Capitalists as a Class Reduce Profits and Raise Wages

If capitalists did not exist, profits would equal 100% of sales revenue and an infinite percentage of zero capital invested. For proof, see my CAPITALISM: A TREATISE ON ECONOMICS, available in hardcover, 2-volume paperback, and Kindle editions at https://amzn.to/3kd4y39

Contrary to Adam Smith and Karl Marx, capitalists do not create the phenomenon of profit, which exists prior to their existence, but rather the phenomenon of PRODUCTIVE EXPENDITURE (i.e., expenditure for the purpose of making subsequent sales).

Productive expenditure consists of wage payments and expenditure for capital goods, both of which show up as costs of production that must be deducted from sales revenues and as capital invested in business assets.

The more economically capitalistic the economic system, i.e., the more the buying for the sake of selling relative to sales, the lower is profit both as a percentage of sales and as a percentage of capital invested, while the higher are wages.

Capitalists as a class do not create profits but wages. They increase wages both relative to sales revenues and profits and absolutely in terms of wage earners’ standard of living.

Again, for proof, read my CAPITALISM: A TREATISE ON ECONOMICS, available in hardcover, 2-volume paperback, and Kindle editions at https://amzn.to/3kd4y39

Who Are the Supporters of Slavery?

Ever since the defeat of the Nazis in WWII, Marxists/Socialists have clearly been the world’s leading advocates of slavery. For elaboration, see Chapter 8 “The Chaos and Tyranny of Socialism” in my Capitalism: A Treatise on Economics. Available at amzn.to/2PM19ut.

See also my June 28, 2020 blogpost “Socialism Is Slavery and Worse” at http://georgereismansblog.blogspot.com/2020/06/socialism-is-slavery-and-worse.html.

Nevertheless, Marxist/Socialist super-hypocrite-thugs dare to pull down statues of Washington and Jefferson on the grounds that these men owned slaves.

These men set forth the principle of individual rights and of government existing for no other purpose than to protect those rights, and fought a war to establish a country dedicated to their protection.

Their success was the indispensable precondition of the abolition of slavery in the Civil War.

To attack them for not having freed their own slaves is comparable to attacking Marx and Engels (a wealthy cotton mill owner) for Engels’s “exploitation” of alleged “wage slaves” and Marx’s willingness to be supported by it.

It would have been a good thing for all the parties to have abstained from actions that violated their principles.

Had Washington and Jefferson done so, their record would now shine with even more luster than it does.

Had Marx and Engels done so, scores of millions more people would have lived instead of being executed or dying of starvation. Hundreds of millions would have avoided the experience of life as torture.

The paragraph before last is a measure of the good accomplished by Washington and Jefferson. The last paragraph is a measure of the evil accomplished by Marx and Engels and their supporters, including the hordes of uneducated children today masquerading as college graduates.

(And very often even passing as professors, journalists, mayors, governors, and United States Congressmen and Senators.)

The remedy for our growing chaos begins with reading and studying the works of Ludwig von Mises, the greatest man of the 20^th Century, and of Ayn Rand, the greatest woman of the 20^th Century.

Having been a member of Mises’s seminar for 10 years and a member of Ayn Rand’s “Collective” also for many years, I think I have been able to add some major intellectual contributions of my own to those of these giants. See again amzn.to/2PM19ut.

We have the answers and all we are up against is a horde of semi-savages who are in process of withdrawing themselves from Western Civilization and its values. To reverse the process, read Mises, Rand, and Reisman.

TURNING MARX AND THE EXPLOITATION THEORY UPSIDE DOWN

ATTENTION: ALL MARXISTS AND SOCIALISTS.

Marxists hate capitalism and want to replace it with socialism because they believe that profits are stolen from wages. They begin with the idea that originally there were workers but no capitalists and that the value of the products the workers produced and sold was all wages.

But then allegedly came the capitalists, who proceeded to deduct a part of wages and claim it as profits. Adam Smith expresses this idea in paragraphs 1,2,&5-8 of his chapter on wages in Bk. I of The Wealth of Nations. They’re online at bit.ly/2MKUhfu. Please read them.

Marx took over Smith’s view of profits and went on to claim that the alleged deduction of profits from wages would be so great as to leave the wage earner with nothing more than minimum subsistence, for which he would have to work unbearable hours in unbearable conditions.

I will now show that PROFIT, not wages, is the original and primary form of labor income and that this follows both from the actual nature of Smith’s “original state of things” and from Marx’s version of it that he called “simple circulation.” (bit.ly/2ZWyIxS, pt. 2, ch. 4)

In simple circulation, “C-M-C,” workers produce commodities, “C,” sell them for money, “M,” and use the money they receive, to buy other commodities, “C.” I say that the money the workers receive in exchange for the sale of their commodities is not wages but SALES REVENUES.

(To my knowledge, I am the first economist to identify this, and its implications. I was inspired by reading Henry Hazlitt's discussion of John Stuart Mill's proposition "demand for commodities is not demand for labor.")

Wages are money paid in exchange for the performance of labor. Here, money is paid not in exchange for the performance of the workers’ labor but for the workers’ COMMODITIES. Thus, the workers have sales revenues, not wages.

However, because this is simple circulation, not “capitalistic circulation,” there are NO COSTS to deduct from these sales revenues. Costs appear only in capitalistic circulation, “M-C-M,” where they are the reflection of the first “M.”

(Costs in business are the prior expenditures of money for the purpose of bringing in the sales revenues. If there are no such expenditures, there are no costs to deduct.  Simple circulation is characterized precisely by the fact that there are no such expenditures.)

(For the benefit of those unfamiliar with Marx, capitalistic circulation means the outlay of money, “M,” for the purpose of producing commodities, “C,” which are to be sold for a further sum of money, “M,” [or “M’,” to indicate a larger sum of money].)

As I say, given the absence of capitalistic circulation and its first “M,” there are no costs to deduct from the sales revenues and thus THE ENTIRE AMOUNT OF THE SALES REVENUES IS PROFIT. In addition, because there is no first “M,” there is no monetary capital.

The workers of simple circulation have not spent anything for tools or materials, let alone the labor of other workers. Thus, the amount of capital on their books is zero.

It follows that in simple circulation profits are both 100% of sales and an infinite percentage of capital invested, which capital is zero.

As I’ve shown, the workers of simple circulation are not wage earners. Because they sell their commodities rather than their labor, they are more correctly described as small businessmen. They are small businessmen without costs and without capital.

Simple circulation morphs into capitalistic circulation as and when some of these worker/businessmen begin to save and productively expend a portion of their sales revenues and profits rather than consume them all. These worker/businessmen are now worker/businessmen/capitalists.

Their productive expenditure (i.e., their expenditure for the purpose of making subsequent sales) is the first “M” in capitalistic circulation. It buys capital goods and labor and has the following further major consequences:

IT BRINGS INTO EXISTENCE COSTS OF PRODUCTION IN THE INCOME STATEMENTS OF BUSINESSES, AND CAPITAL WITH A MONETARY VALUE ON THEIR BALANCE SHEETS. Thus, it reduces both the percentage of sales revenues that is profit and, doubly, the percentage that profit bears to capital invested.

I say that the rate of profit on capital is doubly reduced because, per dollar of sales revenue, not only is the amount of profit reduced but also the amount of capital on the books is increased.

Marx’s sequence for capitalistic circulation can be used to provide a simple formula for measuring the economic degree of capitalism, namely, the higher is the ratio of “M” to “M’,” the more economically capitalistic is the economic system.

Using this formula, “simple circulation” represents a zero economic degree of capitalism. As the economic degree of capitalism rises, not only do profit margins and the rate of profit fall, but wage payments come into being and then rise both absolutely and relative to profits.

Thus, so far are capitalists from stealing wages as the source of their profits, that the truth is the exact opposite. The starting point is not 100% wages and zero profits, but 100% profits and zero wages. Capitalists then raise wages and reduce profits!

The higher is the economic degree of capitalism, the more is this the case. The fall in profits does not imply a loss to capitalists. It’s far more than offset by the increase in production and consequent rise in buying power that accompanies it (and also raises real wages).  

For an introductory elaboration of this analysis, read my essay whose title appears immediately below. It’s available at amzn.to/2N44uTu
in Kindle format for 99¢ and also in paperback.

For full elaboration, read my Capitalism: A Treatise on Economics, available in  hardcover and Kindle formats at https://amzn.to/2PM19ut. Also available at www.capitalism.net both in  hardcover and as a free pdf replica capable of download. (Read chapters 11 and 14 in particular.)

New Kindle Book by Reisman

I've just published a new book. It's as short as Capitalism is long, i.e., 59 pages. Its title is Warren Buffett, Class Warfare, and the Exploitation Theory. It appears in Kindle format on Amazon.com and sells for 99¢.

The book consists of two parts. The first is my recently published article "An Open Letter to Warren Buffett on the Subject of Class Warfare," which is a critique of Buffett's views on the subjects of taxation and The Giving Pledge, as well as class warfare. The second part is a section of my book Capitalism: A Treatise on Economics, titled "Correcting the Errors of Adam Smith: A Classical-Economics Based Critique of the Conceptual Framework of the Exploitation Theory." While a critique of the exploitation theory is present in the Buffett article, this part goes deeper and seeks to completely overturn the foundations of Buffett’s and most other people’s ideas concerning the relationship between profits and wages.

At least since the time of Adam Smith, it has been believed that profits, interest, and all other income that is not wages (or salaries) is a deduction from what is naturally and, by implication, rightfully, wages. This view is the starting point of the Marxian exploitation theory, which seeks to explain what determines the extent of this alleged deduction and finds the answer in a distorted version of the classical economists’ labor theory of value. But this same view is no less the starting point of the most important critic of the Marxian exploitation theory, namely, the great Austrian economist Eugen von Böhm-Bawerk, who differs from Marx in concluding that, because of time preference, profits (interest) are a justified deduction from what is originally all wages.

In opposition to Smith, Marx, Böhm-Bawerk, and all who share their ideas, the theory that I propound is that the original, primary form of income is not wages but, however ironically, profits. Developing the implications of this major finding and anticipating and answering the questions that come to mind in connection with it occupies a substantial portion of both parts of this book, but especially the second part, which is completely given over to this task. The most important of these implications is the demonstration of a harmony of the self-interests of wage earners and capitalists. This, in turn, has enormous implications for the way people view such major economic issues as capitalism versus socialism, economic freedom versus government controls, income and inheritance taxation, and labor and social legislation. This little book offers an unprecedentedly powerful defense of capitalism and economic freedom in the space of a comparatively few pages. It is offered as an introduction to the author’s major work Capitalism: A Treatise on Economics, which is a state of the art defense of capitalism and economic freedom in virtually all of their aspects.

Readers' reviews of my book on the Amazon site would be most welcome.