Not quite first thoughts: An exchange on the theory of surplus value

[A response to Jesse, who is reading David Harvey's essay, Right to the City.]

Jesse asks:

First thoughts

Surplus Capital, what and why is it? Is it inherently good or useful? or as I might believe rather destructive. In the absence of surplus capital creation there appears to be some semblance of stasis and/or equilibrium, with the constant creation of surplus capital we find the need for creative destruction etc. It would seem to be a current necessity born out of the methodology of debt financing that currently exists in our economic structures, where we underwrite our current expenses by promising future profits and production, which does all sorts of good things like create capital multipliers, but also requires that future returns exceed current value, due to the fun that is interest. This seems fundamentally unsustainable in an environment that contains finite resources.

I reply:

You seem to have that mostly correct, although I think the surplus generally plays a creatively-destructive character rather than a purely destructive one. You are also right to flag the question of financing, although I don't believe that the need to produce a surplus is rooted within debt.

In a broad sense, surplus-value is the Marxist term for profit. The accounting methods differ, as Marxists believe that all surplus/profit basically results from exploitation of labor or nature. (Explanation: Assuming perfectly competitive markets in which all actors have the same information, goods will trade at some equilibrium value that reflects the amount of expected benefits they will confer upon their holder. In short, you can't buy a ton of iron and expect it to make itself into something more valuable - if you could, that would have already been reflected in the price. The exception is labor-power, the only commodity that carries itself to the marketplace. The marginal cost of hiring workers is equal to the amount of money that they will need to sustain and reproduce themselves - for as long as poverty exists, you will always be able to find someone to undercut his fellow worker for a subsistence wage. However, workers can produce more value in an hour than they are being paid for. You can verify this for yourself by looking up figures for average wages and average labor productivity in the US. There are some complexities to this picture - technological change and machines, chiefly, and the role of the entrepreneur - but basically, surplus value is derived from labor exploitation.)

You can understand why the surplus has to be used as it does by thinking through the logic of the individual capitalist. Essentially, he or she is in the game to make a profit. If they can't expect to have more money at the end of the year than at the beginning, they wouldn't put their time and money into business. They'd go sit on a beach instead. So they fall within what Marx describes as the M-C-M' cycle - they trade money for commodities (including labor power) which they then expect to exchange for an increased amount of money at the end of the year.

The problem of surplus-value arrives when the capitalist is deciding what to do with the increased amount of money - M' - that they have at the end of the year. Essentially, they have three options: They could spend it, they could have it redistributed (i.e. through progressive taxation), or they could reinvest it. The second option, taxation, is generally frowned upon. The first option, conspicuous consumption and philanthropy, sucks up a fair amount of the surplus. (In the 1930s, Gramsci described the rise of a class of "luxury mammals" attached to the bourgeoisie and totally devoted to consumption.)

However, the surplus cannot be totally consumed - for if a capitalist wants to stay in business, he or she must reinvest a portion of his/her profit. Not doing so will mean falling behind compared to his/her competitors, and eventually ceasing to be a capitalist. So a portion of the surplus capital must go into enlarging production facilities, expanding sales into new markets, developing new lines of products, increasing marketing, etc.

At this point, we must remember that the capitalist is in business to make a profit. He or she expects their new investment to produce a return. However, anyone will be able to tell you that expansions tend to produce diminishing returns. Presumably, the capitalist class as a whole will begin by investing in the most profitable activities, and only move on to less profitable activities after these are exhausted.

At this point, we can see the "creative" side of surplus capital operating. Material expansion, new technologies, physical infrastructure, increasing world linkages, etc, are the results of such a phase of expansion. (Although these tend to impose ecological and social costs as well. For example, I don't see suburbanization as a particularly progressive type of material expansion.) At some point this expansion hits a road-block: too much has been promised from the reinvestment of surplus capital, and too little profit can be delivered.

A crisis, in short. Assets are devalued, businesses are written off, and the working class is thrown out of jobs en masse. This "destruction", like the "creation" that preceded it, is a direct result of the incentives faced by capitalists as a whole. In general, capitalists compete amongst themselves to decide who will bear the costs (witness the dispute between Chrysler bondholders over who would bear the first losses) and attempt to fob off as much of the cost on the working class as possible (e.g. the $700 billion TARP bank recapitalization scam). A messy period of losses and reorganization ensues. This in itself often sets the stage for further continued expansion. For example, the 1870s and 1880s railway boom in the US resulted in the bankruptcy of most rail companies after they had laid tracks and discovered that the rail business wasn't as profitable as they had thought. After the bankruptcies, others snapped up the "distressed assets" at a lower cost and used them to grow across the continent. A similar thing happened after the IT booms-and-busts of the 1990s and early 2000s.

At this point, I will break from the standard analysis and note that your point about finite resources is spot-on. Capitalism, as an economic form, rests upon the exploitation of labor and the large-scale extraction of natural resources. Limitless resources are a necessary (but not sufficient) precondition for limitless growth - and I believe that most economists ignore this fact. Seen from the perspective of limited natural resources, much of the activity that we think of as generating income - e.g. mining, non-sustainable forestry, oil drilling - is in fact a cost imposed upon the earth and upon future generations.

If the above analysis is correct, growth is tied inextricably to capitalism. Accepting that planetary resource limits exist would require us to (a) stop growing, and cease to be capitalist, or (b) go off-planet, either by space exploration or large-scale capture of other energy and resource sources.

A second addendum: Finance and debt doesn't by itself cause problems with surplus capital, but it does tend to generalize the need to make a profit. Individual entrepreneurs may be in business for all sorts of reasons - some want the money, some love the product or service. But as soon as they indebt themselves, they commit themselves to producing and reinvesting surpluses to make good the claim against their future income. I have other thoughts on finance, but I will save them for later as I need to go buy vegetables.

Now Jesse has to get me doing math again (he will, quite shortly) and all will be well with the universe again.