The Genesis of Pure Surplus Income

Money in circulation is always a balance in some human person’s bank account, pocket, or mattress.

It is in the nature of a transaction that as money flows out of one person’s account it flows into another person’s account. What is spent by Smith is simultaneously received by Jones.

As a flow out, it is either an initial outlay by an entrepreneur for productive services or a final expenditure by an entrepreneur or consumer for a completed product. As a flow in, it is a receipt of income for some defined purpose.

As a flow of disposable income in, but not designated for consumption, it is called “surplus income;” and it may be designated for either repair and maintenance of the existing capital stock or for expansion of the capital stock. (“surplus” does not mean it has no use; on the contrary it underpins the entire economy)

As a flow in directed to new capital rather than to repair and maintenance of existing capital, it is called “pure” or “net,” and as expended, this pure surplus income or net savings becomes “expansionary investment.”

Let us follow the money as it is being invested in the expansion of plant and equipment rather than spent on repair and maintenance of capital equipment or on consumer goods:

We begin with a static economy, which is merely reproducing itself at a certain level of economic activity and using a money supply perfectly calibrated for the volume of transactions. Capital has been being fully utilized, but some materials are available and some persons are idle. An opportunity arises to add capital to expand the economic process. Through open-market purchase of bonds, the Central Bank channels sufficient new money into the system to enable this expansion of transactions. This new money is received by the commercial and investment banking system, then loaned by the commercial and investment banking system to the entrepreneurs for production of the additional capital. The money is outlaid by the entrepreneurs to newly-employed humans for their productive services. The newly-employed pour most of the new money into consumption, and the inevitable higher prices – inevitable because more money is now chasing an as yet unexpanded supply of consumer goods – enable entrepreneurs in the aggregate to garner this money as pure surplus income and dedicate it to legitimate further investment. Thus, as over and above what has previously been needed for continuity in an as yet unexpanded basic circuit and as received for use as investment, the money becomes a balance of pure surplus income in someone’s account; and the same money is then dedicated to another round of investment.

As the capital product is being manufactured in a rectilinear series of value-adding steps by a series of contributing firms over considerable time, all outlays are ultimately being made to people for their productive services. The outlays are, for sure, not being made to inanimate structural steel or to inanimate computer code or to an inanimate electric-power system. The inanimate capital product never has a money balance in its personal account and is always totally impoverished. Steel bars and computer code do not present themselves at a retail store to purchase bread, clothing, or any other element in a standard of living. It is people – in the person of individual employees (including owners) or entrepreneurs conducting units of enterprise – who hold in their accounts this pure surplus income which – since it is not being used for consumption or repair and maintenance – is being invested over and over again, period after period, in circular repetition.

if the real flows of goods and services move, as it were, in straight lines from the potentialities of universal nature (to a completed product), on the other hand, the dummy flows of money and monetary substitutes, of cash and credit, move in circles. See Precepts for Operators (Consumers, Entrepreneurs, Governors)

The same currency is used over and over; the same accumulation sustains indefinitely a given volume of credit. One must not be misled by the name ‘circulation’ into thinking of dummies as moving with an angular velocity. They lie very quietly in the reserves of individuals, firms, banks. Only at the instant of exchange or loan do they move and then their movement is instantaneous. The meaning of the term ‘circulation’ is that these instantaneous movements in various directions (in circles and through crossovers) have to balance with opposite movements. There has to be equilibrium. … funds, like rivers, can be permanent principles of flow only on condition that they permanently are fed by tributary streams. CWL 21, 57-58

If the new and higher rate of capital production and monetary circulation in the capital circuit happens to be maintained – rather than contracted to constitute a decline of capital production and monetary circulation – the same amount of money is clearly continuing to circulate to expand the stock of capital. The same amount of money is allowing a flow of pure surplus income to be repeated over and over again.

The same currency is used over and over; the same accumulation sustains indefinitely a given volume of credit. [CWL 21, 57-58]

Conversely, a fixed volume of credit sustains the accumulation of more and more capital until the limits and constraints of technical relations are reached, i.e. marginal efficiency tapers off, investment opportunities diminish, and the banking system prudently demands more collateral and reduces its lending. Also, demands of repair and maintenance of the accumulation begin to claim more and more of the existing money in circulation. The given volume of credit is initially used repetitively to produce more and more capital; further credit may be granted; but eventually opportunities for both investors and banks are exhausted.

The next excerpt reviews the phases of the long-term cycle and the inevitable rise and fall of pure surplus income. This inevitable rise and fall is normative and good. It does not conform to the conventional criterion of ever expanding pure surplus income, or colloquially, continued earnings growth. The failure to understand the formal reason for falling pure surplus income and the consequent defensive counterproductive contraction – so as to increase profits by reducing employee costs when the system is not yielding increasing profits – is a major source of major problems.[1]

In the (capital expansion phase, dQ”/Q”>dQ’/Q’), the secondary (surplus-circuit) rhythms are widening and deepening themselves. … Surplus activity, surplus expenditure, and net surplus income (pure surplus income) are becoming greater and greater. To make a large profit is, in the general case, not a matter of brilliant enterprise. It is inevitable. It would occur even if all the attempted new enterprises were blunders. For if there is surplus expenditure, there cannot but be net surplus income. ¶ In the(subsequent basic expansion phase, dQ”/Q”<dQ’/Q’), the (capital-circuit) rhythms are widening and deepening[2] the primary (basic-circuit) rhythms. But the wider these rhythms are, the greater the maintenance that the (capital-circuit) rhythms have to effect, and, since they are not increasing themselves, there is no increase in the widening and deepening they can effect in the primary. S (the ratio of pure surplus to total surplus activity)is some proper fraction, but it is decreasing. No matter how intelligent and efficient traders may be, S cannot but be decreasing; for with (total) surplus expenditure decreasing, (pure) surplus income cannot but follow suit. … ¶In the static phase, S is zero. … the industrial structure is not becoming bigger and bigger. And it also means that, in the aggregate, there is no surplus income. CWL 21, 52

Finally, while the formal cause of pure surplus income, – i.e. the immanent intelligibility of the flow of pure surplus income in fully explanatory macroeconomic dynamics – is its functional relation to other flows of income as monetary correlates in a structured and temporal productive process, let us note the conditions, efficient causes, and attendant phenomena of its practical occurrence in a world of human agents:

(We) enumerate the causes or conditions of this (pure) surplus activity, expenditure and income. .. The first condition is that … labor, industry, and commerce do more work than (previously). … A second cause … is the general acceptance of an inflation of primary consumer income. …A third cause is savings (for another round of investment). … A fourth cause is financial technique. … A final and fifth cause is the emergence of ideas, the taking of risks, and the enterprising conduct of affairs. CWL 21, 89-91



[1] See on this website Precepts for Operators (Consumers, Entrepreneurs, Governors) and Why and How the Basic Expansion Fails to be Implemented


[2] Transitive verbs