Monday, November 20, 2017

Marx's Value and Surplus Value theory

One of the major questions for 19th century economists was “what determines the value of a product?”.  Karl Marx followed most other economists of his day in accepting the labor theory of value.  In this theory, the value of a product was determined by the socially necessary labor time to produce it.  This was to include both current labor and past labor (that is, the labor that went into building the machines that made the product).  Only “socially necessary” labor time would determine value; one could not increase the value of one’s product by adding unnecessary labor.  Skilled labor was counted as a multiple of unskilled labor in determining value.

Marx then applied this theory to the question:  “what determines the value of the labor power?”.  His answer followed logically from the labor theory of value:  the value of the labor  power was determined by the socially necessary labor time to produce it. This, to Marx, meant subsistence. Marx never defined exactly what he meant by subsistence.  It would seem that he viewed subsistence as determined in relation to the society of the time. Subsistence could mean more than basic physical subsistence.  (Thus, subsistence living would be higher in the modern United States than in Ethiopia.) Yet, it certainly seems that Marx intended subsistence to involve quite a low standard of living.
Marx followed other economists of the day in viewing population growth as the force that
would keep workers’ wages at the subsistence level.  If the demand for workers increased, wages would rise.  Workers were expected to respond to the higher wages by having more children (or at least having more children survive).  This increased number of workers would drive the wages back down to subsistence.  This idea was first stated by David Ricardo and is known as the “iron law of wages”.

     According to Marx, under capitalism, workers were forced to sell their labor power to
capitalists in order to be able to earn a living.  This put them in a weak bargaining position.
Capitalists only had to pay workers subsistence wages.  But in a days’ work, workers would
produce a value greater than their subsistence.  This extra value was then taken by the capitalist. 

Marx called this extra value “surplus value”.  The amount of surplus value as a percent of the wage paid to the workers Marx called the rate of exploitation. So if a worker is paid $8 per hour but produces goods worth $16 per hour, the extra $8 is surplus value and is taken from the worker. The rate of exploitation is $8 divided by $8, or 100%.  The profits of the capitalists are produced by the workers and then taken from them by the capitalists as exploitation of their position of power! The implication is that the capitalists have done nothing to earn the profits!  Today, in Europe and even in the United States, it is not uncommon to see profits (dividends, capital gains) labeled as “unearned income”

For more on Karl Marx and Marxism: