According to Marx’s Exploitation Theory employers will only pay workers as much as they are required to pay. It is true businesses will pay workers no more than they have to. So why are so few workers paid the minimum wage or less?
In 2013 in the USA 96% of all workers got paid above the minimum wage. See https://www.bls.gov/opub/reports/minimum-wage/archive/minimumwageworkers_2013.pdf
If Marx's exploitation theory was correct, we would expect to see 96% of all workers being paid the minimum wage or less. Obviously, Marx was dead wrong. So why do so many employers pay their workers more than they are legally required to pay them?
The following is used with the permission of the author.
I. 5. Adam Smith as the Father of the Marxian Exploitation Theory
What enables Marx to believe that the conditions of a wage earner under capitalism are essentially the same as those of a slave under outright slavery, is, first or all, a set of three gross errors propounded by no less than Adam Smith, the man who is generally regarded as the father of capitalism. The first of these errors is the confusion of labor with wage earning, as though to perform labor were synonymous with wage earning. The second error is drawing the inference that in a world in which there are no businessmen or capitalists, but only manual workers, the income of these workers is wages. The third error is that, on the basis of these errors, profit appears as an income that was originally wages, and naturally and rightfully still is wages, but is now taken from the wage earners to constitute the profits of their employers .
These errors are clearly expressed in the following passages from The Wealth of Nations :
The produce of labour constitutes the natural recompence or wages of labour.
In that original state of things, which precedes both the appropriation of land and the accumulation of stock [capital], the whole produce of labour belongs to the labourer. He has neither landlord nor master to share with him.
Had this state continued, the wages of labour would have augmented with all those improvements in its productive powers, to which the division of labour gives occasion....
The produce of almost all other labour is liable to the like deduction of profit. In all arts and manufactures the greater part of the workmen stand in need of a master to advance them the materials of their work, and their wages and maintenance till it be compleated. He shares in the produce of their labour, or in the value which it adds to the materials [9]
Adam Smith’s notion that profits are a deduction from wages contradicts everyday experience. But it has gone unchallenged for almost two and a half centuries. In normal, everyday business and accounting practice, profits are not a deduction from anything. On the contrary, they are the result of deductions. They are what remains after the deduction of wages and all other costs from sales revenues. Nevertheless, Marx makes Smith’s gross error— Smith’s treatment of the result of deductions as though it were a deduction—the starting point of his exposition of his world-famous exploitation theory. The exploitation theory begins with Smith’s notion that profits are a deduction from wages and then goes on to claim that the size of the deduction is limited only by the workers’ need for enough wages to keep themselves alive.
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We need to start with the fact that capitalists do not deduct profits from wages, do not steal profits from wage earners. Contrary to Smith and Marx, the economic world did not begin in a condition in which all income was wages and then, only later, when capitalists appeared on the scene, did the phenomenon of profit emerge—as a deduction from what was originally all wages. Indeed, Marx himself, had he looked, was in a position easily to realize this.
I. 6. Marx’s “Simple Circulation” and “Capitalist Circulation”
Marx begins his analysis of the alleged exploitation of labor under capitalism with a distinction between the fundamental economic character of the ages that preceded capitalism and the fundamental economic character of capitalism. The distinction he makes is between two sorts of the circulation of money from hand to hand. The one sort, he calls “simple circulation.” It supposedly characterized economic conditions prior to capitalism. (“Simple circulation,” it should be noted, is actually the same state of affairs that Adam Smith described in The Wealth of Nations as “the original state of things.”)
Under simple circulation, manual workers produce commodities, designated by “C,” sell them for money, designated by “M,” and then use the money earned to buy other commodities, also designated by “C.” Thus, simple circulation is the sequence C-M-C. Under simple circulation, there is allegedly no exploitation of labor. The workers—the wage earners—receive the full proceeds brought in by the sale of their products. These sales proceeds are viewed as indistinguishable from wage payments, as though they were in fact wage payments. This is because, following the practice of Adam Smith, all income due to the performance of labor is assumed to be wages. To say it once more, in simple circulation all income earned in producing commodities for sale is regarded as wages. Smith provides the clearest possible example of this view when he writes, “In some parts of Scotland a few poor people make a trade of gathering, along the sea-shore, those little variegated stones commonly known by the name of Scotch Pebbles. The price which is paid to them by the stone cutter is altogether the wages of their labour; neither rent nor profit make any part of it.”[10]
The exploitation of labor begins, according to Marx, only with the coming of capitalists and “capitalist circulation.”[11] Here the starting point is an outlay of money by the capitalists to pay wages and buy previously produced commodities in such forms as materials and tools and, ultimately, also machines and factory buildings. These outlays of money are for the purpose of producing commodities that are to be sold in the market, hopefully, in the view of the capitalist, for a larger sum of money than he has expended in producing them. Thus, capitalist circulation is represented by the sequence M-C-M or, more precisely, by the sequence M-C-M′, with M′ used to represent the second M as being larger than the first and thus the sequence as a whole as showing a profit.[12]
I. 7. Profits, Not Wages, as the Original and Primary Form of Labor Income
Now the position of Smith and Marx is utterly absurd. The obvious fact is that in simple circulation there are no wages paid in production. Manual workers, true enough, are the only recipients of income, but the money they earn is not wages. It is sales revenues. They are producing and selling their products, not their labor. A wage is money paid in exchange for the performance of labor. What is paid in exchange for a product of labor is a sales revenue, not a wage. Thus, what is paid for Smith’s “Scotch Pebbles” or any other good or product, is sales revenues, not wages. In the words of John Stuart Mill:
Demand for commodities is not demand for labour....This theorem, that to purchase produce is not to employ labour; thus the sequence as a whole as showing a profit. that the demand for labour is constituted by the wages which precede the production, and not by the demand which may exist for the commodities resulting from the production; is a proposition which greatly needs all the illustration it can receive.[13]
Let me proceed immediately to give Mill’s proposition some of its much needed illustration.
Thus, one simple proof of Mill’s proposition is that if one did buy the labor that produces a product, one would not have to buy that product, because one would already own it, in which case having to buy it would be a form of swindle. For example, if I employ a housekeeper, pay her wages and give her money to buy groceries, and she then cooks me a dinner, I am not presented with a check for the dinner, because having bought the means necessary to its production, I already own that dinner and therefore do not have to buy it. If in these circumstances I were somehow made to pay a check for the dinner, I would be the victim of a crime. By the same token, when I go to a restaurant and legitimately have to pay the check for my dinner, it is because I have not bought the labor and materials, etc., necessary to its production. In other words, if you buy the output, it is because you have not bought the inputs. If you had bought the inputs, you would not be buying the output, because you would already own it. Thus the buyer of a commodity does not buy the labor that produced that commodity. He does not pay wages but product sales revenues.
Furthermore, to claim that in buying a product one buys the labor and/or anything else necessary to the production of that product, such as the materials or equipment required in its production, entails the contradiction of claiming that one is simultaneously buying not for the purpose of selling and buying for the purpose of selling. For example, the purchase of a loaf of bread by a consumer is not for the purpose of making subsequent sales. However, the expenditure for the flour and the labor of a baker necessary to the production of that loaf of bread is for the purpose of making subsequent sales. Thus, if somehow in buying the loaf of bread one were buying the flour and labor of a baker necessary to its production, one would simultaneously, in the very same act, be not buying for the purpose of subsequently selling and buying for the purpose of subsequently selling.
Finally, and most importantly, as we shall see, demand for commodities is not only not demand for labor but regularly and consistently exceeds the demand for labor and that this fact is the main source of profit in the economic system. Profit is the excess of sales revenues over costs. Since demand (expenditure) for capital goods appears equally both in sales revenues and in costs, it is precisely the excess of demand for consumers’ goods over the capitalists’ demand for labor that is the source of profit in the economic system.[14]
As soon as one joins with Mill in realizing that the purchase of a commodity is not a purchase of the labor that produced it, a fatal problem arises for the whole philosophy of Marxism/Socialism. And that is, that not only do the workers under simple circulation earn sales revenues rather than wages, but they also have zero costs of production to deduct from those sales revenues, since, as yet, no one has expended any money for the purpose of bringing in sales revenues. Costs of production are nothing but the reflection of prior outlays of money for the purpose of bringing in sales revenues and thereby, to the extent that the sales revenues exceed the outlays, earn a profit. But such outlays are simply not present under simple circulation. Smith and Marx have both told us so. They exist only under capitalist circulation.
And thus we reach what will understandably appear to many as an amazing conclusion: not only is the money earned by the workers under simple circulation sales revenues rather than wages, but also it is profit . The entire sales proceeds earned by the workers under simple circulation are profit, because, in the absence of buying for the sake of selling, there are no costs to deduct from the sales revenues, and thus the entire sales revenues turn out to be profit: M`-0=M`.
This conclusion means that profit, not wages, is the original, primary form of labor income. It also means that capitalists are not responsible for the existence of the phenomenon of profit, since it exists prior to their existence.
I. 8. Capitalists Responsible for Wages, Costs, and Reduction of Profits
A further conclusion follows. Namely, that what capitalists are responsible for is not only not the phenomenon of profit but rather the phenomena of wages, expenditure for capital goods, and costs of production. Capitalists are responsible for the first M in capitalist circulation. That M represents the wages paid in production plus the expenditure for capital goods, and shows up as costs of production to be deducted from sales revenues.
It also follows that by virtue of creating the phenomenon of costs of production, i.e., the costs that show up in business income statements, the activity of the capitalists serves to reduce the proportion of sales revenues that is profit. Capitalists do not create profit and subtract it from wages. On the contrary, they create wages and the other costs which are subtracted from sales revenues, and thus the capitalists reduce the proportion of sales revenues that is profit. Of course, in creating wages and costs, capitalists not only reduce the proportion of sales revenues that is profit, but they also increase the proportion of sales revenues that equals wages, adding positive amounts to an initial amount of zero, and at the same time correspondingly increasing the ratio of wages to profits. Thus, capitalists create wages and reduce profits in terms of their respective size relative to sales revenues.
It follows that capitalists do not impoverish wage earners, but make it possible for people to be wage earners. For, as I have shown, they are responsible not for the phenomenon of profit, but for the phenomenon of wages. They are responsible for the very existence of wages in the production of products for sale.
Without other people existing as capitalists, the only way in which one could survive in connection with the production and sale of products would be by means of producing and selling one’s own products, namely, as a profit earner. But to produce and sell one’s own products, one would have to produce or have inherited one’s own tools and materials. Relatively few people could survive in this way. The existence of capitalists makes it possible for people to live by selling their labor rather than attempting to sell the products of their labor. Thus, between wage earners and capitalists there is in fact the closest possible harmony of interests, for capitalists create wages and the ability of people to survive and prosper as wage earners.[15]
Historical confirmation for the theory I am propounding can be found in F. A. Hayek’s Introduction to Capitalism and the Historians. There we find such statements as: “The actual history of the connection between capitalism and the rise of the proletariat is almost the exact opposite of that which these theories of the expropriation of the masses suggest.... The proletariat which capitalism can be said to have ‘created’ was thus not a proportion of the population which would have existed without it and which it degraded to a lower level; it was an additional population which was enabled to grow up by the new opportunities for employment which capitalism provided.”[16]
A simple application of Marx’s formula for capitalist circulation brings all this out. All we need do is take the first M of the sequence and divide it by the second M of the sequence. I call the resulting mathematical expression, M/M′, the economic degree of capitalism. Simple circulation represents a zero economic degree of capitalism. It is expressed as 0/M′. The more economically capitalist the economic system is, the higher are wage payments relative to sales revenues and the higher is the expenditure for capital goods relative to sales revenues. Putting aside the negative effects of confiscatory taxation and government deficit spending, both of which deprive capitalists of funds they would otherwise spend in buying labor and capital goods, today’s economic degree of capitalism might be on the order of .9 or .95, or even higher. Profits would then be equivalent perhaps to less than a mere 5 or 10 percent of business sales revenues, wages equivalent to perhaps 40 or 45 percent, or even more, and purchases of capital goods equivalent to the remaining 50 percent or more of business sales revenues.
Thus, so far from the actual relationship between capitalists and wage earners being one of class warfare, as the Marxists/Socialists claim, it is one of class harmony. The only warfare that exists here is a warfare waged by the Marxists/Socialists on the basis of their misidentification of profits as wages and their belief that the capitalists, who create wages and reduce profits, instead create profits and reduce wages.*
Because of the exploitation theory of labour, it is assumed by many that the purchasing power of workers would not have risen if it was not for unions. (Wealth is not determined by how much money a person makes; it is determined by how much they can buy with the money they make. If all workers in a nation were to receive a five dollar an hour increase in the minimum wage, and prices rose accordingly, none of those workers would be better off. In fact they would be worse off as many businesses would move their manufacturing to countries where labor was cheaper, thereby increasing unemployment. But when prices fall, the purchasing power of all labourers rise and the demand for labour increases.) Reisman explains how unions have benefited some people, while harming many others:
"Labor unions can raise the standard of living of narrow groups of workers, by gaining monopolistic privileges that limit the number of workers who can be employed in a given line of work or by causing or maintaining an artificial need for the services of workers of given types. But in these cases they reduce the standard of living of other workers.
The workers who are barred from working in the unionized fields must find work in other fields, where their added numbers serve to depress wages. If minimum wage laws prohibit that fall in wages, then the workers displaced end up as simply unemployed or take the jobs of other workers who become unemployed.
Compelling the continued employment of more workers than are needed to produce a product despite the fact that economic advances have made their employment in that line of work no longer necessary, has the effect of maintaining a product price that is unnecessarily high and thereby of depriving wage earners throughout the economic system of the funds they would have had available as the result of a lower price to spend on other products. And, it should be realized, the production of those other products, previously not affordable because of lack of available funds, would have required the employment of an amount labor equal to the labor initially displaced.
In the light of these facts, one can understand how the productivity of labor over the last 225 years or so has risen by enormous multiples with a comparably enormous positive effect on real wages and the general standard of living and no negative effect whatever on the overall rate of unemployment. Indeed, the total number of wage earners employed has also increased enormously, in line with the increase in population made possible by the rise in the productivity of labor and consequent rise in the standard of living.
The only contribution of the labor unions to this process is to impede it. At every step of the way, they fight the rise in the productivity of labor whenever it threatens to reduce the number of jobs available for their members. Indeed, they openly pride themselves on “making work” rather than making goods, apparently incapable of grasping that making work by requiring more labor to produce a good than is necessary, serves to prevent the production of other goods, that would have been available in addition to the one, particular good they are concerned with.
Labor union membership in private employment has greatly declined over the decades, from about 35 percent in the mid 1950s to about 7 percent today. The reason is the fact that unionization imposes artificially high costs on firms, in the form of above-market union wage rates and reduced efficiency and quality of product as they struggle with union hostility to improvements in productivity, arbitrary work rules, and the difficulty or even impossibility of firing incompetent workers. Under such conditions, firms cannot meet the competition of other firms, foreign or domestic, that are non-union, and thus sooner or later must go out of business. The most recent large-scale example is that of Hostess Brands. It finally had to close when one of the major unions it had to deal with was unwilling to accept a wage reduction, with the result that 18,000 workers became unemployed. This kind of story, repeated hundreds of times over, explains the decline in union membership."**
Note: Price controls are the main reason communism can never work as an economic system. It cannot work in practice because it does not work in theory. If you are not familiar with the problem of price controls I highly recommend reading The Government Against the Economy or chapters 6 to 8 of Capitalism by Reisman. Capitalism is available for free on-line (see here). It is also worth noting that all systems of government (including those which fall under the umbrella of communism) reward some people financially and punish others. (Chapter 8 of Reisman's book explains how individuals are financially rewarded in communist countries.)
* Extract from part one of George Reisman's, MARXISM/SOCIALISM, A SOCIOPATHIC PHILOSOPHY CONCEIVED IN GROSS ERROR AND IGNORANCE, CULMINATING IN ECONOMIC CHAOS, ENSLAVEMENT, TERROR, AND MASS MURDER: A CONTRIBUTION TO ITS DEATH (pp. 12-21). TJS Books, Laguna Hills, California.
** Labor Unions, Thugs, and Storm Troopers by George Reisman
Both books are available through amazon.