In Marxian economics, surplus value is the difference between the amount raised through a sale of a product and the amount it cost 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 labour and surplus product. The concept was subsequently developed and popularised by Karl Marx.David McLellan once claimed that Marx first used the term ‘surplus-value’ in his articles on ‘The Law against Thefts of Timber’ in 1842. David McLellan, Marx before Marxism, 2nd edn. (London: Macmillan, 1980), pp. 96 and 217. 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, underpinning a variety of his theories related to the function of capitalism and the exploitation of the working class. 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 labour-cost, which is appropriated by the capitalist as profit when products are sold.Marx, The Capital, Chapter 8"...It was made clear that the wage worker has permission to work for his own subsistence — that is, to live, only insofar as he works for a certain time gratis for the capitalist (and hence also for the latter's co-consumers of surplus value)..." Karl Marx, Critique of the Gotha Programme. Sec.II 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 labour, 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 hypothesis that surplus value that was being extracted from labour 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 labour" and "surplus produce" (in Marx's language, surplus product), which have distinct meanings in Marxian economics: surplus labour 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 criticising 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 labour-time worked and labour 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 them. Although their 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 their 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 them 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; their capital has not only been replaced by the operation, but also has increased by $10.
This "simple" exploitation characterises the realisation of absolute surplus value, which is then claimed by the capitalist. The worker cannot capture this benefit directly because they have 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 labour organisers, 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 labour-time of production is reduced, effecting a change in the value of labour-power. For example, when new technology or new business practices increase the productivity of labour a capitalist already employs, or when the commodities necessary for workers' subsistence fall in value, the amount of socially necessary labour-time is decreased, the value of labour-power is reduced, and a relative surplus value is realised as profit for the capitalist, increasing the overall general rate of surplus value in the total economy:
Definition In Marxian economics, surplus value is the difference in value created by workers in the process of production and the wages they receive in exchange for their labor. In a capitalist system of production, workers sell their labor power to capitalists in exchange for their wages. However, the value produced by workers during a workday exceeds the amount required to reproduce workers' labor power, as embodied by their wages. This excess value is kept by the capitalists as profit. Marx regarded this not as a symptom of fair exchange, but as a structural feature of capitalist production. Because workers do not own the means of production, they are required to sell their labor at a wage less than the value they create, enabling capitalists to grow wealth over time by reinvesting this surplus value. Marx linked this process and broader patterns of inequality, arguing it contributes to the concentration of wealth and continued class division within capitalist societies, and saw surplus value as central to understanding how economic growth can occur alongside unequal outcomes.Marx, Karl. Capital: A Critique of Political Economy, Vol. 1 (1867).
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: As a component of the new value product, which Marx himself defines as equal to the sum of labour costs in respect of capitalistically productive labour (variable capital) and surplus-value. In production, he argues, the workers produce a value equal to their wages plus an additional value, the surplus-value. They also transfer part of the value of fixed assets and materials to the new product, equal to economic depreciation (consumption of fixed capital) and intermediate goods used up (constant capital inputs). Labour costs and surplus-value are the monetary valuations of what Marx calls the necessary product and the surplus product, or paid labour and unpaid labour. Surplus-value can also be viewed as a flow of net income appropriated by the owners of capital in virtue of asset ownership, comprising both distributed personal income and undistributed business income. In the whole economy, this will include both income directly from production and property income. Surplus-value can be viewed as the source of society's accumulation fund or investment fund; part of it is re-invested, but part is appropriated as personal income, and used for consumptive purposes by the owners of capital assets (see capital accumulation); in exceptional circumstances, part of it may also be hoarded in some way. In this context, surplus value can also be measured as the increase in the value of the stock of capital assets through an accounting period, prior to distribution.