is complete, according to Marx, the whole of production has become simultaneously a labor process creating use-values and a valorisation process creating new value, and more specifically a surplus-value appropriated as net income (see also capital accumulation). Marx contends that the whole purpose of production in this situation becomes the growth of capital; i.e. that production of output becomes "conditional" on capital accumulation. If production becomes unprofitable, capital will be withdrawn from production sooner or later. The implication is that the main driving force of  capitalism becomes the quest to maximise the appropriation of surplus-value augmenting the stock of capital. The overriding motive behind efforts to economise resources and labor would thus be to obtain the maximum possible increase in income and capital assets ("business growth"), and provide a steady or growing return on investment. Absolute vs. relative. According to Marx, "absolute surplus value" is obtained by increasing the amount of time worked per worker in an accounting period. Marx talks mainly about the length of the working day or week, but in modern times the concern is about the number of hours worked  per year. In many parts of the world, as productivity rose, the workweek decreased from 60 hours to 50, 40 or 35 hours. "Relative surplus value" is obtained mainly by: 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. Production versus realisation. Marx distinguished sharply between value and price, in part because of  the sharp distinction he draws between the "production of surplus-value" and the "realisation of profit income" (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. 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 bourgeoisie to wrest state power from the feudal aristocracy at the beginning of the capitalist era. In reality, of course, a substantial portion of tax money is also "redistributed" to private enterprise in the form of government contracts and subsidies. 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 and 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).For example in the United Kingdom alone 75% of all taxation revenue comes from just three taxes Income tax, National insurance and VAT which in reality is 75% of the GDP of the country. Relation to the circuits of capital. Generally, Marx focused in Das Kapital on the new surplus-value  generated by production, and the distribution of this surplus value. In this way, he aimed to reveal the "origin of the wealth of nations" given a capitalist mode of production. However, in any real economy, a distinction must be drawn between the primary circuit of capital, and the secondary circuits. To some extent, national accounts also do this. The primary circuit refers to the incomes and products generated and distributed from productive activity (reflected by GDP). The secondary circuits refer to trade, transfers and transactions occurring "outside" that sphere, which can also generate incomes, and these incomes may also involve  the realisation of a surplus-value or profit. It is true that Marx argues no net additions to value can be created through acts of exchange, economic value being an attribute of labour-products (previous or newly created) only. Nevertheless, trading activity outside the sphere of production can obviously also yield a surplus-value which represents a "transfer" of value from one person, country or institution to another. A very simple example would be if somebody sold a second-hand asset at a profit. This transaction is not recorded in gross product measures (after all, it isn't new production ), nevertheless a surplus-value is obtained from it. Another example would be capital gains from property sales. Marx occasionally refers to this kind of profit as "profit upon alienation", alienation being used here in the juridical, not sociological sense. By implication, if we just focused on surplus-value newly created in production, we would "underestimate" total surplus-values "realised as income" in a country. This becomes obvious if we compare census estimates of income & expenditure with GDP data. This is another reason why surplus-value "produced" and surplus-value "realised" are two different things, although this point is largely ignored  in the economics literature. But it becomes highly important when the real growth of production stagnates, and a growing portion of capital shifts out of the sphere of production in search of surplus-value from other deals. 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). Measurement. The first attempt to measure the rate of surplus-value in money-units was by Marx himself in chapter 9 of "Das Kapital", 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. Since early 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 Anwar Shaikh and 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". Different conceptions. In neo-Marxist thought, Paul A. Baran 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 "Kapital" 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". Morality and power. A textbook-type example of an alternative interpretation to Marx's is provided by Lester Thurow. He argues: "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.