The discontent and unrest that followed the 2020 presidential election was, at least in major part, one of the innumerable destructive consequences of an almost 250-year-old error in economic theory made by Adam Smith: namely, the belief that profits are a deduction from wages. (See the first eight paragraphs of chap. 8 , bk. I, of The Wealth of Nations.)
This error is the basis of the
Marxian exploitation theory, which holds that profits are stolen from wage
earners by a comparative handful of capitalist exploiters who, under a system
of unhampered, full-bodied, laissez-faire capitalism, reap enormous profits by
compelling the masses of wage earners to toil eighteen hours a day for
subsistence wages under brutal and dangerous working conditions that apply even
to the labor of small children, whose work is necessitated by the insufficiency
of the earnings of their parents. It is present, at least implicitly, in
practically all debates about tax, spending, and labor and social legislation. (All
references to Marx are to vol. I of Das Kapital.)
This view of things is the
foundation of demands for the “expropriation of the expropriators” and the
establishment of socialism, which will allegedly give back to the wage earners
what the capitalists have stolen from them and continue to steal from them.
This view has been the foundation
of most of the major policies of the Democratic Party at least since the time
of Woodrow Wilson and the “progressive” movement, with progress being
understood as movement toward socialism. Today, it is prominent as never before
in the far-left agenda of the Biden Administration. Its influence has become so
great that it permeates the thinking even of the alleged capitalist exploiters
themselves, many of whom apparently seek redemption by pouring fortunes into
the financing of far-left causes and so present the spectacle of capitalist
“exploiters” themselves acting as veritable communists, following in the
footsteps of Friedrich Engels, the wealthy capitalist who was both the
collaborator and the financial patron of Marx.
The fact is that capitalists do
not deduct profits from wages or “exploit” wage earners. Capitalists do not
create the phenomenon of profit. The existence of profit is logically prior to
the existence of capitalists. Indeed, if there were no capitalists but only
manual workers producing and selling products, as Smith and Marx claimed was
the case in their respective imaginary constructions of “the original state of
things” and “simple circulation,” the rate of profit would be infinite. The
truth is that the existence of capitalists serves to reduce the rate of
profit. Indeed, their saving and the expenditure of their savings in the form
of wage payments and expenditure for capital goods has served in the industrial
countries of the world both to reduce the rate of profit to just a few percent
and progressively to raise the standard of living of the average wage earner to
a level far surpassing that of kings and emperors of past ages.
However ironic this may be, a good
way to understand the truth about profits is by using the distinction Marx
makes between simple circulation and “capitalist circulation.” Simple
circulation refers to conditions in which workers produce commodities, “C,”
which they sell for money, “M,” that they then use to buy other commodities,
“C.” Marx describes this sequence as “C-M-C.” Under capitalist circulation in
contrast, the starting point is not the production of commodities by workers
but the outlay of money by capitalists, who pay for the construction of factories,
for the machinery that fills them, for supplies of materials, and the wages of
workers while the commodities later to be sold are in process of being
produced. Marx describes this sequence, that constitutes capitalist circulation,
as “M-C-M.”
As I say, what the capitalists are
responsible for is not the phenomenon of profit but the first “M” in
Marx’s “M-C-M” sequence, that is, for expenditures for capital goods and wage
payments. These expenditures all show up, sooner or later, as costs of
production that are deducted from the second “M” in Marx’s sequence,
representing capitalist circulation.
Now this second “M” is equally
present in simple circulation. In both types of circulation, it is the money
for which the commodities produced are sold. It is sales revenues.
In simple circulation, while there
are sales revenues, there are no monetary costs of production to deduct from
those sales revenues, because there have been no prior outlays of money to
bring in the sales revenues, costs being the reflection of such outlays.
Thus, Marx’s simple circulation is
a situation in which 100 percent of the sales revenues are profit. There is
also no accumulated capital in the form of a monetary book value of land,
plant, equipment, or inventory, for no such assets have been purchased. (Their
having been purchased would require capitalist circulation, which is precluded
by the requirements of simple circulation.) Thus, we have a situation, in which
not only do profits equal 100 percent of sales revenues, but also the rate of
profit is determined by the division of that amount of profit by a zero
amount of capital invested. Division by zero, of course, results in infinity.
In simple circulation, only
workers receive incomes, but the incomes they receive are profits, not wages. In
simple circulation, there are no wages paid in the production of products for
sale. Such wages, and the expenditure for capital goods, come into being only
under capitalist circulation. And as capitalist circulation intensifies,
something which can be expressed by dividing the first “M” by the second in
Marx’s sequence for capitalist circulation, the economy wide profit margin
declines. This is because the costs of production emanating from the first “M”
grow as the result of its increase relative to the second “M,” which is sales
revenues. And, of course, the economy-wide average rate of profit on capital
invested declines even further as a larger first “M” in Marx’s sequence results
in a book value of capital assets that is greater than sales revenues.
In conclusion, what capitalists
are responsible for is not the phenomenon of profit, but the expenditures that
include wage payments and that show up as costs of production to be deducted
from sales revenues and correspondingly reduce the proportion of sales revenues
that is profit. The capitalists’ expenditures are also responsible for the
accumulation of the monetary value of property, plant, equipment, and
inventory/work-in-progress, which serves further to reduce the average rate of
profit, as a smaller economy-wide profit margin is divided by a larger capital
base.
A further point: The capital
accumulated by the capitalists is not used to fill their bellies, as commonly
alleged in cartoon depictions of capitalists as men who are very fat. On the
contrary, the capital of the capitalists is the source of the supply of
products that everyone buys, including, for the far greater part, non-capitalists,
and is also by far the main source of the demand for the labor that
non-capitalists sell. In other words, the capitalists’ capital is the source of
enormous general economic benefit. A classic example of this is Henry
Ford’s accumulation of a vast personal fortune, which served to enable millions
of ordinary people to have automobiles and tens of thousands to have gainful
employment in producing them. Again, the capitalists’ capital is the source of
the supply of products that non-capitalists buy and of the demand for the labor
that non-capitalists sell.
And one last point: Capitalists
work. Their ranks include the primary workers in the economic system: those who
supply guiding, directing intelligence at the highest level in firms. This work
is a labor of thinking, planning, and decision making, rather than manual
labor. As such, their income tends to vary with the size of the capitals they employ.
Just as a worker digging a hole with a steam shovel, is still the party who
digs his vastly larger hole than a worker using a conventional shovel, because
it is he who supplies guiding, directing intelligence to the steam shovel, so a
capitalist with ten billion dollars of capital may produce ten times the output
as one who has just one billion of capital. In both instances it is the
capitalist who is the party who supplies the guiding, directing intelligence at
the highest level. Thus, just as one says, it was Columbus rather than his crew
members who discovered America (or did say this in the days when people
identified with the ideas, values, and perspective of Western Civilization
rather than the racial membership of their ancestors), so it is capitalists
like Ford, Rockefeller, and their contemporary counterparts who should be named
as the producers of their companies’ products. The employees are to be regarded
as their helpers (the “help”) in producing their, the capitalists’
products.
I have certainly not answered in
these few paragraphs every possible question concerning the justice and
fairness of the profits earned by capitalists, but I believe I do so in my book
Capitalism: A Treatise on Economics (see in particular, pp. 473-500 and
603-673.) So, I will simply stop here and hope that the reader will turn to
those pages and read and study them. If enough people do so, that will be the
end of Marxism and all of its destructive consequences resulting from its
doctrines of exploitation and class conflict, for people will then realize that
there is no exploitation of labor and no class conflict under capitalism and
its economic freedom but rather a profound class harmony between capitalists
and wage earners.
