Understanding Value, Price and Profit

29 June 2021

Title: Value, Price and Profit

Author: Karl Marx (economist & political theorist)

Published: 1865

Description: An essay delivered to the First International Working Men's Association. It refutes a common argument against raising wages.

Why it's important: This federal minimum wage has been stagnant since 2009. While up to $15/hr is being implemented in some places, it's still far behind its mark.

Value, Price and Profit

Setting the Stage

The points below are the initial arguments that are refuted in the essay:

  1. an increase of wages will not improve the material conditions of the working class (because prices will rise as a reaction)
  2. wage increases in one branch of industry will have a negative impact on other branches of industry

These arguments were based on acceptance of the theory of the wage—fund doctrine - a theory that believed a fixed amount of capital existed from which capitalists pay the wages of workers. This implied that attempts by the workers to increase wages wouldn't work because capitalists would respond by raising the prices of necessities or reducing the number of workers employed.

The "fixed amount of capital" part disproved this theory and another has taken its place in modern times: the wage-price spiral.

The wage-price spiral is an economic term that describes the 'phenomenon' of price increases as a result of higher wages. When workers make more money, they demand more goods and services. The rise in demand coupled with the wage increase purportedly increases general business expenses that are passed on to the consumer in the form of higher prices. Although wages are higher, the increase in prices cause workers to demand even higher salaries.

It's worth noting I could not find much evidence supporting the above theory. Plenty of evidence exists against it though - such as how prices have continued to rise especially on important things like rent prices. In fact, historically when companies pay people more it shows a different outcome.

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Why the amount of wages allocated by each company are not fixed

Evidence simply doesn't support the theory that there is only a fixed amount of capital with which to pay wages. Year after year, production increases in value and mass, the productive powers of labor increase, and the amount of money in circulation changes. These have always been variables, and there's no reason why that would change as a result of paying people more money.

It benefits corporations to stagnate wages for no other reason than to increase profit as much as possible.

"The will of the capitalist is to take as much as possible. What we have to do is not to talk about his will, but to inquire into his power, the limits of that power, and the character of those limits."

Returning to the wage—fund doctrine, it purports that if companies paid $14/hr instead of $7/hr, then the company will only make $7/hr worth of profits.

There is no (good) argument supporting why there is supposedly a limit that might be crossed by boosting wages or even why the threshold is the quantity that it is (minimum wage). It seems like it would be more straightforward to say, "If companies pay employees more, their profit will decrease because their profit depends on the wage exploitation of my employees and their greed has no limits".

Even if, hypothetically, the amount of capital for wages were fixed, it doesn't make sense - the wage is inversely proportional to profit: the more you pay in wages, the less you make in profit.

Are we supposed to think that wages are stagnant because there's no increase in productivity or profit among the companies we work for? Or in the value of the dollar, if we're accounting for inflation? The only way rises in wages affect the price of goods is through the proportion between supply and demand for these goods.

Every rise in demand occurs on the basis of a given amount of production. It can never increase the supply of the articles demanded, but can only enhance their money prices. Whether the rise of demand springs from surplus wages or from any other cause does not change the conditions of the problem.

Why the prices of commodities are not determined or regulated by wages

The law of supply and demand dictates that:

When supply and demand equilibrate each other, the market price of a commodity coincides with its real value, the standard price around which its market prices oscillate. In inquiring into the nature of that value, we have, therefore, nothing at all to do with the temporary effects on market prices of supply and demand. The same holds true of wages and of the prices of all other commodities.

So what does determine and regulate wages?

Value and Labor

The value of a commodity is determined in relation to other commodities. A commodity's greatness of value is dependent on the relative mass of labor necessary for its production. on the relative mass of labor necessary for its production.

Reward for labor and quantity of labor are disparate things. Wages can not exceed the values of the commodities produced because then there would not be profit. This means wages are limited by the values of the products, but the values of the products are not limited by wages. The values of commodities are settled without any regard whatsoever to the wages paid for the labor.

Quantity of labor is measured by time. The longer it takes to produce something, the higher its value; the shorter the time, the lower its value.

The faster something is produced, the more is finished in a given time of work; the slower something is produced, the less is finished in the same time.

The greater the productive powers of labor are, the less work is required to perform the labor. The smaller the productive powers of labor are, the more work is required to perform the same amount of labor - hence the greater is its labor value.

Price is nothing but the monetary expression of value. The value of money is regulated by the quantity of labor necessary for earning it.

Consider the concept of a natural price, when supply of a commodity is equal to its demand. If supply exceeds demand, it will fall below its natural price. If demand exceeds supply, it will rise above its natural price. A rise in market price is compensated by its fall and vice versa.

The existence of profit cannot be explained solely by selling a commodity at a higher price than its market value (such as via high markup). Profit must always take wages into account.

Laboring Power

It is a mistake to try and assign a monetary value to labor. It's not the same as anything else that is bought and sold. The correction is to think of labor power as what is bought and sold.

The value of labor power is quantity of labor that is socially necessary to produce labor power that determines its value in exchange. The costs associated with labor power are the costs of maintaining one's capacity to work through consumption of the necessities of life.

The value of labor power is determined by the value of the necessaries required to produce, develop, maintain and perpetuate the laboring power, as is seen in the "work in order to survive" conditions of society.

How could we define the value of a 10 hour working day? How much labor is contained in that day? To say the value of a 10 hour working day is equal to 10 hours labor would be nonsensical at most jobs (especially white-collar ones).

There is a limit on how many hours one is allowed to legally work. If allowed to do so for any indefinite period, slavery would be immediately restored.

Production of Surplus Value

Let's say we are paid $15/hr. Are we consistently providing exactly $15 or less worth of value per hour? Could it be possible we are giving more?

It is easier to understand this concept in the times of more simplified economies: A spinner is being paid $3 daily to produce yarn. In six hours, he makes $3 worth, but he is required to continue working until the end of his shift (six more hours) which means he can produce $6 in a day. His wages do not change and he is never compensated for the surplus product.

It is this sort of exchange between capital and labor upon which capitalism is founded, and which constantly results in the perpetuation of the 'working class'.

To the wage laborer, even unpaid labor seems to be paid labor.

To the slave, on the contrary, even the part of his labor which is paid appears to be unpaid. In order to work, the slave must live. But because no bargain is struck between him and his master, all his labor seems to be given away for nothing.

The nature of the transaction of wage labor is completely masked by the intervention of a contract and the pay received at the end of the week. Labor appears to be voluntarily given in the one instance, and to be compulsory in the other. That makes all the difference.

Profit is Made by Selling a Commodity at its Value

The capitalist makes a profit by selling the product of labor at a price equal to its value. The value of a material object is equal to the total quantity of labor that is realized within it. The quantity of labor (a full workday/week) is a combination of paid and unpaid labor. In this way we must acknowledge the surplus value intertwined within every working day.

General Relation of Profits, Wages and Prices

Wages and prices are inversely related - as wages rise, the rate of profit falls and vice versa.

Take a situation where a worker spends 12 hours to spin 12 lbs of yarn. The employee receives a daily wage of $6.

On the other hand, a worker at another company may use older, slower machinery and is only able to spin 2 lbs of yarn within 12 hours. This employee also receives a daily wage of $6.

The price of yarn is regulated by the total amount of labor spent on it (12 hours) and not by proportional division of the total amount into paid and unpaid labor.

The Struggle between Capital and Labor and Its Results

Two features distinguish the value of labor power from the value of all other commodities:

The general consequence of the development is capitalism is a tendency for the price of labor to fall more or less to its minimum limit.

Conclusion

The highest motivation for keeping wages low is to keep profit high. This is because by design, a high profit margin depends on keeping wages as low as possible. Wage labor was never designed or implemented as a 'fair compensation for fair labor'. For as long as wage labor exists, it will do so at the expense of the exploitation of the working class.

To read the original work that has been summarized above, see here.