Tuesday, June 1, 2010

The Value of Labor

There are two ways to establish a monetary value for labor. Both of those ways are economically sound, depending on the purpose for which labor is being evaluated. For purposes of this writing, both are equally important, as what I wish to discuss is the difference between the two.

The first (and simplest) way of determining the value of labor is through the labor market. This follows the tautology that everything is “worth” what its customer will pay for it. A merchant (in this case a worker) will seek the highest price (wage) possible, while a buyer (employer) will seek the lowest price (wage) possible, and the balance in bargaining power between the two determines the outcome. In the labor market, that balance is affected by the number of workers available to do a particular type of work (supply), the number of such jobs open (demand), the ability of workers to bargain collectively (organization), and the parameters set by law and regulation (rules of the game). Supply, demand, organization, and rules of the game are what determine the “value” of labor – in this sense. Let us call this the market value of labor.

The second way of determining labor’s value is in terms of the value of what it produces. All labor produces goods or services which are then offered for sale (or at least could be), and these goods and services have a market value of their own. In the context of any business, the “value” of labor in this sense is equal to the market value of all goods and services produced by it, net of any non-labor costs of production and marketing. This we may call the productive value of labor.

It should be self-evident that the market value of labor is always less than its productive value. In a capitalist economy this is entirely unavoidable, and as a practical matter it may be unavoidable in any economy, since some portion of the wealth produced must be set aside as capital to be reinvested. But in a capitalist economy, the entire point is to maximize, as much as practical, the difference between labor’s productive value and its market value, because the difference between these two is the margin of profit, and the purpose of a capitalist economy is to maximize profit.

Putting it another way, the purpose of a capitalist economy is to maximize the gap between the market value of what is produced, and the share of that wealth which goes to those who do the work of producing it. Or, more simply, a capitalist economy has as a condition of its defining purpose, the secondary purpose of keeping labor down.


The goal of capitalism, in service to its ultimate goal of maximizing profit, is to increase as much as possible, and to maintain at as high a level as possible, the labor value gap – that is, the gap between labor’s productive value and its market value. How is this done?

Let us first recognize that capital cannot arbitrarily set wages anywhere it wants. If it could, it would get all labor for free. The market value of labor is determined by the factors of supply, demand, organization, and rules of the game. If capital is to influence the price of labor, therefore, it must influence these four factors. As a practical matter, though, there is limited influence that can be brought to bear by an individual business on any of them. An employer may certainly use organization and machinery to improve efficiency of production and so reduce its demand for labor; it may also use techniques of intimidation and propaganda to prevent the formation of labor unions and so reduce organization; in the modern world, it may in some cases outsource production to foreign countries and in this way increase the supply of labor. But to truly keep the cost of labor down and so maximize the labor value gap and hence maximize profit, business must exert influence over the government, which controls the rules of the game absolutely, and the other three factors to a very large degree.

The manner in which capital influences government is outside the scope of this article, but well known enough that it should need little elaboration; suffice it to say that bribery, either directly through payments to legislators or somewhat less blatantly through campaign contributions, buys access and influence, and turns the government to the service of capital much more than it would turn if it were truly answering the will of the people in democratic fashion. The results may be seen throughout history. It’s also interesting to see how the methods change from time to time depending on circumstances, but always work towards the same outcome.

At one time, the government influenced the supply of labor by encouraging high immigration rates, especially of refugees faced with even more brutal treatment in their home countries. During the 19th and early 20th centuries, this flood of immigrants almost by itself kept wages suppressed in basic industries such as mining, railroads, agriculture, and manufacturing. Today, immigration is still a factor in government policy to increase labor supply, but a less important one. The government encourages high rates of legal immigration of skilled labor today, at the request of the computer industry and others needing technical expertise. With respect to unskilled labor, the rules of the game have changed enough since the 1930s (for reasons I’ll go into in the next section) that legal immigration no longer suffices. A combination of illegal immigration and outsourcing has replaced it as the desired source of labor, since neither illegal immigrants nor foreign workers in their own countries benefit from U.S. labor laws and regulations.

Decreasing the market value of labor is only one side of the process. It’s also been the historical desire of capital to increase labor’s productive value. If this is done without increasing, or better still while decreasing, the market value of labor, then the labor value gap is increased that way as well. In the past, prior to globalization, capital has often sought high tariffs for this reason. Tariffs reduced foreign competition, and allowed higher prices to be set on goods, thus increasing the productive value of the labor that produced them. Of course, improving the productivity of labor through organization and mechanization also increases the productive value of labor. There have been times, however, when capital has been willing to see labor’s productive value actually decreased, as long as its market value was decreased more. A perfect example is the outsourcing of manufacturing that occurs today in response to the historically enlightened rules of the game governing American labor at this time. By moving manufacturing operations to countries where labor is paid only a small fraction of what American workers would have to be paid, manufacturers have been able to substantially reduce prices, and they have done so – not nearly as much as their labor costs have declined, but considerably. In this way, they have been able to continue selling higher quantities of goods to American consumers, whose paychecks have declined because of the loss of labor demand. So it isn’t about either maximizing price or minimizing wages by themselves. Rather, it’s about maximizing the gap between the two.


There are limits on how wide the labor value gap can become. These fall into two categories, the political and the economic. The political limits arise from the fact that everyone wants what they perceive as a fair shake. For workers, that means payment for their work that constitutes a living wage, and that they perceive as being a fair share of the wealth that their labor produces. A capitalist economy, by systematically increasing the labor value gap, incurs opposition and incites rebellion. The wider this gap becomes, and especially the worse off in real material terms the working class is compared to its expectations, the more opposition and rebellion will occur.

This rebellion may take the form of union organizing and strikes, of sabotage and assault, or, at its greatest extreme, of actual armed rebellion. The response to it, both by private capital and by capital-influenced government, tends initially to be repressive, but over time incorporates elements of reform and compromise. We may see this in the history of all capitalist economies to date, with the oldest such economies (those of the U.S. and western Europe) today exhibiting rules of the game that favor labor much more than was the case in the past. Repeatedly, the level of political unrest has reached a point where the more enlightened capitalists saw a need to offer reform of the system in order to allow it to continue functioning at all. Over time, this has resulted in a more humane and less brutal form of capitalism, incorporating many socialist features.

It’s important to recognize, though, that these reforms do not represent a defeat of the capitalists; they are not a revolution. Rather, they represent evidence that capitalist control of the state and of the economy is not and never has been absolute; it has always been possible to resist. If pushed hard enough, the government will institute reforms, and when the pressure becomes sufficiently strong, capitalists themselves will acquiesce in this reform, since it is preferable to revolution. The truly revolutionary change would be at root political, depriving capital of its monetary influence over government. Until that occurs, it’s questionable just how far the process of reform can go, and certain that any set of reforms will at times be undercut and reversed, or ways found around them, as has happened today with globalization and outsourcing.


The other limit on how wide the labor value gap can become is economic. It arises because wages for work serve a dual function. On the one hand, they are a necessary cost of doing business, which capital seeks to minimize. On the other, they are what create a market for the goods and services offered. The market value of labor, therefore, is a limiting factor on the productive value of labor, and this means that in the long run too great a gap between the two will be unsustainable.

Economic history shows this clearly. The U.S. economy in its early phase was one of periodic crisis (1837, 1857, 1873, 1893, 1907, 1919, 1929) that wiped out small businesses and brought great suffering to working people. These were more than just “recessions.” No recession during the period from the end of World War II until the election of Ronald Reagan ever reached the horrid depths of the financial panics that occurred about every 20 years, almost like clockwork, in the pre-Depression economy, when double-digit unemployment was the norm in such downturns, and the economy experienced nearly as many years in depression as it did out of it. Many people think of the panic of 1929 – called the “Great Depression” – as somehow extraordinary. It was not really that extraordinary. It was the longest of the depressions of that time by a couple of years, but otherwise not the worst; that dubious laurel goes to the depression of 1893. What distinguishes the Great Depression from its predecessors is not its severity, nor even its length, but the reforms that arose from it.

Why did these panics occur? Why was the economy as often depressed as otherwise? Because a high labor value gap means a depressed consumer market, sustainable only by a combination of speculative investment and credit. This is unavoidable as long as a significant labor value gap exists: the productive value of labor is the net market value of the goods produced, and in order to buy the goods produced the market value of labor must equal its productive value, or nearly so (we may allow a small gap, representing capital accumulated for reinvestment, with labor accordingly diverted from producing goods for consumption to producing capital goods).

All of these panics, like the severe recession we are experiencing as of this writing (2010), were deflationary, that is, they drove prices down. As such, they reduced the productive value of labor, which is partly dependent on the prices of the goods produced. Unfortunately, at the same time they also reduced the demand for labor and so reduced the market value of labor as well, and this preserved the imbalance and prevented quick economic recovery.

After the end of the Second World War, the U.S. economy, and also those of capitalist Europe and Japan, entered a uniquely enlightened period. The labor value gap was lower during this period than before the Depression, and also lower than it is today. Just the same, the gap never completely disappeared, and in a capitalist economy my belief is that it can’t. A capitalist economy is defined as one that exists to pursue profit, and profit is found only through a labor value gap.

Just the same, the depression of the consumer market caused by the labor value gap represents a limit to how wide that gap can become. Along with the political restraints produced by rebellion, it tends over time to move a capitalist economy, in fits and starts, along the socialist road.


I am unsure of the answer here. Much depends on whether the process of reform described above can reach a stage in which capital loses its excessive influence on the government (by any means other than violent revolution). If so, then a full transition to some sort of socialist economy will occur. If not, then we will reach an equilibrium in which we see-saw, as we have in the period since World War II, between wider and more narrow labor value gaps.

But such prognosis is beyond the scope of this article, as would be a prescription for what sort of socialist structure would best describe the post-capitalist economy, should attaining that prove possible.

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