Wages, Prices and Profits - Part 1

I was reading a back copy of Capital and Class the other day. In an article by G.Mantega and M. Moraes “A Critique of Brazilian Political Economy”, they write,

“Wage increases, when they occur, far from reflecting capital's preoccupation in guaranteeing a level of consumption, are a result of the struggle, which the working class undertakes through its trade unions, parties etc. and are the victories of this class over the Capitalists.” (p150)

They make this comment in relation to the idea put forward by some Brazilian economists that rising wage levels were not only desirable, but necessary in order that the Brazilian domestic market could grow, and so capital accumulation could proceed.

But, this statement is false. Marx in his debates with Weston – See Value, Price and Profit, shows that workers can never win ultimately from these “guerilla” struggles, as he calls them. If workers win a pay rise, higher than is consistent with capital accumulation, if they raise the price of labour-power above the value of labour power, then capital will respond by a variety of methods – speed-up, introduction of new, labour-saving machinery, a slow down in investment, and so on, in order to reduce the demand for labour power, so that its price falls back again. However, in The Grundrisse, Marx also says that workers real living standards DO rise, as a result of the expansion of Capital. He calls it Capitalism's “Civilising Mission”. Even had Marx not said that, then we only have to use the evidence of our eyes to see that workers living standards have risen, and are rising. There appears to be a contradiction here. On the one hand, Marx shows that capital has an interest in forcing wages down to the minimum level. This is a basic class conflict that lies at the heart of capitalism, between labour and capital. He shows that the actual rise in wages/living standards cannot be a result of an economistic, distributional struggle, because in that struggle workers lack the basic tools to be able to win anything other than temporary skirmishes, which will be reversed. As he puts it,

"Citizen Weston, on his part, has forgotten that the bowl from which the workmen eat is filled with the whole produce of national labour, and that what prevents them fetching more out of it is neither the narrowness of the bowl nor the scantiness of its contents, but only the smallness of their spoons."

Yet, living standards do rise. If that rise is not a result of this distributional struggle, then what is its cause? It is not enough to simply say that the cause is the fact that capital needs such a rise. Just because capital might need it, does not mean it will get it, or tell us how it is achieved, particularly given the conflict at the level of each firm, that leads capital to try to minimise wages.

In the Grundrisse, Marx sets out a basic outline of the process. Capital, in trying to reduce the value of labour-power, reduces the value of wage goods. As workers consume more of these lower priced goods they eventually reach a situation where the demand for any particular commodity is relatively sated. Orthodox economics refers to this as the price elasticity of demand, whereby to increase demand by any given proportion, requires larger and larger proportional falls in prices. Long before orthodox economics discussed this phenomena, Marx had described it. He writes, for example, in Theories of Surplus Value,

“Say’s earth-shaking discovery that “commodities can only be bought with commodities” simply means that money is itself the converted form of the commodity. It does not prove by any means that because I can buy only with commodities, I can buy with my commodity, or that my purchasing power is related to the quantity of commodities I produce. The same value can be embodied in very different quantities [of commodities]. But the use-value—consumption—depends not on value, but on the quantity. It is quite unintelligible why I should buy six knives because I can get them for the same price that I previously paid for one.” 

(TOSV 3 Chapter 20, p 119) 

Capital as it expands produces new use values, which then form additional commodities that workers can consume, which then form part of the general bundle of goods that comprise the necessary consumption for the reproduction of labour-power; what Sraffian economics calls the “Standard Commodity”. As workers increasingly form the majority of consumers, capital depends on being able to sell to workers.

This might be an accurate description of the process, but it is not an explanation of it. The reason capital cheapens wage goods is to reduce the value of labour-power. That can only happen, capital can only minimise the payment to labour, if the actual bundle of use values that form the workers consumption remains the same. As Marx says in the Grundrisse, each capitalist wants to keep the wages of his workers at a minimum to maximise his profits, but wants the wages of all other workers to be as high as possible in order to create the maximum demand for his products! As, Mantega and Moraes say, wage goods are not the only form of consumption. Marx himself demonstrates that under capitalism, constant capital grows at a faster rate than variable capital over time i.e. workers share of the pie, of total production falls, whatever happens to their wages in nominal or real terms. So, capital can create demand for itself by producing more means of production. In addition, if the bundle of wage goods consumed by workers remains the same, capital can still increase the production of use values consumed by capitalists as unproductive consumption i.e. luxury goods, out of their increased surplus value.  Besides, productive-capitalists are not the only ones besides workers who consume.  Landlords, obtain large rents out of surplus value, the state derives taxes out of surplus value, and money-lending capitalists derive vast amounts of interest and dividends out of surplus value, all of which goes to fund unproductive consumption.

As Mantega and Moraes point out, the fall in the value of wage goods, means that the bundle of wage goods could be increased, whilst still enabling the rate of profit to rise. If, formerly workers had to work for 4 hours to reproduce their labour-power i.e. to create sufficient value to equal the value of the wage goods they consume, and worked another 4 hours producing surplus value, then, if workers only needed to work for 3 hours, that would mean 5 hours of surplus value. If real wages rose so that the bundle of wage goods increased to be equal to 3.5 hours, that would still leave 4.5 hours of surplus value. The rate of exploitation would have risen from 100% to 4.5/3.5 x 100 = 128%, even though workers living standards would have risen. But, again, the fact that this possibility exists does not give us an explanation as to why it should, why capital should facilitate such a rise in workers living standards, when the basic tendency is to maximise exploitation by minimising wages.

The following attempts to pick this apart, and provide an explanation of the process. The starting point is to deal with the idea that the mechanism is a consequence of distributional struggle, by going beyond the argument provided by Marx, and looking at the empirical evidence.

Forward To Part 2