Wage-Rate and Profit-Rate Trends

C. Wage-Rate and Profit-Rate Trends

We turn now to consider more closely aspects of distribution theory touched on in Section B. Once again there arise questions of consistency between the views of

Marx’s Economics 1843–1845

As for wage-rate determination, we find the generalization in the Manu- scripts – based on an exaggerated reading of Adam Smith – that the “ordinary” wage reflects physiological subsistence assuring a constant (working) population: “The lowest and the only necessary wage rate is that providing for the subsistence of the worker for the duration of his work and as much more as is necessary for him to support a family, and for the race of labourers not to die out. The ordinary wage, according to Smith, is the lowest compatible with common humanity, that is, with cattle-like existence” (MECW 3 : 235). The strong monopsony pressures at play – also to be found in Smith in some contexts (1937 [1776]: 67–8, 71, 532) – and the absence of alternative sources of income for labor assures the outcome in question. Moreover, immobility of labor restricted its exit from declining trades to its disadvantage.

Notwithstanding the representation of the subsistence wage as the “ordinary” case, Marx recognizes – again following Smith – that a condition of increasing wealth “is the only one favourable to the worker;” for “here competition between capitalists sets in. The demand for workers exceeds their supply” (MECW 3 : 237). 11 Marx adds, however, the paradoxical proposition that rapid growth of “capital and revenue” is itself only possible because of extractions from labor (238), or – as he phrased it in his Notebooks – accumulation presupposes “la privation majeure, la propri´et´e” (Marx 1968: 9), here adopting Say’s term “privation ant´erieure” (Say 1819, 1 : 92) but giving it his own reading, for Say intended abstinence on the part of capitalists and neglected that the private property institution presupposes

privation on the part of labor. 12 But all this is somewhat academic since any initial upward pressure on the real wage is outweighed by ongoing structural changes inherent in the growth process enhancing the divorce of the class of labor from that of capitalists and with it the dependency of the former on the latter (MECW 3 :

237), 13 while “the increase in the class of people wholly dependent on work intensifies competition among the workers, thus lowering their price. In the factory system this situation of the worker reaches its climax” (237–8; emphasis added). The downward pressure on the wage towards subsistence, it is to be noted, does not emanate from population growth ; rather, the “increase in the class of people wholly dependent on work” entails inflows from the middle classes as we shall now see. 14

11 Nonetheless, upward pressure on the real wage induces “overwork” – also a Smithian concept (Smith 1937 [1776]: 81–2) – and even an increase in the death rate, though from the perspective

of the laboring class this latter is a “favourable circumstance” since the market is turned to its advantage. 12 See also: “wages are a deduction which land and capital allow to go to the worker, a concession from the product of labour to the workers, to labour” (MECW 3 : 240–1). 13 On J. S. Mill’s preoccupation with labor’s “dependence,” see Hollander 1985: 776–7, 782–3, 820–1. 14 As Mandel says of the downward wage trend: “In contrast to Malthus and Ricardo, however, Marx pointed out that this was not the inevitable consequence of some ‘law of increase of population,’ but resulted from the separation of the workers from their means of production” (Mandel 1971: 31). But he also believes that Marx came to modify the increasing absolute

C. Wage-Rate and Profit-Rate Trends 173

A falling interest rate characterizing growing economies (which Marx here takes for granted) contributes to concentration of capital and a resultant flow of small bankrupt employers into the labor force. The argument sets out with a Smithian theme regarding the demise of the rentier, whereby – in Marx’s paraphrase – “[i]n an increasingly prosperous society only the richest of the rich can continue to live on money interest. Everyone else has to carry on a business with his capital, or venture it in trade” (Smith 1937 [1776]: 96). “As a result,” Marx continues:

competition between the capitalists becomes more intense. The concentration of capital increases, the big capitalists ruin the small, and a section of the erstwhile capitalists sinks into the working class, which as a result of this supply again suffers to some extent a depression of wages and passes into a still greater dependence on the few big capitalists. The number of capitalists having been diminished, their competition with respect to the workers scarcely exists any longer; and the number of workers having been increased, their competition among themselves has become all the more intense, unnatural, and violent. Consequently, a section of the working class falls into beggary or starvation just as necessarily as a section of the middle capitalists falls into the working class (238).

And there are further damaging consequences for labor’s welfare arising from capi- talists’ “competition,” including the adoption of machinery and “overproduction” (on which see below Section E). Certainly, productivity increase is no benefit to labor: “Thus the advance made by human labour in converting the product of nature into the manufactured product of nature increases, not the wages of labour, but in part the number of profitable capital investments, and in part the size of every subsequent capital in comparison with the foregoing” (249).

All of this is the very best the worker can expect: “Such are the consequences of a state of society most favourable to the worker – namely of a state of growing, advancing wealth” (239). Evidently any upward pressures on the wage are seen to be overwhelmed. But in any event growth itself must sooner or later peter out: “Eventually, however, this state of growth must sooner or later reach its peak,” Marx citing Smith’s stationary state but adding that its achievement entails an increase in mortality: “both the wages of labour and the profits of stock would probably be very low. . . . [T]he competition for employment would necessarily be so great as to reduce the wages of labour to what was barely sufficient to keep up the number of labourers, and, the country being already fully peopled, that number could never

be augmented” (Smith 1937 [1776]: 94–5). The surplus would have to die.” The argument closes with a depressing summary: “Since, however, according to Smith,

a society is not happy, of which the greater part suffers – yet even the wealthiest state of society leads to this suffering of the majority – and since the economic system (and in general a society based on private interest) leads to this wealthiest condition, it follows that the goal of the economic system is the unhappiness of society.”

We turn next to the profit rate, and a reference in the Manuscripts to Smith’s distinction between profit as such “regulated by the value of the capital employed”

Marx’s Economics 1843–1845

would have no interest in employing the workers, unless he expected from the sale of their work something more than is necessary to replace the stock advanced by him as wages and he would have no interest to employ a great stock rather than

a small one, unless his profits were to bear some proportion to the extent of his stock” (Smith 1937 [1776]: 48; cited 248). 15 An index of the profit rate is provided, again as in Smith, by the rate of interest: “Wherever a great deal can be made by the use of money, a great deal will be given for the use of it; wherever little can be made by it, little will be given” (Smith: 88). And Marx relies on Smith’s proposition basing the falling rate of profit on increasing “competition of capitals” (Smith: 87, 342; cited 250). The full Smithian exposition of the effects of increasing competition – upward pressure on the wage rate as well as downward pressure on prices – is rehearsed (Smith: 336, cited 252), although we have seen that the upward wage component is discounted. A final stationary state – gratuitously said to be “the situation most dear to the heart of political economy” (251) – is also defined in Smith’s own terms.

Now for Marx “increased competition” partly takes the form of enhanced “con- centration of capital” (a phenomenon encountered above, p. 173), since activity subject to the high wages and low prices generated by the (assumed) competition could be faced more easily by the “big capitalist”: “The larger size of his capital com- pensates him for the smaller profits, and he can even bear temporary losses until the smaller capitalist is ruined and he finds himself freed from this competition” (252) –

a theme encountered in Capital. There are also scale economies, both pecuniary and technical. As for the former: “the big capitalist always buys cheaper than the small one, because he buys bigger quantities. He can, therefore, well afford to sell cheaper”; and “the credit which a big capitalist enjoys compared with a smaller one means for him all the greater saving in fixed capital – that is, in the amount of ready money he must always have at hand” (252–3). As for technical economies of scale: “where industrial labour has reached a high level, and where therefore almost all manual labour has become factory labour, the entire capital of a small capitalist does not suffice to provide him even with the necessary fixed capital”; while “the accumulation of large capital is also accompanied by a proportional concentration and simplification of fixed capital, as compared to the smaller capitalists. The big capitalist introduces for himself some kind of organisation of the instruments of labour” (253–4).

How much is left of the Smithian doctrine of secularly falling profit rates considering the alterations in industrial structure now allowed for, namely

15 Oakley observes: “It is evident in this passage, that the origin of the return to capital is to be found in a surplus over the advances to employ labour. Neither Smith nor Marx explicitly

recognised this principle, and Marx went on directly to consider the phenomenal form of profit as a rate relative to capital advanced without any concern for the origin of the revenue” (Oakley 1984: 55). But we recall that the source of profit is touched on in Marx’s references to Proudhon on the “tribute” paid capital (above, p. 168). And in the Manuscripts themselves, we find the Smithian notion of the source of profits in current labor (below, p. 175).

C. Wage-Rate and Profit-Rate Trends 175 “concentration” and the related advantages of size? Marx himself does not go

so far as to say that the fall in the profit rate due to competition is actually pre- vented by these structural changes, only that it is counteracted: “The accumulation of capital increases and the competition between capitalists decreases, when capital and landed property are united in the same hand, also when capital is enabled by its size to combine different branches of production” (258). And Smith himself is cited to illustrate “other fortuitous causes which can raise the profit on capital” by reducing “competition of capitals”such as “[t]he acquisition of new territories, or of new branches of trade” (Smith: 93, cited 249); moreover “the number of profitable capital investments” is also increased in a more specific sense, citing Smith’s proposition that “[as] any particular commodity comes to be more man- ufactured, that part of the price which resolves itself into wages and profit, comes to be greater in proportion to that which resolves itself into rent. In the progress of the manufacture, not only the number of profits increases, but every subsequent profit is greater than the foregoing; because the capital from which it is derived must always be greater” (Smith: 51). We conclude that in his Manuscripts of 1844 Marx stood by the falling profit rate based on “increasing competition” despite various counteracting forces.

One further feature of the Manuscripts may be noted in this regard. It is the proposition based on the foregoing Smithian text that since profit is generated by human labor it rises with the labor intensity of products : “[The capitalist] profits doubly – first, by the division of labour; and secondly, in general, by the advance which human labour makes on the natural product. The greater the human share in a commodity, the greater the profit of dead capital” (MECW 3 : 249; emphasis added). This assertion – which clashes with the profitability attributed to the use of fixed capital by large firms also outlined above – is in line with the falling profit rate due to rising c/v of the later doctrine.

We recall, finally, Marx’s continued adherence to a falling real wage trend and ulti- mate stationariness. Unfortunately, the transition from a state of growth to one of stationariness is left unexplored. This had been a weakness in the Wealth of Nations, resolved by Ricardo and Malthus in terms of a land-based growth model (Hollander 1992, 2001). The problem is aggravated because Marx, again following Smith, has it that a falling return on capital actually encourages accumulation: “A great stock though with small profits, generally increases faster than a small stock with great profits. Money, says the proverb, makes money” (Smith: 93, cited MECW 3 : 252). There is no decelerating force in the system to bring it to a state of stationariness.

This leads us to the Notebooks and the impression that in some respects they may have reinforced the Manuscripts. In the first place, Marx paraphrases Ricardo approvingly to the effect that should technical progress reduce the real costs of wage goods, “in very few years his circumstances would be found to have scarcely improved” – as a result of “competition” adds Marx; “Ricardo emphasises

Marx’s Economics 1843–1845

splendidly that the worker gains nothing from increased labor productivity” (Marx 1968: 8). Conspicuously absent is any mention of the population component on which Ricardo himself relied to obtain this result (1951–73 1 : 16). More generally, Marx found the empirical importance of Ricardian theory to lie in its presumption against Smith’s upward wage movement during the course of accumulation, rely- ing, however, on the non-Ricardian gloss relating to a pool of unemployed available to service increase in demand for labor: “Ricardo’s theory is important in current circumstances solely because it shows how, during a process of on-going accu- mulation, competition between capitalists and the fall in their profits, in no way entails – as Smith supposed – a rise in wages. At the present time, in all industrial countries, labor supply exceeds demand, and laborers can be recruited daily from the unemployed proletariat. . . . ” But wages do not in fact remain constant; for to the contrary, “by dint of competition, accumulation brings with it a continuous fall in wages” (11; emphasis added).

There is then a superposition of Smithian, Ricardian, and various empirically related elements. The Smithian component is still indicated by the reference to “competition between capitalists” as cause of the falling profit rate, though Marx rejects Smith’s upward pressure on the wage, forgetting that Smithian theory too implies ultimately falling wages (above, p. 174). The reference to Ricardo is lim- ited to an alleged constant-wage proposition. Conspicuous too is the empirical proposition relating to contemporary unemployment, though the possibility of drawing in labor from such a pool does not gainsay the more general proposition that accumulation as such entails a continual fall in the wage rate.

Elsewhere in the same Notebooks (37–8) there is reference to the fall in the secular rate of profits as rationalized by Ricardian theory in McCulloch’s Discours. But though Marx rejects a “refutation” by Pr´evost (McCulloch’s French translator)

he does not commit himself to the land-based doctrine itself. And this raises further complexities. The need to account for a transition from a rising to a declining wage had been removed to the extent that Marx rejected Smith’s upward pressure on the wage; nevertheless, the supposed simultaneous decline in both the wage and the profit rates remains unjustified, Marx neglecting to explain who the beneficiaries of economic progress could be in the absence of land scarcity, indeed assuming technological advance or at least increasing economies of scale. (The outcome in the absence of land-scarcity considerations and assuming technical progress will be determinate provided labor-supply and capital-supply functions are defined. But in this case we would expect the wage rate and profit-rates to rise not to fall.) Marx also neglected to investigate the consistency between the simultaneous decline of the factor returns and the inverse wage-profit relation – to which, we recall, he had subscribed in the Manuscripts (above, p. 167).