My argument yesterday with the Marxists was rather infuriating, but typical of commies everywhere. When they say:
Capitalism is an employee generating $1,000 of value an hour but being paid $16.
They are talking about the basic tenets of Marxist economics:
- Workers produce more value than they are paid
- The difference is called surplus value
- That surplus goes to owners as profit
- Therefore, business owners, landlords, etc. are stealing the worker’s value
“Value” ≠ revenue
If a worker “generates $1,000/hour,” that usually means revenue, not pure value created. From that $1,000, a business pays:
- Materials
- Rent
- Equipment
- Utilities
- Other staff
- Risk costs
So the gap between $1,000 and $16 is not all profit. To say that it is ignores the contribution of the business itself. The worker and their labor are useless without the facilities, equipment, and organizational structure needed for the business to run.
In mainstream economics, wages depend upon:
- supply and demand for labor
- skills and scarcity
- bargaining power
- institutions (minimum wage, unions).
Bargaining power flows from supply and demand, which flows in turn from skills and scarcity. If you are the only person who can do a particular job and that job needs to be done or can generate profit, your wages will be high. See Michael Jordan. If literally anyone can do your job or the job itself doesn’t produce much value, your pay will be low.
Let’s say I am buying a hamburger. I have choices. I am going to buy the burger fitting my needs and requirements, but I am also going to do so at the lowest price point that I can. For the most part, that’s how consumers shop. It’s no different when a business is shopping for labor. That business is going to buy the product (labor) suiting its needs for the least amount of money that it can.
Example: A person is skilled in this job:
- Pull a frozen hamburger patty from the freezer
- Put that patty on the grill
- Push the start button on the timer
- When the timer beeps, flip the patty over
- when the timer beeps again, put the patty on the bread
- Pass the bread/patty assembly to the next person on the line
Note this is a skillset that nearly anyone can do in a competent manner. In fact, the most difficult part of this job is finding an employee who will show up to work as scheduled and not steal everything in the building. That being the case, the employer doesn’t have to pay a high wage. No employer will hire someone for $100 an hour to do a job they can find someone who will do that job in a suitable manner for $12 an hour. The business is going to offer the lowest amount it can that will attract a person with the requisite skills.
However, let’s say you are very competent for this job. You are a Michelin star chef. You still won’t get $100 an hour, because the product you are making (grilled hamburger patties) can’t be sold for enough to recoup your wages.
So that takes care of bargaining power, supply and demand, and skills and scarcity. What about institutions? That’s merely a term for artificial price controls. Call it what you want, whether that be unions, minimum wage, overtime laws, requirements for health insurance, or whatever- it’s an external body attempting to place constraints on the cost of purchasing labor. Price controls don’t work. We are seeing that now in real time with the influx of illegal immigrants to industries most vulnerable to price controls. Why hire a legal construction worker or farm hand when an illegal will work under the table for a fraction of the cost?
The market will always seek ways around price controls. Let’s say the government sets a minimum wage. They can do that with legislation or by requiring a business to deal with a proxy like a labor union. For whatever reason, a business is now required to pay a certain price for labor and no less. Some businesses will hire non-Union or illegal immigrant labor to circumvent this restriction. That will permit them to sell at a lower price on the black market, which gives that business a competitive advantage.
So let’s say the minimum wage is $100 an hour for our fabled burger flipper. The business needs to sell that burger at $85 in order to make money. However, there is a guy selling burgers in a back alley for $4. He has a competitive advantage and will likely sell all of the burgers he can make at that price.
So why doesn’t the government step in? In many cases, they do. When that happens, assuming prices are higher than the consumer wants to pay, people just cook their own burgers at home. Now there are no more businesses selling burgers, and the jobs disappear, making an effective wage of $0, regardless of what the minimum is.
The market always sets the price. There is a demand curve here- as your price increases, the people willing to pay that price steadily decreases. The trick is to maximize profits by balancing production capacity with price.
That excess value Marx claims the business owner is stealing ignores the contribution of the business owner. That owner took financial risks in creating that business and expects to get money (profit) in return. If there is no profit, there is no business, and then there is no job for the worker to perform in exchange for wages. That’s why communism fails- it ignores this truth, even as communist policies destroy every economy that has tried it.
So let’s move on to price gouging. There is no such thing: what is referred to as price gouging is merely the market’s response to increased demand. Let’s say that there is a massive power outage in your area. People rush to buy generators, and the local supply is quickly used up. There are some people who drive 100 miles away, outside of the affected area, to home depot. They buy 100 generators, drive back the 100 miles, and sell the generators for double or even more than what the normal price is. Many people would scream price gouging, but that is merely the market responding to demand and filling it. If you make that illegal, then no one will be willing to make the drive, and now there are no generators available at any price.
We see that all of the time with respect to surge pricing on Uber, the fact that the soda machine outside your office sells at a higher price than the supermarket 10 miles down the road, or even the tickets to that concert you wanted to see that’s been sold out for months, but are selling on resale sites for double their face value.
In each case, the “excess value” that Marx claims isn’t profit to be had, but a business owner taking advantage of workers, isn’t excess. It’s the cost of getting things done. That worker’s value is useless if there isn’t a facility that has the equipment, marketing, management, and other conditions required for that labor to mean something.
Michael Jordan is useless without a court, basketballs, teammates, and opponents, each of which has to be paid for. Each of us makes pay based upon our skills in producing something, the scarcity of that skill, and the demand for the product we produce. If you don’t like how much you make, increase your skill set, gain a skill that is scarce and has value, or assume the risks of starting your own business. Each of those choices has its own risks, pitfalls, and rewards.
Just don’t sit around and complain how someone is holding you back and keeping you from being rich. The only person holding you back is-
you.
Just getting a degree isn’t going to automatically make your labor worth more. If your degree is in gender studies, outdoor recreation, or 14th century French poetry, you have skills, but those skills aren’t in demand. Likewise, if you are an expert craftsman who makes buggy whips, you likely aren’t going to see a high demand for your products.
As a side note, I tried using ChatGPT as an editor to find logical deficiencies in this post. What that AI told me is a great example of the built in biases of these computer programs. It took particular umbrage with the statement “Communism fails.” It argued that true communism has never been tried, so we don’t know if it will fail.
That’s a bullshit leftist talking point- “true communism hasn’t been tried, but we are smarter than those other people and we are going to do it correctly.”
They aren’t true Intelligence. These programs are merely parroting the opinions and thoughts of those who wrote the program. For that reason, they have the same problems and shortcomings as the humans who created them, and that is their greatest weakness.