WAGE LABOUR AND CAPITAL & WAGES, PRICE AND PROFIT – Karl Marx

NOTE: This is a classic work of literature and a foundational part of Marxism, one of the most important political and economic theories ever.  I don’t think a traditional review where I critique the author’s writing is going to be of much value to anyone.  It’s a product of its place and time, and a part of our history.  Since it’s in the public domain, I’ll attempt to summarize the key ideas, clarify its importance, and will also attach my notes so you can read them yourself to either enjoy or criticize my doodles.

Wage Labor and Capital

In 1849, German Philosopher Karl Marx gave a series of lectures to the German Workers’ Society, amidst a continuing wave of revolutions and insurrections in Europe. This book collects the text of these lectures, with plenty of footnotes and an introduction or two by his constant partner, Friedrich Engels. These lectures took place years before Marx published the first volume of his most substantial work, Capital (or Das Kapital if you’re German). Some of his ideas evolved between these lectures and the publication of that giant volume, but this work still serves as a useful way of getting the basics of Marxist thinking on labor, value, economics in general and capitalism in particular.

Engels starts his intro in earneEngels starts his intro in earnest with an explanation of Marx’s conception of the Labor Theory of Value, an idea that has been part of economics since the classical days of David Ricardo and Adam Smith, but has fallen out of favor in the last century or so as capitalist economists have put up other, more subjective theories of where value comes from and how prices are determined.

The Labor Theory of Value

This theory all hinges on the idea that labor, the work we do to produce goods and services, is a commodity, meaning it is routinely bought and sold.  Prices of commodities fluctuate constantly, and not always for clear reasons.  The forces of “supply and demand” that conventional economists talk about all the time don’t always explain this variation in price.  Classical economists like Adam Smith and David Ricardo suggest that a commodity is priced based on how much labor goes into making it.  The problem with this, of course, is how you determine what the value of labor actually is.

As Engels says, “we keep on moving in a circle.”

Classical economists tried to measure the price of a commodity by how much labor it costs to produce it, but you can’t really measure how much it costs to produce labor itself.

So what can you measure?  Marx and Engels’ answer is that you can measure how much it costs to produce (and reproduce) a worker.  

What Marx means here is the cost of subsistence, how much money it takes for a worker to survive. And remember – since the proletarian working class no longer has control over the capital we use to produce goods and services, they have to sell their labor power in order to survive, or to make up that cost of subsistence.

How does all of this lead to the Labor Theory of Value?

• And, for the sake of simplicity, let’s say I need to make ten bucks today to pay my rent, utilities, get bus fare home and buy food and clothes.  That’s my cost of subsistence.

• I work a ten-hour day.  And boss man Tim Cook will pay me ten bucks for today’s ten-hour shift.
• Let’s say that the fancy electronics parts in the plant cost $30 for Tim Cook to buy for each unit he makes.  The electricity in the plant costs $5 per phone, and using all the plant’s equipment puts about $5 more of wear and tear on the machines.  Add it all up, plus the wage my boss pays me, and you get $50.  
• That’s what it costs to make the phone – $50.  But it’s gonna sell for more than that. 
• You see, Tim Cook is gonna sell it for $60.  That’s $10 more than it cost for us to make the phone.
• But classical economics, according to Marx & Engels, says products are sold at their value and that this value corresponds to the amount of work put into making the product!
• $40 of that value was already there in the parts, power and plant’s machines before I started working.
• When I worked, and assembled that product, I added by $10 wage to the value.  But then it sold for another $10 above that.
• How does that happen? The Marxist answer is that my labor created value; in this case, $10 worth of value that wasn’t there before.  That’s how you get that $60 selling price.  
• In other words, labor added value to the product.  $10 was my wage as a worker.  $10  more was the surplus value that my work added to the product.  So, the value of that labor is a total of $20.
• When capitalists hire themselves out to capitalists, they are selling their labor power for a period of time or to create a definite amount of output (products or services).  
• That labor power adds value to the product, in that case $20 on the phone.  Half of that value gets paid back to the worker – me, in my example – for a $10 wage.  The other half, another $10, gets added to the price.
• Then the capitalist, Tim Cook, sells the phone for a $10 profit, since it cost $50 for us to make but sells for $60.  With me so far?  Because here is the problem Marx and Engels see:

I worked ten hours to make that phone, and added $20 to its value by doing it. BUT, that means I added $10 to its value in 5 hours, working half the day, and $10 is also the value of my wage. So I paid back what I owed him for my wage by working just half the day! But I don’t get to leave, go home and play Xbox after just half the day, do I? I gotta keep working the rest of the day, and add $10 more to the value of that phone while getting paid nothing more. I was working for my own benefit when I was reproducing my wage – now, I’m working for my boss alone.

The value I added the rest of the day is surplus value, and it all goes to the boss even though I did the work.

Because the boss gets ALL the surplus value I create, he has incentive to keep my wages as low as possible. How low? Down to my cost of subsistence – the minimum they need to pay to keep me and mine housed, clothed, fed, and able to work again the next day.

New technology, and more advanced means of production allow the capitalist to squeeze more surplus value out of me, because I can make more products faster (and reproduce the value of my low wage even quicker). Meanwhile, my wages get ever lower, until those in the working class with me can’t even afford to buy the products we make.

Marx explains how the prices of goods fluctuate based on the producer’s costs and supply and demand.  He also Marx explains how the prices of goods fluctuate based on the producer’s costs and supply and demand. He also discusses how when the demand for a commodity rises, a cycle begins where investment capital (from banks, people with wealth who invest in businesses) will flow toward that industry, on the understanding that that’s where the money is. They keep producing more of that commodity until they can no longer sell it at the inflated, or even normal price, because they’ve made too much of the commodity, and now supply is greater than demand.

The opposite happens if prices dip below the normal price. Capital will flee until production matches reduced demand. In other words, supply and demand cause fluctuations in price, but Marxist economics believe that in the long run, prices are moving around a single center of gravity – the cost of production.

Currency, Capital, and Class Struggle

When Marx himself gets going, he tries to explain that the true cause of the revolutions and upheavals being seen in Europe at the time is the underlying class struggles taking place. The prominent one during these revolutions is the one between the aristocratic nobles and the bourgeoisie, or the middle class that is rapidly rising to be the wealthy capitalist class. The revolution he sees bubbling under the surface, however, is the coming one between the bourgeoisie (capitalists) and the proletarian class of workers who perform work in their mills and factories. The relationship between wage labor and capital is critical to understanding how Marx sees this period of time, and where he sees it going.

So what are wages? How are they determined? What you probably know already is that depending on the work you do, you as a worker get a sum of money from a boss for a certain period of work (or a certain output of work). This is what happens when capitalists buy a worker’s labor power. Because labor power can be bought and sold like this, Marx states that it is a commodity.

Money or currency, in which wages are paid, represents all the potential commodities a worker could buy; as a result, the exchange value of a worker’s labor power can be expressed in wages as well.

And remember – workers have to sell their labor power in order to live. In capitalism, unlike earlier systems, you can certainly leave any employer you like, and leave any job, but you can’t get away from the whole capitalist class. Sooner or later, you have to agree to sell your labor to someone if you don’t have capital of your own.

In Chapter 2, Marx asks us to consider how the price of a commodity is determined. The big element he begins with is competition, which takes place between sellers trying to gain market share, and also between buyers, who are competing to get the goods they need. The interplay between these two forces is what we call supply and demand.

Marx explains how the prices of goods fluctuate based on the producer’s costs and supply and demand. He also discusses how when the demand for a commodity rises, a cycle begins where investment capital (from banks, people with wealth who invest in businesses) will flow toward that industry, on the understanding that that’s where the money is.

In Chapter 3, Marx defines capital as any raw materials, tools & machinery, buildings or other “means of subsistence” that can ber used to create new raw materials, tools & machinery, commodities and so on.

Since all this capital is created or made accessible through people working – through labor – Marx refers to it as accumulated labor. But he also notes that all of this only becomes capital in certain contexts. Human beings have to interact with each other (engage in social relations with one another) in order to produce goods, and the ways that people relate as they produce goods determines, at least for Marx, the kind of society we have. For instance, are we in ancient times, the feudal era, or the current system where the capitalist class dominates? In each era, the social relations are different and, so, are the relations through which we produce and distribute all the things we make and services we provide.

The commodities that make up capital are exchangeable for each other (you can exchange a certain amount of hammers for a certain amount of computer parts, for example, even if you do it through the medium of money), and the ratios by which we exchange them constitute their price.

Capitalists purchase labor power from workers. Workers then labor to make up the value of what they consume in wages but in doing so, they create more value than what existed before.

However, workers generally spend most of what they earn right away (in our day, we tend to call this “living from paycheck to paycheck”. Meanwhile capitalists get enough in their earnings (by taking the surplus value workers create through labor) and accumulate enough capital to spend some of their earnings by reinvesting back into their business. They expand production, and by going again through this whole process of production, sale, profit and reinvestment, they are accumulating even more capital.

They’re Scrooge McDucking, basically.

Conventional economists will say that both capitalists and labor need each other – and in this economic system, they certainly do. But Marx asserts that this relationship is inherently exploitative. They both have to be there to keep the system going, but the capitalist is the only one in the relationship that is getting ahead.

To review, capital:

• Involves a social relation (a bourgeois one) between people in the process of producing goods and services.
• It consists of exchange values (commodities) that can be exchanged for one another, often using money as a medium of exchange.
• What form that capital takes (steamships, wheat, Xboxes, office towers) can change without changing the amount, ownership, or relations of capital.
• Workers utilize capital, performing labor that creates extra value even after accounting for their wages.
• When that surplus value is appropriated by capitalists, they pay their costs, enjoy some of the profit for their own consumption, and reinvest some of the rest to expand production and accumulate more capital that benefits the employer, but not the workers.

In Chapter 4,  Marx implies a common argument that capitalists make – “a rising tide lifts all boats”.  After all, if capitalist companies continue to grow, won’t that create more demand for workers, and won’t that mean wage growth as those companies try to attract more workers?  Sure, it can mean that.  If that system is working “correctly”, it does mean that, in absolute terms.  Still, the disparity between rich and poor can still and often does grow.  

Sometimes, though, companies decide not to raise wages, even as demand for goods, or other factors, lead to an increase in prices.  When this kind of inflation occurs, it means real wages have decreased for workers.  

The opposite is true if the price of goods goes down – the value of a worker’s dollar can stretch farther. We are experiencing high inflation right now, but the real wage increases that low-income workers saw from the growth of big box stores like Wal-Mart in the 1990s and 2000s comes to mind as an example.  

In other words, the numerical amount of wages is only one part of the story.  It also matters what we can buy with them.

Capitalist Revenue

• Capitalists split the revenues from a sale into 3 basic parts, according to Marx:

1. Replacing the price of raw materials, tools, machinery, etc. (this is what Marxists call constant capital)
2. Replacing the wages they pay to workers
3. Profit.

Because capitalists have to account for wages before they can claim profits out of their revenues, the general law Marx sees here is that capitalist profits tend to rise as worker’s wages fall.

Granted, there are other ways to increase the green in a capitalist’s balance sheet.  They can also increase profits by increasing market share versus their competitors (through techniques like better marketing, underselling, etc).  Improving production technology and developing new techniques like increased division of labor to make more products (or make them cheaper) helps too.  But in the long run, expanding production in this way still tends to lead to lower profits.  

Why is that?  Because as tech and new techniques make it easier to produce more products and services faster, flooding the market, prices go down.  You make more, but each unit sells for less.  The machinery and tech you’d use to streamline your production is expensive.  Marxist theory on industrial machinery and tech is that its value for the capitalist (how much that machinery can produce in terms of commodities) is baked into the price he pays for that machine.  

So if I run a printing press and buy an industrial printer that’s rated to create one million books, the value of getting one million books printed is imbued into the price of that printer.  Its value will slowly depreciate as I use it until, at the end, it’s broken down, used up, and/or obsolete, and its value is expended.  I need that printer to put out my product more cheaply and quickly, but it’s not adding value the way labor does.  As the capitalist firm that bought the machine, I’m just getting what I paid for.  From a Marxist point of view, it can’t do anything to change the fact that labor adds value and that value is the source of profit.  

Chapter 5 describes how this process driven by competition, accumulation, overproduction and exploitation tends to end up.  

In order to profit, you must always be producing more, selling more, driving down costs and conquering new markets for your products (sometimes with literal conquering – ask Africa).  But if you get an advantage, like better tech or division of labor, or underselling on price to crowd out your competitors, it will only last until the others in your market catch up and adopt the same tactics.  This can drive prices down even further, below the cost of production.  

Then, the arms race you’re in with your competition begins anew!  That means:

• More division of labor
• More new tech & machinery
• More new markets
• More downward pressure on wages

This has to keep happening because once this process begins, capitalists have to produce more and more goods just to get the same profits they were getting before.  

It isn’t just that all capitalists are evil.  A capitalist firm can’t help it.  If they stop, they will get beaten out by a competitor, or not be able to pay the debts they’ve taken out to expand or support their business, and they will go bankrupt or be bought out.  Their business will die.  This is what the system demands.  Once a capitalist starts this process and relies on its success, they are trapped by it.

But at least the capitalist gets to enjoy the fruits of profit while they last.  Predictably, workers get a much worse end of this deal. Workers get screwed by the drive for greater division of labor and more efficiency.  They have to do more and more work.  Automation leads to their work being less skilled, and as a result it tends to pay less.  It’s often more menial, more unsatisfying, less dignified.  The result?  Workers work more and more to receive less and less for it.  

New forms of technology do the same thing – computers, robotics, and other forms of automation allow companies to use fewer workers, and particularly fewer skilled workers.  There’s an exception to carve out for workers skilled in “computer and robot maintenance and repair” in just about any dystopian scenario, but the rest of the labor pool is going to end up being displaced by these advances sooner or later.  They have to find new jobs, and usually the work is worse, and pays less than the old one.  If you doubt it, look how desperately trucking unions are fighting against automation, or the death of the coal industry, or how sweaty and nervous every writer gets when one of those new “article-writing bots” manages to churn out something readable.

It isn’t going to happen just to blue collar workers or low-level office workers, either. With increasing regularity, more and more professional positions are getting harsher conditions, lower pay, and facing increasing competition from cheaper labor overseas or automated alternatives.  The standards of living for these professionals gets lower and lower as the new, capitalist-preferred means of replicating their services get employed all over the place, a process we call proletarianization.  That’s right – even the software guys, health workers, lawyers and the like can become proles, too.

Meanwhile, capitalist crises increase in scope and severity, with worsening consequences for all of us except the luckiest.  And those crises, and the contradictions in the system they expose, make clear that despite the ever-growing gap between workers’ fortunes and those of their bosses, the two classes remain interdependent.  The fortunes of one class inevitably affect the other.  

Marx couldn’t predict every change in the capitalist system that took place in the 140 years since his death, but the relevance of his central critiques – that workers get exploited by capitalists, that class struggle is essential to understanding our system and our history, and that capitalism may sow the seeds of its own demise – are still an essential part of our society’s debate about what we make, and who gets what.

Value, Price and Profit

In 1865, Karl Marx gave a couple addresses to the First International, an organization of socialists and communists based at that time in London.  He was responding to the ideas of a member of the First International’s general council named John Weston.  Weston had been pushing an argument that trade unions, associations of workers united to collectively bargain and, if necessary, [/wikipopup]strike action[/wikipopup] or otherwise oppose management and their employers, weren’t actually beneficial to the labor movement.  He also suggested that rising wages wouldn’t help workers, since in the aftermath of raising wages, prices of goods would rise to match.  Marx’s collected response to these ideas was compiled and published as “Value, Price and Profit”, sometimes also known as “Wages, Price and Profit”.

This read reminded me of Marx’s other work Critique of the Gotha Program in that once again, Marx is taking some other argument from another element of the socialist movement of his time, and doing his best to demolish it.  From my readings of him so far, Marx seemed to really, really enjoy telling people he thought they were morons, a tradition that many leftists unfortunately decide to carry on (sometimes myself included.  Trust me, I’m working on it).

Marx sets out to prove Weston’s assertions to be wrong on all counts.  And honestly, when I read this book after other works by Marx, after taking Macroeconomics a decade and a half ago, or just being a human being with internet access, it seems hard to take any of Weston’s claims seriously in 2022.  He asserts that the amount of goods a country produces is fixed, that it doesn’t change, and suggests the same for the amount of real wages workers receive (not what they receive numerically, but the amount of real goods they can buy with that wage).  These are really, really easy to disprove.  It’s not surprising that Marx had little trouble doing it in 1865.

Weston makes more assertions and Marx smacks them all down, with evidence, and in the process he manages to state a lot of his main views on economics, including where value comes from, how prices are determined, and from where capitalists get their profits.  

Reading this work, you’ll understand more of Marx’s ideas about:

• What makes the rate of profit rise and fall and what affects it has.
• Why raising wages can spur more consumer demand and, in the end, help spur more production and investment.
• How supply and demand change over time in a market for a particular good, and how they affect prices that fluctuate around a given baseline price.
• The labor theory of value – essentially that a) labor is a commodity, b) the value of other commodities can be measured in the amount of socially necessary labor time it takes to produce them, c) workers are forced to sell their labor power to capitalists in order to survive because in our system, they no longer control the means of production like factories, mills and complex tools or machinery, d) workers create surplus value through their labor even beyond the value of the raw materials, tools they use and their own wages, and e) the capitalist seizes that surplus value when a sale is made and claims it as their profits.
• Why the more wages rise, the more a capitalist’s profits tend to fall (I think Marx means this in a closed-system sense, because while this is true in the direct relationship between a capitalist and his employees, if wages rise across the board in a market it can also lead to more consumer demand and increase corporate profits overall, even after accounting for increased labor costs and the resulting increase in prices).
• Why if prices sink low enough, a worker’s real wages can rise even if their nominal pay decreases (think of the impact of Wal-Mart’s “always low” prices during its heyday).
• Why capitalists perceive it to be in their interest to stretch the workday as long as possible.
• Why capitalism leads to cyclical crises of overproduction.

Marx ends by restating his main takeaways – namely that rising wages do not lead to falling prices, capitalists will always push for lower wages if they can, and unions can help fight for better working conditions but are no substitute for a broader revolution to end capitalism altogether.  Marx isn’t against incremental progress, but he’s always aware that it has its limits, and he’s steadfast in his belief that the workers’ movement should never be deceived into thinking they’ll ultimately end capitalism’s ills without more radical action.

I’ve seen many people on the left recommend this as a good read for a beginner looking to understand Marxist economic theory.  That’s part of the reason I just read it.  In fact, many of those recommenders cite this and Wage Labour and Capital for giving us the gist of Marx’s ideas on capitalism, labor and value without going through the slog that is Capital, Volume 1.  These two works are supposed to be “accessible” and in “plain, non-academic language”.  That may be true compared to Capital, and it might be true compared to other economic writing that was being published in the same place and time.  Still, persevering through Marx’s writing, with his 19th century German sentence structure, syntax, vocabulary and references, demanded a lot of me, and I’ve heard others agree.  I was fortunate to have read clearer works like Friedrich Engel’s The Principles of Communism beforehand, and to have read introductory texts on Marxist economics written in the 21st century.  They all made it easier to tackle Wage Labour and Capital and Wages, Price and Profit, since I had been introduced to most of the core concepts already.  I’d recommend this approach.