US Economics and Politics V The UK and EU - Part 9

As part of the deal to get the support of the
 Social-Democrats, Merkel has agreed to the
introduction of a Minimum Wage.

Given what has been said so far, it is perhaps no coincidence that in both Germany and in the US, the issue of the Minimum Wage is under discussion, not to scrap it, or reduce it, which is the demand of conservatives, but to introduce it, or increase it! In Germany, the Social Democrats are demanding that a Minimum Wage be introduced, as a condition of them supporting Merkel; in the US, increases in the existing Minimum Wage are being proposed, and in some Democrat controlled States, increases are already in hand.

Economies that have rapidly developed have done so by moving
up the value chain.  In the 1980's, economies like Singapore,
 deliberately began to encourage higher wages, and to discourage
investment by low value/low wage producers.  China having
encouraged foreign investment by low wages, is now following suit.
The state is supporting demands by workers for wage rises of up
to 50%, as it seeks to both foster a domestic market, and encourage
higher value production.  It is also planning to introduce a Welfare State
in line with the development of other capitalist economies to ensure
the production of the labour-power it requires, and to divert workers
savings to the state, and into consumption.

The reason such policies are being proposed is easy to see. As Marx described, wherever, wages are low, labour is expensive, because low wages encourage lack of investment, and the low productivity that goes with it. Economies that have rapidly and successfully industrialised and developed, have done so by continually moving up the value chain. They have pursued policies that have encouraged the continual move from lower value production, to higher value production, which can sustain the payment of higher wages, and at the same time they have encouraged the development of higher wages, for the same reason, i.e. to encourage domestic capital to become more efficient, higher value, and more capital intensive. Economies that follow such a development path, as Marx demonstrates, thereby increase the volume, and often the rate, of profit produced, thereby facilitating increased accumulation of capital. The amount of labour employed may fall relatively, whilst increasing absolutely. Moreover, as the amount of relative surplus value produced increases, so real wages tend to rise. As, the living standards of workers rise, so they begin to consume a range of other commodities, many of which can only effectively be produced locally, for example, much service production.

Germany has not needed such a Minimum Wage, because for a long period, its social-democratic model facilitated the development of high value production, and the relatively high wages that goes along with it, including the relatively high level of social wage it provides. Ironically, the reason it may need such a Minimum Wage today may be partly due to the fact that Germany itself experimented with the Schroder reforms, to screw additional absolute surplus value from its workers, as the Long Wave downturn dragged on, and developed economies, even including Germany, suffered relatively as China and other newer economies developed as new global competitors.

From the perspective of big capital, higher wages are, in any case, less of a problem than for small capital, which is the implication of what Marx says in Capital III, Chapter 11. There Marx sets out the effect on capitals of varying compositions of a general rise or fall in wages.

He concludes,

“1) the price of production of the commodities of a capital of average social composition does not change;

2) the price of production of the commodities of a capital of lower composition rises, but not in proportion to the fall in profit;

3) the price of production of the commodities of a capital of higher composition falls, but also not in the same proportion as profit.” (p 201)

A general rise in wages results in the average rate of profit falling, but because the new value created by labour has not changed, and because the value of those commodities produced with the average composition of capital is equal to their price of production, the market prices of those commodities cannot change. The rise in the price of commodities produced with a lower organic composition is cancelled out by the fall in the price of commodities produced with a higher than average composition.

But, the only way that market prices can fall where demand remains the same, is if supply increases, and similarly, the only way that market prices can rise if demand remains constant is if supply falls. Marx is wrong then when he says,

“Therefore, the price of production of the commodities produced by this capital is now 50 c + 62½ v + 16¼ p= 128 8/14. Owing to a wage rise of 25%, the price of production of the same quantity of the same commodities, therefore, has here risen from 120 to 128 8/14, or more than 7%.” (p 201)

It is impossible, all other things being equal, for “the same quantity of the same commodities” to sell at this new higher price, precisely because the new higher price will result in a fall in demand for those commodities.

The new price of production will be 50 c + 62.5 v, cost price = 112.5 + p = 14.29% = 16.08, so a price of production of 128.58. But, the percentage composition of the capital here hides the fact that this capital itself will be smaller, and will produce fewer commodities than before the wage rise. The increase in price is approximately 7%. If the elasticity of demand is such that a 1% rise in price causes a 1% fall in demand, then demand for these commodities will fall by 7%. As a result, supply would have to fall by 7%, which means that 7% less constant capital would be used, and the amount of labour-power bought would fall by 7%.

Suppose, now we take a capital with a higher composition than the average, e.g. 92 c + 8 v. With the same assumptions, its price of production will also be 120. After the wage rise, v rises from 8 to 10. The cost price rises, from 100 to 102. If the price of production was still 120, this would mean c 92 + v 10 + p 18. That would give a rate of profit of 18/102 = 17.65%. But, the average is 14.29%. That means the price of production must fall to bring the profit rate down to the average. The only way this can happen is if the level of supply increases. The price of production to reach the average must be c 92 + v 10 + p 14.58 = 116.58.

Once again the percentage composition of the capital hides the fact that in order to bring this about the amount of capital itself must increase, just as in the former case, the amount of capital had to fall. The fall in price from 120 to 116.58 here causes demand to rise, and for the price to be stable, supply must rise to meet it.

We see here the objective material reality, which lies behind the different attitudes of capital of different sizes and compositions to wage rises. Capitals with a lower than average composition of capital, usually the smaller, more backward capitals, are badly affected by any wage rise. It causes their cost-price to rise by a larger amount, and, therefore, causes their profit to fall by a larger amount. When they come to increase their prices to restore an average rate of profit, they are hit by a large fall in demand for their commodities. So wage rises in these sectors lead to a sharper contraction of capital.

But, for the bigger more advanced capitals, which generally have a higher organic composition, the opposite is true. Because, wages form a smaller proportion of their cost-price, any wage rise has a smaller effect on increasing the cost-price, and on the reduction in their profits. In fact, the consequence is that they enjoy a higher than average rate of profit as a result of the increase in wages, which results in an influx of capital. That reduces prices, but as a consequence causes demand to rise. In fact, because more capital is now employed in this sphere, even at the lower average rate of profit, it may be the case that in terms of the absolute amount, the volume of profit rises above where it was before the wage increase!

Suppose, previously £100 million was employed in this sphere, with a 20% rate of profit bringing in £20 million of profit. After the wage rise, but now with the consequent reduction in market price, which raises demand, £150 million of capital is employed. But, £150 million at the now lower rate of profit of 14.29% brings in £21.435 million of profit. This is what Marx refers to elsewhere, when he says that the tendency for the rate of profit to fall really only affects the plethora of small capitals, because for these big capitals, the fall in the rate of profit is often compensated by the rise in the actual volume of profit.

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