Which Came First: Profits or Wages?

Marxists don't understand the reality of where wages come from.

by Richard Morris

I find it no surprise that Karl Marx, founder of the political theory of Communism that has killed hundreds of millions of innocents over the last century, and Speaker of the House Nancy Pelosi say the same things.

For example, on September 17, 2021, Speaker Pelosi said:

In America, capitalism is our system, . You cannot have a system where the success of some springs from the exploitation of the workers.

Marx's "surplus value" theory says the difference between the sales revenue  and the wages paid to make the product (profit) is surplus value. Thus, Marx says the employer steals profit by exploiting the worker, who should receive it as higher wages. It sounds to me like Pelosi says the same.

But - which came first, profit or wages?

Let me define the terms. A wage is money paid by an employer to an employee for work. Profit is the income received, minus the cost of production and sales.

Now, let's consider a widget maker - we'll call him Mr. Wow. Working alone, the revenue exceeding his cost of production is profit. Yes, profit, one of the most evil words in the Marxian lexicon. But wait: Wow has no workers to pay, ergo, no wages at all.  Everything he earns is "excess" profit, but it's excess to him, since he did all of the work; he keeps it all.

However, working alone, Mr. Wow can make only a certain number of widgets. Now, let's suppose customers want (demand) more widgets than Wow can make. In that case, one way he can increase production, and thus the supply of widgets, is to hire an assistant to help him. But there is no benefit for Wow to create a job and hire help unless it will increase his profit.

If he hires a helper, the wages are part of the cost of production. They will come from the revenue of the additional widgets sold.

Remember, before he hired somebody, there were no wages. Now he has a paid employee. Could Wow's increased profit be stolen from the employee, as Marx claimed?

The greater the demand for widgets, the more is Wow's demand for workers. Wow creates jobs. Wow is the prime mover of the business, not the workers. The workers cannot be the prime movers because neither the company nor their jobs would exist without Mr. Wow - again, contrary to Marx.

As Wow's widgets catch on, he needs to make even more. So, to make his workers more efficient, Wow buys widget-making equipment and a building to manufacture them. This is called capital, and Wow becomes a capitalist, an evil person in Marx-speak.

The Marxists shout that the employer is at war with his workers. But take a look: there's no war! They work together. Wow's workers were not forced to work; they wanted to. And Wow voluntarily hired them.

The workers benefit by receiving wages, Wow benefits when gross revenues exceed expenses by more than he could do alone, and the customers benefit by having an increased supply of widgets. Everybody is happy.

Too simple, say the politicians. Marx claims an antagonistic struggle between the capitalist and worker determines wages. So they beat the war drums for laws allegedly to meet the needs of workers and force greedy employers to pay what the drummers consider a proper wage. But could it be these claims are both untrue and irrelevant? Let's see.

To live, people must consume stuff, and somebody has to make that stuff. If a worker had no alternative, the worker must either work for a subsistence wage or die. This led Marx to predict employer greed would drive wages down so low that they would only be enough to keep workers alive so they could work as slave labor.

Is this what we've seen in the world since the days of Marx?  Absolutely not. Not only was Marx utterly wrong, but his whole concept of surplus value is not relevant to actual wage rates.

Of course, employers prefer to pay lower wages than higher wages. Employers are buyers of labor, and every buyer wants to pay less for whatever he is buying. But so what? The naked desire to pay less does not set the price of anything - including wage rates.

Here's why. Assume there are two potential buyers, and both want the same widget. Both buyers wish to pay the least possible. Buyer One is willing to bid up to $200. The other, Buyer Two, has a limit of $100.

Buyer One is willing to bid $200, but does that mean he wants to? Of course not - he wants to buy for the lowest price he can. So the question is: how low can Buyer One go and still end up with the widget? $20?

If you answered no, go to the head of the class. If, for example, Buyer One offers $20, the widget will go to somebody bidding more than $20, and we know Buyer Two's limit is $100. So if Buyer One wants to buy the widget, the winning bid will end up higher than Buyer Two's maximum of $100.

That's how things work in real life. A buyer cannot pay the price he would like to pay, but must pay a price equal to or higher than other potential buyers. So in this example, since Buyer One's limit is $100, Buyer Two must outbid him. Thus the market price is $101.

The only difference between the labor market (wages) and the widget sale is the number of units involved; the principle is the same. Instead of one widget with two buyers, millions of workers want to sell their services, and millions of employers want to buy them.

There is an infinite number of things to do. We call them jobs. Therefore, the number of jobs available (demand) exceeds the number of workers who want to do those jobs. In economic terms, this is called a limited supply. Whether workers will take one job or another depends upon the price, i.e., the wage rates.

How low can wages go? Marx argued that wage rates decrease to the point of subsistence - as usual, he was wrong.

Moreover, the competition among employers causes wages to increase, not decrease. Three hundred years of history well demonstrates that real wages increase as worker productivity increases. This is precisely contrary to Marx's claim that capitalism results in continuously lowering wages. Here's the rule: in a free market, wages can go no lower than the point of full employment.

What does that mean? Let's look at the mysterious full employment point. Full employment means all available workers have jobs. But, whatever the wages are at full employment, that is as low as they can go. Any employer who offers less will have no applicants for the job and risks his present workers quitting to go to employers offering more. This "market force" raises wages to the "full employment" wage rate.

In other words, even if workers are willing to work for minimum subsistence, the wage they will actually get depends solely on the market, not the workers' need or the employers' greed. Need and greed are not relevant because the interactions of buyers and sellers determine prices, including wage rates.        

Let's return to the simplified widget industry. We find Wow's Widgets and its competitor Wonder Widgets are the two buyers of labor, the "greedy" employers who seek a worker. Both want to pay the lowest price (wages) for the worker's work. But on the other hand, the greedy worker (the seller) wants to sell his skills at as high a price as he can get. Does this create a Marxist antagonistic struggle between them?

No. We already know employers must pay wages high enough to attract and keep the workers they want. Therefore, Wow's Widgets must bid more than Wonder Widgets to attract and retain the workers.

The economy is not a fixed pie. By that, I mean if Person A becomes rich, that doesn't mean less income for Persons B and C. Moreover, successful entrepreneurs only get a tiny fraction of their wealth from creating jobs for others. Lastly, you don't have to be an economist to see the average income keeps rising, and all segments of society tend to rise and fall together.

To recap, first, both "worker need" and "employer greed" are not relevant to how much wages are paid. Second, profits do not come from wages because profits precede wages.

Contrary to Marx and Pelosi, the successful capitalist creates jobs and provides the path to wealth for many workers.  Get rid of the profits, as Marx and Pelosi want to do, and you'll get rid of the capitalists, as well as the countless millions of jobs they create every day.

Wouldn't it be easier to just get rid of one job, Nancy Pelosi's?

This article was reprinted from a different site. Commentary may be added.  Read other Scragged.com articles by Guest Editorial or other articles on Economics.
Reader Comments

Actually what came first was sharing. Of course that didn't work out too well because Bob didn't work that hard and wanted a large share so some of the others beat him up. Finally they settled on Ben to oversee things and divide out the fruits of the labor. Ben took on the job of overseer and Bob started working harder under Ben's supervision and everyone did better until Ben wanted a larger share for the frustration of having to deal with Bob. So Bob decided to form a union and the fight was on.

October 25, 2021 8:16 PM

A very admirable attempt at simplicity but, I'm afraid it's a losing battle. If 3+4 no longer equals 7, what possible hope remains for any explanation of economics?


October 25, 2021 9:51 PM

i see from David and fred that some who appear to be leftists are reading scragged now; this is an EXCELLENT thing! whenever people of different political beliefs can talk with one another without physically attacking one another, civilization has a better chance of survival - especially a civilization of free people.

i'm sure that sharing came first, but it was in tribal societies, which were only rarely even close to what we might consider civilized today. usually, when a person who was unknown to anybody in the tribe was encountered, he was a competitor for scarce resources (this was in hunter-gatherer times), and thus *NEEDED* to be killed, to prevent the knowledge of the existence of the tribe from spreading to those possible competitors. if the tribe was lucky, the dead person's tribe would remain ignorant of the killer tribe's existence, and could be attacked for supplies and females. the very concept of "stranger" - a person who was unknown to another person, but was considered safe - did not appear until the rise of urban centers. and by the time that urban centers had appeared, wily humans had already figured out ways to make a living by trading wares and selling services to others. nobody got hired for anything until these first entrepreneurs had created businesses (however limited by rulers and other parasites) and the need for jobs.

??? what do U mean by "If 3+4 no longer equals 7...?" since the very first jobs were not created until AFTER the very first businesses were built, how can there be "surplus value?" there was NO value until the businesses created the need for jobs.

i would love for both David and fred to continue the discussion. i recognize that it is *very* hard to lay out an argument in a short comment, and that many assumptions and ideas the commenter may have cannot easily be articulated in so short a space and time ... so let's take some time laying out the arguments. i have learned from people with whom i vigorously disagreed in the past, and i am willing to be convinced today, if U can overcome my objections (which are equally difficult to lay out in a short comment). let's talk with one another rather than shouting, name-calling, and physically attacking one another!

October 25, 2021 10:32 PM

Good article highlighting the reality of a socialist economy/society vs the "yes, unicorns are real" lies coming from DC politicians and the msm.

Make no mistake, none of the push for equality of outcome via socialism has anything to do with equality. No! Quite the opposite. It's all and only about creating a two tiered system of elites, billionaires, big tech, and politicians at the top (think Davos), and then, everyone else at the bottom. And it will be decidedly unequal. It already is. Politicians dont have Obamacare for health insurance like everyone else. Politicians do have pensions for life while few if any others do. Politicians like Patrick Kennedy and his dear old dad Ted, don't get arrested or suffer any consequences for crimes like wreaking a 5.0 mustang while driving drunk a few blocks from the White House or leaving your date to drown in a car crash, but you do get arrested and you do suffer consequences.
There are 1000's of additional examples of the stark unequalness of treatment/outcome on both sides of the aisle in DC and in every state government too, as compared to us.the great mass of people at the bottom.
These 2examples are a gross minimization of the actual reality of socialism and an economy (or lack of) under socialism.
The one and only goal of the people pushing this narrative, that inequality, unfairness, and privilege are everywhere, and that the solution is socialism, is to amass power, control and money by them and use the power, control and money against us to further and maintain their control.

Just look at China, North Korea and Venezuela. Two tiered systems and if you're not in the top tier, you never will be. And they will keep you out by force if necessary.

And let me touch on the posters mention of unions.. In my opinion, yes, there was a time and a place where groups of workers had to join together to get fairer treatment from businesses. And as soon as they formalized these groups into unions with union management, the goal to perpetuate the union for union management to get paid was created despite the initial problem being solved.
And today, with huge and most often "woke" HR departments touting "core values, inclusiveness and equality for all", unions are almost extinct. And don't kid yourself, not one woke HR manager or CEO wants anything to do with any union and they will do whatever it takes to prevent a union from taking root. Unions are just a Trojan horse way to get paid without adding any value thereby raising the cost of goods for both the company and the customer. Just like a tax. And present day HR departments sole reason for being is to protect the company/corporation from - YOU, the employee.

The current state of affairs reminds me of the movie Rollerball (1975) starring James Cann where woke corporation's rule the world and conflict is resolved and everyone at the bottom is placated (anesthetized) via the rollerball tournament. Everyone is a pawn in the game, only they don't know it and believe they are part of the upper tier until they realize they are not and never will be.

The left wants us to deny what our ears hears and our eyes see.

October 26, 2021 2:04 PM

Relatively free market capitalism, the rule of law and government by the consent of the governed, have led the modern world to prosperity unprecedented in history (herstory?) Why should we abandon it for socialism, which, like Bullwinkle pulling a rabbit out of his hat, is a trick that never works?

Socialism is a revollt of academics who believe that capitalism underpays them for their "expertise." They want the rule of "experts," themselves, to replace the rule of law, with no checks and balances. They either don't care that socialism doesn't work, or are confident they are smart enough to make it work this time.

I think the hash that "experts" have made of everything they've touched in the last 10 months will defeat them at the polls in 2022 and again in 2024. Angry voters will swamp the margin of fraud.

October 26, 2021 10:58 PM

It is increasingly amazing to me how increasingly little Marx about economics.

I compare him to Locke. Locke described human civil behavior by which we attribute equity. And he ruled out the extremes. Locke simply rationalizes inconsistent human behavior into a principle.

Marx seems to concentrate on what happens but "shouldn't".

It's amazing that his Labor Theory of Value hasn't been more ruthlessly ridiculed over the 170 years. As much labor as a farmer puts into his crops it will never equal the value of the land and the soil they grow in. The more land he has, the more food he has to trade. Thus, every square of land he can add to his farm, add a little more labor for a little more value. The land is the basis for value. But of course there is no value in wasting all that land cultivating plants nobody wants to eat. Neither the land nor the labor matter, if nobody cares about how scarce the crop is.

Economics is the study of scarcity.

October 30, 2021 3:34 AM

"which came first, profit or wages?"

In a modern "economy" the answer is obvious, but the modern economy is very new, so actually the answer is neither, survival came first (and still does).

In "pre-economy" times humans were dispersed in small bands living off the land. The only way to survive was to be both lucky and to accumulate what is now called capital. Mostly this capital was in the form of practiced cooperation and knowledge (technology), although some was physical. It is only the physical that is relatively easily found, although linguistics and more recently DNA analysis have also found interesting patterns.

Why is this important? Because capital can to some extent make up for bad luck, and cause good luck. In other words wealth is a form of protection that helps insure survival and fosters advancement.

I suggest the same is true of "modern" societies and economies. "Bad luck" still occurs, and still kills the "unlucky", but at far lower rates than before because we have the resources and knowledge (capital) to predict,and avoid or remediate. We have, and can move, what is needed where it is needed when it is needed.

In a historical perspective these capabilities are astonishing in scale, but not really surprising in kind. After all Rome was built by cooperation and shared purpose, and engineering skills that built ROADS. In fact, although I am not a historian, I suspect that all societies were built by cooperation and investment in first knowledge then in useful assets that generated more wealth.

In the most general terms basic wealth, in the forms of cooperation and minimal knowledge comes first, then investment, and lastly the generation of more wealth. As a corollary, some investment must go to increasing cooperation and knowledge, and some to maintenance, or the process stops and everyone becomes "unlucky" at the same time. This process is after all an overlapping cycle.

Any society that does not value, or worse hinders, trust and cooperation or capital formation and preservation will not last long because they are attacking the very foundation on which they exist. These are the problems that have demolished every communist/socialist society. They are also core problems with any political movement that seeks to divide a society into subgroups with asserted differences and deficiencies they cannot overcome or do not "deserve", especially along economic lines.

Similarly this the is problem with destroying the educational system, for all wealth ultimately rests on the knowledge of cooperation, what will create wealth, how to best coordinate and manage those processes, and the meta-knowledge of what wealth actually is.

This destruction can take the more subtle form of tradition or ideology leading to resisting change based on increased knowledge, or attempts to force false "knowledge" into the process.

Consider the decline of the British landed gentry. In a time when farmland was the important capital, land ownership and stewardship were the keys to wealth. But as the industrial revolution started the key shifted to knowledge about physical sciences and engineering. Many of the gentry resisted this by disdaining "trade", and used the tools of society to this end. This raises the question of how much faster could wealth have been created, and the societal issues that gave raise to Marx been averted or mitigated, if they had supported and better managed this process? Another, and in some ways more important example, is the Soviet experiment with Lysenkoism for ideological reasons, resulting in the starvation of millions and economic decline for many millions more.

October 30, 2021 4:13 PM

"Marx's "surplus value" theory says..."

...nothing, as the following discovery illustrates...

Marx's definition of capital is surplus value (surplus value, and capital, says Marx, being peculiar to capitalist production: "Hitherto we have investigated how surplus-value emanates from capital; we have now to see how capital arises from surplus-value."."But this production of surplus-value completes but the first act of the capitalist process of production."), surplus value merely equaling a company's profits, a company's profits equaling the portion of wages Marx said labor isn't paid. Of course, before there existed the capitalist economy, there was no surplus value that capitalist production could operate on for its capital base, meaning Marx's labor surplus value-based capitalist economy couldn't have come into existence, proving that there first existed a non-surplus value based capitalist financial system that set in motion capitalist production! Marx's writings on economics places the mule before the cart!

Let's clarify the paragraph above by starting the capitalist mode of production, according to Marx...

What do we need? We need capital, of course. So let's get some capital, shall we? I'm looking, but I can't find any? Oops! I forgot, we need surplus value to create the capital. Okay, let's look for surplus value. It's not there because surplus value emanates from capital!

Marx says surplus value emanates from capital, and capital arises from surplus value:

Capital can't exist without first surplus value existing, we're told by Marx, but surplus value can't exist first because it requires the existence of capital from which it emanates!

There's nothing there! Not even a circular logic argument is present! Obviously the Marxist leadership know this, because I couldn't be the first person to stumble upon this huge discovery.

In Capital, Marx begins his analysis with an already existing capitalist economy. Marx can't explain how the capitalist economy came into existence because such an economy couldn't come into existence according to Marx's peculiar analysis of the capitalist economy where surplus-value created capital must first exist, but since surplus-value doesn't exist yet, there can be no capital to begin the capitalist economy. To overcome this inherent contradiction in Marx's "investigation", he begins Capital where we find an already existing capitalist economy:

"The wealth of those societies in which the capitalist

mode of production prevails, presents itself as "an

immense accumulation of commodities," its unit

being a single commodity. Our investigation must

therefore begin with the analysis of a commodity."

Let's rewrite that first paragraph from Capital, correcting the errors...

"The wealth of those societies in which the capitalist

mode of production prevails, presents itself as "an

immense accumulation of capital," its unit being the

rate of interest. Our investigation must therefore begin

with the analysis of interest rates."

November 27, 2021 11:04 AM
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