Surplus Product - Modern Economics

Modern Economics

In modern economics, however, the whole problem of the surplus product does not exist, or is not theorized in the same way. The main reason is that in modern economics, based on double-entry bookkeeping, the value of inputs is always exactly equal to the value of outputs. This mathematical or accounting identity holds true by definition, because in economic theory the operating surplus (or gross profit) is treated as the "cost of capital" (as a "factor cost") as well as an income. Therefore, it is treated both as a component of input as well as a component of output – instead of being simply the residual that remains after costs are deducted from gross sales revenue. Thus, total expenditure on inputs always balances exactly against total revenue from output sales; for each factor income, there is an equivalent factor cost. This view of the matter makes it impossible that the value of output created could ever be larger than the value of inputs (except for inventory changes).

As an effect, it begins to look like economic growth occurs not because there is more production (more is produced, than is consumed in total), but because there is more trade (an expanding market, a greater volume of sales). It then seems to follow that "more wealth grows out of more trade". The classical economists certainly believed in the benefits of trade, but they never assumed that wealth creation was simply a result of trade, since that wealth had to be produced in the first instance, and because harmful trade caused the economy to crash. Some kinds of trade, they believed, promoted production, others did not, or only to a small extent.

Another reason why the "surplus" problematic does not exist in modern economic theory is, because nowadays economists generally accept the standard national accounting system developed by Simon Kuznets and Richard Stone and adopted by UNSNA. The product account in this system offers standard measures for gross output, value-added, factor costs and operating surplus. These standards are nowadays used worldwide for the production of macro-economic statistics about wealth creation, such as GDP and its components. They provide a universal "language" for talking about the economy, and are accepted as an objective description. Because the modern social accounting system is all-inclusive and complete (it is able to allocate every transaction, product and activity to a category somewhere in the system), it is regarded as final and scientifically sound, and therefore beyond controversy.

The only residual theoretical disputes there still are, concern activities and resources in the economy which are normally not priced goods, or for which prices are difficult to estimate or impute. The modern system assumes that everything has a price, or can be priced, and that assumption is based on the fact that most things nowadays really do have a price tag. That situation did not exist in bygone times, because there was no universal market in economic goods.

The modern category of "value added" which is central to the standard accounting system, i.e. "value of goods produced less the value of goods used up to produce them", seems to provide a neutral and objective description of wealth creation. But this ingenious category actually has the effect, that the process of the accumulation of capital is conflated with the process of the production of output, in one concept (the operating surplus component in gross output, which strictly speaking can vary according to how depreciation write-offs are valued, is simply the "residual item" in the product account, referring to that part of the gross profit which is considered to be generated directly by production; gross fixed capital formation is the net addition to physical fixed capital stocks, funded by income).

In that case, the net addition to the stock of wealth (the surplus) seems to occur simply because "more output was produced than the goods consumed to produce it", a physical definition which holds good for all time, and which can be generalized to any kind of society. In turn, that means that the socio-economic relationships which are historically specific to capitalist society (in particular, the specific modes of commercial self-enrichment), are simply abstracted away from and ignored. The classical problematic of the kinds of activities which promote wealth or detract from it disappears from view, since almost any activity which makes money is considered to create wealth.

In residual cases, such as banking, the "productive" source of net interest might be a bit tenuous, but such income could nevertheless be defined as the charge levied for the provision of a financial service. In the case of the buying and selling of land, it is rather obvious that no new, extra land appears out of this activity, because the existing land only transfers from one owner to another, and therefore - leaving aside the difficult methodological problem of valuing it in a standard way, from the economic point of view - national accounts largely ignore changing land values, except that investments in land improvements are included in value-added. What the value of a country's total land area is, or different parts of it, is unknown and perhaps unknowable if the land is not offered for sale. The idea that landownership rents and tributes are part of the surplus product, as Marx argues, makes no sense at all in conventional economics.