Surplus value

Based on Wikipedia: Surplus value

Here's a puzzle that kept economists up at night for centuries: if every trade is fair—if you always exchange equal values for equal values—where does profit come from?

You can't get rich by buying low and selling high, because your gains as a seller would cancel out your losses as a buyer. Cheating doesn't explain it either, since fraud just shuffles money around without creating any new wealth. And yet, somehow, factory owners in the nineteenth century were accumulating fortunes at a rate the world had never seen before.

Karl Marx believed he had cracked this riddle. His answer—surplus value—would become one of the most influential and controversial ideas in economic history.

The Simple Version

Let's start with an example. Imagine you hire someone to operate a boot-making machine. You pay them ten dollars an hour. But in that hour, using your machine and your leather, they produce boots worth forty dollars.

You subtract the ten dollars you paid the worker. You subtract another twenty dollars for leather, machine wear, and other costs. You're left with ten dollars. That ten dollars is surplus value.

The arithmetic is straightforward. What made Marx's analysis explosive was his explanation of why this arrangement exists—and who benefits from it.

The Distinction That Changes Everything

Marx drew a sharp line between two things that seem almost identical: the labor someone does, and their capacity to work.

When you hire a worker, you're not actually buying their labor. You're buying their labor power—their ability to work for a certain period of time. This sounds like a technicality, but it's the key to the whole puzzle.

A worker's labor power has a cost: roughly, what it takes to keep them alive, fed, housed, and healthy enough to show up tomorrow. Call this the worker's subsistence cost. If a worker can produce more value in a day than their subsistence cost, there's a gap. That gap is surplus value.

The worker can't capture this gap for themselves. They don't own the factory. They don't own the machines. They don't own the raw materials. And crucially, there are usually plenty of other workers willing to take the job if they refuse. So the surplus flows to the person who does own those things—the capitalist.

An Idea With Deep Roots

Marx didn't invent this concept from scratch. The intellectual trail stretches back at least to the French physiocrats of the eighteenth century, who noticed that employers seemed to extract something from labor that they called "net product."

Adam Smith used similar language. But the term "surplus value" itself was coined in 1824 by William Thompson, an Irish political economist and philosopher. Thompson wrote about how capitalists capture the "additional value produced by the same quantity of labor in consequence of the use of machinery"—which sounds remarkably like Marx's later formulation.

This similarity led to accusations of intellectual theft. The Austrian legal scholar Anton Menger claimed that Marx had borrowed "the whole theory of surplus value, its conception, its name, and the estimates of its amounts" from Thompson and earlier writers like William Godwin and Charles Hall.

Friedrich Engels, Marx's longtime collaborator, fired back with a fierce defense. He argued that Marx's contribution wasn't the basic observation that workers produce more than they're paid—that was obvious to anyone who'd set foot in a factory. What Marx added was a systematic explanation of how surplus value is produced and how it shapes the entire capitalist system.

The truth probably lies somewhere in between. Marx was building on a tradition, but he built something larger and more elaborate than his predecessors had imagined.

Two Kinds of Surplus

Marx identified two fundamentally different ways that capitalists can increase their take.

The first, which he called absolute surplus value, is brutally simple: make people work longer. If a worker produces enough to cover their wages in six hours but you keep them at the factory for twelve, those extra six hours are pure surplus. This was the dominant mode of exploitation in the early industrial era, when fourteen-hour days and six-day weeks were common, and factory owners bitterly resisted any legal limits on working time.

The second kind, relative surplus value, is more subtle. Instead of extending the workday, you reduce the amount of time it takes a worker to produce value equal to their wages. You do this through productivity improvements—better machines, more efficient processes, cheaper raw materials.

Here's where it gets interesting. Relative surplus value doesn't arise in a single factory. It emerges from changes across the entire economy. When someone invents a faster way to grow wheat, bread gets cheaper. When bread gets cheaper, workers can survive on lower wages. When wages fall, more of each worker's output becomes surplus.

This creates a relentless pressure for innovation. Every capitalist has an incentive to adopt productivity-boosting technology, because doing so lets them undersell competitors while still making a profit. But as everyone adopts the new technology, prices fall, and the advantage disappears—leaving only a new, higher standard of productivity that everyone must meet to survive.

Marx saw this as the engine driving industrial society forward at a pace no previous economic system could match.

Where Does All That Surplus Go?

In Marx's analysis, surplus value is the well from which all non-labor income flows. Profits, obviously. But also interest on loans, since lenders are essentially taking a cut of the surplus that borrowers generate. And rent, since landlords extract surplus from the productive activities that happen on their property.

Marx focused on these three streams because in his era, taxation was minimal. When he was writing in the 1860s, government spending in advanced economies averaged around five percent of total economic output. Today it's closer to thirty-five or forty percent. This represents a massive redirection of surplus value through the state—something Marx glimpsed but couldn't have predicted in its modern scale.

You can think of surplus value as flowing into several distinct channels: profits that get reinvested into expanding production, profits that capitalists spend on personal consumption, interest payments to creditors, rent payments to landowners, and taxes that fund government activities. The relative size of these channels varies enormously across times and places, but they all draw from the same source.

The Rate of Exploitation

Marx introduced a metric he called the rate of surplus value, sometimes described more provocatively as the rate of exploitation. It's a simple ratio: surplus value divided by the wages paid to workers.

If workers produce thirty dollars of value and receive ten dollars in wages, the rate of surplus value is two hundred percent—workers are producing three times what they're paid.

Marx believed that competition would tend to equalize this rate across different industries and firms. If one sector had an unusually high rate of exploitation, workers would migrate away from it, and capital would flow toward it, until the rate matched the overall average. He acknowledged this was a theoretical simplification—reality would always be messier—but he thought it captured a genuine tendency.

This equalization, if it exists, would have profound implications. It would mean that differences in profitability between industries come not from some being more exploitative than others, but from differences in how they combine labor with machinery and materials.

What This Theory Leaves Out

Marx's theory of surplus value has been influential, but it's not part of mainstream economics today. Economists in the neoclassical tradition reject his labor theory of value—the idea that the value of a commodity ultimately derives from the labor required to produce it.

Modern economists typically explain profit through different mechanisms: the return on risk-taking, the reward for deferring consumption, the product of entrepreneurial coordination and insight. They see wages as determined by supply and demand in labor markets, not by any fixed "subsistence" level.

Critics also point out that Marx's framework struggles to account for various real-world phenomena. How do you calculate the surplus value in a service economy where many workers don't produce physical commodities? What about highly paid professionals like doctors or lawyers—are they exploited too? And how does the theory handle cases where workers own shares in the companies that employ them?

These aren't trivial objections, and Marxist economists have spilled enormous amounts of ink trying to address them, with varying degrees of success.

Why It Still Matters

Even if you reject the specific theoretical machinery, the underlying observation remains potent: there is a systematic gap between what workers produce and what they receive. The size of that gap, and who benefits from it, shapes everything from political movements to public policy.

The question that Marx was trying to answer—where does profit come from in a system of apparently free and equal exchange?—is one that any honest economic theory must eventually confront. His answer may be incomplete or wrong in its details, but the question itself refuses to go away.

And his insight that productivity gains don't automatically benefit workers—that improvements in technology can enrich owners while leaving wages stagnant—has proven uncomfortably prescient. The past several decades have seen productivity in many developed economies rise far faster than wages, a pattern Marx would have recognized immediately.

Surplus value remains a useful lens for thinking about who captures the gains from economic activity, even if you'd rather not adopt the full Marxist framework. It's a reminder that the distribution of wealth isn't automatic or natural—it's shaped by who owns what, who makes the rules, and who has the power to bargain.

The Puzzle Restated

We started with a puzzle: how can everyone trade fairly and yet some people consistently end up richer than others?

Marx's answer was that the trade isn't quite as equal as it appears. Workers sell their labor power at its market value—what it costs to sustain them. But their labor power, once purchased, can produce more value than it cost. That gap is where profit comes from.

Whether this constitutes exploitation, or simply a mutually beneficial exchange, remains one of the most contested questions in economic thought. What's undeniable is that the gap exists, and that the history of capitalism is, in large part, the history of struggles over how to divide it.