Friday 14 January 2011

Land, Rent and Wages (III)

It's been 20 years since you started making shirts for a living and you have grown considerably wealthy.

And you achieved that because you realized the answer to the question in the previous blog was C. This is what you did:

When you started, you were able to make only one shirt a day, selling it for Re 145, as everybody else.

Your costs were Re 140 (Re 65 for labour), for a profit of Re 5 per shirt per day (i.e. 3.4%).

This is summarized as:

Costs, markup and price BEFORE
Materials include depreciation.

After a while, by working faster and possibly longer, you were able to make two shirts, spending twice as much in materials. (This is where we left in the previous blog). [*]

Consider this: your personal expenses during this harder working day remain the same (three meals, lodge, etc), and you can still cover them with Re 65, exactly as you did before. This leaves the second shirt's Re 65 labour compensation available.

That's summarized below:

Costs, markup and price AFTER
Materials include depreciation.

As a worker, you felt tempted either to (1) consume that Re 65, or (2) slow down the working pace.

But as an enterprising artisan you quickly realized that the additional Re 65 charged for labour and included in the second-shirt price are yours to dispose: instead of spending Re 65 in additional consumption, you could invest that amount.

In your case, even though you wore a capitalist and a worker caps, your capitalist side prevailed. So, by adding the monetary items in gray in the table, your real total profit was:

Re 65 + Re 10 = Re 75 (equivalent to a 25.8% profit).

That's what Marxists mean when they say that labour reproduces itself (1st shirt Re 65) and creates a surplus (2nd shirt Re 65). Marx called "surplus value" this unpaid work.

Note that, if required (say, to gain market share), you can afford to make a discount of Re 5 per shirt; even if your mark-up ("book profit") disappears, your surplus value remains and you still make a profit.

Unlike most less productive artisans, your profit no longer is limited to a mark-up: you will still strive to get one, but you don't need to.

Further, soon enough you realized that you don't need to make shirts yourself: you can hire workers to make them for you. You provide one sewing machine, material for each worker and make them work as hard as possible (which is exactly what you once did yourself), paying them Re 65. And you get a profit.[**]

Medieval craftsmen probably shared this duality worker/capitalist, wearing both caps. Over time, however, they evolved their business practices. And they became fully fledged capitalists by hiring workers.

Just like you did.

Enough. If you have questions, ask them. If you have objections, object away, with one condition: don't just say "I disagree"; state your objection precisely. 

Next blog we'll discuss any objections in detail. Hopefully, we'll be able to adopt a more "technical" language, too.

[*] The numerical example here is largely based on a similar example presented in Marta Harnecker's "Los Conceptos Elementales del Materialismo Histórico". Siglo Veintiuno Editores, España. 1969. page 161.

[**] Now you understand why, every time you and your workmates seem too happy, your boss comes up with new jobs.

Update: 17/01/2011 - added a link to Land, Rent and Wages (II)


  1. You seem to describe this proto-capitalist very asocially/ahistorically. whether he existed in the 18th century or in today's Bangladesh is crucially important (from a marxian perspective. i will make no claims about a ricardian perspective because i'm more familiar with Marx, although i suspect the following to be true in both).the value embodied in a commodity stems from the socially necessary labor time it takes to produce it. Socially necessary labor time is defined by marx (in chapter one of volume one of capital) as the labor time needed to produce use value in “normal” times for a certain society and with the average skill and intensity of labor that exists in said society. the average time it would take to produce that shirt in 18th century Britain would be much longer then the average time taken to produce that shirt in Bangladesh. that proto-capitalist in england would probably produce well above average surplus value and obtain super profits. the same proto-capitalist in Bangladesh (assuming he was remunerating himself at the standard wage rate in the industry) would probably not only not be producing surplus value, but if he was earning profits, was receiving lots of surplus value from another industry that someone, for some reason, is willing to transfer to him by buying his way overpriced shirts. you take this into account by assuming in the beginning of this model that it takes "one day to make a shirt". Therefore the analysis you provide is not technically incorrect. it is however, very misleading for an introductory guide to the labor theory of value to pretend as, it seems you did in the beginning, that the analysis is ahistorical and asocial.

  2. Thanks for the comments, Nathan.

    I am relieved you don't find the post technically incorrect. My main goal and hope was to produce an easy-to-understand exposition of surplus value, as opposed to an academic account of labour theory of value.

    This is part of my on-going project of showing to the non-technically minded public that meritocracy is no more than an urban legend.

    There was also a secondary goal (concerning you more directly, a little more academically oriented), which I'll treat towards the end of this reply.

    In my experience (and I am not an academic, btw) people in general (including non Marxist academics) find it difficult to understand the proposition that labour is remunerated at its value, but produces a profit even in the absence of a mark-up. As I am sure you have already observed this, I will not cite examples of prominent academics lacking the slightest clue about this (and worse, ignoring they don't have a clue).

    That's why I chose a bare-bones scenario. I mentioned Bangladesh and medieval Europe, as I could have mentioned Middle-Earth, not because historical context is unimportant, but to help the reader assume the role of our proto-capitalist, placing him/herself in a specific setting, seeing the problem through the artisan's eyes and how profits do not require a mark-up.

    The idea of an evolution in the role of artisan to capitalist was meant to allow readers to start in a situation they can easily identify with the character, not to suggest my own theory of how things actually happened. In other words: while I do believe that scenario is rather plausible (and frankly, I'm happy with it), I am not suggesting it is literally true.

    So, although you may well be right in saying that a contemporary Bangladeshi produces more shirts per unit of time than a medieval Englishman, I don't think this is vitally important to the example.

    Unlike the above, I did not mention important things (and you are absolutely right on this). I did that for simplicity. However, I tried my best to include something in the assumptions, accounting for them.

    An example: by fixing shirt price and time required, I tried to make sure competition and socially necessary labour time were not issues. It takes everybody (except our proto-capitalist) a day to make a shirt (that's the socially necessary labour time), and everybody sells their shirts at Re 145, period (so there's no problem with competition).

    I trust readers (at least the interested ones) can infer for themselves that if Giovanni, Frodo or Mohammed can't produce the minimum required number of shirts a day, sell them by the current market price and live on the labour compensation provided by the sales, then he's stuffed and needs to do something else. (More on this below)

    End of part 1 (of 2)

  3. Beginning of part 2 (of 2)

    And I did hint at how competition could arise: when I mentioned "less productive artisans" still require the Re 5 mark-up per shirt, but our artisan/capitalist could afford giving up the mark-up, to grab extra market share.

    There also are things that I find extremely important, which I did not mention explicitly but only hinted at: a vital one for Marxists is the opposed interests of workers and capitalists (suggested by the two hats repeated mentions); another is the question of who benefits from increased productivity.

    But to focus on rent (the constant mark-up) had an ulterior motive, for I believe orthodox Marxists (and economists in general) overestimate the powers of the market to reduce profits, through competition. You might remember that we have already discussed this (specifically, about the falling rate of profit and the possibility that wages had been falling to fuel profits).

    In that opportunity your counter argument (admittedly, a generally valid one) was that profits cannot sustainably erode wages, or labour cannot reproduce itself. My reply then was that wages are only required for labour to reproduce; if wages are not sufficient, consumption could be temporarily financed through debt.

    I failed to mention then that outsourcing and offshoring are means to lower labour compensation (so, although American wages might fall below reproduction level, foreign workers abound to replace American workers). And regardless of whether this phenomenon is the whole explanation, or just a part of it, the fact is that labour compensation as a component of GDP has fallen in many places, including the US and lil'ol Oz.

    Further, I am yet to be persuaded that rents are not keeping the profits rate from falling.

    To suggest people in general (and you in particular) to think about these things was my secondary goal. A bit devious, I know. :-)