A Neoclassical Approach to Surplus Value Theory

October 6th 2020 | كتبها



Using standard neoclassical textbook microeconomics, one can show that surplus value emerges from consuming labor power by firms even under the strict conditions of perfect competition and diminishing returns to labor.

Starting from the first-order conditions for maximizing a profit function, equilibrium in the labor market occurs where labor is paid in wages (w) the market value of its marginal product (MRP).

Based on this first-order condition, neoclassical economists commit a fallacy of composition, i.e., they assume that since THE LAST WORKER HIRED gets paid the value of her or his marginal product, THEN ALL WORKERS HIRED GET PAID THE VALUE OF THEIR MARGINAL PRODUCT TOO.

But that is NOT true according to neoclassical theory itself. Firms stop hiring at that equilibrium point. They go on hiring as long as MRP is greater than w, and stop hiring when MRP = w. So that equilibrium point tells us simply how many units of labor should be hired to maximize profit for the firm. This is just like any consumer would go on consuming units of any good or service so long as its marginal utility is greater than its price (the marginal utility of the $$$ given up to buy it). In the product market, equilibrium tells us what the equilibrium quantity bought and sold will be (given a constant price).

As a result, a consumer surplus emerges. In the case of labor markets, the consumer is the entrepreneur. The consumer surplus is hereby the surplus appropriated by the firm from consuming labor. And what do we call that otherwise? Long ago, someone called it surplus value. We can call it a “chicken”, but that won’t change what it is.

The mathematics and a graphical illustration are worked out in the attached photo.

That consumer surplus/ surplus value is the area under the demand curve for labor and above the equilibrium wage, which is also the labor supply curve here (since we are assuming perfectly competitive markets in the product and input markets) since a perfectly competitive firm envisages a labor market where it can hire all the labor it wants at the going market wage.

Just one thing: for every worker to be paid the value of her or his marginal product, there has to exist a labor market where the supply and demand curves for labor overlap snugly on top of each other, with an infinite number of equilibrium points. Otherwise, if we include an element of monopsony in the labor market, with a few large firms buying labor, or if we include an element of monopoly power in the product market, restricting production, and therefore the labor input, which would make the supply curve of labor increase, or shift to the right, for other firms, the surplus value would get much larger, so this attached illustration was worked out under the strict assumption of perfect competition, to make the point stick. A similar surplus value exists from using K of course, hence the distinction between the interest rate as a return to capital, and the profit rate (which goes to entrepreneurs and banks). But that is another story.

Ibrahim Alloush


الموضوعات المرتبطة

The Conflicting Economic Lessons of Amazon versus Tesla during the Corona Episode

Collectively, the net worth of the world's 500 richest people grew about $1.8 trillion last year, according to Bloomberg. Initial reports, in early October 2020, had said they got $813 billion richer. As it turns out, there is a TRILLION dollars more to that. Small potatoes! After all, what's a trillion dollars in the history of the [...]

Price Gouging and Profiteering Does NOT Exist According to Most Economists

  Raising prices of essentials prohibitively during emergencies or periods of crisis does not exist according to most economists.  The market is all about charging what the market will bear, according to them.  So if a retailer can charge $20 for a loaf of bread pending an imminent Corona virus lockdown, for example, then more power to [...]

Environmentalism, Corona Curfews, and the Poor: It’s the Economy, Stupid!

  Environmentalism, for all it’s worth, has always sounded stand-offish for the poor generally, and the poor in poorer countries particularly.  Where people need jobs, health, education, infrastructure, housing, and more than a subsistence wage, sounding off worries about endangered species, coral reefs, dolphins caught inadvertently in [...]

Billionaires Get About A Trillion Dollars Richer During 2020 with NO Trickle-Down Effect in Sight

According to Time on Oct. 6, 2020, "despite the global economic shock, the world’s 500 richest people are a combined $813 billion richer now than they were at the beginning of the year, according to the Bloomberg Billionaires Index", and 2020 is not even over yet. The largest accumulation of wealth took place in the technology and [...]

Two Equations which May Help Explain Why Prices Rise and the US Dollar Appreciates in War-torn Countries under Siege.. Syria as a Case in Point

For people living in countries torn by war, then besieged by stifling sanctions, the issue of rising prices and depreciating local currencies is a very emotional subject which impinges on the very core of their livelihood and the livelihood of their families. Yet it is precisely such dire situations which require an objective understanding of [...]
2024 الصوت العربي الحر.