Brewer - Surplus

Prévia do material em texto

S
Surplus
Anthony Brewer
Abstract
The surplus produced by an economy, in the
sense discussed here, is its output over and
above the necessary subsistence of the labour
force as well as other costs. This concept has a
long history in economics, with the focus
sometimes on the uses of the surplus for luxury
consumption, state spending, or new invest-
ment, and sometimes on income
distribution – if workers are paid a subsistence
wage then the surplus accrues to non-wage
earners.
Keywords
Aggregate demand; Baran, P. A.; Cantillon, R.;
Capital accumulation; Classical economics;
Excess saving; Hobson, J. A.; Hume, D.; Impe-
rialism; Labour theory of value; Luxuries;
Marx, K. H.; Natural price; Necessities; neo-
Ricardian economics; Net product; Petty, W.;
Physiocracy; Price of production; Profit and
profit theory; Quesnay, F.; Rent; Ricardian dis-
tribution theory; Ricardo, D.; Sraffa, P.;
Stationary state; Subsistence; Surplus; Surplus
value; Tableau économique; Turgot, A. R. J.;
Unemployment; Value; von Neumann, J
JEL Classifications
B1
The key question in defining the surplus is: what
should be counted as the cost of maintaining the
labour force? If we deduct from output only what
is physically necessary to maintain workers at a
minimum standard of existence, the resulting sur-
plus measure would represent the amount avail-
able for everything else. It could be relevant, for
example, to a very poor country or to a situation of
total war. In a very crude version of classical
economics, wages might be held down to the
subsistence minimum by Malthusian population
pressures with the surplus over bare subsistence
going to others. In modern developed economies
wages are well above physical subsistence, so this
definition of surplus is of little interest. At the
other end of the scale, we could count the actual
wage, whatever it might be, as the cost of subsis-
tence of the labour force, so surplus is simply
defined as total income less wages, equal by def-
inition to total non-wage incomes.
Modern proponents of the surplus approach
typically claim that (real) wages are determined
prior to other variables, at some socially accept-
able level (perhaps representing workers’
bargaining power), so wages can be treated as
fixed, with profits (plus other non-wage incomes)
This chapter was originally published in The New Palgrave
Dictionary of Economics, 2nd edition, 2008. Edited by
Steven N. Durlauf and Lawrence E. Blume
# The Author(s) 2008
Palgrave Macmillan (ed.), The New Palgrave Dictionary of Economics,
DOI 10.1057/978-1-349-95121-5_2208-1
determined by the remainder, or surplus. With
very strong assumptions, the static equilibrium
profit rate and prices can then be determined,
given the real wage.
Necessities and Luxuries: From Petty
to Smith
Early writers on economic issues often used a
concept of surplus, focusing on the production of
necessities (frequently identified with food) and
drew conclusions about the relation between sec-
tors, not sources of income. The key idea is that
people need a certain amount of food (and other
necessities), but no more, since ‘[t] he desire of
food is limited in every man by the narrow capac-
ity of the human stomach’ (Smith 1776, p. 181).
The agricultural sector has to feed itself and every-
one else. The size of the non-agricultural sector is
limited by the agricultural surplus, that is, the
output of food less the amount consumed by the
agricultural sector itself. Using a somewhat
broader definition of necessities, William Petty
gave a hypothetical example (with an implausibly
high level of productivity for the period): ‘if there
be 1000 men in a territory, and if 100 of them can
raise necessary food and raiment for the whole
1000’ (Petty 1899, vol. 1, p. 30). His worry was
about employment – only 100 are needed to pro-
vide necessities, so what will the rest do? In his
example, he suggested a variety of employments
(200 produce for export, 400 produce luxuries,
and so on) but some might remain unemployed.
David Hume used the idea of an agricultural
surplus quite differently. ‘The land may easily
maintain a much greater number of men, than
those who are immediately employed in its cul-
ture, or who furnish the more necessary manufac-
tures to such as are so employed’ (1955, p. 6). The
question he asked was: why should farmers work
to produce more than they themselves want to eat?
They might be forced to do so, in a feudal system,
but that was unlikely to generate much of a sur-
plus. If, however, they could buy attractive man-
ufactures, they would have an incentive to
produce and market a surplus. ‘When a nation
abounds in manufactures and mechanic arts, the
proprietors of land, as well as the farmers, study
agriculture as a science, and redouble their indus-
try and attention’ (1955, p. 11). For Hume, this
was not simply a theoretical point – in his History
of England (1778) he described how the introduc-
tion of luxuries, initially from abroad, changed the
behaviour of successive generations down to his
own time.
Adam Smith told a similar story. ‘When by the
improvement and cultivation of the land the
labour of one family can provide food for two,
the labour of half the society becomes sufficient to
provide food for the whole’ (1776, p. 180).
Although the need for food is limited, ‘the desire
of the conveniences and ornaments of building,
dress, equipage, and household furniture, seems
to have no limit’ (p. 181). Smith’s account of
development in Europe drew on Hume, and
stressed that as landlords became more concerned
with luxury spending than with maintaining their
political power, they switched to forms of tenure
which gave better incentives to farmers.
The concept of surplus sketched in the last
three paragraphs is a surplus generated in the
necessity-producing sector which supports every-
one else – soldiers, the upper class and their ser-
vants, luxury producers, and so on. There is,
however, no presumption that farmers, or
workers, are reduced to bare subsistence. Part of
the surplus may be extracted as rent, but part
accrues to the producers of necessities themselves
and allows them to purchase other things.
Cantillon and Quesnay
In Richard Cantillon’s theory, written before
Hume but published later, the land is fundamental
and everyone works, directly or indirectly, for the
landlords. Whether the owner manages the land
himself or lets it out to farmers, the farmers and
labourers must ‘have a living’, but the ‘overplus
[in the French original, ‘surplus’] of the land’ goes
to the owner (1755, p. 6). Wages are set by social
convention, at levels which vary between differ-
ent places. Here, then, the distribution of income
between landlords and the rest is determined by
the surplus over a socially determined subsistence
2 Surplus
level. François Quesnay developed Cantillon’s
model further, using the famous Tableau
économique to show the relations between the
different sectors of the economy (Meek 1963).
Only agriculture generates a net product (produit
net) or surplus of output over costs, since the
‘sterile’ manufacturing sector covers its costs,
but no more.
Cantillon treated agricultural productivity as
essentially given. Quesnay, by contrast, thought
that French agriculture had declined, bringing the
whole economy down with it. Investment, he
argued, is needed to maintain agricultural produc-
tivity. Excessive taxes and restrictions on trade
had so reduced agricultural returns that farmers
were unable to invest. The net product plays two
roles in Quesnay. Reforms which restore returns
to a healthy level accrue first to farmers, allowing
them to invest, but when leases come up for
renewal the owners will be able to capture the
increased net product as rent. Whether either
Cantillon or Quesnay allowed for any net profit
on investment to accrue to tenant farmers in the
long run is a matter of debate.
In sum, Quesnay and his followers, the Phys-
iocrats, took a critical step towards classical eco-
nomics by recognizing the need forinvestment
(financed out of the net product), but did not
explicitly recognize the return to investment as a
continuing source of income (and a share of the
surplus) or make any provision for continued
investment beyond the periodic renegotiation of
rents. This next step should be credited to Anne
Robert Jacques Turgot, who anticipated key ele-
ments of Adam Smith’s system ten years before
the Wealth of Nations.
Classical Economics
David Ricardo plays a central role in the surplus
interpretation of classical economics (hence the
surplus approach is alternatively known as
neo-Ricardian economics). He based himself on
Smith but concentrated particularly on the distri-
bution of income between wages, profits, and rent,
which he thought Smith had not treated ade-
quately. The familiar textbook summary of
Ricardian distribution theory makes a good
starting point. Land is of varied qualities, and
there are diminishing returns to investment on
any given piece of land. As cultivation expands
(to feed a growing population), marginal returns
fall. Marginal land yields no rent so, with a given
real wage, profit is the difference between costs
(including wages) and returns on marginal land.
Better land, of course, yields higher returns, but
landowners capture intra-marginal returns as rent.
Capital mobility keeps non-agricultural profits in
line with returns on marginal land. As the econ-
omy grows, the margin moves out and the surplus
at the margin falls, bringing the profit rate down.
In this reading of Ricardo, then, profit is the sur-
plus over given wages on marginal land, while
rent and profits absorb the surplus for the whole
economy.
There are two main problems with this reading.
First, costs and returns have to be calculated in
terms of prices to give profit as a percentage return
on investment. Ricardo sought to solve this prob-
lem with a labour theory of value – prices propor-
tional to labour inputs. This way, costs and returns
could be calculated without reference to the profit
rate, which is the unknown in the calculation.
Unfortunately, labour values are not compatible
with equalization of profit rates across industries.
Ricardo had no answer to this problem.
Second, and more relevant here, the surplus
reading of Ricardo requires real wages to be
treated as independent of profits and prices. It is
not clear that this assumption adequately repre-
sents Ricardo’s wage theory. He defined the natu-
ral price of labour, like the natural price of
anything else, as the cost of producing it, hence
‘that price which is necessary to enable the
labourers . . . to subsist and perpetuate their race,
without either increase or diminution’ (1817,
p. 93). But he then admitted that the wage must
rise above this level in a growing economy ‘for an
indefinite period’ (p. 95). On average, therefore,
the actual profit rate must be below the rate cal-
culated using the natural (subsistence) wage
throughout the process of growth, until the sta-
tionary state is reached. Since growth influences
wages and hence profits, and the growth rate of the
economy depends (inter alia) on the profit rate and
Surplus 3
the total size of the surplus, the surplus cannot
play the independent causal role that the simple
version suggests.
Adam Smith had rejected a subsistence wage
theory much more explicitly than Ricardo. He had
a notion of agricultural surplus, as noted above,
but his (rather confused) theory of profit does not
fit the Ricardian surplus pattern at all. If we look at
the classical school as a whole, Ricardo’s empha-
sis on factor returns and on surplus as an explana-
tion of non-wage incomes is only a relatively
small element in a large body of work devoted to
economic growth, to policy issues and incentives,
and so on.
Marx
If there is one writer who fits what has been called
the surplus approach to income distribution, it is
Karl Marx. This is not surprising, because the
surplus approach was largely inspired by Marx
and by his view of his predecessors.
The substance of Marx’s analysis of profit
(or surplus value) is very similar to Ricardo’s,
though Marx’s terminology and conclusions are
very different. Like Ricardo, Marx adopted a
labour theory of value, but where Ricardo saw
the labour theory as a theory of price (and one
which he knew could not be sustained, as noted
above), Marx distinguished between value and
price, simply defining value as labour embodied
and thus making the labour theory of value true by
definition. In the first two volumes of Capital
(Marx 1867–94), he assumed that prices were
proportional to values (as defined), without giving
any justification.
The value of labour power (the labour value of
the real wage) is determined by subsistence needs,
including a (rather ill-defined) ‘historical and
moral element’. The value produced by each
worker depends on the hours worked. Given the
assumption that everything (including labour
power) sells at a price reflecting its (labour)
value, the difference between the value produced
and the value of labour power accrues to the
capitalist employer as profit.
In the unfinished third volume of Capital,
Marx (1867–94) tried to link the analysis of the
first two volumes to the determination of what he
called ‘prices of production’ (long-run equilib-
rium prices or Smith’s ‘natural prices’). The key
idea is that total profit is determined by total
surplus value, as analysed above, but that relative
prices adjust to equalize profit rates across indus-
tries. His procedure for doing this is not now
regarded as sound. In the third volume he also
allowed for some part of surplus value to be
absorbed by incomes other than profit (such
as rent).
In sum, Marx explained profit by the surplus of
hours worked over the hours needed to produce
subsistence, and hence by output over a socially
determined subsistence wage. The main problem
of substance with this theory is that his subsis-
tence wage is a matter of definition, without a
satisfactory account of how wages are determined
in the market. When he did provide such an
account (in the splendid account of accumulation
in Capital, volume I, chapter 25), wages in a
growing economy turn out to be determined
simultaneously with profit and accumulation
(as in Smith and Ricardo), so the wage is not
determined prior to other variables after all.
The 20th Century
By the time Marx’s Capital was published, the
mainstream in economics was moving away from
a subsistence wage theory, and hence away from
surplus theories of profit. More generally, late
19th- and 20th-century mainstream
(neoclassical) economics had little use for the
notion of surplus because economic variables
(including incomes, consumption demand, invest-
ment and savings decisions, and so on) were all to
be explained in a common framework, with no
distinction between necessities and other goods or
between different types of income.
John Hobson, an avowed heretic, was one of
the few to keep the notion of surplus alive. In his
account, one part of output corresponds to the
costs of production, including both a subsistence
wage (with a ‘moral’ element as well as the bare
4 Surplus
physical minimum) and a return on investment
sufficient to induce investors to keep their invest-
ment unchanged. The remainder is the surplus. In
a growing economy, factor returns have to be
higher to induce growth: the part of the surplus
absorbed in this way is the ‘productive surplus’ or
‘costs of growth’. The rest is the ‘unproductive
surplus’ or ‘unearned increment’ (1910, ch. 4). In
modern society the surplus increases with
increased productivity, but much of it accrues to
a small minority who earn so much that they
cannot spend it all. The resulting excess saving
causes unemployment, a search for investment
opportunities abroad, and hence imperialist
expansion.
Paul Baran’s influential Political Economy of
Growth (1957) has much in common with
Hobson. Baran defined the ‘actual surplus’ as
actual output minus actual consumption (of all
sorts), making it effectivelyequal to new net
investment. Up to a certain level, at least, invest-
ment determines surplus, not the other way round,
because higher/lower investment will induce
higher/lower aggregate demand, bringing the
actual surplus (in Keynesian terms, saving) into
line. By contrast, the ‘potential surplus’ is the
difference between maximum potential output
and the minimum acceptable level of consump-
tion, showing the maximum possible investment
level. Surplus concepts like these provided a
rather loose framework for radical discussions of
growth, unemployment, the role of military
spending, and the like in the mid-late 20th century.
John von Neumann’s classic paper on general
equilibrium deserves mention, since it embodies a
surplus account of growth, assuming that ‘all
income in excess of necessities of life will be
reinvested’ (1945, p. 2). It was important in the
development of mathematical techniques for han-
dling general equilibrium, but the surplus aspect
was not widely developed.
Piero Sraffa’s Production of Commodities by
Means of Commodities (1960) can be seen as a
restatement of the Ricardo–Marx theory of profit
and prices, but avoiding the problems caused by
the labour theory of value. Put simply, Sraffa
wrote down equations for a many-commodity
system showing the conditions for an equal profit
rate across all industries, and showed that there
remained one degree of freedom, representing the
distribution of income between wages and profits
(assumed to be the only forms of income). Sraffa
did not commit himself on how to close the sys-
tem, but the majority of his followers have chosen
to take the real wage as fixed. When this is done,
the profit rate and the set of relative prices are
simultaneously determined. Sraffa’s system does
indeed provide a logically coherent version of the
surplus theory of profit free of the labour theory of
value. Beyond that, it is not clear why one would
want to assume that wages (and the whole pattern
of outputs and inputs) are determined indepen-
dently of and prior to the determination of prices
and profits.
Conclusion
Classical economists were acutely aware that
wages were not very far above subsistence. An
important theme in their work was indeed the
generation of a surplus over subsistence and the
use of part of the surplus for investment and
growth, but an interpretation which insists on
treating wages as determined prior to other vari-
ables is at best a first approximation, used by some
classical writers but only with heavy qualifica-
tions. In a modern context, it is hard to see what
purpose a concept of surplus serves when wages
are far above subsistence.
See Also
▶Baran, Paul Alexander (1910–1964)
▶Cantillon, Richard (1697–1734)
▶Hume, David (1711–1776)
▶Labour Theory of Value
▶Marx, Karl Heinrich (1818–1883)
▶Neo-Ricardian Economics
▶ Petty, William (1623–1687)
▶Quesnay, François (1694–1774)
▶ Smith, Adam (1723–1790)
▶ Sraffa, Piero (1898–1983)
▶Turgot, Anne Robert Jacques, Baron de
L’Aulne (1727–1781)
Surplus 5
http://dx.doi.org/10.1007/978-1-349-95121-5_571-1
http://dx.doi.org/10.1007/978-1-349-95121-5_352-1
http://dx.doi.org/10.1007/978-1-349-95121-5_751-1
http://dx.doi.org/10.1007/978-1-349-95121-5_1054-1
http://dx.doi.org/10.1007/978-1-349-95121-5_1019-1
http://dx.doi.org/10.1007/978-1-349-95121-5_2787-1
http://dx.doi.org/10.1007/978-1-349-95121-5_1359-1
http://dx.doi.org/10.1007/978-1-349-95121-5_1734-1
http://dx.doi.org/10.1007/978-1-349-95121-5_1785-1
http://dx.doi.org/10.1007/978-1-349-95121-5_1349-1
http://dx.doi.org/10.1007/978-1-349-95121-5_1385-1
http://dx.doi.org/10.1007/978-1-349-95121-5_1385-1
▶ von Neumann, John (1903–1957)
Bibliography
Baran, P. 1957. Political economy of growth. New York:
Monthly Review Press.
Cantillon, R. 1755. Essay on the nature of commerce in
general. New Brunswick: Transaction Publishers,
2001.
Hobson, J. 1910. The industrial system: An inquiry into
earned and unearned income. London: Routledge/
Thoemess Press, 1992.
Hume, D. 1778. The history of England from the invasion
of Julius Caesar to the revolution in 1688. Indianapolis:
Liberty Fund, 1983.
Hume, D. 1955. InWritings on economics, ed. E. Rotwein.
Edinburgh: Nelson.
Marx, K. 1867–94. Capital, vols. 1–3. Moscow: Foreign
Languages Publishing House, 1957–62.
Meek, R. 1963. The economics of physiocracy: Essays and
translations. Cambridge, MA: Harvard University
Press.
Petty, W. 1899. In The economic writings of Sir William
Petty, 2 vols, ed. C. Hull. Cambridge: Cambridge Uni-
versity Press.
Ricardo, D. 1817. On the principles of political economy
and taxation. In The works and correspondence of
David Ricardo, vol. 1, ed. P. Sraffa. Cambridge: Cam-
bridge University Press, 1951.
Smith, A. 1776. In An inquiry into the nature and causes of
the wealth of nations, ed. A. Campbell, A. Skinner, and
W. Todd. Oxford: Clarendon Press, 1976.
Sraffa, P. 1960. Production of commodities by means of
commodities. Cambridge: Cambridge University Press.
von Neumann, J. 1945. A model of general economic
equilibrium. Review of Economic Studies 13: 1–9.
6 Surplus
http://dx.doi.org/10.1007/978-1-349-95121-5_1406-1
	2208-1: 
	Surplus
	Necessities and Luxuries: From Petty to Smith
	Cantillon and Quesnay
	Classical Economics
	Marx
	The 20th Century
	Conclusion
	See Also
	Bibliography