The visible hand in economics

The surplus value of labour

Posted on: June 24, 2008

Over at The Standard they are discussing ‘triangular employment situations’ and a bill that is coming in to play that will give employees greater rights in these situations. Now that’s cool, I don’t have any issues with that. If I had to critique the bill I would run with the employee choice argument – if the employee chooses that he wants to work in a scheme where he doesn’t get sick leave etc (as he gets compensated for this) then these schemes provides this opportunity, so removing this opportunity will reduce the welfare of the workers in the scheme.

Still this isn’t my point. I was interested in the fact that Steve Pierson mentioned the surplus value of labour. The wikipedia definition for this is:

Surplus value is a concept created by Karl Marx in his critique of political economy, where its ultimate source is unpaid surplus labor performed by the worker for the capitalist, serving as a basis for capital accumulation.

Now I always found this idea a bit unusual. Fundamentally it states that labour unit creates more value than it is paid by the capitalist, and that excess value is taken by the capitalist and either used to create more capital or for their own consumption. Fundamentally, as capital is in some sense equivalent to savings, which is deferred consumption, the capitalist is taking this surplus away from the labour that created it.

Many contemporary proponents of the theory would not be this extreme – however, they would still fundamentally say that the surplus that the capitalist extracts comes from the exploitation of the worker. As a relatively middle of the road economist this isn’t how I feel:

If we view that the labour unit is provided on the market willingly, so any surplus that is created from the combination of the labour and capital units will be split depending on the relative bargaining power of the labour and capital owners. In this sense the value the is extracted by the capitalist is the section of the surplus from trade which they received due to bargaining.

Now we may have problems with the relative bargaining power of the labour and capital units – but this is not a case for saying that the surplus that was created was solely the result of the implementation of labour.

Fundamentally, the confusion stems from what we view as the marginal input. Typically people that sell the surplus value of labour line tend to state that we have a given capital stock, and this creates value as we add labour – so that each addition unit of labour creates revenue and thereby we assume that they create the value. However, if we take a labour stock and then say that we could vary capital, then we could say that for each unit of capital that is added value is added in the same way – implying by the same logic that capital should extract the entire surplus from production.

This critique is a combination of the Austrian critique and the critque by Steve Keen (of all people, see a critique of Steve’s view of economics here h.t. Anti-dismal) which are mentioned in the aforementioned wikipedia entry (*). The Austrian view tells us that the trade is voluntary and so the value only exists insofar as there is an agreement between labour and capital holders, implying that saying surplus comes from labour is nonsensical.  Steve’s point is fundamentally that each input to the production process is involved in the “value-making” process. Together, these points make me feel comfortable with the idea that the surplus value of labour is a over-blown concept.

However, I would love to here what people have to say about the surplus value of labour – especially if you are a supporter. I don’t know any supporters of the concept, which implies that I’ve never really had the chance to see if this critique of it stands up – so please, please comment.

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10 Responses to "The surplus value of labour"

Yeah, Tane was hoping a reference to Marxism would get the Tories’ blood boiling. Way over the heads of most of them, unfortunately.

Not a big fan of the surplus value of labour idea myself (and not really sure that it’s use in the post is even correct) but, then, my economics training was very orthodox/rightwing.

Hi Steve,

Fair enough. I don’t have too much experience with the stuff myself, outside of reading a little and thinking about the idea a little.

Ultimately, I find the bargaining concept more satisfying – as I get the impression your do as well. In that sense it becomes important to make sure that labour and capital are fairly represented at the bargaining table – it seems like a more consistent way of viewing the issue then through the lens of surplus value.

Hopefully someone with more heterodox training finds this post and can provide us with more background on the surplus value of labour idea :)

Yeah, like SP says, it was mostly bait to get the right-wing trolls frothing. But as my man points out it instead went right over their heads and got a thoughtful and intelligent response from you lot.

Oh well, nevermind.

Hi Tane,

Thanks for the kind comment. We had been planning to write about the surplus value of labour for a wee while – your guys post just gave us a reason to do it :)

So no defense of the concept? Not surprising.

It started out as a political tool, used to push the idea of the moral supremecy of labour over capital, and that is probably all it ever has been.

Yes Matt, I think you hit the nail on the head when you talked about bargaining power. I am not a labour economist so this is out of my field but it strikes me that the surplus value of labour is simply a dressed up way of saying unequal bargaining positions. Ironically bargaining theory is in itself a very value-laden topic ….

Actually Tane, looking at what you wrote, right over your head as well.

“If we view that the labour unit is provided on the market willingly”

This is where the over-simplification starts. “Willingly” is a bit misleading. Do most people who work really have a choice as to whether they do or not? Only if you consider being terminally depressed and living on $200 a week an option – which clearly most people don’t.

This is the genesis of the unequal bargaining relationship between employer and employee. Most of the time an employer can take or leave a prospective worker (unless you have scarce skills), but the opposite is true for the worker.

It’s primarily for this reason, that most of the time there will be no bargaining, and the employer will just announce the terms of employment to the prospective employee, and the employee will sign on the dotted line.

in a survey carried out from mid-1995 to 1996 by Ryan (1997: 314), it was found that of 698 workplaces in the Accommodation, Cafes and Restaurants industrial sector, only 56 .2 percent had written employment contracts. Even by managers’ own accounts employment contracts, irrespective of whether they are collective or individual are determined by management, and in only 18.2 percent of workplaces did managers describe their contracts as being negotiated, either by individuals or an employee representative (Ryan 1997: 314). In another study of secondary labour market McLaughlin and Rasmussen, (1998: 286) found that just 45 percent of respondents reported negotiating their contract with employers, and only 20 percent of employees said that they were happy with what they had been offered. Further evidence of the increase in managerial prerogative came from a survey carried out by Rasmussen et al., (2000: 54), which found that 56.7 percent of part-time workers indicated there had been no negotiations in the formation of their contracts, while for people earning below $30,000 annually, this figure was 52.5 percent.

So if the Labour market is left to function “freely” (without regular increases in statutory wage levels) employers can appropriate ever more surplus from the labour of their workers, particularly at the lower end of the Labour market where workers are typically exposed to competition from people without work.

The right-wing theory, that wages increase with productivity, is a myth. The US provides a brilliant example of this.

During the five years from 2000 to 2005, the US economy grew in size from $9.8 trillion to $11.2 trillion, an increase in real terms of 14%.

Productivity – the measure of the output of the economy per worker employed – grew even more strongly, by 16.6%.

But…. Average hourly real wages for both college and high school graduates actually fell between 2000 and 2005, and fewer of the jobs they found carried benefits such as health care or company pensions.

http://news.bbc.co.uk/2/hi/business/5303590.stm

Now I’m definitely not asserting that Marx’s theory is right. Clearly capital accumulation and profits are desirable, necessary and just. The unregulated free-market clearly isn’t though.

The right-wing theory, that wages increase with productivity, is a myth.

Given the persistant increases in both wages and productivity since the industrial revolution I hardly think 6 years data from one country proves that theory a myth.

“This is where the over-simplification starts. “Willingly” is a bit misleading. Do most people who work really have a choice as to whether they do or not? Only if you consider being terminally depressed and living on $200 a week an option – which clearly most people don’t.”

There is an outside option of $200 a week (alot more than I was able to borrow when I was a student) – that does give them a choice. As remember that a choice exists between jobs – especially with the tightness of our labour market.

“This is the genesis of the unequal bargaining relationship between employer and employee.”

If you read my post you will realise that I am actually stating that a bargaining relationship is a better way to look at the issue than “surplus value of labour idea”. Now in situations where we think the bargaining relationship is “unfair” then I can see room for intervention, we have had this conversation before.

In fact I said:

(from Matt) “Now we may have problems with the relative bargaining power of the labour and capital units – but this is not a case for saying that the surplus that was created was solely the result of the implementation of labour.”

OK!

“The right-wing theory, that wages increase with productivity, is a myth.”

No its not. I have looked at the data on this time and time again. I agree that productivity increases may not be passed on because of bargaining differences, and that sucks. However, if the bargaining position stays constant the only way to get real wage increases is through productivity increases – how are you supposed to buy more things with more things being avaliable?

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