Surplus + Profits
Workers sometimes feel that because a business earns a profit on top of what they are paid for their labor, they are getting cheated out of their cut of the profits, or ‘surplus value’ that they are creating. This view does not consider a couple of things, specifically the role of capital (money) in the business, and the role of the entrepreneur.
A portion of the profits of a business can be classified as interest on capital invested. If the business is capitalized at $10 million, and the prevailing interest rate is 5%, then $500,000 of the ‘profit’ is really interest on capital and should not be counted as profit that the business is generating (the $10 million could generate $500,000 in interest anywhere). Obviously workers have no claim to this portion of the business profit, it is not their capital being invested in the businesses, and it could make this money passively without the involvement of the worker. Another point here is that workers get paid immediately for their work. But most of the time, the products they work on aren’t sold and paid for until much later. The entrepreneur advances workers the money well before she collects any revenue from their labor.
Another monetary factor is the risk that entrepreneurs or investors take with the firm. The worker bears none of this risk, they are paid whether the entrepreneur succeeds or fails. If the worker feels they are entitled to surplus profits, do they also feel responsible for the business losses? Especially in the first few years of existence when almost all businesses lose money. If the worker wishes to be a ‘partner’ by sharing in the profits, they must also share in the losses. Part of the business profits are compensation for the entrepreneurs and investors for taking the risks involved, risks which the workers are insulated from.
If the entrepreneur also works as a manager of the businesses, another part of business profit that has nothing to do with the worker is the portion of the profit that would go her salary. The amount she would get paid at a similar job should also be subtracted from the profit of the company; if the entrepreneur’s labor saved the company $100,000 by not hiring someone, that part of the profit should not be attributed to other workers in the company, it was savings due only to the labor exerted by the owner.
Another important reason that the worker is not entitled to the profits of the company, is because of the entrepreneur’s role as owner of the firm, starting with discovering an inefficiency in the market, and their ongoing work in that role.
Before the business is even running, the following is an incomplete list of what the entrepreneur does (and what the worker demanding surplus value feels should not be compensated for):
Think of an idea, find an inefficiency in the market that can be solved
Research the idea, talk to people in the industry
Build a financial model
Write a business plan & deck
Find funding
Scout out location
Come up with marketing plan, find designer, create branding, logo, etc.
Hire managers and have employee plan
Building customer support systems
Business permits, licensing, incorporation/LLC, sales tax, insurance, potentially much more depending on if there is a physical location, food served, etc.
Create financial, operational, HR systems, etc.
When the business is running, the entrepreneur as owner:
Makes sure the managers are doing their jobs correctly, overseeing every aspect of the firm
Keeping pace of the industry & market, making sure the business stays relevant or competitive
Makes decisions about adding new products, or removing those that are underperforming
Serves as the customer service agent of last resort, handling major customer issues
Cultivating large clients, maintaining important relationships
Setting the corporate culture, making sure the employees are happy
These are the reasons that employees are not entitled to the profits or ‘surplus value’ that they create. As an employer, I think that part of the profits should be given to employees as bonuses, to incentivize them to care for the company, this should be in the compensation for every employee, no matter their position with the firm. But they are not entitled to any compensation above what is in their contract, just as they are not required to work above and beyond what is required of them.
The argument that the worker is entitled to surplus value can be extended to anything that the business uses in production – if the business uses steel in their process, why wouldn’t the company that produces the steel also be entitled to the profits they were making on the steel? What about the electricity the company uses, or even the landlord providing a space? It is the entrepreneur that has come up with the idea, put the pieces in place (of which the employee is just one), taken the risk, and continues to stay innovative and ahead of an incredibly competitive marketplace.
