The capitalists are in a position to establish big industries, where as the labourers cannot establish their industries. They are compelled to sell their labour and get employment in the factories established by the capitalists. The capitalists sell the finished goods at a high rate and give meager wages to the labourers. The difference between the cost of the finished goods and their sale price is called profit. This process of earning profit is called the theory of Surplus Value according to Marx. Marx held the view that this profit should go to the labourers and not to the capitalists because labour is the basis for production of all types of wealth. His theory of surplus revealed the mystery of profit of capitalists.

Marx argues its ultimate source is unpaid surplus labour performed by the worker for the capitalist, and that the surplus-value is the primary basis for capital accumulation. According to Marx capitalism is essentially the economy of exchanging goods. In this sense also labour is a product, exchanged under the laws of markets.

Marx's broad conceptualization of production as being divided into two parts:

a. The cost of production, which was the labour time spent on producing the good, and

b. The surplus value, which was the difference between the good's price and its cost of production.

Marx's discussion of value contains an objective part that puts certain aspects of the economy into perspective, but it also explicitly includes an element of ideology. Stripped of ideological overtones, Marx's message is simply that ‘any economy will produce more goods and services than are needed to pay all the real social costs of production’. Thus, subtracting from total yearly output in the United States all the real costs that must be paid to produce that output would yield a residual, which could be called surplus value. These real costs would include both labor costs and capital costs. Marx's surplus value is thus similar to the physiocrats concept of net product. How surpluses are divided up is a complicated question that involves issues of philosophy and legal structure. At the time that Marx wrote, these issues were very much on people's minds. The Industrial Revolution had brought about large increases in the yearly surplus value created in the world. Marx raised a legitimate question: What is an equitable way to distribute this socially produced surplus among participants in the society?

But Marx was not content merely to raise this issue. Nor was he content to suggest that in his time the cutting of the social pie was inequitable, unjust, and unfair. Marx went beyond this and claimed with "scientific objectivity" that the surplus created by labor was taken from it because of its lack of ownership of the means of production. It is this claim of scientific objectivity that has not stood the test of time and that has led to the careful reexamination of Marx's theory of value.

The concepts of surplus and exploitation are still used often in discussions and in the popular press. For example, workers in developing countries are often described as being exploited by global companies because they are paid lower wages than U.S. workers. Similarly, large profits are considered a surplus that is taken from workers.

Marx used the terms surplus and exploitation in a pejorative sense. He strongly believed that the income distribution at the time was unfair and that the institutions that led to this unfairness deserved to be called exploitative. Most modern economists see such judgments as going beyond the role of economists as economists. They try to separate normative judgments from positive analysis. But even in terms of normative judgments, they question the value of the exploitation concept. They see human nature as generally exploitative and see the market as based on the concept of mutual exploitation. Abba Lerner summarized this view nicely: in capitalism man exploits man; in socialism It is the other way around.

The problem of explaining the source of surplus value is expressed by Friedrich Engels as follows:-

"Whence comes this surplus-value? It cannot come either from the buyer buying the commodities under their value, or from the seller selling them above their value. For in both cases the gains and the losses of each individual cancel each other, as each individual is in turn buyer and seller. Nor can it come from cheating, for though cheating can enrich one person at the expense of another, it cannot increase the total sum possessed by both, and therefore cannot augment the sum of the values in circulation. This problem must be solved, and it must be solved in a purely economic way, excluding all cheating and the intervention of any force — the problem being: how is it possible constantly to sell dearer than one has bought, even on the hypothesis that equal values are always exchanged for equal values?"

Marx himself also put the problem as follows:-

"If the exchange-value of a product equals the labour-time contained in the product, then the exchange-value of a working day is equal to the product it yields, in other words, wages must be equal to the product of labour. But in fact the opposite is true. Ergo, this objection amounts to the problem, -- how does production on the basis of exchange-value solely determined by labour-time lead to the result that the exchange-value of labour is less than the exchange-value of its product?

Marx's gave his solution for this problem. His suggestion was to distinguish between labour-time worked and labour power. A worker who is sufficiently productive can produce an output value greater than what it costs to hire him. Although his wage seems to be based on hours worked, in an economic sense this wage does not reflect the full value of what the worker produces. Effectively it is not labour which the worker sells, but his capacity to work.

For an example:-

“Suppose a worker who is hired for an hour and paid Rs. 50. Once in the capitalist's employ, the capitalist can have him operate a boot-making machine using which the worker produces Rs. 50 worth of work every fifteen minutes. Every hour, the capitalist receives Rs.200 worth of work and only pays the worker Rs. 50, capturing the remaining Rs. 150 which, after deduction of costs (the leather, depreciation of the machine, etc.) leaves a remaining, i.e. surplus value or profit”.

The worker cannot capture this benefit directly because he has no claim to the means of production (e.g. the boot-making machine) or to its products, and his capacity to bargain over wages is restricted by laws and the supply/demand for wage labour. Hence the rise of trade unions which aim to create a more favourable bargaining position through collective action by workers.

Definition of Surplus Value:

Total surplus-value in an economy (Marx refers to the mass or volume of surplus-value) is basically equal to the sum of net distributed and undistributed profit, net interest, net rents, net tax on production and various net receipts associated with royalties, licensing, leasing, certain honorariums etc. The way generic profit income is grossed and netted in social accounting may differ somewhat from the way an individual business does that.

According to Marx:-

Marx believed that the price of a commodity is to be determined according to the labour invested in it. He held that the basis of wealth is labour. The labourers produce wealth with their labour, but the capitalists does not give them their share of profit. The capitalists are in a position to establish big industries, whereas the labourers cannot establish big industries. They are compelled to sell their labour and get employment in the factories established by the capitalists. The capitalists sell the finished goods at a high rate and give insufficient wages to the labourers. The difference between the costs of the finished goods and their sale price is called profit. This process of earning profit is called ‘the theory of Surplus value’.

Marx held the view that this profit should go to the labourer and not to the capitalist because labour is the basis for production of all types of wealth. Marx's own discussion focuses mainly on profit, interest and rent, largely ignoring taxation and royalty-type fees which were proportionally very small components of the national income when he lived.

Marx himself considered his theory of surplus-value his most important contribution to the progress of economic analysis (Marx, letter to Engels of 24 August 1867). It is through this theory that the wide scope of his sociological and historical thought enables him simultaneously to place the capitalist mode of production in his historical context, and to find the root of its inner economic contradictions and its laws of motion in the specific relations of production on which it is based.

Marx’s theory of classes is based on the recognition that in each class society, part of society i.e. the ruling class appropriates the social surplus product. But that surplus product can take three essentially different forms (or a combination of them).

It can take the form of

· Straight forward unpaid surplus labour,

· As in the slave mode of production,

· Early feudalism or some sectors of the Asiatic mode of production (unpaid corvée labour for the Empire).

It can take the form of goods appropriated by the ruling class in the form of use-values pure and simple (the products of surplus labour), as under feudalism when feudal rent is paid in a certain amount of produce (produce rent) or in its more modern remnants, such as sharecropping. And it can take a money form, like money-rent in the final phases of feudalism, and capitalist profits. Surplus-value is essentially just that: “the money form of the social surplus product or, what amounts to the same, the money product of surplus labour”. It has therefore a common root with all other forms of surplus product: unpaid labour.

This means that Marx’s theory of surplus-value is basically a deduction or residual theory of the ruling classes’ income. The whole social product (the net national income) is produced in the course of the process of production, exactly as the whole crop is harvested by the peasants. What happens on the market (or through appropriation of the produce) is a distribution (or redistribution) of what already has been created. The surplus product, and therefore also its money form, surplus-value, is the residual of that new (net) social product (income) which remains after the producing classes have received their compensation (under capitalism: their wages). This ’deduction’ theory of the ruling classes’ income is thus ipso factor an exploitation theory, as mentioned above. Not in the ethical sense of the word - although Marx and Engels obviously manifested a lot of understandable moral indignation at the fate of all the exploited throughout history, and especially at the fate of the modern proletariat - but in the economic one. The income of the ruling classes can always be reduced in the final analysis to the product of unpaid labour: that is the heart of Marx’s theory of exploitation.

According to Marx's theory of exploitation, living labour at an adequate level of productivity is able to create and conserve more value than it costs the employer to buy; which is exactly the economic reason why the employer buys it, i.e. to preserve and augment the value of the capital at his command. Thus, the surplus-labour is unpaid labour appropriated by employers in the form of work-time and outputs, on the basis that employers own and supply the means of production worked with. The commercial function of labour is only to conserve their value, add value to them, and transfer value.

Marx finds himself with economic dilemma capitalism and its systematic ability to maintain a profit. With this quandary Marx finds himself with the conclusion that a profit produced by a capitalist system intrinsically relies upon an exploitative relationship between that of the capitalist and the worker.

“With the increasing exploitation of labor, the profit of the capitalists also accumulates. The Theory of Surplus Value refers to the quantity of value produced by the worker beyond necessary time. The price of any commodity is determined by the amount of labor it takes to produce it. The increasing exploitation leads to the surplus wealth accumulated by the capitalist thereby dividing the society into rich and poor”.

Marx Labour theory of Value:-

The Labour Theory of Value is a theory in the science of political economy to explain how the working class are exploited under capitalism and how capitalist society works. The Labour Theory of Value is central to an understanding of the economics of capitalism because capitalism is commodity production par excellence; and is the stage in the development of human society characterized by class monopoly of the means of production, with wage-labour and commodity-production.

According to Marx's labor theory of value, human labor is the only source of net new economic value, but is also indispensable for the conservation and transfer of economic value (maintenance and redistribution of capital assets). Asset revaluations according to this theory only redistribute claims to product-value which has already been created previously.

Absolute And Relative Surplus Value.

According to Marx, the unnecessary labour time in which the worker recoups for the capitalist the value which the capitalist has not paid wages for creates surplus value. The rate of surplus value can be increased by lengthening the working day so that more surplus-labour is extracted on top of a given amount of necessary labour. Surplus value can be equally increased, within the limits of a given working day, if necessary labour-time can be reduced, that is, if the value of labour power falls.

According to Marx,

absolute surplus value is obtained by increasing the amount of time worked per worker in an accounting period. Marx talks mainly about the length of the working day or week, but in modern times the concern is about the number of hours worked per year; and

relative surplus value is obtained mainly by reducing wages — this can only go to a certain point, because if wages fall below the ability of workers to purchase their means of subsistence, they will be unable to reproduce themselves and the capitalists will not be able to find sufficient labor power; by reducing the cost of wage-goods by various means, so that wage increases can be curbed; by increasing the productivity and intensity of labour generally, through mechanisation and rationalisation, yielding a bigger output per hour worked.

Surplus value that derives from a reduction in necessary labour-time is called Relative surplus value, distinguished from Absolute Surplus Value, which results from a lengthening of the working-day. It is however necessary to understand that it is not possible to identify one part of surplus value as relative and another part as absolute without a starting point.

Different Concepts used by Marx in the theory of Surplus Value.

Labour: Labour according to P. Savchenko, has always been a domain of exchange between man and nature. Objectively to man’s vital activity, labour is his eternal companion and a most important factor in the evolution of world civilization. The instruments and objects of labour essential to manufacturing the things that man needs are material elements of the labour process. In their totality, they constitute the means of production.

The excess value created by the wage-workers over and above the value of their labour power is referred to as Surplus Value: It is appropriated by the capitalist without remuneration. That explains why surplus value is the goal of capitalist production from the capitalist’s point of view only that labour is productive which produces surplus value and increases his capital.

The concept of Value: To understand the importance of value in the concept of Surplus value, it is important to brief about Marx’s theory of Value. According to this theory, the main postulates emphasized by Karl Marx are:

· Commodity production is the outcome of a specific division of labour: “Only such products can become commodities with regard to each other, as result from different kinds of labour, each kind being carried on independently and for the account of private individuals”

· The value of commodities expresses what private labors have in common: it is a socially necessary quantity of labour.

· Exchange relations are the manifestation of the social character of value: “If we bear in mind that the value of commodities has a purely social reality (…)it follows as a matter of course, that value can only manifest itself in the social relation of commodity to commodity”

Valorization: Valorization thus specifically describes the increase in the value of capital assets through the application of living, value-forming labour in production. The valorization of capital is a concept created by Karl Marx in his critique of political economy. In modern translations of Marx’s economic writings, the term valorization is preferred because it is recognized that it denotes a highly specific economic concept. It refers both to the process whereby a capital value is conferred or bestowed on something, and to the increase in the value of a capital asset.

A value creation process which goes beyond the point at which the worker has just created the equivalent of the value of his own labour power, and begins to increase the value of capital, is a valorization process, not just a value creation process.

Rate of Surplus Values:-

The rate of surplus value is also called as “percentage of surplus value” and ‘degree of exploitation’ as well.

When the workers get down to work, they have to perform, for some time, work that is equivalent to the value of wages. This portion of the work is one that has to be performed for their own sake. Workers have to do this portion of work. For labourers, this is the portion of necessary labour. After the completion of work that is equivalent to the value of wages, whatever work that is performed thenceforth, the whole of it will be not for the sake of the workers but for the sake of the capitalist. Which means, after getting down to work every day, workers perform ‘necessary labour’ for some time and ‘surplus labour’ for some more time. Neither the capitalists nor the workers know that the work done daily thus consists of two portions.

If the working day is ’12 hours’, it may have 6 hours of necessary labour and 6 hours of surplus labour. Or there may be 4 hours of necessary labour and 8 hours of surplus labour. These two portions might thus be of any portion.

It is the “rate of surplus value” that expresses the ratios of the two portions of labour in a ‘working day’. By means of ‘this rate’ one can know how much work the workers have done for themselves and how much for the exploiters. This rate of surplus measures ‘exploitation’ just as a thermometer measures ‘heat’. It reveals the degree of exploitation. The rate of surplus value can, therefore, be called as ‘degree of exploitation’.

‘Surplus value’ will be known only if the expenditure spent initially on the commodity and the value at which the commodity is sold are known. Thus, the rate of surplus value will be known if the proportions of wages and surplus value are seen.

The rate of surplus value is represented by the following formulae:

Surplus value (s/v) = surplus value = surplus labour

Disapproval of the Marx Concept of Surplus Value:

The most fundamental criticism of Marx's theory of value is offered by Austrian economics, which holds that

the value is purely subjective, and cannot be derived from labour, surplus or otherwise. The labour itself can be productive, resulting in creation of goods which are desired by other people, or destructive, merely wasting resources on creation of goods nobody wants – this phenomenon was quite evident in the socialist economies.

Thus, we can say whether something has value or not only by observing voluntary exchange between people. When such exchange is prevented, there is no way to tell if the labor is creative or destructive, and so it is impossible to direct the efforts towards creation of value. This impossibility of economic calculation was famously proposed by Ludwig von Mises as the reason for imminent failure of socialist economies, in stark contrast to predictions of Marx's theory. There are two major issues with this approach.

First, Marx's theory never made any 'predictions' of the managing and functioning of a 'socialist' economy. The socialist calculation debate was largely carried out by neoclassical sympathizers attempting to apply concepts that functioned within the framework of neoclassical economics to the maximization of production in planned economic development - its failure shows the failure within the neoclassical paradigms more than anything else.

Second, and more fundamentally, this argument misses or ignores the fact that Marx did not attempt to explain value from the labor time of individual producers in isolation, but from socially necessary labor time that becomes normalized as capitalist production expands and includes the mass of producers in a social web of production. Value begins to dominate exchange to a greater extent as production becomes social, or the division of labor that capitalist production encourages expands.

Some economic historians argue that Marx did not discover the concept of surplus-value, because other political economists had already discovered it first. There is some truth in this, but as against that, Marx only claimed that he had theoretically refined and systematised existing notions of added value, removing inconsistencies and apologistic theories. His theoretical presentation is far superior though to that of his contemporaries, as economic historians acknowledge.

A substantive, foundational criticism of Marx's concept of the surplus product and surplus-value was made by Harry

W. Pearson in the 1950s in his essay, "The economy has no surplus". Another modern, more sophisticated critique of the concept is by Helen Boss.

An alternative criticism is by Steve Keen, who argues that the economy does have a surplus, but that it can arise from numerous different sources. Specifically, he claims that "mathematics and Marx's philosophy confirm that surplus value - and hence profit - can be generated from any input to production". Thus Marx's view that economic value is a human attribution or comparison, and that only human labour can conserve, transfer and create value is rejected.

Some issues concerning “surplus value and its ‘rate’.

If an example is taken of cloth manufacturing where the constant value I 80 and the variable value is 20, there are still fixed means of 400 value in the ‘work place’. The rate of surplus value has nothing to do with either the 80 constant or with the fixed means in the work place. As wages along give the surplus value, the relations of these 2 factors alone continue the rate of surplus value.

a. Surplus value and the ‘rate of surplus value’ are not the same.

b. Surplus value’ means the ‘mass’ which is excess than the capital.

c. The ‘rate of surplus value’ means the relationship between the ratios of necessary labour and surplus labour.

d. The formula to know surplus value is: “commodity value ‘minus’ capital’.

e. Symbol of surplus value is S and symbol of wages is V.

f. The formula of rate of surplus value is S/V.

g. Symbol for rate of surplus value is Sⁱ.

CONCLUSION:

Surplus Value is critical to the expansion of capital. The specific economic form, in which unpaid surplus labour is pumped out of direct producers, determines the relationship of rulers and ruled, as it grows directly out of production itself and, in turn, reacts upon it as a determining element. Upon this, however, is founded the entire formation of the economic community which grows up out of the production relations themselves, thereby simultaneously its specific political form. It is always the direct relationship of the owners of the conditions of production to the direct producers -- a relation always naturally corresponding to a definite stage of the methods of labour and thereby its social productivity -- which reveals the innermost secret, the hidden basis of the entire social structure, and with it the political form of the relation of sovereignty and dependence, in short, the corresponding specific form of the state. This does not prevent the same economic basis -- the same from the standpoint of its main conditions -- due to innumerable different, empirical circumstances, natural environment, racial relations, external historical influence, etc. from showing infinite variations and gradations in appearance, which can be ascertained only by analysis of the empirically given circumstances.

The overall conclusion after going through the Marx concept of Surplus Value is that, the theory is relatively important in the support of the labourers but when it comes to the owners, this theory has its own week points. It does not completely support or is against the system of capitalism. The concept in this theory is not practically possible.

Received on 18.01.2012

Revised on 24.02.2012

Accepted on 26.03.2012