The concept of surplus value, which was developed extensively by Karl Marx at the end of the 19th century, is the monetary surplus arising from human labour in any productive action.
Surplus value, also known as surplus value, was defined by Marx in his work ‘Capital’ and is basically the unpaid value of the labour of the worker that creates a surplus product which becomes the owner of the entrepreneur. Thus originating the essence of capitalist exploitation or accumulation.
That is, according to the theory developed by Karl Marx, the worker is paid less than he actually produces. Thus, the difference between what he actually produces and his wage is what is known as surplus value. This surplus value constitutes the extra profit of the employer.
This surplus product or surplus value, when it enters the market, becomes a commodity and is sold, turning it into money that does not return to the employee’s pockets in the form of wages.
The origin of the concept of surplus value
The concept of surplus value, as Karl Marx acknowledges in his writings, was borrowed from the classical economist David Ricardo. In turn, we can say that David Ricardo had tried to perfect the concept coined by Adam Smith.
However, it was Karl Marx who developed the concept as we know it today. Marx worked the concept to the point of distinguishing between ‘labour power’ and ‘labour’. This fact greatly facilitated the effective explanation of surplus value. The concept of surplus value is a fundamental term in his theory of ‘labour-value’.
Marx also explained that the capitalist is able to increase the intensity of exploitation through the maximisation of ‘absolute surplus value’. Either by trying to extend the working day. Or, by means of ‘relative surplus value’, i.e. by decreasing the number of workers.
How is the capital gain calculated?
One of the main novelties in Marx’s development of the concept was the mathematical formulation of the problem. That is, a formula which makes it possible to calculate the amount of surplus value.
Intuitively, surplus value is calculated as the result of subtracting production costs from profits. Thus the formula would be as follows:
Capital gain (s) = Revenues – production costs (c+v)
Marx further decomposes the following values to develop his labour theory of value:
- c = constant capital (machinery, materials, fixed costs…)
- v = variable capital (workers)
- s = surplus value (entrepreneur’s surplus)
In Marx’s words, only ‘living labour’ generates surplus value. Or, in other words, only the ‘v’ component, labour power, generates surplus value. While the ‘c’ component, which he defines as ‘dead labour’, does not generate surplus value.
From the above, we can calculate the capital gain rate. The formula is:
Capital gains rate = s/v
The result of the above calculation represents the units earned by the employer for each unit of labour.
Example of capital gain calculation
Suppose there is a firm that spends $80 on machinery (c), $50 on workers’ wages (v) and sells its goods for $150 (revenue). Then the surplus value is:
Capital gain (s) = Revenue – production costs (c+v) = 150 – (80+50) = 20
Capital gains rate = 20 / 50 = 0,4
The above results are interpreted as follows:
The total capital gain of the entrepreneur(s) is $20. Also, the rate of surplus value is 0.4. This 0.4 is equivalent to saying that the entrepreneur keeps 40% of the product generated by the workers.
Criticisms of the concept of surplus value
Like any concept, the term developed by Karl Marx has advantages and disadvantages. That is to say, economists are in favour of his theory and others are against it. However, it is important to point out that Marx’s theory has evolved. In order to assess it correctly, it is necessary to take into account the period in which it was written.
Positive criticisms of this concept include:
- The entrepreneur, by taking the risk, may deserve this capital gain, but it should be controlled. Some economists argue that the profit made by employers is excessive and that, therefore, they should pay their workers better.
- Among those most sympathetic to their theory, they argue that there should be no such benefit in favour of employers. Companies should pay their workers exactly the value of what they produce.
- It was a turning point in economic theory. So much so that work is still being carried out on the subject today.
Negative reviews include:
- The concept made sense when it was written. Now the labour market has changed and machines (c) do offer value.
- The existence of machinery or automation of processes does not impoverish the population. On the contrary, it makes work more productive and reduces hours worked.
- Technology does not necessarily have to increase unemployment. Unemployment moves from one sector to another and changes according to the needs of those sectors.