Posts Tagged ‘surplus-value’


Austin O’Brien is a J.D. Candidate (Class of 2019) at the Fordham University School of Law and a former student of mine at the University of Notre Dame. He sent the following response to my recent piece on “utopia and markets,” which I am pleased to publish here as a guest post.

Dear Professor Ruccio,

I have been enjoying your recent blog posts on various dimensions of utopia. The one about “utopia and markets” struck a particular chord with me as I had my Corporations exam last Tuesday. Throughout the course, I noticed that corporate law itself has certain utopian elements. The very notion of a fiduciary duty to the corporation and shareholders (and creditors, when the business is on the brink of insolvency or is insolvent) enshrines the notion that an officer or director should maximize shareholder value, that is, the surplus to which they have access through their holdings and dividends. But, what I find to be most interesting is the flipside of this: it is not only the case that officers/directors should maximize value, but also that they are obliged to do so and, when a shareholder prevails in demonstrating that this duty has been breached, the breaching party must be punished. I think this counters the notion that profit-maximizing behavior is “natural.” The utopia that these duties try to build is one where officer/directors maximize (surplus) value at the behest of those who have claims on the surplus. So, the maintenance of capitalism takes extraordinary (legal) efforts just to compel officers/directors to act in the manner prescribed (as opposed to merely discovered or described) by neoclassical theory. Thus, the hegemonic economic utopian project is an active project that makes legal recourse an option when officer/directors take actions that do not allow investors to benefit from the exploitation that is at the heart of the firm’s consumption of labor power.

Let me try to explain what I mean. Corporate law is premised on the notion that it governs voluntary exchanges among sophisticated parties who seek to maximize profits.  Those individuals subject to corporate law are none other than the economic actors that fit neoclassical economists’ understanding of human nature: rational decision-makers who maximize utility or profits under conditions of scarcity. Well, that is at least the set of individuals corporate law deems itself to oversee. Perhaps it is more likely that this type of actor is the type of actor that corporate law intends to create. This rational actor is the dream of corporate law. Indeed, perhaps this homo economicus is proscribed by corporate law. In fact, if corporate law is largely in place to assist in profit-maximization, then this is the type of actor it must demand so that its project may succeed

The very heart of corporate governance lays bare corporate law’s project. At least with regard to the enforcement of particular norms among corporate officers and directors, the notion of a fiduciary duty is central to corporate law. Fiduciary duties arise in many contexts. In corporate law specifically, a fiduciary duty typically refers to the duty owed by a corporate officer or director to the corporation’s shareholders. The duty of care (i.e., the duty to make informed business decisions) and duty of loyalty (i.e., the duty to not use their position as officer or director to further their private interests) are hallmark examples of such a fiduciary duty. Now, the idea of these fiduciary duties is that they protect a corporation’s shareholders by ensuring that a corporation’s officers and directors are actually acting for the benefit of the shareholders and, more generally, the corporation itself. And what is the benefit of being a shareholder of a corporation? In short: a share of the profits. Shareholders benefit from a corporation’s increasing (rate of) profit(s), especially when profits are used to issue dividends.

This seems fairly innocuous at first glance. It is this mass of shareholders, after all, who vote for and elect the directors. And, it is this group of directors who select the corporation’s officers. But the tension is hidden in plain sight. If corporate law (and neoclassical economics) takes as given the idea that firms maximize profit and that such behavior is natural, then why the need to ensure that profit-maximization occurs? While corporate law is premised upon the notion that it oversees the activities of sophisticated rational individuals interested in profits, the ultimate scandal is when an officer or director is this very individual who behaves accordingly but to the detriment of the class that has claims on a corporation’s profits. See, the problem for corporate law is the possibility that a rogue officer or director might maximize their own gains to the detriment of the shareholders.

In trying to address this tension, corporate law, by way of imposing and enforcing fiduciary duties, unwittingly brings in class through the back door. One of the many problems with capitalism is, of course, rooted in the fantastical belief that self-interested individuals acting selfishly somehow bring about, in the aggregate, the best possible social results. Well then, why the need to punish these self-interested officers and directors? Shouldn’t it be the case that, by the invisible hand, capitalists benefit in the aggregate when capitalists act selfishly? The answer is, simply, no because capitalism is a class system that must be vigorously maintained to reproduce itself across time. In this case, it is maintained not only by proscribing (as opposed to merely discovering) how corporate officers and directors behave, and not only obliging them to act to the benefit of a specific class of capitalists, but also legally punishing such officers and directors when they do not act to the benefit of corporate shareholders. For the maintenance of capitalism, this is a necessary fix. It is a needed measure to build the neoclassical utopia by ingraining specifically neoclassical values into the decision-making of corporate officers and directors. So, when corporate officers and directors do act for the benefit of the corporate shareholders, they are not doing so because of some innate nature, but rather according to a specifically proscribed set of values that are enforced by the specter of shareholders seeking legal recourse for a breach of a fiduciary duty.

It becomes increasingly clear that corporate law itself is an active project shaping the way corporate actors behave as economic agents. In the end, if corporate shareholders are not able to successfully lay claim to a share of the profits arising out of the private and productive consumption of labor power, then what good is it to be a capitalist? For capitalism to (re-)produce itself across time and space while maintaining legitimacy within the capitalist class itself, capitalists must be able to do as capitalists do: extract surplus-value from the production process through the consumption of labor power.

Thus, celebrating when ill-behaved corporate directors are caught and punished as if such a victory is yet one more blow to the legitimacy of capitalism misses the point: punishing such actors maintains, indeed even reinforces and reinvigorates, the capitalist organization of society. Shareholders taking legal actions for a director’s or officer’s breach of a fiduciary duty is part and parcel of furthering the utopia envisioned by neoclassical economists. The ideal corporate officer or director, according to the neoclassical utopian vision, is a quasi-religious one that directly contradicts the neoclassical view of human nature: an officer or director who acts selflessly to the benefit of the shareholders. Of course, such directors and officers are far and few between. It should then come as no surprise that corporate directors regularly bestow lavish compensation packages upon corporate officers to ensure that these officers take actions to maximize (surplus) value for shareholders. And, if a director or officer does breach their duties, they are a bad capitalist who are nearly certain to be replaced by a good capitalist, that is, one who maximizes corporate profits. So, a bad corporate actor, at least in the terms of corporate law, is really an actor who fails to uphold specifically neoclassical values that sustain the capitalist system of relations. And one should not forget that, in light of the Marxian critique of these capitalist social relations, this fight over profits is a fight over the surplus-value extracted from workers.

Perhaps one can readily imagine a different set of values and an alternative alignment of duties. Imagine a scenario in which workers are the shareholders and elect the boards of directors. This would be remarkably different. Rather than being incentivized to further extract value in the consumption of labor power, directors (and their corporations’ duly appointed officers) would have an incentive to reward workers with the value created by the workers’ very labor. But this is antithetical to capitalism and corporate law as they stand today. This set of values would turn the system on its head. And turning this system on its head means first pointing out corporate law’s blind spots, tensions, contradictions, and values that it takes for granted yet furthers in its quest to build a very particular vision of society. This task of criticism is rooted in the recognition that corporate law actively maintains capitalism all the while providing active measures to bring legal actions to those with claims on the surplus against those officers and directors who stand in the way of shareholders enjoying the fruits of others’ labor.

General views of Seattle-based grafitti artists Jonathan Matas and Zach Rockstad's mural called "Up and Down" depicting Karl Marx and Adam Smith located on Mott Street just north of Houston Street in

Mainstream economists refer to it as price theory, everyone else value theory. But whatever it’s called, it’s at the center of economists’ differing explanations of what happens in (and alongside) markets.

As I see it, price/value theory serves as the framework to explain a wide range of phenomena, from how and for how much commodities are exchanged in markets through the determinants of the distribution of incomes to the outcomes—for the economy and society as a whole—of the allocation of resources and commodities through markets.

And each price/value theory has a utopian dimension. It’s not just an accounting for and an explanation of the conditions and consequences of commodity exchange; it’s also a way of thinking about the fairness and justice of markets. It therefore informs (and is informed by) a utopian horizon within and beyond markets.

Let me explain. Mainstream economists today generally rely on a price theory that has been produced, disseminated, and revised by neoclassical economists in a tradition that dates from the late-nineteenth century. Students know it as what they learn in the typical microeconomics course, the rest of us by the celebration of free markets in mainstream theory and policy.*


The starting point of neoclassical value theory is that commodities exchange on markets at a price (p*) that is determined by supply and demand.** But that’s only the beginning. According to neoclassical economists, supply and demand are ultimately determined by human nature—a combination of tastes and preferences (utility), know-how (technology), and resources (factor endowments)—which are taken as given or exogenous.

And that leads to one of the major conclusions of neoclassical theory: the prices of goods and services, as well as the distribution of income, are ultimately determined by—and therefore reflect—human nature. That’s important because, if for whatever reason you don’t like the existing set of prices of commodities or the distribution of income, you face the formidable task of changing human nature.

Other significant conclusions also follow from neoclassical price theory, including:

  • Everyone gets what they pay for (since price is equal to the ratio of marginal utilities).
  • Everyone is equal (since, via the invisible hand, everyone’s marginal rate of substitution is equal to that of everyone else).
  • Everyone benefits from markets (since utility-maximation and profit-maximization lead to Pareto efficiency, i.e., a situation in which no one can be made better off without making someone worse off).

That’s an extraordinary set of conclusions—about commodities, markets, and capitalism—which is why, as I explain to my students, so much theoretical work has to be done to go from the initial assumptions to the final results.

That set of conclusions is the basis of the utopianism of neoclassical price theory.  According to neoclassical economists, the capitalist distribution of income is fundamentally fair. If every factor of production (e.g., capital and labor) is remunerated according to its marginal contribution to production, and each individual sells to firms the amount of each factor they desire (because of utility-maximization), the resulting distribution represents “just deserts.” It’s fair on an individual level and it represents justice for society as a whole. Let free markets operate, without any external intervention (e.g., by the state), and the result will be both fair and just.

It’s that powerful conclusion that serves as the starting point for value theory, the critique of the core of mainstream economics—with, of course, very different results.

Take the case of Marxian value theory. Marxian economists accept the notions of fairness and justice, a standard upheld by mainstream economists, and then shows that commodities and markets can’t but fail to achieve those goals. They do this, first, by showing that every commodity has two numbers attached to it—exchange-value and value—not just the one—price—and showing how those two numbers are equal only under a very particular set of assumptions. Then, second, they demonstrate that, even if the two numbers are equal (such that the form of value in exchange equals the value of commodities in production), the production of commodities is based on a “social theft,” that is, the exploitation of workers.

Here’s the idea: assume that all commodities exchange at their values (that is, the kind of world—of free markets, private property, perfect information, and so on—presumed by mainstream economists). Labor power, too, is allowed to be bought and sold at its value. But after the value of labor power is realized in exchange and is set to work, more value is extracted than it costs employers to purchase it. In other words, an extra value—a surplus-value—is created by laborers (during the course of production) and appropriated by capitalists (and then realized, when the finished commodities are sold, in exchange).

My view is that the critique of capitalist class exploitation forms the utopian horizon of Marxian value theory. Since exploitation violates the social norms of fairness and justice (of “just deserts,” i.e., that everyone within capitalism gets what they deserve), it points in a quite different direction: the possibility of creating the economic and social conditions whereby exploitation is eliminated.

The differences between neoclassical price theory and Marxian value theory couldn’t be more stark. The differences are even more dramatic when we compare their utopian horizons. Whereas neoclassical price theory leads to a utopian celebration of capitalist markets, Marxian value theory both informs and is informed by a utopian critique of capitalist exploitation—and therefore a movement beyond capitalism.

In both cases—neoclassical price and Marxian value theory—the story about commodity exchange, and therefore the analysis of the form that wealth takes under capitalism, has a utopian dimension. The two theories have that in common. Where they differ is the form that utopian dimension takes. Neoclassical price theory is guided by a utopianism according to which free markets and private property represent the best possible way of organizing an economy—and therefore should be created and defended by any means necessary. Marxian value theory, as I interpret it, serves as a critique of all such utopianisms. It marks their failure, on their own terms, and points in a different direction—toward the possibility (but certainly not the necessity) of eliminating the exploitation that serves as the basis of capitalist wealth, and therefore of creating a different standard of fairness and justice.

As is well known, for generations of Marxian economists that utopian horizon has been summarized as “from each according to their ability, to each according to their needs.”


*To be clear, modern neoclassical price theory extends some important aspects of the theory originally elaborated by Adam Smith—such as the focus on individuals and the general praise for free markets—but it also represents a fundamental break from Smith’s theory—especially from the classical labor theory of value Smith and other classical economists (such as David Ricardo) utilized.

**It’s actually a pretty complicated set of steps, which most students are never taught. The key is that p*, the equilibrium price, is determined not just by supply and demand, but by the imposition of a third condition—a market-clearing equation—such that the quantity supplied is arbitrarily assumed to be equal to the quantity demanded.


income  wealth

Inequality in the United States is now so obscene that it’s impossible, even for mainstream economists, to avoid the issue of surplus.

Consider the two charts at the top of the post. On the left, income inequality is illustrated by the shares of pre-tax national income going to the top 1 percent (the blue line) and the bottom 90 percent (the red line). Between 1976 and 2014 (the last year for which data are available), the share of income at the top soared, from 10.4 percent to 20.2 percent, while for most everyone else the share has dropped precipitously, from 53.6 percent to 39.7 percent.

The distribution of wealth in the United States is even more unequal, as illustrated in the chart on the right. From 1976 to 2014, the share of wealth owned by the top 1 percent (the purple line) rose dramatically, from 22.9 percent to 38.6 percent, while that of the bottom 90 percent (the green line) tumbled from 34.2 percent to only 27 percent.

The obvious explanation, at least for some of us, is surplus-value. More surplus has been squeezed out of workers, which has been appropriated by their employers and then distributed to those at the top. They, in turn, have managed to use their ability to capture a share of the growing surplus to purchase more wealth, which has generated returns that lead to even more income and wealth—while the shares of income and wealth of those at the bottom have continued to decline.

But the idea of surplus-value is anathema to mainstream economists. They literally can’t see it, because they assume (at least within free markets) workers are paid according to their productivity. Mainstream economic theory excludes any distinction between labor and labor power. Therefore, in their view, the only thing that matters is the price of labor and, in their models, workers are paid their full value. Mainstream economists assume we live in the land of freedom, equality, and just deserts. Thus, everyone gets what they deserve.

Even if mainstream economists can’t see surplus-value, they’re still haunted by the idea of surplus. Their cherished models of perfect competition simply can’t generate the grotesque levels of inequality in the distribution of income and wealth we are seeing in the United States.

That’s why in recent years some of them have turned to the idea of rent-seeking behavior, which is associated with exceptions to perfect competition. They may not be able to conceptualize surplus-value but they can see—at least some of them—the existence of surplus wealth.

The latest is Mordecai Kurz, who has shown that modern information technology—the “source of most improvements in our living standards”—has also been the “cause of rising income and wealth inequality” since the 1970s.

For Kurz, it’s all about monopoly power. High-tech firms, characterized by highly concentrated ownership, have managed to use technical innovations and debt to erect barriers to entry and, once created, to restrain competition.


Thus, in his view, a small group of U.S. corporations have accumulated “surplus wealth”—defined as the difference between wealth created (measured as the market value of the firm’s ownership securities) and their capital (measured as the market value of assets employed by the firm in production)—totaling $24 trillion in 2015.

Here’s Kurz’s explanation:

One part of the answer is that rising monopoly power increased corporate profits and sharply boosted stock prices, which produced gains that were enjoyed by a small population of stockholders and corporate management. . .

Since the 1980s, IT innovations have largely been software-based, giving young innovators an advantage. Additionally, “proof of concept” studies are typically inexpensive for software innovations (except in pharmaceuticals); with modest capital, IT innovators can test ideas without surrendering a major share of their stock. As a result, successful IT innovations have concentrated wealth in fewer – and often younger – hands.

In the end, Kurz wants to tell a story about wealth accumulation based on the rapid rise of individual wealth enabled by information-based innovations (together with the rapid decline of wealth created in older industries such as railroads, automobiles, and steel), which differs from Thomas Piketty’s view of wealth accumulation as taking place through a lengthy intergenerational process where the rate of return on family assets exceeds the growth rate of the economy.

The problem is, neither Kurz nor Piketty can tell a convincing story about where that surplus comes from in the first place, before it is captured by monopoly firms and transformed into the wealth of families.

Kurz, Piketty, and an increasing number of mainstream economists are concerned about obscene and still-growing levels of inequality, and thus remained haunted by the idea of a surplus. But they can’t see—or choose not to see—the surplus-value that is created in the process of extracting labor from labor power.

In other words, mainstream economists don’t see the surplus that arises, in language uniquely appropriate for Halloween, from capitalists’ “vampire thirst for the living blood of labour.”

I don’t have strong views about the idea of “platform capitalism,” the concept presented and elaborated in a recent book by Nick Srnicek to make sense of the business model of such companies as Google, Amazon, and Uber. I don’t feel I have a dog in that hunt.

What I do like is Srnicek’s critique of other designations—such as tech companies, sharing, and the gig economy—and his focus on the idea that these are, after all, capitalist firms operating in a capitalist economy. Their raison d’être is to make a profit by centralizing and monopolizing access to data and selling data (or services based on those data) to other firms.

In fact, the notion of “platform capitalism” might be extended to other kinds of enterprises. I’m thinking, for example, of sports franchises and universities. They also operate as platforms inasmuch as they generate profits across a range of activities. Nominally, they produce and sell a commodity (e.g., a football match and higher education)—but that only serves as a pretext for generating profits in other activities: in the case of sports franchises, television revenues, shirts and other memorabilia, food and drink concessions, and so on; similarly, in the case of higher education, on-line courses, research-based fees and patents, food and lodging for students and visitors, branded clothing, and of course collegiate sports spectacles. In both cases, sports franchises and universities operate as diverse, profit-making platforms.

So, in my view, the idea of “platform capitalism” might be a useful way of thinking about at least some forms of capitalism that exist today.

What I find odd, though, is some of the commentary on Srnicek’s work. Consider, for example, Daniel Little’s posing of the questions generated by the emergence of “platform capitalism”:

what after all is the source of value and wealth? And who has a valid claim on a share? What principles of justice should govern the distribution of the wealth of society? The labor theory of value had an answer to the question, but it is an answer that didn’t have a lot of validity in 1850 and has none today.

What Little seems not to understand is that the profits of the enterprises operating under the rubric of “platform capitalism” are still based on the surplus labor of workers who produce the commodities that are being sold. Uber, for example, manages to generate its profits by capturing the surplus of its drivers. It doesn’t own the vehicles and doesn’t directly employ the drivers (with all the associated costs savings) but, since it owns the platform that connects drivers to passengers, it secures a “right” to the surplus created by the drivers and paid for by the passengers. The other kinds of platforms analyzed by Srnicek have different ways of generating profits: by selling advertising based on information collected about users (e.g., Facebook and Google), by renting servers used to process data (e.g., Amazon), and so on. But in all these cases, workers are doing the job of writing and modifying software, collecting and processing data, building and maintaining servers, and supplying the ultimate services to other enterprises or final consumers who purchase the commodities. And the members of the boards of directors of platform capitalist enterprises are the ones who ultimately appropriate the surplus.

Capitalism has, of course, changed since the mid-nineteenth century. The technologies, the modes of employment of workers, the ways commodities are marketed and the role users play, the measuring and processing of data—all of those features of the capitalist mode of production have changed radically since industrial capitalism first emerged. But the basic logic—of capitalists and workers, of creating, appropriating, and distributing surplus labor in the form of surplus-value—is the same for capitalist enterprises today just as it was in 1850.

That’s why the Marxian critique of political economy, modified and updated for the twenty-first century, continues to be able to explain the “source of value and wealth”—including and perhaps especially “the soaring inequalities of income and wealth that capitalism has produced” in recent decades.


Special mention

freedomtobescrewed17-600  195638_600


Treasury Secretary Steve Mnuchin may not be worried. Nor, it seems, are other members of the economic and political elite. But the rest of us are—or we should be.

As regular readers of this blog know (cf. all these posts), the robots are here and they’re rapidly replacing workers, thus leading to less employment, downward pressure on wages, and even more inequality.

The latest evidence comes from the work of Daron Acemoglu and Pascual Restrepo, who argue, using a model in which robots compete against human labor in the production of different tasks, that in the United States robots have reduced both employment and wages during recent decades (from 1993 to 2007). That conclusion holds even accounting for the fact that some areas of the economy may grow (thus increasing employment for some workers) when the use of robots raises productivity and reduces costs in other industries.


Even though U.S. employers have been introducing industrial robots at a pace that is less than in Europe, their use in American workplaces has in fact grown (between 1993 and 2007, the stock of robots in the United States increased fourfold, amounting to one new industrial robot for every thousand workers). And, once the direct and indirect effects are estimated, robots are responsible for up to 670,000 lost manufacturing jobs. And that number will rise, because industrial robots are expected to quadruple by 2025.

Actually, the effects have likely been even more dramatic, because Acemoglu and Restrepo take into account only three forces shaping the labor market: the displacement effect (because robots displace workers and reduce the demand for labor), the price-productivity effect (as automation lowers the costs of production in an industry, that industry expands), and the scale-productivity effect (the reduction of costs results in an expansion of total output).

What they’re missing is the effect on the value of labor power. As I explained last year, when productivity increases lower the prices of commodities workers consume, the value capitalists need to pay to get access to workers’ ability to work also goes down. As a result, even if workers’ real wages go up, the rate of exploitation can rise. Workers spend less of the day working for themselves and more for their employers. Capitalists, in other words, are able to extract more relative surplus-value.

And more surplus-value means more income for all those who share in the booty: CEOs, members of the 1 percent, and so on.

That’s why the increasing use of industrial robots, which under other circumstances we might actually celebrate, within existing economic institutions represents a disaster—not for their employers (who, like Mnuchin, are not particularly worried), but for all the workers who have been or are likely to be displaced and even those who manage to hang onto their jobs.

Workers are the ones who are going to continue to suffer from the “large and robust negative effects of robots”—unless and until they have a say in how robots and the resulting surplus are utilized.


Noah Smith is right about one thing: mainstream economists tend to use the word “capital” pretty loosely.

It just means “anything you can spend resources to build, which lasts a long time, and which also can be used to produce value.” That’s really broad. For example, it could include society itself. It also typically includes “human capital,” which refers to people’s skills, talents, and knowledge.

But then Smith proceeds, like the neoclassical equivalent of Humpty Dumpty, to make his definition of human capital the master—because, in his view, “it helps to convey some important truths about the world.”

Human capital, as I’ve explained in some detail before, is a profoundly misleading concept.

I don’t want to repeat those arguments here. But I do want to make two additional points.

First, if Smith wants to invoke human capital to say “education and skills are a form of wealth,” then why not include other ways people are able to earn more or less than their counterparts? Why not, for example, go beyond his reference to credentials (he has a Stanford degree) and intellectual abilities (apparently, he can do math well and write well) and refer to some of the other important ways people are sorted out within existing economic relations. I’m thinking of such things as gender, race and ethnicity, immigration status, and so on. They’re all ways workers are able to receive more or less income that have nothing to do with the effort they put into their jobs. Does Smith want to argue that masculinity, whiteness, and native birth are forms of human capital?

No, I didn’t think so.

Second, there’s the issue of capital itself. When capital is treated as a thing (which is what one finds in Smith’s account, as in most versions of mainstream economics), then it’s possible to forget about or overlook the historical and social conditions necessary for those things to operate as capital. Buildings, machinery, and raw materials, robots and computer software, even skills, talents, and knowledge—they only operate as capital within particular economic relations. Only when workers are forced to have the freedom to sell their ability to work to a small group of employers, only then does capital become a means to extract surplus labor from those workers. Once appropriated, that surplus labor then assumes a variety of different, seemingly independent forms—from capitalist profits to land rents, including payments to merchants and finance, the super-profits of oligopolies, taxes to the state, and, yes, the salaries of CEOs and supervisors.

But those payments are not “returns” to independent forms of capital, human or otherwise. They’re all distributions of the surplus-value that both presume and produce the conditions under which laborers work not for themselves, but for their capitalist employers.

They, and not the various meanings neoclassical economists attribute to capital, are the real masters.