Surplus Value (draft)

Another draft chapter for my book. All comments welcome. The most interesting part, I think, is the last section.

Surplus Value

Marx begins Capital with an analysis of the commodity form. He immediately tells us why: because the commodity is the most elementary form of capitalist wealth. From an analysis of the commodity a whole host of categories arise, many of which have been discussed in previous chapters (abstract and concrete labor, general equivalent, money, intrinsic value, etc.) These categories all relate to specific social relations, relations between producers. However, what is missing from the opening moves in Marx’s analysis is an exploration of the twin categories that are the hallmark of his analysis of capitalism: wage-labor and capital. It is not until the second part of Capital that he introduces these central categories.

This is no accident. It is true to Marx’s form. Reality is a concrete totality of many inner relations. It is the job of philosophy to begin with the most abstract categories and slowly expand them until we construct a picture of the concrete totality. In a famous passage in the Grundrisse Marx discusses the task of his new science:

…the abstract determinations lead towards a reproductionof the concrete by way of thought. In this way Hegel fell into the illusion of conceiving the real as theproduct of thought concentrating itself, probing its own depths, and unfolding itself out of itself, by itself,whereas the method of rising from the abstract to the concrete is only the way in which thoughtappropriates the concrete, reproduces it as the concrete in the mind. But this is by no means the processby which the concrete itself comes into being. For example, the simplest economic category, say e.g.exchange value, presupposes population, moreover a population producing in specific relations; as wellas a certain kind of family, or commune, or state, etc. It can never exist other than as an abstract,one-sided relation within an already given, concrete, living whole.”1

The abstractness of value cannot exist on its own. It only makes sense within a certain type of society. But in order to prove that this type of society is necessary for value relations to exist we must probe the category of value as much as we can to see how much it can explain on its own. Once we hit limits, once we find questions we can no longer explain, we find that we are forced to expand the analysis outward to encompass more concrete social relations. If we were to claim, in Hegelian fashion, that reality was a product of the self-expansion of these ideas we would be making a mistake. Rather, our ideas are a product of the world we live in. To make sense of ideas we must identify the social relations that make them possible. We must ‘ground’ the ideas in concrete social practices.

Because Marx holds back his introduction of wage-labor and capital he is able to tease out many of the subtleties of the commodity form that might be skipped over if we rushed head-long into a discussion of wage-labor and capital. For instance, other forms of the accumulation of abstract value, such as hoarding, merchant capital, usury, etc., are all theoretically developed, to an extent, prior to introducing wage-labor and capital. Of course, because wage-labor has not been introduced to the discussion yet these categories often appear only partially, or as potentials. It is not until capitalist production takes the stage that they can develop fully.

At the same time this allows Marx to explain how a theoretical project of building up a concrete picture of capital from the most basic abstractions is different than the real, historical process of capitalist development. Many of the component elements of a capitalist society (money, usury, merchant capital, even the commodity!) existed long before the capitalist mode of production. In their pre-history these categories all exhibited potentials, partially developed aspects of the commodity form that would only fully develop in a capitalist society.

The fact that Marx does not develop the categories of wage-labor and capital until after he has developed all of the categories of the form of value (intrinsic-value, abstract and concrete labor, money, etc.) has historically led some Marxist writers to conclude that Marx began Capital with an analysis of a pre-capitalist society based on “simple commodity production”: a society in which small, independent producers own their own means of production and exchange wares in the market. This interpretation, which begins with Engles and dominates a great deal of Marxist thought, has more recently fallen out of fashion.2 If we try to image how a ‘simple commodity production’ society would operate under the law of value we quickly see that value relations would have a very difficult time disciplining and apportioning labor in a society in which producers were tied to their own means of production. You can not fire and hire workers in response to market signals or race to beat the socially necessary labor time when everyone works for themselves on their own means of production.3 If such a society had existed historically then we could speak of it too having certain potentials and partially developed aspects that could eventually fully develop in a capitalist mode of production. However there does not seem to be historical evidence for this type of society. Rather history shows us communities organized around some form of directly social labor which then sell their surplus product to other communities.

A variant of this myth is that though Marx is not talking about an historical period of simple commodity production he is making an abstraction which operates on the level of a theoretical simple commodity production, a sort-of thought-experiment which imagines the relations between independent commodity producers. I see no evidence in the actual text to support this interpretation. (The most glaring evidence is the lack of the term “simple commodity production” in any of Marx’s writing!4) Rather, what Marx is doing is to slowly expand his picture of capitalism beginning, as he tells us, from the most elementary form of capitalist wealth, the commodity. He will not introduce new categories into his analysis until the categories themselves force the analysis in that direction. This has the advantage of avoiding arbitrary choices in levels of abstraction and starting points. It also allows him to fully develop the potentials of each category before moving on.

This chapter reviews the details of how Marx grounds his analysis of the commodity-form by introducing the categories of wage-labor and capital. It does so by asking the question “Where does profit come from?” Along the way we review the reasons why value cannot be created in exchange, which will lay the groundwork for a discussion of Marx’s theory of price in chapter 9. The end of this chapter discusses the importance of a temporal, non-equilibrium framework for Marx’s theory or surplus value.

The theoretical precision and discipline of Marx’s exposition in Capital is such that he must always develop categories from previously developed ones. It is not enough for Marx to say to his readers, “You must look behind circulation to the realm of capitalist production!” Marx has to show the reader that the categories of circulation are inadequate to the task. He must show that circulation cannot explain itself without reference to production relations. In this way his exposition constantly drives itself forward.

The phenomenon within circulation that drives the analysis toward production is the phenomenon of capital. Marx shows that circulation always maintains a conservation principle: value cannot be created by the mere circulation of commodities and money. Yet capital is a phenomenon made possible by the existence of profit. Because aggregate profit cannot come from circulation we must look to production to discover is origins. This leads to the revelation that the exploitation of wage-labor is the source of profit. Let us review some of the details of this argument.

Marx begins by contrasting two forms of circulation: simple commodity circulation (C-M-C) and the circuit of capital (M-C-M).

Susan sells a pie for $10. She then uses this $10 to buy a book. A commodity (C) has turned into money (M) and then this money has turned into another commodity (C). The same sum of value has changed forms twice: Commodity-Money-Capital, or, as Marx abbreviates, C-M-C. C-M-C, or simple-commodity-circulation, deals with the production of commodities and their exchange with money.

This is contrasted to the circuit of capital: M-C-M. Here a capitalist starts with a sum of money with which she buys commodities. She then sells these commodities for money. Obviously this process is only worth the investment if the capitalist ends up with more money at the end of the process. There must be a profit in sight at the end of M-C-M in order for the circuit to begin.

These two processes, C-M-C and M-C-M, are qualitatively and quantitatively different. C-M-C starts with a use-value and ends with a use-value. When Susan begins the circuit she has a final use-value as her aim even though her initial production is production for exchange. By contrast our capitalist begins with value in the abstract and ends with value in the abstract. The goal of capitalist investment is not the attainment of a specific use-value but rather the attainment of value in the abstract, unattached to any specific use-value.

A superficial reading might make it seem like C-M-C is a tale of ‘simple commodity production’, the supposed mythical society in which all producers are self-employed persons owning their own means of production. There certainly are many people who are self-employed and who participate in the market this way. However the primary way the great mass of people enter the market is by beginning C-M-C with the sale of a very special commodity: labor-power. By selling their labor-time as a commodity to the capitalist they attain money to buy their means of subsistence. C-M-C refers to the way in which both the self-employed and workers participate in the social economy.

M-C-M describes the behavior of capitalist investment. Because the goal of this investment is to make more money this is often written as M-C-M’ to show that the two sums of money are of different quantities. This circuit describes all types of capital investment: banking capital (which loans money in order to earn interest), merchant capital (which buys cheap in order to sell dear), and productive capital (which exploits wage-labor in order to produce profit.) As we will later see, while bank capital and merchant capital predate productive capital, it is capitalist production that dominates in a capitalist society.

These are the qualitative differences between C-M-C and M-C-M. These qualitative differences reflect different social classes with different access to resources and different relations to the social labor process. There is an obvious quantitative difference as well. After Susan buys her book this circuit closes. The book and the pie have left circulation and are in the possession of their final owners. C-M-C has a finite timeline. When Susan makes her pie she ends up with another commodity of the same value. She does not become wealthier through the process. The opposite is the case with M-C-M’. Since capital begins and ends with the same substance, money, there is no point to the process other than to continue investment, to continue to increase the amount of money. Money capital stays in circulation, constantly being reinvested in the search for more profit. The circuit has an infinite timeline. This gives Susan and the capitalist very different motives. It is common in popular discourse to treat the expansive quality of capital as the result of subjective motivations. In other words, we hear a lot of complaints about ‘corporate greed’ as a cause of social ills. As we can see from this simple analysis of the circuit of capital, the term ‘corporate greed’ is a useless concept. The pursuit of value as an end in itself is a natural and logical result of the circuit of capital. There may be a lot of greedy capitalists in the world but they are greedy as a result of the structure of the circuit of capital, not vice versa.

Even though there is a quantitative difference for Susan and the capitalist there is also a very important quantitative similarity. Both C-M-C and M-C-M obey the same conservation principle: value is not created through either process.

Susan starts with a $10 pie, sells it for $10 and buys a book for $10. All together $30 of value has changed hands: a $10 pie, $10 of cash and a $10 book. All that has happened is that three sums of value have changed hands. It would be the same as if three friends went to a Christmas gift exchange and traded three gifts worth $10. No value is created in this process. Value has just changed hands. This is what circulation is, the movement of previously produced values between different people.

Things might seem different for the circuit of capital but they are not! Our capitalist begins with $100, buys $100 worth of commodities and sells them for $110. The capitalist has seen an increase in value but what about the total value in society? We started with three sums of value ($100 in money, $100 of commodities, and $110 in money) for a total of $310 worth of value. At the the end of the process these three sums of value still exit and still add up to $310. While the capitalist has benefitted from the process, no value has been created merely by moving these three sums between different hands. In the above example the capitalist has benefitted from exchange while the buyer of the $100 of commodities has lost $10 of value in the process. Profit merely through buying and selling, merchant capital, is an old form of capital, one that proceeds industrial capital. While merchant capital may be a good way for a class of merchants to make money it is not a way to increase the total amount of value in society. It can only profit through an inequality in exchange. This is why industrial capital comes to be the dominant form of capital. More on this shortly…

The same law of conservation would apply if Susan was to exchange her pie for $11 instead of $10. Here a $10 pie trades for $11. The process involves $21 of total value changing hands. One person wins and another loses but there is no aggregate increase in value. Exchange of unequal values is par for the course in a society where production and exchange are regulated through fluctuating averages enforced through market laws. People get ripped off, they have incomplete information about markets and demand and supply constantly fluctuate. None of this changes the aggregate value in society. It merely producers winners and losers.

The concept that value cannot be created in circulation seems simple enough and we would be able to leave the issue and move on were it not for a category-confusion introduced into the discussion by subjective value theory. Subjectivists claim that commodities have no intrinsic value but that they get their exchange value from the subjective valuations that consumers give to them in exchange. Hence they argue that exchange is not an exchange of equivalents (as when Susan sold a $10 pie for $10) but rather of non-equivalents, that in exchange people trade something they value less for something they value more therefore ending up with a ‘subjective profit’. Prices are merely a result of this process and not a reflection of an underlying value.

There are too many problems with subjective value theory to deal with them all here, but there is one major one that we should address: the conflation of two different notions of ‘value’.5 People make subjective judgements about their preferences for commodities. Commodities have exchange-values. These subjective valuations are not the same thing as exchange-values. Subjectivists have to prove a necessary, causal relation between personal values and exchange-values. There are many problems with their attempts to do so. Regardless of these arguments exchange-values are really existing magnitudes. Thus if a pie has a price tag of $10, regardless of whether this price is a result of its socially necessary labor time or the subjective preferences of consumers, and if this pie is sold to a consumer for $10, then equal quantities of exchange-value have traded hands and no exchange-value has been created from the process. Subjectivists may make arguments about an increase in psychological satisfaction that comes from either side. Though this cannot be quantified or proven they are welcome to make these assertions, but this changes nothing about the fact that equal amounts of exchange-value have changed hands.6 Thus there is nothing about subjective value theory that can change the law of the conservation of value in circulation.

In C-M-C money serves as a passing mediation between two use-values. But in M-C-M’ the commodity stands between two sums of money. Our capitalist’s capital changes form between money and commodities while always being a sum of value. Where as C-M-C is a finite process that ends in the consumption of a use-value, M-C-M’ is a never-ending process of the ‘self-expansion of value’. Capital is this process of self-expansion. A sum of value expands itself over and over by changing form between money and commodities. This new value, above the quantity of the original investment, is ‘surplus-value’.

Saying that value cannot be created in circulation is the same as saying that value cannot be created through the change of form between money and commodities. A capitalist can make money through unequal exchange, buying cheap to sell dear, but this does not change the total amount of value in society. A profit system that relied purely on unequal exchange would not allow an economy to grow because net gains would always be balanced by net losses. Yet we know that capitalist economies grow and that the aggregate profits of the capitalist class grow. How can we explain this given the conservation of value in the circuit of capital?

If surplus-value cannot arise from the change of form of commodities and money then it must arise from one of the stages of the circuit M-C-M. It makes no sense to look for the source of surplus-value in the money stage because money, as a mere quantity of value has no ability to expand. Change in a piggy-bank does not grow more change just by sitting there. However the commodity stage of the circuit points us to the realm of commodity production. We know that production is the sphere of value creation so it makes sense to look there for a source of surplus-value.

When the capitalist invests in production she buys different types of commodities, materials, machines/tools, and labor-power. The non-labor inputs into production Marx calls “constant capital” because these inputs do not transfer any more value to the final product than the original cost of their purchase. If Susan buys a bag of apples for $5 and bakes 5 pies with these apples then value of $1 of apples is passed onto each pie.

The same logic applies to machines which transfer their cost onto the final product over a longer period of time. We call these ‘fixed capital’, a subset of constant capital. If a machine costing $1,000 is used in the production of 1000 widgets over a period of years then $1 of value is transferred into the final value of each widget. Sometimes this way of looking at the value transfer of fixed capital is not intuitive to people. For instance, it is not uncommon to hear the opposite (hypothetical) conception: “I spent $1000 on grow-lights and fertilizer. It was a big expense but after the first batch of marijuana was sold it was all paid off. All future batches were pure profit.” In this conception the cost of the inputs are transferred in full to the first production period (or as many as it takes to pay off the fixed capital) and the successive production period pass on no fixed capital value to the final product. However, such an interpretation is not as logical as it sounds. On one hand, the question is just one of perspective. If, say, we grew 2000 plants over the life of the grow-lights and fertilizer then we could say that each plant contained .50 cents of fixed capital value ($1000 divided by 2000) or we could say that the first 1000 plants contained $1 and the next 1000 plants contained no fixed capital value. When looked at in the aggregate, over the lifetime of the fixed capital, it is the same regardless of how choose to look at the division.

On the other hand, if we want to really be specific, it would be wrong to say that some plants created with the fixed capital contain this value while others do not. If the grower is a reasonable capitalist he does not raise his prices when he buys a new grow-light and then drop the prices as soon as the grow-light is “paid off”. He keeps his prices consistent with the market price. This is obvious evidence that the value of fixed capital transfers over the life of the machine, and not all at once.

This brings us to a second conversation principle, one related to production: constant capital transfers its value into the value of the final product but it does not create surplus-value. This accords with Marx’s basic concept of value, that value is abstract labor. While labor is done on constant capital, while human labor transforms constant capital into new products, it is not the constant capital that is doing the labor and therefore constant capital cannot increase in value during production.

This law of conservation even applies to fully-automated production such as in “lights-out manufacturing” where production is carried out in the dark because there are no humans present in the factory. From Marx’s perspective a totally automated factory produces no value but that does not mean that its owners receive no profit from their investment or that the commodities produced by robots cannot have prices. This is explained through the transfer of value in exchange. We will explore this concept in more detail later, however for now we can at least shed a little light on the subject by analogy with a laundromat. A laundromat is an investment that requires little or no human labor yet the owner of the laundromat makes a profit every time their machines are used by customers. The machines, in Marx’s system, are not creating value but they are certainly filling up with quarters. Rather than being value creation, these machines function more like rent. In the same way you might rent a house or a car, you rent the use of a washer/dryer for an hour. Rent doesn’t involve value creation at all. It just involves extracting money from consumers in exchange for the use of something. There are many ways in which profit can be made without creating value. But these are not methods that increase aggregate value in society. This is the fundamental distinction to be made between surplus-value through production (which we will get to in a moment) and the transfer of value in exchange which happens any time something is rented or when a labor-less product is sold. These forms of making money are parasitic upon the dominant mode of production in society, capitalist production, which produces value. Without capitalist value production there could be no automated factories, laundromats or landlords siphoning off value.

The only commodity that is capable of producing surplus-value is labor-power. This is because of the distinction, which Marx was the first to theorize, between labor-power and labor. Labor, the act of working, is what creates value and this is measured in hours of socially necessary labor time. Labor-power is the ability to work, our working time, which the capitalist buys from the worker for a period of time in return for a wage. Labor-power is a commodity and like every other commodity it has a use-value and an exchange value. It’s exchange value is the wage, which is set by the prices of commodities that the worker needs for her subsistence. The use-value of labor-power is that labor is used to create value. There is no necessary relation between the wages paid to workers and the amount of value that they create. There is no law of conservation that requires the hourly wage to equal the value produced in an hour, either on the individual level or in the aggregate. In fact, the difference between these two quantities, the wage and the value produced, is the source of surplus-value. Without it capital could not not self-expand and there would be no capitalist production. There is therefore an incentive to increase value produced relative to wages.

The total working day is divided into two portions, necessary and surplus labor. The necessary labor is the amount of time the worker spends creating value equal to the value of their wage. The remainder of the working day is surplus labor time in which the worker creates surplus-value that forms the profit of the capital. Whereas the value transfer of constant capital is constant, calculated simply by dividing the cost of constant capital by the number of commodities it is turned into, the value transferred by the wage is of a different nature. How much surplus labor will workers do relative to necessary labor? This is a variable factor which is why Marx calls wages “variable capital.” The ratio of surplus-value to variable-capital (the ratio of surplus labor to necessary labor) Marx calls the “rate of exploitation.”

Value Conservation and Expansion in Production

The final value of a commodity is equal to the cost of constant capital inputs plus the labor time involved in its production (value=c+L; where c is constant capital and L is living labor). Since constant capital is the product of past labor (or “dead labor” as Marx calls it) the value of the commodity is dead labor plus living labor. Living labor is divided into two portions, necessary and surplus labor, or variable-capital and surplus-value (L=v+s, where v is variable capital and s is surplus value). The rate of exploitation (s/v) does not change the total amount of of living labor and thus doesn’t change the price of the commodity. The rate of exploitation only defines an internal division within the total labor time that goes into a commodity. Thus the final value of the commodity is also constant capital plus variable capital plus surplus value (value=c+v+s). The cost of production to the capitalist is constant capital plus variable capital (c+v).

This introduces an important conceptual nuance into our conservation principle. Surplus-value is created in production thus setting in motion the self-expansion of value that forms forms basis of capital. Increasing the rate of exploitation will increase the amount of surplus-value capital exploits from workers. But increasing the rate of exploitation does not change the amount of value created. It merely changes the proportions in which the social product is divided between capitalists and workers. The total amount of value is still equal to the total amount of labor performed. Increasing exploitation creates more surplus-value but not more value.

Surplus-Value and Circulation

In order for a capitalist to reinvest in production each day they must have at least earned back the value of their initial investment from the previous day (v+c). They also expect a reasonable rate of return on their investment. However when their products are sold in the market capitalists can receive less or more surplus value than is actually contained in the commodities. In other words, if prices are above values than capitalists receive a greater sum of surplus-value than the value contained in the commodity. If prices are below values then they lose value in exchange. Of course, prices could be so low that capitalists do not even make back the price of their original investment. If this continues they will go out of business.

Earlier we observed that while value changes hands in circulation it cannot be created in circulation. Since surplus-value is a component part of value the same holds for surplus-value. It is quite common for firms to realize more or less of the surplus-value contained in their products. But one firm’s gain is another’s loss. There is no aggregate increase in surplus-value through this process. The conservation of value in circulation remains.

In earlier chapters we discussed the difference between price and value. We said that price is the expression of value, the way value is expressed when a commodity is equated with the money commodity. The difference between value and price allows us to explain the temporal, non-equilibrium dynamism of a capitalist economy. Total value equals total price while the deviations in individual prices and values are the mechanism of rewarding and punishing producers. There is a parallel distinction between surplus-value and profit. Surplus-value is the component part of total value that comes from the surplus-labor that the capitalist class has extracted from the working class. Surplus-value is expressed in profit, the money part of total price that individual capitalists receive after selling their commodities. Total surplus-value equals total profits. The deviations between individual firms’ surplus-value production and profits are the mechanism of rewarding and punishing firms. However, as we will see in the chapter on the Tendency of the Rate of Profit to Fall, this mechanism, rather than encouraging healthy investments that create balanced growth, encourages investments that contribute to the long term instability of the system.

The Role of Surplus-Value in Marx’s System

The theory of surplus-value takes a central place in Marx’s theory of capitalism. It claims that wherever profit exists exploitation also exists. The backbone of capitalism is the exploitation of workers. Of course prior economic systems also relied on exploitation. Feudal peasants worked the land to produce surplus product for their landlords. But this exploitation was easy to see. The peasants worked part of the year on their own land and part of the year on the landlord’s land. There was no mystery about the exploitative relationship. In capitalism the class relation between workers and capitalists is obscured by the fact that both parties agree to the terms of work as legally consenting equals in the market. The commodity labor-power exchanges at it’s value. There is no inequality in exchange between workers and capitalists. The real inequality is only revealed in production, in the relation between necessary and surplus labor in the workplace. This makes exploitation impossible to see unless we examine production and the particularly unique use-value of labor-power.

Capitalist exploitation is also a matter of value expansion and not a matter of physical surpluses. The feudal peasant produced a surplus of product. The modern worker produces a surplus of value. These are different matters, as we will examine below.

The Fundamental Marxian Theorem and Equilibrium Theory

In the introduction to this book we discussed the tendencies of some “Marxist” writers to dismiss Marx’s value theory and instead advance their own reformulations. What allows these writers to still call themselves “Marxist” after abandoning Marx’s theory of value? Often the answer is that these writers claim to be able to deduce Marx’s conclusions via alternative logic and methods. Because of the central place that capitalist exploitation holds in Marx’s theory and in his moral critique of capitalism, these authors often try to deduce the existence of exploitation through alternative methodologies, most often, equilibrium methods. Despite throwing out the concept of value these authors still make the claim that surplus labor is the source of profit. It has become commonplace to refer to this theory, that surplus labor is the source of all profit, as the “Fundamental Marxian Theorem” or “FMT”.7

We can probably assume that Marx would not be happy to know that his complex, multi-faceted theory of capitalism had been reduced to one fundamental theorem. As we have seen in this chapter, the theory of exploitation is directly linked to the conservation of value in circulation. It is therefore closely linked to the concept of value, abstract labor, and, as we will read in chapter 11, the theory of crisis. It is very hard to extract one piece of this interlocking jigsaw puzzle while throwing out the rest, yet this is precisely what is done by writers who seek to reject value theory while rescuing the FMT.

We have previously discussed many of the problems of equilibrium analysis. Here we will look at a demonstration that proves the impossibility of holding the FMT in an equilibrium condition. It is precisely because of Walrasian equilibrium methods that many Marxists have been led to jettison part or all of Marx’s value theory while still trying to maintain the FMT. Yet, as we will soon see, this is impossible. This is a problem not for Marx but for the equilibrium method.

Let us say we have an industry, say a potato farm, that requires potato as inputs. At the beginning of production the farm purchases 10 pounds (units) of potatoes at $10 a pound. This makes the total expenditure of constant capital (C) $10. Workers must work 10 hours to pay back the value of their wage (V) and another ten hours of surplus labor to produce capitalist profit (S). We assume labor produces $1 of value per hour worked.

Table 1

# of units of input Unit price of input C V S W # of units of output Unit price of output
10 $1 $10 10 10 $30 50 $0.6

At the end of production $30 of value (W8) have been produced and 50 pounds of potatoes. The unit price per pound of potatoes is now $0.6.

This is how Marx’s theory of value sees the relation of input values to output values. But this is not how the equilibrium theorist sees the world. For the equilibrium theorist there is a problem with the above example: it is not in equilibrium! The input prices and output prices do no match. Such an example does not have a single equilibrium price. Therefore the equilibrium theorist must impose an equilibrium condition on the example, determining input and output prices simultaneously. Because this method is a central part of equilibrium analysis the method is often referred to as simultaneism.9

The simultaneist/equilibrium approach determines input and output prices as follows:10

10x + 20 =50x

10 units of potatoes at the equilibrium price (X) plus 20 hours of labor are equal to 50 units of potatoes at the equilibrium price (x). The equation solves for x=.50. Now that we know that 50 cents is the simultaneist price we can look at the table again with this new price:

Table 2

# of units of input

Unit price

C

V

S

W

# of units of output

Output unit Price

10

.50

5

5

20

25

50

0.5

With the new unit price we find C (10x.50=5) and W (50x.50=25). There is a surplus of 40 units which allows us to find what the surplus value is (40x.50=20). Subtracting S and C from W we get V, 5. The numbers are different than the first example and the rate of exploitation is different, but there is still a correlation between surplus labor time and profit. It seems that the FMT is still intact.

Now let us examine a different example, one in which the same system of production produces surplus labor but not a surplus product.11 The system is still self-reproducing because enough output is generated to restart production, but no surplus product is created. Here would be the common-sense way of looking at the picture:

Table 3

# of units of input Price of input C V S W # of units of output Output unit price
10 $1 $10 10 10 $30 20 $1.50

Again, this is a problem for the simultaneist because input and output prices are not equal. To impose an equilibrium price on the model we perform the same procedure as before.

10x+20=20x

This tells us that the equilibrium price is $2. Plugging this back into our table we find:

Table 4

# of units of input Price of input C V S W # of units of output Output unit price

10

$2

$20

$20

$0

$40

20

$2

This tells us something quite interesting. Even though we know that surplus labor has been performed there is no profit in the simultaneist version. The simultaneist logic cannot produce surplus value without a surplus product. In fact, if we were to create an opposing example (and I encourage readers to try tabulating such an example themselves) where there was no surplus labor but there was a surplus product then we would find that the simultaneist logic concludes that there is profit without surplus labor! This means that simultaneist methods are not capable of proving the FMT. This is just another example of the complete incompatibility of equilibrium methodology with Marx’s value theory.

There is also another crucial aspect of the simultaneist method that is revealed by this example. Simultaneist logic ties value magnitudes directly to physical magnitudes, to use-values. We found that with zero physical surplus there could be no value surplus even though we know that surplus labor has been performed. The surplus value calculation was directly tied to the amount of potatoes produced and had nothing to do with the labor-time involved. If we just look at the basic equation for simultaneous valuation (10x+20=20x) we can see that the value, x, is being determined in relation to physical quantities. Remember that we derived the values of V and S via subtractions from W. No adding up of labor-times was involved in the calculation.

Theoretical approaches wherein value systems are entirely dependent on the use-value structure of the system are called “physicalist” approaches.12 Simultaneism leads to physicalism.13 They are two sides of the same coin. Both are anathema to Marx’s theory and methods. Marx clearly distinguishes between use-value and value. We can know nothing about a commodity’s value by looking at its physical form or its quantity. Instead commodity values are the result of relations between laborers. Physicalism erases all of these social relations and portrays an economy as merely a quantitative arrangement between objects. It is the ultimate fetishism.

The critique of simultaneism and physicalism comes from the Temporal Single-System Interpretation (TSSI) of Marx’s value theory which is discussed often in this book. Temporal interpretations imitate the real world in that inputs enter production at once set of values and leave with another set of values. There is no requirement that we go back in time and change input prices. Interpreted temporally there is always a relation between surplus labor and profit and thus the FMT always holds. However, there is also no need to frame the analysis in terms of a “fundamental” theorem in the first place since a temporal interpretation allows us to continue to use all of Marx’s method and accept all of his important conclusions, not just one, arbitrarily chosen, “fundamental” one. TSSI authors have continually shown that interpreted in a temporal, non-equilibrium framework, Marx’s value theory is internally consistent.

The FMT is actually an attempt to achieve Marx’s conclusions via bourgeois methods (equilibrium, simultaneism, physicalism).14 This is a common phenomenon in the academy where intellectuals are under pressure to conform to the methods of the dominant bourgeois paradigm. However such attempts, as we have just seen, are actually unable to achieve their aim. What is really proven is that the results are in the method. What distinguishes a school of thought is not just its conclusions but the assumptions and methods by which it reaches those conclusions.15 Marx’s radical conclusions about capitalism flow naturally from his method, a temporal, non-equilibrium method.

1Marx, Grundrisse p.101

2An important work debunking the idea of ‘simple-commodity production’ is an essay by Christopher Arthur called “The Myth of Simple Commodity Production”

3In the chapter on Intrinsic Value we briefly discussed the way in which value relations still permeated pre-capitalist societies to a degree. These societies, however, were not simple-commodity-production societies. Rather, they were societies where production happened for subsistence inside the community and trade happened between communities.

4Again, see Arthur “The Myth of Simple Commodity Production”

5Hence, we see that behind all attempts to represent the circulation of commodities as a source of surplus value, there lurks an inadvertent substitution, a confusion of use-value and exchange-value.” Marx, Capital vol. 1 p. 261

6Quoting first Destutt de Tracy, then Mercier de la Riviére Marx says, “With reference, therefore, to use-value, there is good ground for saying that ‘exchange is a transaction by which both sides gain.’ It is otherwise with exchange-value. ‘A man who has plenty of wine and no corn treats with a man who has plenty of corn and no wine; an exchange takes place between them of corn to the value of 50, for wine of the same value. This act produces no increase of exchange-value either for the one or the other; for each of them already possessed, before the exchange, a value equal to that which he acquired by means of that operation.’” Marx, Capital vol. 1. p. 259-260

7“This theorem, first proved by Morishima (1973), states that the existence of exploitation and the possibility of positive profits cannot are equivalent to each other: without exploitation positive profits cannot exist, and conversely, if positive profits are possible then there must be exploitation.” Mayer, Tom “Analytical Marxism” p.74

8W stands for Wert, German for “value”. It is common to use W for “total value” tables such as this.

9Kliman, “Reclaiming Marx’s Capital” p. 75

10This method of finding the equilibrium price is common in simultaneist/Sraffian literature. See Vienneau, Robert “A Sraffian Interpretation of Marx.” As Vienneau explains, this approach is one of three possible ways of arriving at the same result. http://www.dreamscape.com/rvien/Economics/Essays/sraffa.html

11This method of proving that the FMT cannot always be proven via simultaneist methods comes from Kliman, “Reclaiming Marx’s Capital” chapter 10. What follows paraphrases, more or less, Kliman’s approach. See Kliman for a more rigorous critique.

12“Physicalism” is Kliman’s shorthand for Ian Steedman’s “physical quantities approach” (Steedman “Marx After Sraffa” p. 72) Kliman, “Reclaiming Marx’s Capital” p. 76

13This is one of the most important aspects of the TSSI critique of Sraffa, equilibrium, etc. All simultaneist methods are also physicalist and therefore incompatible with Marx’s conclusions.

14Kliman, “Reclaiming Marx’s Capital” p. 175

15This is another crucial aspect of the TSSI. It is easy to get bogged down in the algebra and forget to look at starting assumptions. Economics in particular has a fetish (not the Marxist fetish) for math. Math gives economists the illusion that they are doing science. And the faux-science allows them to claim that their arguments are neutral, unassailable and value-free. The TSSI critique of equilibrium theory challenges this entire approach to doing economics.

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22 Responses to Surplus Value (draft)

  1. mreverpresent says:

    No linen in the examples? Engels rolls in his grave.

    Good job with the chapter.

  2. Nice piece  - noted one important typo in para 

    The critique of simultaneism and physicalism comes from the Temporal Single-System Interpretation (TSSI) of Marx’s value theory which is discussed often in this book. Temporal interpretations imitate the real world in that inputs enter production at once set of values and leave with another set of values

    should be “at ONE set of values”?

    MR

    ________________________________

  3. Martin says:

    Nice one.

    I think those potatoes cost $1 per pound and not $10 as you have it here (at least that is what the table below says):

    Let us say we have an industry, say a potato farm, that requires potato as inputs. At the beginning of production the farm purchases 10 pounds (units) of potatoes at $10 a pound. This makes the total expenditure of constant capital (C) $10. Workers must work 10 hours to pay back the value of their wage (V) and another ten hours of surplus labor to produce capitalist profit (S). We assume labor produces $1 of value per hour worked….

    Martin

  4. Martin says:

    I understand what you mean here but I think it could be misunderstood:

    The theory of surplus-value takes a central place in Marx’s theory of capitalism. It claims that wherever profit exists exploitation also exists.

    Given you have already shown examples of profit arising from not exchanging value for value (eg merchant capital), and given profits are then redistributed from industrial capital to other capitals (finance, landowners etc) who do not get profit directly from exploitation, then perhaps instead you could say something like “it claims that the ultimate basis of profit is exploitation” as the second sentence.

    Sorry if that is overly pedantic- as I say, I do understand what you mean so maybe it isn’t a problem.

  5. vicuslusorum says:

    I believe you should improve the part on constant capital, which is basic if one needs to withstand the harsh criticism that machines do produce surplus value.

    In fact, how can you reasonably demonstrate that the value within constant capital is equal to a part of the value within the commodity before exchange? Explain to me clearly, without reference to the words of Marx on the subject (he states that the value of the c is present in the final commodity), if the value of c is completely used in the process of production. Why do machines not produce an increment of value above their purchase value, without taking into account the competition in terms of socially necessary time raised by the state-of-the-art technology?

  6. mreverpresent says:

    “The FMT is actually an attempt to achieve Marx’s conclusions via bourgeois methods (equilibrium, simultaneism, physicalism). This is a common phenomenon in the academy where intellectuals are under pressure to conform to the methods of the dominant bourgeois paradigm. However such attempts, as we have just seen, are actually unable to achieve their aim. What is really proven is that the results are in the method.”

    Yes, the same is true of the diversification of the capital notion in bourgeois economics: social capital, human capital, etc.

  7. CB says:

    I’m really looking forward to this book! Whose the publisher, if you don’t mind my asking?

  8. Confused says:

    Apologies for posting this here but I could not figure out how to contact you Brendon. Hopefully you read this message.

    I am reading volume one of Capital with a group of students for a university class (we start on chapter one next week). We have also set up a forum (SA351.forummotion.com) to discuss the text. Join us if you can!

  9. Dnelub says:

    The fact that Marx never used the term TSSI in his texts does not mean that TSSI cannot be used to interpret the value theory of Marx. By definition, it is an interpretation just as “simple commodity production” with reference to the relevant pages in Capital Volume I and III.
    So, neither of following arguments (yours or Arthur’s arguments) might be used as a proof whether in Capital Volume I, Marx proceeds from the simple production of commodities as the historical premise, ultimately to arrive from this basis to capital or not :

    “The most glaring evidence is the lack of the term “simple commodity production” in any of Marx’s writing” …“there does not seem to be historical evidence for this type of society” (from your article)

    “Marx never used the expression ‘simple commodity production’ in Capital. Likewise, it is certain he never referred to the capitalistically produced commodity as a secondary derivative form.” (from Arthur’s article)

    if there is a theory and an expression (simple commodity production) abstracted from it, the proper discussion should be whether this expression fits to the theory or not. Or there should be “plausible” reason why the expression is incoungruent with the theory. However, it seems that you and Arthur are only interested in whether Marx has ever used this expression or not. Pity!

    I do not know much about Arthur but as you are one of the authors of the article “The Unmaking of Marx’s Capital”, I am quite surprised the way you are tackling with the question.

    • mreverpresent says:

      What is your point exactly?

      • dnelub says:

        I am sorry. As I am not a native speaker, it is likely that I might have put my opinions improperly. So, I did not understand your question. Can you please tell me what is not clear?

  10. Martin says:

    Dnelub- I think the argument showing why Marx was clearly not stating that their had been a historical period of simple commodity production is in fact made in the text-

    “If we try to image how a ‘simple commodity production’ society would operate under the law of value we quickly see that value relations would have a very difficult time disciplining and apportioning labor in a society in which producers were tied to their own means of production. You can not fire and hire workers in response to market signals or race to beat the socially necessary labor time when everyone works for themselves on their own means of production.3″

    Further, the progress of the argument in Capital 1 is: (a) in a society where the division of labour is arranged through exchange based on commodity production by private producers then money is the adequate form of appearance of value (ie money develops as what we know as money at the same pace as the spread commodity production); (b) where mone exists then the possibility for capital exists (m-c-m’); (c) so too does the possibility for wage labour- in fact the law of value can’t exert itself properly without that existing (see the argument Brendan makes above).

    I would say that the fact that Marx also didn’t use the term as highlighted is further evidence that this is not what he intended. However, that is also clear from understanding the logical unfolding of the argument in Capital 1.

    Perhaps more importantly than “what did Marx really mean” in any event is whether we find an argument that simple commodity production existed as a historical form convincing- it is not just a historical question but also, I would say, one about whether such a society could exist at all as a generalised way of producing- what happens when one simple commodity producer goes to the wall in such a society and loses their means of production? The wage contract suggests itself immediately. Also how is it possible, again as Brendan says, for production to be matched to what people want to purchase? Simple commodity producers with their own tools etc cannot simply switch from cotton production to carpentry- only workers under the command of capital can be made to do that.

    Martin.

    • Martin says:

      Sorry- last point- it is also, I think more interesting than asking whether positing that form of society existed at all. instead to ask whether hypothesizing its existence helps us understand the critique of the society we actually live in (the point of the book after all) – I would say it only does so as a method of helping us to understand what is necessary for the law of value to operate properly eg capital and wage labour. So capital and wage labour are posited already if one imagines a society of commodity producers where the value of products takes the form of socially necessary quantities of abstract labour.

      • dnelub says:

        The problem is that the expression “simple commodity production” is being discussed regardless in which context Engels used it. As I mentioned in my first comment, there is a similarity between TSSI and “simple commodity production” because both are by-products of respective discussions. For instance, from my point of view, it is impossible to comprehend TSSI without inconsistency discussion because it is obviously an answer to this matter. Likewise, “simple commodity production” should be considered together with the discussion of whether analysis of value in Capital is historical as well as logical. As nobody raised this question on the basis of Capital when Marx was alive, we should not be worrying about why Marx/Engels did not use it. Whether Marx has ever used the expression or not cannot be a criterion of scientific discussion. Neither can it be counted as further evidence nor can it be argued as a matter of intention.

        In fact, Marx discussed it (logical-historical) with Proudhon in “Poverty of Philosophy” long before Capital because Proudhon believed that social relations are just as much produced by men as commodities, which is why from his point of view, economic categories were solely logical categories. I think this is a proper source for whoever is interested in the topic because in the preface of “A Contribution to the Critique of Political Economy”, Marx says “The salient points of our conception were first outlined in an academic, although polemical, form in my Misere de la philosophie”. And then we will be able to understand what Brendan would mean by this: “He will not introduce new categories into his analysis until the categories themselves force the analysis in that direction.”

        The passage you quoted from Brendan would be a reason why simple commodity production does not exist anymore but not the reason why it did not exist at all. The fact that capitalism will disappear one day does not mean that it did not exist at all.

        The last but not least important point is that Brendan does not brought into question what Engels really meant by “simple commodity production” because from his point of view, it is out of fashion. In fact, it is a door waiting to be opened by TSSI.

  11. allan harris says:

    I’ve been reading Marx for a long time and have always wondered if there really is a distinction between surplus-value and profit. As long as we understand that profit or surplus-value is produced by workers during production and is not created in a market exchange, does it really matter whether it is called profit or surplus-value? Marx, for instance, seems to use ‘profit’ without too much concern for ‘surplus-value’ in Wages, Prices and Profit. Thus, a product is sold for its real value and a profit results because the full production costs are not paid by the capitalist. So, you have wages + profit = price. The worker produces a product which is worth its price (on average), but the capitalist does not pay the worker the full price or “value” of the product. The difference is the profit kept by the capitalist. It is true that the capitalist believes that profit originates when he receives the price of the product when he sells it, but that is only because he confuses the appearance of profit with its source of origin.

    Also, modern economics uses the term “value-added.” Why not use that term in analyzing profit, i.e., who adds the value, when and where is it added, who appropriates it? Isn’t ‘value-added’ really the same thing as ‘surplus-value?’

  12. pebird says:

    I don’t understand Table 3.

    My understanding of surplus labor is that labor which is unnecessary – it is unpaid. All of the labor in the model depicted in Table 3 is necessary to reproduce the system.

    And there are no capitalists, as there is nothing available for them to appropriate (much less eat).

    No capitalists, no class system, therefore no wages, therefore no unpaid labor.

    So Table 3 depicts a non-capitalist system. In which case the Law of Value does not apply.

    I am sure I am missing something, but not sure what it is.

    • I think you might be confusing necessary labor (which is the labor necessary to reproduce the value equivalent of laborer’s means of subsistence) and the labor required to reproduce the system. There are definitely capitalists in Table 3 because there is surplus value being extracted. There is surplus labor. What is missing is surplus product.

      • pebird says:

        Are you saying the surplus product is the product (potatoes) used to enter into the next cycle of production? If so, that is required in virtually any economic system. This could be an example of a worker cooperative under socialism. Unless there is product for a class other than the workers to appropriate, how can it depict capitalism?

        If the model assumes capitalists outside the scope of the model (for example, exploiting another country), then I understand. Even so, in this case, the model is incomplete because the value flow to the other system is not included.

        The only system in which workers consume the entire product of their labor each period would be something like hunting and gathering. Even early agriculture under feudalism needs to put aside some excess product (the result of labor in excess of what is needed to survive) in order to reproduce that system. Would that be an illustration of capitalism?

  13. dnelub says:

    I think there is a little mistake in table 1 though it does not have a significant effect on the conclusions of the text. The title of the last column is “Unit price of input”. If Brendan meant “Output unit Price” like in other tables then output unit price should be $30/50=$0.67.

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