Capital is dead labour, that, vampire-like, only lives by sucking living labour, and lives the more, the more labour it sucks
– Karl Marx
Modern methods of production have given us the possibility of ease and security for all; we have chosen, instead, to have overwork for some and starvation for the others. Hitherto we have continued to be as energetic as we were before there were machines; in this we have been foolish, but there is no reason to go on being foolish for ever.
—Bertrand Russell
Rent is the secret tax the wealthy charge the poor.
Joseph Stiglitz
Since the time of Marx, relatively little study has focussed on the increase of inequality within capitalist society. One reason for this is that those who are of the opinion that inequality does increase are mostly Marxists, content to maintain Marx’s analysis of the issue; conversely, those from more modern schools of economics are mostly convinced that inequality does not increase in a self-balancing capitalist system and that any increase is temporary rather than inherent. Certainly, the free marketeers claim that although there will be some inequality, market forces will minimise it. Champions of so-called ‘trickle-down’ economics insist that the increase in wealth for the capitalist class — that is, the strata of society that makes its money from investments rather than from work — will in fact provide greater wealth for all. I disagree strongly, and am of the opinion that the same difference in wealth in fact enables the capitalist class to increase, not decrease, the wealth disparity. I do believe that the core of the issue was identified correctly by Marx, but given both changes in the study of economics and the nature of the world, I believe it is well worth taking a further look. I will also look at these forces in the context of the current depression and explain how inequality is not the product, but the cause of the depression.
Definition and Principles
Specifically, when I refer to inequality, I am referring to the difference in amount of accumulated capital, including money, property, investments and other assets that could potentially be used as, or to gain, money. That is, a difference in the wealth and purchasing power of individuals, companies and any other bodies acting together economically, such as families.
There are several factors that influence the tendency of inequality to increase, but all come back fundamentally to the nature of capital accumulation. By that I mean the tendency of wealth to attract more wealth, or rather, those with wealth to attract more wealth. This applies at every level: the more wealth one has, the easier is is to attract more wealth, to the point that not only is it easier for someone with a million dollars to gain an extra dollar than someone with only five to their name, but it is easier for someone with one million to double that to two million, than it is for someone with five to double it to ten, and vastly easier than for someone ten thousand dollars in debt to halve that debt. Thus, if capital is evenly distributed throughout an economy, there is an equilibrium; but it is an unstable equilibrium, whereby if any actor happens to somehow gain a small amount more capital than their peers, it then becomes easier for them to increase the difference. The more their wealth advantage is increased, the easier it is to further increase that advantage.
A metaphor often used by pro-capitalists is that of the running race. They argue that like a running race, the winners will simply be those who put in the most effort and provide the greatest performance. Everyone starts equal on the start line. Of course, this is complete nonsense: some are born before others, getting a head start; some get a better education or upbringing (better running shoes?); some are born with inheritance and are allowed to start from the finish line. Regardless, even if we grant this assumption, the metaphor still falls down. In a real race, if one person, through luck or effort, gets a step ahead away from the start, the race does not become easier for them as a result. Yet, under capitalism, the runner who is a step ahead of everyone else, suddenly finds themselves able to leech the efforts of the other runners, propelling them further into the lead. As they get further and further ahead, they leech more and more, until eventually, they can sit back, and are propelled further and further into the lead by the efforts of everyone else.
The Cost of Not Being Rich
So let us examine the individual factors involved. One which has already been discussed in the previous chapter is ‘the cost of being poor’. This describes the inherent tendency of the poor to get poorer, or at least be unable to accrue wealth, due to the additional costs associated with being poor. For example, poorer people are unable to afford high-quality appliances, so they are forced to purchase lower-quality versions, which have a lower rate of reliability and longevity. It may be economically ‘irrational’ to purchase a washing machine for £100, knowing it will only last a year and you will have to replace it, rather than buying one for £250 that will last five years; but if you only have £100 available at that time, there is little alternative. Therefore the poorer person may spend £500 in washing machines over five years compared to the richer person’s £250; the gap between their wealth, all else equal, increases as a result. There is, of course, the option of saving up for a better model, but then there is the cost of laundrette fees in the mean time. Alternatively, the new appliance could be bought on credit, but then interest would be due, again increasing the amount paid by a poorer person to achieve the same utility.
The fundamental problem comes from the inability of the poor person to afford an initial outlay. There is an extra cost — what one might think of as a disopportunity cost — that results from being unable to make the purchasing choice which is most rational in absolute terms. Their inability to front capital immediately costs them, which in turn hurts their ability to save and accumulate capital themselves. It’s not just the people that we think of as poor that are affected by this, however; many ‘middle class’ people struggle to save for their first house because they are paying rent in the mean time. Even when they do save up a deposit, they are forced to take out a mortgage, through which they will likely pay over double the actual value of their house. This generally means losing hundreds of thousands of pounds because of a lack of up-front capital. On a macroeconomic scale, this represents a significant diversion of money — and the real wealth bought with that money — from the working class to banks and investors.
There are two sides to every story of course, and the loss of those who are unable to front capital is the gain of those who are. The hundreds of thousands of pounds paid by each middle class family in interest don’t just disappear, they’re going straight into the profits of a bank. Now of course, the interest does partially compensate for the devaluation due to inflation, and the loss of utility by temporarily giving up the principle, but it still works out significantly profitable for the lender. Where the investor would have simply let the capital sit idle, the opportunity cost for them is nil, but they are still well rewarded. The landlord gives up the utility of the house, but to someone who already owns one or more houses for their own use, that loss of utility is very small; in contrast, the rent taken on a property over several decades completely eclipses its initial cost.
The Exploitation of Labour
The same pattern applies in the sphere of work. If one has an idea for a company, but does not have the money to purchase the required means of production — tools, initial wages, machinery, vehicles, buildings, legal work, &c — then one is compelled to seek the assistance of one who does. In fact, both sides know plenty well that the return for the investor will vastly exceed the investment, and if the investor is sufficiently rich then again the money will not be missed. So, for the investor, money can simply be multiplied using other people’s ideas and labour, with no work required. For the would-be entrepreneur, it seems economically irrational to give up a majority of earnings for a far smaller investment, but again, the necessity of not having that money oneself compels. It should be seen therefore that in no uncertain terms, those who happen to already have money have the power to take advantage of — to exploit — those who do not.
What is more, the fewer hands accumulated capital finds itself into in any economy, the less competition there will be among investors. The smaller the capitalist class becomes, the higher the price for anyone seeking to join it.
For the owners and shareholders of a company, their existing ownership of the company, its tangible and intangible assets, is leverage to gain from the workers it employs.
I will now give a microeconomic example, which I will continue to refer to, use use to demonstrate different concepts throughout this essay. It should be noted however, that as well as being a microeconomic example, it is also representative of the class relations throughout a larger economy.
If one hundred and one people live in a village, hypothetically isolated, and one person owns the only viable farming land, all tools and a relatively small amount of coinage — let’s call the currency Units, or U — that one person can use that coinage to ‘employ’ the rest. The hundred others will do all the work, but the owner will take the produce. Since they have no other means of acquiring food, they are effectively coerced into this arrangement.
Once the work is done, the workers can buy back some of the produce. With a little artistic license, or perhaps economic license, let us assume that this produce is not merely food, but the full range of wants and needs that are all consumed by human beings and produced by labour, with the aid of machinery and technique. It should be noted that all machinery, all prerequisites, and such are also the produce of labour, until the point that we reach the land itself and the raw materials within it, which are the produce of no person and therefore cannot be morally claimed by any person. It matters little to us then, whether the prerequisites to making some of these consumer products were made by another company and sold on, because ultimately, any product is the sum of two things: the land and natural resources that form part of it; and the sum of all the labour that went into its creation, including a proportion of the labour from the machines that made it, and the labour from all the sub-components that compose it.
That is not to say, as was the assumption in Marx’ time, that the labour that composes a commodity is what defines its value; i.e. the labour theory of value. In reality, its value is judged by the marginal utility of the product; i.e. how useful or desirable it is in comparison to every other good on the market. In the words of Richard Whately:
“It is not that pearls fetch a high price because men have dived for them; but on the contrary, men dive for them because they fetch a high price.”
The sum of labour that has produced a product is therefore not its value — either in societal terms or as forms its market price — but it can be thought of as its cost; or at at least its cost, again, excluding the cost of using up a certain amount of land or natural resources. Value and cost — specifically what one might call ‘natural cost’ or ‘labour cost’ as opposed to money cost or opportunity cost –are therefore not the same thing.
With such semantics out of the way, let us return to the prior-mentioned example.
Conveniently, at the wages and prices the owner has set, their total coinage may allow them to purchase three-quarters of the total produce between them, leaving a further quarter for the owner. In other words, by virtue of ownership and enforcement of property rights, said owner eats twenty-five times as well as each worker. Yet, the hundred would surely be grateful for being given the chance to work.
It can also be clearly seen, if the owner represents the entire capitalist class of society, that money is a tool possessed by the capitalist class, which simply flows through the working class, motivating them to labour by providing them with a minimum of produce in the process. The capitalist class collectively are able to leverage their ownership, whereas the working class have nothing with which to leverage back; thus, there is unequal economic power which enables coercion. The relationship may be mutually beneficial on a superficial level, but it is not equally beneficial nor just. Money is simply the accounting system which formalises this power relationship.
To solidify this example for later use, assume for the moment that the 100 workers are each paid 1U per day for their services and output 100kg of produce between them, for an average of 1kg each. The total bill of wages is 100U per day. The owner also, for records sake, pays themselves 25U per day dividend. When the work is done, the produce is put up for purchase at 1.25U per kg. The workers all spend their full wage of 1U to acquire 0.8kg of produce and the owner spends their 25U to acquire 20kg. In real terms, each worker has produced 1kg of produce and received 0.8kg; the 0.2 being siphoned-off from each one of them in the form of profit. Effectively, the capitalist class charges the working class a 20% tax for permission to work.
The overall effect is that the working class are effectively at the mercy of the capitalist class. The one saving grace of the market system in this regard is that competition between companies causes a lowering of prices and, where staff are in demand, an increase in wages. At the same time, this competition is far, far from absolute, and generally relies on there being sufficiently many actors in a sector to render cooperation impractical. Conversely, where monopolies, oliopolies, monopsonies and oligopsonies occur — that is, a small number of buyers, or a small number of sellers, in any particular market — there is a tendency for competition to give way to price fixing, or at least for competition to stagnate so as to allow a significant gap between cost of production and sale price. After all, if two companies control a market, it may be more rational for them to agree fixing a raised price for the commodity concerned, than to enter into potentially pyrrhic competition. It may often be better, for example, to maintain a 50% market share with a 30% profit ratio, than to increase market share to 75% with a 20% profit ratio.
Given what we already know about the extra costs of being relatively poor for individuals, it seems not-unlikely that there will be a strong tendency for monopolies to form in the market. After all, if the inequality between a large company and a small one increases, due to the larger company’s greater capital means, eventually the small company will be driven out of business, or at least to a small corner of the market. Companies that are already more successful have more means to become even more successful; larger marketing and R&D budgets, for example. Struggling business may have to cut their funding in the same areas and therefore suffer even more. This in turn, of course, hurts competition, increasing inequality and forming a feedback cycle. None of this implies that it is impossible for a new company to increase its market share, particularly if it has strong initial investment or an advantage provided by innovation, only that the general trend will be to cement the position of existing market leaders. If two companies are fighting for the same group of customers, the company that already has the larger share of the market in total will have more resources to throw at the battle.
Technology
The level of technology primarily affects the labour efficiency with which commodities can be produced. For any given commodity, assuming that the qualitative nature of the commodity remains the same, a technological improvement may increase the production efficiency; that is, reduce the number of labour hours required to produce one unit of the commodity. That means that conversely, it takes less labour hours to provide the same utility; i.e. the relative labour cost has been reduced.
New products may be introduced due to technological advances and old products may become obsolete. This may initially make it appear as if reckoning any general level of production efficiency would be impossible, since those products may fulfil a different degree of utility, but any new product introduced should normally have a greater total utility than any product it makes obsolete, relative to their respective production cost. That is, if Widget A replaces Widget B, it is because ten dollars of Widget A provides more utility than ten dollars of Widget B. Since it is the marginal utility of a product that determines its market price, where one product replaces another, the total utility of its production should still be roughly proportional to the total amount spent on it. Even where new products meet a completely different utility, what we are still concerned with is the level of utility compared to the labour cost of production.
Without the effect of competition therefore, if — either by an increase in the efficiency of production or by replacement with an alternative that grants a higher utility for the same production effort — the production efficiency for any given commodity increases, the amount of spending towards that kind of utility will remain the same, but the quantity of labour required for its production will fall. This will mean that some workers are rendered redundant and that, by less labour hours being paid, the rate of profit for the owner of the company will increase. Conversely, the marginal utility of labour will increase for the company owner, since a single unit of labour will now deliver a greater profit; that is, if a more efficient machine is used, there will be more value from having a worker run it for an hour than previously. That worker is no more valuable intrinsically, but is when combined with the machine. Therefore the marginal utility of that worker’s labour increases. This raises the maximum potential wage of each worker, but this is entirely dependent on there being a demand for workers rather than a demand for work. If wages are not currently constrained by this maximum, but held lower by the balance of competition (workers vs. jobs), wages may be held down for other reasons.
We can therefore conclude that, without accounting for the effects of competition, if the total demand in a market remains the same, and employed hours fall, the efficiency of production must have increased. Conversely, if the amount of employment increases while consumption remains the same, that means that somehow efficiency has fallen; the general trend of technological progress is towards greater efficiency, but there are many reasons why efficiency can decrease on a localised scale.
If such a change occurs however, it is unlikely that the total level of demand would remain the same. A certain amount of money has been redistributed from the wages of the wages of the working class to the capitalist class. The capitalist class however, have a lower propensity to spend; that is, if a certain amount is removed from the wages of a worker who spends their full wage each month, and added to the income of a capitalist who spends only half of their income, adding the extra income, which is a relatively smaller proportion to the capitalist, is unlikely to result in it being fully spent. This implies that aggregate demand must fall, triggering a cascading effect on sales and employment.
Let us return to our microeconomic example of the isolated farm.
Suppose that the owner decides to invest a little of the workers’ time in producing a horse-drawn plough, which reduces the amount of labour time required to plough the field. The cost of producing the plough can be assumed as negligible compared to the full scale of the operation. Once the plough is ready, instead of the hundred workers previously required, 75 workers can produce the same amount of produce. The owner of the farm may therefore choose to lay off 25 of the workers. The owner’s total wage bill has therefore fallen to 75U. Since the 25 are now unemployed, they have no means to acquire food, despite, ironically, the increased efficiency of food production; but this is no concern of our generous entrepreneur who has given them work for so long out of sheer generosity.
The remaining 75 and the farmer can quite literally carry on as before. The farm will still output 100kg of produce each day, but each worker now produces an average of 1.3kg each, due to the increased efficiency of labour. Prices are initially kept the same: 1.25U per kg. The workers are, as before able to purchase 0.8kg each for their full 1U wage, which now totals 60kg between them. The owner is also able to pay themselves a dividend, but this time, because 25U has been saved from the wages bill, that can increase to 50U, purchasing the remaining 40kg of produce.
While the real income of the remaining workers has remained the same, the real wealth of the capitalist has doubled, while a quarter of the previous workers have been rendered unemployed by no fault of their own. Assuming then, that the minimum amount that can ever be paid to the working class is that which is sufficient to keep them alive and able to work, then if anywhere close to that level is paid, the benefit from advancements in production efficiency will be absorbed by capitalists.
It should be noted, of course, that the owner represents the whole capitalist class, and that the workers of course represent the whole working class, which now has 25% unemployment. While in this example, the farmer pays themselves from the company and the purchases from their own shop, in reality, the capitalist class all take profits which they mostly spend with each other’s companies for the luxuries they require. The net effect can be seen to be the same: not a movement of money between classes, but merely within the same class. Dividends spent are simply movements of money within the capitalist class; the full wages of the working class always return to the capitalist class via spending too.
Rate of Employment
So what happens if, assuming the land is not currently worked to its maximum potential, the farmer decides to re-employ the 25 workers previously stood down, in order to produce more produce? With the nine workers employed, the bill of wages has increased again to 100U, but the quantity of produce — assuming a linear relationship between work and produce — has increased to 125kg, or 156.25U at current prices. Expecting to sell the full amount, the farmer pays the 100U in wages, plus a newly increased dividend of 56.25U. Once the workers have made their purchases of 80kg each the farmer can also purchase 45kg from the dividend. As a result of increasing employment and production therefore, the farmer has gained 5kg of extra produce.
What should therefore be quite apparent is that the rate of employment can be maintained as technology improves, so long as the consumption of the capitalist class rises. The farmer must be willing to continue purchasing his own full surplus produce. In the real world, this means that in order for there to be full employment, the capitalist class as a whole must spend their full earnings purchasing products from each other.
If the farmer fails to purchase to their potential — maybe we have reached the limits of his desire to consume — then the company’s income drops below its expenditure. Obviously, the farmer could cut their own dividend, and in fact will have to, but then there will still be an excess of produce compared to what is sold. So the logical option then is to therefore cut the rate of employment; make several of the employees redundant. In other words, return to the situation where three are unemployed and all other matters have also returned. In the same way, if the farmer were to purchase even less, so the employment rate would also have to fall.
It is of course possible that the working class could also choose to reduce their spending, but in truth, while they may save some days and spend on others, their general trend is not towards accumulation of capital simply because they are in need. They have, as Keynes put it, a higher propensity to spend. Their list of wants and needs exceeds their income. The capitalist class, on the other hand, have enough wealth that their wants and needs often do not consume all their income.
It therefore becomes apparent that the higher the level of production efficiency, the more the capitalist class have to consume in real terms, in order for the working class to remain employed. Unfortunately, as their current consumption rises, their marginal propensity to consume — that is, the chance that they will wish to consume the next available unit of real wealth — falls. Simply, the more money one has, the less likely one is to spend it all.
Since, with all other factors equal, the rate of employment depends on the level of spending, and we know that it is the wealthier who vary their spending, then how far an economy is from full employment depends to a large degree what the capitalist class spend or do not spend. While an individual capitalist might curb their spending and still have their company earning money from the spending of others, for the capitalist class on aggregate, their income is a precisely dependent on on their spending. As a result, if the capitalist class experience a fall in their incomes, it does not necessarily follow that ‘the rich are getting poorer’ as they will likely have also experienced (or rather, initiated) a fall in their spending. Again, this is not true for one single capitalist, but it is on aggregate.
Let us assume then, going forward, that the capitalist is not meeting their entire possible desire to consume. 25% of the workers are left unemployed as a result.
The paradoxical nature of this arrangement should also be evident. It would be quite possible for the remaining workers to join in working and take home a share. In fact, they could increase the amount of every worker’s real wage without at all affecting that received by the capitalist. But there is no incentive for the capitalist to allow this to happen. So the capitalist does not provide a way for the unemployed to feed themselves purely because the capitalist has, not short of what they desire, but in excess of what they desire.
Leverage
We can obviously deduct that, unless a capitalist is suddenly overwhelmed with philanthropy, it is unlikely that they would pay their workers at a wage higher than their income, or provide a loan at an interest rate that is negative, or than inflation. A large single purchaser is not going to leverage their market position to buy from their suppliers at a greater cost than for which they can sell the same commodities. Therefore, the minimum rate of exploitation that can possibly occur is zero; that is, where the capitalist does not leverage their capital position for any profit.
So conversely, what determines the maximum degree to which any particular company or capitalist is able to exploit its employees, suppliers or customers? If two economic actors do business, what determines to whom the scales of profit tip? Who is able to leverage their advantage over whom?
The answer comes in the form of two questions which must be balanced against each other, in considering whether I make a transaction decision:
- What is the value of the transaction to me? i.e. the marginal utility of the money vs. of the commodity, money, loan, &c.
- What would be the cost of avoiding the transaction by putting myself in the same position as whoever I am trading with?
The first is the most obvious and simple consideration of any transaction. If I am to purchase a commodity for a certain amount, what utility does this amount of whatever commodity bring to me, bearing in mind what I already have? and what else am I giving up on that I could also get with that same amount? The latter being the opportunity cost of the transaction, which inherently, is the marginal utility of the money, since the utility of money is purely in its purchasing power.
This is of course, the basis of all purchasing, where we all have a finite amount of money and must weigh up the relative merits of many potential purchasing combinations. In the case of selling, we simply consider the value of the commodity against the value of the money offered for it, in light of our existing financial position and alternative purchase offers.
The second question concerns the cost that would be required in avoiding the transaction entirely. For example, imagine I want to use a bicycle to get to the shops. I can hire a bicycle from an (enterprising) friend for the price of £5 for two hours. With this information alone I am equipped to judge the utility of the bicycle as it compares to whatever else I might be thinking of spending £5 on. Yet at the same time I am conscious that my friend is benefiting from this transaction as a result of their existing ownership.
It seems that we have a mutually beneficial relationship. I gain the use of the bicycle; my friend gains money. But what were to happen if my friend were to put their prices up? Of course, at a certain point, it might make sense to give up and walk, but let’s assume that the use of the bike is very valuable to me because the shops are a long way away. Why do I continue to pay the fee demanded by my friend, which far exceeds the cost of wear and tear on the bicycle and in fact represents a significant profit to them?
It simply comes down to the cost of entry. If I do not have the existing capital to purchase a bicycle of my own then the cost of entry is, relative to my resources, infinite; that is to say, if I simply cannot afford something, then it does not matter if it is one penny or a trillion pounds out of reach. In which case, I will keep paying increasing prices until I can no longer afford that either, or I finally decided that I would rather walk. Conversely, if I can afford the bicycle, but it would take up a lot of my savings, I might still decide to hire, but only up to a certain price point where I decide it is more economical to purchase. At such a point, the rent charged has come to such a proportion of the cost of entry that leverage is approaching zero.
The degree to which a given item of capital can be leveraged, either to change rent or to exploit workers, is therefore proportional to the cost which would be incurred in the transactional partner acquiring it for themselves. Capital, in this sense, does not inherently mean money, or even the equipment which is traditionally thought of as the means of production; it includes intellectual property, knowledge that is not shared freely, intangibles such as company reputation and brand, and functions of sale. By functions of scale I mean that in some circumstances, the marginal utility of labour increases rather than diminishes at a certain quantity; that is, just like table legs become useful once you have four of them, a collection of workers might only become useful for what you need when there are a certain number. The organisation of a company is therefore itself a form of capital.
The point at which one ceases to be a worker and begins to be a capitalist then, is defined by the point at which one begins to leverage property of any form, rather than effort.
For practical purposes, the de minimalis intellectual property held by semi-skilled workers enabling them to receive slightly higher wages is not significant enough to start thinking of them as a capitalist. Once, however, we reach the level of skilled professionals with their own equipment and intellectual property however, then we are starting to see capitalist attributes. Where two entities are involved in a transaction, we can think of them as having a certain comparative leverage relative to one another. While a professional consultant providing services for an individual has moderate leverage and the individual likely has little, the same consultant providing services to a large corporation has the exact same resources, but the corporation has far greater resources still, meaning that their comparative leverage is reduced. In any given transaction, comparative leverage will be tipped in favour of one party and against the other, although between similar-sized companies in horizontal agreements this may be very small indeed.
The maximum potential for exploitation in any given transaction is therefore a product of the comparative leverage of the two parties.
In some circumstances the effects of leverage may not be immediately apparent. For example, a company may not even pay a large amount of shareholder dividends, but pay its senior staff very well. In this instance, the company is exercising a certain amount of leverage over the ordinary employees for profit, however, the power afforded by senior employees may give them the leverage to demand a high proportion of that profit. Even though that will be paid, for legal purposes, as if it were wages, it is in fact the exploitation of a capital resource (political power) and should be regarded as that.
It should also be noted that, as far as dividing people into workers and capitalists goes, there is not only the concern that some may leverage property and also have property leveraged against them in the same transaction, but that people may leverage property in one transaction and have it leveraged against them in another. For example, a small business owner may leverage their owner of the business to exploit their employees, but then go home and pay a mortgage with interest because they do not have the same leverage as the bank.
The same person may therefore wear a capitalist hat at some times and a worker’s hat at another. One might think of the middle class consisting of those who receive income through both work and investments. In macroeconomic terms it makes little difference because if we have one capitalist, one worker, and two middle class people, for whom their income is half work and half investments, we can ‘split’ them both and for most functional purposes simply assume that we have two capitalists and two workers.
Competition
Through our discussion earlier there was the quite deliberate mention that the effects of competition were not accounted for. It is therefore important to now consider these effects.
Imagine that we expand our hypothetical economic example and include another identical farm. There are now two-hundred workers, two farms and two farm owners. The key difference now is that there is some competition in the market for produce. When all of the workers receive their wages, they have a choice whether to purchase food from the farm where they work, or from the other. There is therefore an incentive for each owner to price their goods slightly cheaper than the other, until both cannot price any lower.
This might seem like economics 101, but it’s important to look at what happens to efficiency and surplus in this circumstance.
In a perfect world, competition would drive prices down to the absolute minimum. In this case, that means that the total income of each farm must equal its total costs; i.e. 75U in wages. The 100kgs of produce are therefore sold for a reduced 0.75U per kg. Each farm pays its workers out 1U per day still, but that 1U can be used to purchase 1.33kgs of produce; the entire produce of that worker. There are no remaining funds left to pay the owners.
This is exactly what is meant when free-market economists declare that no company will make a profit during market stability. In other words, it is only because of the lag time between efficiency changes and competition taking full effect on prices, that profit is made. This is all very well in theory, but it assumes perfect competition. In reality, barely any market has perfect competition. Even the fact that one store is thirty seconds further walking distance may negate a small difference in price. There are issues like price snobbery, brand impression, et cetera. In reality, most products have qualitative differences and the differences in utility may be judged differently by different customers. There are always more complex issues at hand than simple competition on price.
There are other considerations which must be evaluated, too. If profit has been reduced to a minimum per unit, then the profit generated by each workers has also fallen. In other words, as profit nears zero, it becomes less worthwhile at this time for the business to operate at this level. Since the utility of the labour amounts to the rate of profit that labour creates for the business owner, the utility of labour is also reduced.
Assuming that there is still a small amount of profit being generated, it may still make sense to re-hire the remaining workers. As previously discussed, at the old rate of profit and corresponding dividend, the owners’ desire to consume may have been sated, but that may not be the case now. The income of the capitalist class has been reduced and therefore their propensity to spend what remains has increased. In other words, by driving down the rate of profit, competition is forcing the capitalist class to spend a higher proportion of their income in order to acquire the same real commodities.
I hope that this makes clear then, despite how imperfect it is, how important competition is in constraining the ability of the capitalist class to exploit the working class. The less effective competition is in general, the greater opportunity the capitalist class will have to exploit the working class. The worse competition is in any particular industry, the greater more companies in that industry will be able to exploit customers and suppliers, up to what their leverage allows. In fact, if we remember that leverage depends on the cost of alternative options that provide the same utility, competition therefore acts to reduce leverage by offering an better-priced alternative. The more competition there is, the more other options the consumer or worker has.
Wages and Employment
Let us consider what will occur in our current hypothetical environment if a business owner tries to save money by cutting wages, increasing their profit margin in that respect. Current the two farms are employing 75 workers each. Let us assume for the sake of argument that they are managing 20% profit. Due to the imperfect nature of competition, which is a result of innumerable human and physical factors, their prices are set at 0.9U per kg and wages are still 1U per day. 100kgs of produce are still produced at the current rate, which at current prices, equals 90U turnover. After the 75U wages that leaves 15U profit which can be paid out in dividends.
If the wages of the workers for one company are now cut to 0.5U per day however, the outgoings of the company in wages reduces to 37.5U per day. Instead, the remaining 37.5U can now be added to dividends, increasing the dividend to 52.5U per day. Obviously, one might now argue that it is in the best interest of the employees to seek a better-paid job at the other farm, but since the other farm already has a full quota of employees and others in reserve, even if they do gain a job there, someone else will be made unemployed as a result. The crucial thing is that the 50 unemployed people serve as a reserve pool of labour and a warning to the workers; if the workers don’t like the new rate, there’s surely someone else who would take it rather than starve (I intend no hyperbole by my use of the word starve; this literally is the fate of the unemployed where there is no welfare state).
If this was the end of the story of course, then we would all be working for literally the minimum required to survive. So why can’t wages simply be cut constantly across the board?
By cutting wages, the company gains another opportunity to compete. It can cut prices by sacrificing a little profit in the hope of drawing in more sales from the rival business. Therefore, the rival business is also compelled to cut prices to complete, and to do so, it must also cut wages. Competition leads to prices falling to the lowest possible point, dropping wages with it.
Since both wages and prices fall in the same proportion, by the time prices have again stabilised, the real wage of the workers has returned to the exact same point. What has in fact occurred is that the same amount of money now has a relatively higher value in both wages and goods; in other words, deflation. Yet the rate of labour exploitation has finished off where it was.
Once again however, we are conscious that an increased profit was made for the lag time between the decrease in wages and the decrease in prices. This is in the same way as we have seen previously, where extra profit is accrued in the time between technological or methodical improvement and the corresponding fall in prices due to competition.
So it may make sense for one business to cut wages if it can, but in doing so, it hurts the sales of every business its employees shop at.
What we can see from the cascading effects of trying to decrease, or conversely increase, the wage of the workers is that, for any given level of technology and effectiveness of competition, there is only one level of mean real wage; if money wages are changed universally then the value of money will have to change to return to this same real wage, because prices too will change under the force of competition. Real wages are determined not only by the rate of wage (higher = better) but the prices of goods that are purchased with those wages (lower = better). The aggregate difference between the wages paid in the production of all commodities and the combined sale price of said commodities is the rate of profit.
The average real wage is therefore determined by the efficiency of production and the degree to which competition acts on prices.
The other consideration as to why businesses do not cut wages constantly is explained largely by the distribution of wages. If there were no welfare state whatsoever, nor any minimum wage or regulation, we literally would see our baseline workers paid no better in real terms than two-hundred years ago. Which in fact, is exactly what we do see for some immigrant workers in places such as Dubai. In order to incentivise more-skilled jobs however, and due to social expectations, as one moves up the management hierarchy, wages rise. Unlike our hypothetical example, people are not all paid the same.
It is apparent then, that if there is a distribution of wages, the average wage will still fall around the level previously discussed, as determined by real efficiency and forces of competition. But many people will be above that, and many below.
Inflation
In real life, workers are more resistant to decreases in money wages than they are simply to a non-increase in money wages, even if their real wages still fall. Central banks tend to provide a small flow of money into the economy to ensure a small amount of inflation rather than deflation. Additionally, during a credit boom phase, if borrowing occurs at a rate faster than the underlying real economy is yet growing, then the money borrowed under fractional reserve also creates inflation.
In other words, inflation acts as a constant downward escalator in the wages of working people (although it also has the same effect on hoarded capital). In order for real wages to remain the same, money wages must be increased periodically. It is here that we find one of the key tricks of capitalism: by again utilising the lag time between the decrease in real wages and the increase in money wages to bring real wages back up, there has in fact been a dip in real wages. Therefore, the time taken for changes in technology, competition and the value of money to take effect, all provides a gap in which capitalists are able to extract more real produce from the working class.
The fundamental mechanism of inflation will be discussed in more detail in a later essay. The remaining thing that must be said at this point is that inflation is the reason that the money income and money hoardings of the rich continue to rise. As we have seen from our examples, if the money supply does not change, the rich will have a certain amount of money that they pay out and receive back. It is simply the increase in the money supply, in real life, that ensures that money incomes incomes increase.
Abundance
Alternatively, let us consider the impact of a further development in technology.
Suppose that technology progresses again to the point that only twenty workers are now required for what is currently done by seventy-five, and what was once done by one hundred. If this seems like a drastic leap, consider the advances that have been made in manufacturing with automated machinery and robotics over the last fifty years, and consider the changes that are likely to occur in the next fifty.
Since the same produce can now be produced by twenty and sales will not immediately change, the first change will always be the laying-off of the excess staff. In this case it means that, for each farm, 55 workers will be laid off and 20 will remain employed. The total bill of wages will therefore fall to 20U per day.
Accounting for competition, prices will then be able to fall. For the 100kg of produce the cost of manufacture is now 20U, or 0.2U per kg. Assuming again 20% profit then a total of 24U will have to be raised from sale of the produce, at 0.24U per kg. This will afford the 20 workers just over 4kg each, for a total of 83kgs, and the business owner, paid 4U dividend, will be afforded just over 16kgs.
Another advance might take result in it taking a mere 10 workers to do what was previously done by 20, and 100 before that. In which case, after competition lowers wages, the production cost of the produce will be 10U, so with 20% profit, the total turnover will be 12U. The price will therefore bee set at 0.12U per kg. The lucky remaining workers will be afforded 8.3kg from their wages, but the owner’s 2U will again buy 16kgs.
As can be seen, if the rate of profit remains the same, as technology improves, wages should increase for the workers who are employed, but again, employment will decrease if the consumption of the capitalist class does not increase. Conversely, if we assume that the capitalist does wish to increase their consumption, 20 workers will produce 200kgs of produce, from which they will again take 8.3kg each, but the owner will then be afforded 33kgs.
Give the reducing marginal propensity of the rich to consume, what can be expected is that as technology advances, the rate of employment will initially hold and the rich will get richer; then, as progress continues, the income growth of the rich will begin to slow, but employment will fall.
The ultimate result is that, though advancement of technology to the point where we have near-abundance, the few remaining workers will be well-paid, but there will be massive unemployment.
The Rate of Profit
It might be pondered, given what has been demonstrated so far, that if the incomes of those in work do continue to rise, and the incomes of the rich remain in the same proportion, why does it not seem like this is the case in real life?
Inherently, it comes down to the rate of profit and the effectiveness of competition. As previously seen, if real wages are cut (even by simply allowing inflation to reduce them), competition should then facilitate a following cut in prices (or a halt in the raising of them with inflation); but if this competition does not occur effectively, then the rate of profit will increase. If the rate of unemployment is high — and we know it will increase as efficiency advances –then there will be more competition for jobs than for workers, meaning there will be no competitive incentive for companies to pay workers better.
Once again, the effectiveness of competitive forces is impossible to quantify exactly because there are an innumerable quantity of factors involved in consumer purchasing decisions. The dogma that consumers will always act ‘rationally’ has long been questioned by behavioural economists who have examined actual rather than hypothetical behaviour.
What can be said is, as was mentioned early on, the unstable equilibrium of the market will tend to cement the position of existing dominant players, resulting various forms of inefficient competition and non-competition.
So, if hypothetically, the two farmers engaged in our theoretical example were to get together over dinner and decide that, rather than continue to engage in pyrrhic competition, they will agree to fix their prices at 0.24U per key; then the wages of workers would still only buy 4kgs each, but the farmers could each pay a dividend of just over 14U, affording them 60kgs of produce, a massive increase.
The reality is somewhere between the two. Most markets are not engaged in underhanded price fixing, but nor are they engaged in perfect competition. The result is that workers’ wages will rise over time, but not as much as they should; unemployment will increase, although not as much as it could.
The other thing that must be noted is that the rate of profit in this respect concerns only the profit made from labour. It does not factor in any of the money moved back from the working to capitalist classes through usury. Thus, while the capitalist class may make a certain payment out in wages, any part that is received back in rent is effectively a deduction from the real wages of the working class.
The Welfare State
The question that is inevitably raised at this point is, given how far our production technology has advanced and how weak the competition is in some markets, why are things not worse than they are?
The simple answer is that everything is not left to the whims of the capitalist class. Most countries have in place some form of welfare state. There are also significant amounts of money spent in charity.
I will discuss some of the flaws of these alternatives in Shoddy Patches for Broken Bridges, but nevertheless, what is important to realise is that each one of these things — particularly taxation and benefits — is a redistribution of wealth from the capitalist to the working class. Not only does this benefit the recipient of said benefit, but, as is completely overlooked by politicians, the public and even some economists, that money is also spent, which maintains employment for other people.
If you recall our example of the farmer who had no need to employ the remaining workers because he or she did not wish to buy any more, then in that case, the welfare state would take some of that money and move it to some of the unemployed workers. Not only would that help them, but because they would spend it in its entirety, that might just keep an extra one of them in employment to meet that demand.
Still we know two things. As our technology brings us closer to abundance, unless the welfare state increases the redistribution of wealth, then there will be plenty for few and little for the many; and that cuts to the welfare state, in the form of austerity programmes, will hurt even those who do not depend on benefits.