The Theory of Surplus Value

A. The Theory of Surplus Value

In this concluding chapter we take a general overview of the main results that have emerged with respect to matters theoretical, empirical, and historiographical. Our primary concern is the surplus-value doctrine, for the theoretical core of Marx’s enterprise must stand or fall with this kingpin of his system. Objections to the doctrine are clearly discernable in his own work. We surmise – and it is no more than

a conjecture – that this dissatisfaction might help explain why Capital remained unfinished. 1 The “labor-power” concept, we first recall, was introduced to explain how it is that in the absence of monopsony – i.e., assuming a competitive exchange of “equivalents” in wage-rate determination – there can yet be a positive return to capital. The proposed solution requires that “labor capacity” and not “labor” be perceived as valued by the wage contract, the worker receiving a competitive return though the whole work day yields more than is required to cover the costs of his reproduction. The argument thus turns on the notion of surplus as comprising unpaid hours in a day’s labor, a surplus that (as expressed in Capital 1) is “embezzled, because abstracted without return of an equivalent . . . ” (MECW 35: 607). Unequal exchange is central to the matter considering that labor is excluded from ownership

of property. 2 But two points require emphasis. First, although for Marx the moral

1 See Robinson 1980 (1955): 15 on this matter. Also Judt 2006: 89n. Failing health, of course, played its part. Against this must be weighed the argument that “[t]he last decade of Marx’s

life was a tremendously productive period for him” indicated inter alia by additions to the French edition of Capital 1 appearing in 1873 (Anderson 1983: 231). Yet the fact remains that the Capital 2 and 3 materials proved too heavy a burden. 2 See Roemer 1983. Gordon 1968 has helpfully clarified Marxian exploitation theory in terms of a normative “distributive-rights function” R = R(L), where R is the quantity of right to receive income and L the labor performed; a “distribution equation” O = l + p, where O is net rational output and l and p wages and “surplus value” respectively, describing the fact that property-owners actually receive income. Gordon adds that a labor theory of value, O = O(L) is necessary in order to solve the “product-exhaustion problem,” assuring that the

Conclusion – A Recapitulation and Overview

right to real income derived from performance of socially necessary labor, he eschewed appeal to “morality” or “justice” in evaluating capitalist organization, as we have shown in Chapter 13; indeed, “the capitalist – as soon as he pays the worker the real value of his labour power – would have every right, i.e. such right as corresponds to this mode of production, to surplus value” (above, p. 387). Second, the labor-power concept was designed only to interpret surplus for those inhab- iting the “illusory” world of markets, and had, for Marx himself, no operational significance whatsoever since in actuality the wage contract specifies a payment per time period (Chapter 2, p. 76; Chapter 9, p. 287). As for the value of labor power, that is nothing but the labor time required to produce the real wage paid per day. It follows that use of terms such as the “value-creating” or “wealth-augmenting” power of labor, amount to no more than brilliant rhetoric since when all is said and done all that is entailed is the unexceptionable proposition that only part of the worker’s day is required to reproduce his daily wage goods.

It has been asserted not only that “the impression that Marx gave, and must have meant to give, is that the value of labor-power is to be identified with the actual wage or at least with the average wage over a period of time” – presumably given technology, the value of labor power then reflecting the commodity wage – but also that he “thus held a subsistence wage theory” (Brewer 1995: 123). Now certainly an unambiguous notion of the value of labor power requires a real wage sufficient only to maintain the labor supply; and when Marx assumes as a first approximation that the actual wage does not fall below the value of labor power – as for example in 1861–63 (Chapter 12, p. 375) – he is implicitly taking this definition for granted. But we have also shown, over and again, that Marx’s full-fledged growth process accords

a central place to expansion of population and the work force, indeed that Marxian growth cannot be perceived apart from population expansion. The value of labor power is accordingly in practice redefined to allow a component in the real wage which assures not only the replacement but the growth of the work force (Chap- ter 3, p. 93); and that the value of labor power (always in the sense of the real wage, apart from technical progress) is subject to downward pressure – the principle of “immizeration” – is insisted upon from the 1840s through Capital (Chapter 6.C; 7.G; 12.E; 3.D). Accordingly, it is only in some purely conceptual stationary state, not in the real-world economy under investigation, that the value of labor power reflects strict subsistence.

Of course, allowance must be made for productivity improvement, Marx’s hall- mark. Here we recall the accounts of growth entailing a constant real wage at a level sufficiently high to encourage population expansion, which – because subject to reduction in labor cost – generates increased surplus and thus increased aggregate

sum of rights to income resulting from labor performed is exactly equal to the value of goods produced with “the total product exhausted by the just claims made upon it.” This purpose, one might add, would not require a strict labor theory, but would be served by the Capital 3 or Ricardian variety.

465 demand for labor (Chapters 8.D, 12.E). The two perspectives should be seen as

A. The Theory of Surplus Value

complementary. Widening the labor-power concept to accommodate population growth, coupled with allowance for a downward trend in the real wage under freely operating labor-market pressures, comes at a high cost indeed, for the contrast between “necessary” and “surplus” segments of the workday loses all sharpness. Particularly damaging is the implication that constraints on the growth of labor supply, as by Malthusian “prudential” measures, can contribute towards maintenance of the real wage or even its increase, the working class having some degree of control over the distribution of “surplus.” As Waterman has suggested (1998: 300), we must give some credence to Bonar’s view that while “seeking to demonstrate the hopelessness of the labourer’s position,” Marx was “too acute not to know that his demonstration would be seriously weakened if he admitted the truth of the Malthusian doctrine and the bare possibility of the adoption of prudential habits by the labourers. This is the reason for his bitter attacks on the Essay” (Bonar 1924 [1885]: 391).

Setting aside the foregoing complexities by taking the doctrine on its sim- plest terms, all depends as far as concerns the “generation” of surplus on what to include within the “productive” labor category. 3 Marx found himself from the outset embroiled in the inevitable classificatory exercises. On the one hand,

he widened the criteria for entry beyond a simple materiality qualification to cover such activities as transport or “spatial movement” (Chapter 9, pp. 269–

71) and also management, including that exercised by the capitalist himself, the latter creating a particular embarrassment for the doctrine of surplus value (Chap- ter 14, p. 434). Even the opera singer puts in an appearance. On the other hand, there are remarkable exclusions, conspicuously unskilled labor – the Lumpenproletariat (Chapter 8, p. 237). In the 1861–63 document, in Capital 3 and in correspondence of 1868 there is a further narrowing by the omission of agricultural labor with the emergence of Absolute Rent when the industrial sector is accorded priority in profit-rate determination (Chapter 1, pp. 29–31; Chapter 10, p. 305). In Capital 3 the treatment of labor employed by large joint-stock companies is not clear-cut, in that “such undertakings, in which the ratio of constant capital to the variable is so enormous, do not necessarily enter into the equalization of the general rate of profit” (Chapter 1, p. 31). A notion of surplus value which turns upon (unpaid) “labor” of a fluid and ill-defined sort and which excludes major sectors, is on weak grounds even on its own best terms.

The doctrine is further severely compromised by concessions that had to be made arising from value “realization,” for Marx allowed in the Grundrisse that “a moment

3 A remark by Samuelson on the Sraffa-Marx connection is of interest. “He [Sraffa] was 50 when I first knew him; and the puzzlement this sophisticated intellectual engendered in me by orally

defending such a notion as Smith’s concept of PRODUCTIVE labour (whereby concrete goods are given a primacy over ephemeral services) suddenly evaporated when I came to hypothesize that this sophisticated mind had a penchant for Marxist notions. This paradigmatic insight for understanding Sraffa serves the observer well” (1990: 264–5).

Conclusion – A Recapitulation and Overview

of value determination come[s] in here which is independent of labour” and “does not arise from the direct relation of labour to capital” (Chapter 9, pp. 268, 271). The defensive representation of “circulation” merely as a “barrier” to the creation of surplus value (pp. 272–3) is a mere formality. All these qualifications come to a head in the “overproduction” context where the interdependence of the production

and valorization processes is of the essence (pp. 274–5). 4 We have traced out the doctrinal dilemma as it emerges in the Economic Manuscripts (Chapter 10.G) and in Capital 3 (Chapter 1.H).

We come now to the primary implication of surplus value conceived as unpaid labor, namely that the capitalist employer is “functionless,” merely taking advantage of his status as a sort of toll-gate keeper allowing him to obtain “productive” labor free of charge. In what follows we review the disintegration of the Marxian doctrine in consequence of changes in Marx’s perspective on industrial capitalism.

Paul Sweezy opined that Marx won hands down as far as concerns the “judgement of history,” with the institutional and deliberate planning of science, technology and production during and since World War II putting the role of individual inven-

tors and entrepreneurs into second place (Sweezy 1968: 117). 5 But such attributions of second sight are unhelpful – Marx was after all dealing with mid-nineteenth cen- tury industrial capitalism. And in any event, we have documented in Chapter 14

a radical change in Marx’s position based on his reading of contemporary events. Marx’s so-called technological determinism is particularly conspicuous with

respect to major historical transitions between organizational arrangement, but we have focussed in Chapter 14 on the functions attributed in the Economic Manuscripts to the industrial capitalist within the “automatic workshop” environ- ment, seeking for recognition of individual decision-making in the face of riskiness and uncertainty. In our account of the sources of new technology, we found Marx focusing on basic science in terms of “the theoretical progress of humanity,” as “the general product of social development” which “costs the capitalist nothing”; but even in the context of applied science capital is treated as “the personification and representative . . . of the productive powers of social labour,” directing atten- tion away from the individual capitalist innovator, for only in “appearance” was applied science “the work of capital” (Chapter 14, pp. 419–21). There is no scope for decision making in the face of uncertainty in these contexts. And this is true also of discussions of new products whose discovery is treated as the semi-automatic response to “new needs” (pp. 423–4).

Marx was at pains to reject what he read as apologetic interpretations of “profit” as a justified return to managerial functions, both because those managerial expenses under capitalist arrangement were peculiarly high – reflecting control

4 On the production-circulation dichotomy, see Boss 1990: 96–103. 5 Schumpeter later adopted the Sweezy position, writing of “the obsolescence of the entrepreneurial function” with the increasing bureaucratization of the entrepreneurial func- tion within the large firm (see Chapter 14, note 4).

467 over labor and thus falling within the faux frais of capitalist organization – and

A. The Theory of Surplus Value

because there still remained a “surplus gain” to be accounted for. In any event, the management tasks are represented largely as entailing routine cost control. This generalization must be qualified in the light of differential managerial abilities emerging in discussions of the capitalist’s allocative function where complexity, reflecting forward-looking decision making in an uncertain environment, seems to be of the essence. Marx avoided the conclusion that part at least of the capital- ist’s return reflected a reward for uncertainty-bearing by focusing on the average return in a particular industry, assuming that to be unaffected by the efficiency with which the allocative (or managerial) task was undertaken by individual capitalists (pp. 417–18). Marx was now applying a device that he had in 1844 condemned, namely Ricardo’s alleged abstraction entailing the disappearance of the individual capitalist and laborer (see Chapter 6, p. 181).

With respect to major innovatory investment where complex decision making in the face of uncertainty and high capital cost is central to his account, Marx similarly avoids any implication that the capitalist’s return reflects a reward for uncertainty bearing by emphasizing the transitory nature of such profits in the competitive environment, apart from the circumstance that they relate while they last to the individual not the industry – an unsatisfactory defense, as Schumpeter was to point out in discussion of his own original perspective (see Chapter 14, p. 428). But there is a further line of defense that would, in principle, cover even “permanent” inno- vatory profit. Marx allows that the profit motive dictates the innovating capitalist’s behavior, but insists that this in no way detracted from the validity of the surplus- value doctrine; only in appearance did innovatory profit resulting from cost reduc- tion constitute “the deed and accomplishment of the capitalist,” who functioned as “the personification of the social character of labour, of the total workshop as such” (p. 427). In brief, profits from innovatory investment, though motivating the inno- vating capitalist, were the result of social forces at play – which takes us back to the position adopted in discussing the sources of new technology where Marx was at pains to get behind “appearance.”

Marx seems therefore to have recognized the fact of decision making under uncer- tain conditions, but – impeded by his presumptive exploitation doctrine – could not allow that the return to the capitalist constituted a reward for uncertainty-bearing. There is an exception – his ready agreement that “[a]ll profits of expropriation are uncertain,” referring to the “individual work” of the capitalist in commercial activity (p. 418). But here it was only a matter of distributing the surplus value created in the production process; there was no doctrinal danger with which to contend – if we are prepared to forget the interdependence allowed between the production and valorization processes. And he also relied on measurable risk to defend the theory of surplus value (p. 429–30).

Appeal to the empirical framework to justify, as it were, Marx’s failure to follow through his own recognition of the forward-looking entrepreneur, by spelling out properly the consequences for profits of uncertainty, will not do. It would not even

Conclusion – A Recapitulation and Overview

be convincing with respect to late eighteenth-century Britain, 6 while the contem- porary evidence for the play of uncertainty in Knight’s sense as non-insurable risk was readily available to Marx (and Mill), as the Appendix to Chapter 14 makes clear. Precisely for this reason we have been obliged to rationalize Marx’s hesitancy to allow uncertainty its due weight in terms of his concern to protect the exploitation doctrine. And that this doctrine indeed imposed a constraint preventing him from following up promising lines of investigation is confirmed by the much warmer attitude adopted in Capital 3 towards the industrial capitalist who manages his own capital, coupled with recognition of failure as the typical consequence of the high degree of uncertainty attached to innovatory investment (pp. 439–40).

Nathan Rosenberg argues, on the basis of the Capital 3 “trail blazer” who gen- erally goes bankrupt, that if “in his earlier work” Marx had “paid more attention” to the “vulnerability of capitalists in their social role as carriers of technological innovation, the main source of capitalist dynamics . . . it would have been necessary to portray capitalists in a distinctly different light” (1991: 158). This is valid in general, but requires modification. It is not a matter of an “earlier” and “later” Marx. The relevant materials published by Engels as Capital 3 date to the mid- 1860s when Capital 1 was being prepared for the press; moreover, much of Marx’s position is based on empirical materials relating to the mid-1850s, indeed much earlier. Capital was under threat from Marx himself even before he published the first volume.

We have sought to understand why in the end Marx could afford to relax some- what. First, it was not the industrial capitalist who earned innovatory profits but the monied capitalist who picked up the pieces (Chapter 14, pp. 440–1). Were the trail-blazer engaged in heavy outlay himself to enjoy innovatory profit − the posi- tion of the Economic Manuscripts of 1861–63 – such profit might be envisaged as a return to uncertainty-bearing undermining the entire surplus-value doctrine though, as noted, Marx then appealed to the temporary character of such returns in defense. That it was monied capitalists who profited from innovation reduced the danger, and Marx could afford to portray the industrial capitalist more favorably. In any event, this figure was, he believed, fast disappearing from the scene with the expansion of the stock-company and cooperative organizations, the former entailing “the abolition of capital as private property within the framework of the capitalist mode of production itself ” (pp. 438, 442).

There are two further indications that Marx finally adopted a warmer attitude towards “classical” or industrial capitalism, both relating to the operation of the credit system. One occurs in Capital 3: “The capital itself, which a man really owns

6 Adam Smith’s discussion of the contemporary usury laws reflected in part his concern with unjustifiable risk-tolerance, such that in a free credit market the lenders’ prejudice towards

high-risk projects would predominate to the social detriment. Beyond this, all “long-term” financing was to derive from private not bank credit since banks were incapable of evaluating risk properly. Without exaggerating the risk attached to innovation and invention in the late eighteenth century, there was evidently already enough uncertainty present to raise such

469 or is supposed to own in the opinion of the public, becomes purely a basis for the

A. The Theory of Surplus Value

superstructure of credit. This is particularly true of wholesale commerce, through which the greatest portion of the social product passes. All standards of measure- ment, all excuses more or less still justified under capitalist production (emphasis added), disappear here. What the speculating wholesale merchant risks is social property, not his own” (MECW 37: 437). Second, and a related point, the perspec- tive on “classical” abstinence was changing. For despite his charges against Senior, Marx in Capital 1 distinguishes between “the capitalist of the classical type [who] brands individual consumption as a sin against his function, and as ‘abstinence’ from accumulation,” and “the modernised capitalist [who] is capable of looking upon accumulation as ‘abstinence’ from pleasure” (MECW 35: 589; cited Chapter 2, p. 62); again, in Capital 3: “Equally sordid becomes the phrase relating the origin of capital to savings, for what he demands is that others should save for him [the wholesale merchant]. The . . . phrase concerning abstention is squarely refuted by

his luxury, which is now itself a means of credit. 7 Conceptions which have some meaning on a less developed stage of capitalist production, become quite meaningless here” (MECW 37: 437; emphasis added). The text proceeds from wholesale trading based on credit to industry as a whole, with respect to the process of “centraliza- tion,” involving “expropriation” not only of successful small and medium firms, but also of failures or bankrupt and weak firms bought up cheap by their creditors – an entirely different breed from the classical industrialist.

We return to our main theme. It is surely fair to say that there is no reason to criticize Marx in particular for the general position adopted in the Economic Manuscripts and Capital, since Mill too failed to give uncertainty its due, devoting surprisingly little attention to knowledge creation and application (Chapter 14, note 26). Similarly, the insistence that innovatory profit is pertinent to the individual not the industry (above, pp. 427–8) corresponds to Mill’s perspective whereby profit – excluding pure interest – varies little in equilibrium between employments, but may vary greatly between individuals (Chapter 14, note 17). We can take this a step further. While Schumpeter complained that the British classicists all but “accom- plished the impossible feat of overlooking the most colourful figure in the capi- talist process” – namely the entrepreneur (Schumpeter 1954: 554), he himself did not make uncertainty the basis of his theory of innovatory profit (Brouwer 2002: 90). (Though “Knightian” uncertainty does characterize Schumpeterian innova- tion, losses are born by capitalists not entrepreneurs; Chapter 14, note 3.) And as Whitaker has recently observed, even Marshall “failed to anticipate the rapidity of [the rise of the joint-stock company] when composing the Principles in the 1880s and so he locked himself into a framework that rapidly became outdated, yet was difficult to amend satisfactorily” (Whitaker 2003: 153). It is, we must also allow, to Marx’s credit that in the light of ongoing developments in industrial organization he was ready to revise his original evaluation of the function of the industrial capitalist.

Conclusion – A Recapitulation and Overview

It has been said that “Marx’s Capital (1867) was essentially and consciously macro- economic . . . particularly . . . his theories of reproduction and accumulation, falling profit rates, increasing misery of the proletariat, industrial reserve army, con- centration, etc.” (Machlup 1963: 105). There is much to this; but it would be a severe indictment indeed for Marx to have written a book on “capital” in which the indi- vidual “capitalist” in effect disappears from the scene. Our point thus far has been that Marx came to realize this once the industrial system that he had set out to ana- lyze was thought to be in the course of disintegration. But beyond this, the macro- dimension to Capital requires qualification. The notion of surplus value as unpaid labor time did not prevent Marx from providing a splendid analysis of the circular- flow process wherein expenditure by laborers appears on a par with expenditure by any other class, very much like the analysis provided by J.S. Mill and Ricardo (Chapters 2.B, 9.E, 12.B); and certainly the Transformation of values into prices and the equalization of profit rates, we have shown, occurs by market processes, again in the canonical classical tradition (Chapters 1.D, 8.F, 10.C). Upon reflection then, it should not come as too much of a surprise to find a sophisticated appreci- ation of the operation of the price mechanism in practical applications, as emerges with respect to rent-confiscation and price control, and inventory control (Chapter 13.C). There is thus a powerful allocative dimension to Marx’s economics – as there is to canonical classicism – that is easy enough to neglect if we allow ourselves to be guided solely by the methodological concern to convey a notion of “exploitation” at the aggregate level disguised by the surface operation of markets, alone visible to the untrained eye. (See also Sowell 2006: 164–5.) Indeed, as Desai recognized – and as we have demonstrated (Chapter 13.B) – “Marx was the first economist to make

a proper distinction between equity and efficiency, and he in his critique of the Gotha Programme warned German socialists not to confuse the two” (1997: 3). 8

A “competitive” allocation mechanism is essential for the Transformation pro- cess and thus for the basic surplus-value doctrine, which comes under threat by the trend towards monopoly or “centralization” or “concentration” of capital. 9 Once again we see that the doctrine turns on a rationalization which real-world

8 Our perspective leads us to question the following contrast between Knight and Marx: “ . . . for the modern economist Knight was – or, more accurately, could have been – a far more effective

radical than Marx: for in contrast to Marx, Knight understood the workings of the market system, but he went on by a deeper analysis of these workings to deny the ethical foundations of this system” (Patinkin 1981: 36). 9 Per contra, it has been said that since so much in Marx depends on competitive conditions, it may be presumed that Marx did not by “centralization” so much intend a tendency to monopolization or “the concentration of firms within markets,” but rather concentration of “control over the productive process in the hands of fewer individuals” a process that increasingly “removes control over the productive process from the owners of business,” and which “by concentrat[ing] power over the productive process . . . hasten[s] the collapse of capitalism” (Williams 1982: 241). While I do not deny the latter process (see Chapter 14, p. 498n6), at the same time there seems little doubt that increasing concentration in the standard sense implying increasing firm size was also intended (see Chapter 1.E; Chapter 2,

B. Marx and the Classical Canon: The Theory of Value 471 conditions recognized by Marx was rendering irrelevant. In fact the phenomenon

was recognized at least as early as 1856 (see Chapter 14, p. 436). And that Marx was troubled by the issue in outlining the Transformation is apparent from his qualification to the condition regarding “the removal of all monopolies,” that it applied “with the exception of the natural ones, those that is, which naturally arise out of the capitalist mode of production” (Chapter 1, p. 28). Again we recall the remarkable circumstance that since land scarcity is included within the “natural monopoly” category, agriculture is excluded from the determination of the general profit rate; and equally striking is the proposition that the returns to major stock companies “do not necessarily enter into the equalization of the general rate of profit” (above, p. 465).

“Competition” also refers to the dynamic process engendering cost reduction on the part of innovating firms in a quest to raise the rate of return with subsequent correction of market price to the new, lower, level, by which process the industry- wide c/v ratio rises and the general or average rate of profit tends downwards (Chapter 1, p. 37). But this process too is equally under threat. As the matter is stated in Capital 3: “as soon as formation of capital were to fall into the hands of a few established big capitals, for which the mass of profit compensates for the falling rate of profit, the vital flame of production would be altogether extinguished. It would die out” (Chapter 2, p. 67; see also the 1861–63 document, Chapter 10, p. 310).

There is a further consequence flowing from the trend towards monopoly. I refer to the “chaotic” dimension to the price system that is responsible for cyclical instability with accompanying excess capacity and unemployment, contrasting

with its “allocative” function. 10 Thus we find the falling profit rate held responsible for the tendency towards speculative ventures on the part of small firms specifically (Chapter 4, pp. 132–3; Chapter 5, pp. 140–1). By implication, the regular cyclical pattern would be superannuated by the tendency towards monopoly. Again, Marx’s cyclical analysis makes much of heavy investment during upswings in response to the promise of a high rate of return, but this relationships holds good of small firms only, the large corporations being unresponsive to the rate of return (Chap- ter 5, p. 142).