Comparison with the surplusapproach

A comparison of what the marginalist approach takes as given to determine the rate of return on capital with what is taken as given for the same determination in the surplus approach is enlightening.

1. preferences;

2. technical knowledge (the adoptable methods of production); and

3. endowments of factors of production and their allocation among consumers.

(Fixed capital would also require the specification of the age distribution of the several durable capital goods.) Comparison with data (1), (2), and (3) or (3') of the classi­cal determination of the rate of profits reveals that the classical and the marginalist approach differ radically. The most glaring difference is that the surplus approach takes the real wage as already determined in another part of the overall analysis, while the marginalist approach determines it simultaneously with the rate of interest. (In what follows, land will be mostly assumed free, and neglected, because it is not in the treat­ment of land rents that the important differences between the two approaches reside.) The reason is the presence in the marginalist approach of the factor substitution mecha­nisms acting symmetrically on all factors, which imply a similar and simultaneous determination of all factor rentals. The idea of factor substitutability is on the contrary absent in the surplus theorists; this helps in understanding other differences too. In the absence of the premises for a decreasing demand curve for labour and hence for an adjustment toward equilibrium between supply and demand for labour, in the surplus authors a determination of the wage by political and social forces is indispensable to the explanation of wages, and therefore of profits.

The political evaluation of capitalism is, of course, immensely influenced by the new approach: interest is now the reward for the sacrifice of abstinence, just as wages are the reward for the sacrifice of unpleasant labour; capital and labour cooperate rather than being in conflict (more capital raises the marginal productivity of labour and vice versa); both rates of reward reflect the marginal contribution to society of the “last unit” of sacrifice, for example, the wage equals what would be lost by society if an individual decided to supply one unit less of labour, so there is correspondence between individual contribution to social welfare and reward, which denies the exploitation of labour; a higher-than-equilibrium real wage damages society by reducing labour employment and thereby aggregate production.