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From Chapter 11: The Conceptual Framework of the Exploitation Theory (pp. 476-479)

This excerpt is taken from George Reisman, Capitalism: A Treatise on Economics. Ottawa, Illinois: Jameson Books, 1996. Copyright © 1996 by George Reisman. All rights reserved. May not be reproduced in any form without written permission of the author. The following limited exception is granted: Namely, provided they are reproduced in full and include this copyright notice and are made for noncommercial use, i.e., for use other than for sale, including use as part of any publication that is sold, copies of this excerpt may be downloaded into personal computers and distributed electronically or on paper printouts from a personal computer; reproduction on the internet is permitted provided the copy of the excerpt is accompanied by the following link to the Jefferson School's home page (which may, and hopefully will, be displayed elsewhere and more prominently): The Jefferson School of Philosophy, Economics, and Psychology. This limited right of reproduction expires on December 31, 1999.

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Having dismissed the possibility that profits could be a labor income, and regarding whatever income might be due to labor as necessarily being wages, Smith arrives at what I consider to be the essential conceptual framework of the exploitation theory. This framework is the belief that wages are the original and primary form of income, from which profits and all other nonwage incomes emerge as a deduction with the coming of capitalism and businessmen and capitalists. The framework and its supporting beliefs easily lead to the assertion of the wage earner's right to the whole produce or to its full value. Thus, Adam Smith opens his chapter on wages, with the following words:

The produce of labour constitutes the natural recompence or wages of labour.

In that original state of things, which precedes both the appropriation of land and the accumulation of stock, the whole produce of labour belongs to the labourer. He has neither landlord nor master to share with him.

Had this state continued, the wages of labour would have augmented with all those improvements in its productive powers, to which the division of labour gives occasion.

And he continues, a little further on:

But this original state of things, in which the labourer enjoyed the whole produce of his own labour, could not last beyond the first introduction of the appropriation of land and the accumulation of stock. It was at an end, therefore, long before the most considerable improvements were made in the productive powers of labour, and it would be to no purpose to trace further what might have been its effects upon the recompence or wages of labour.

As soon as land becomes private property, the landlord demands a share of almost all the produce which the labourer can either raise or collect from it. His rent makes the first deduction from the produce of the labour which is employed upon the land.

It seldom happens that the person who tills the ground has the wherewithal to maintain himself till he reaps the harvest. His maintenance is generally advanced to him from the stock of a master, the farmer who employs him, and who would have no interest to employ him, unless he was to share in the produce of his labour, or unless his stock was to be replaced to him with a profit. This profit makes a second deduction from the produce of the labour which is employed upon land.

The produce of almost all other labour is liable to the like deduction of profit. In all arts and manufactures the greater part of the workmen stand in need of a master to advance them the materials of their work, and their wages and maintenance till it be compleated. He shares in the produce of their labour, or in the value which it adds to the materials on which it is bestowed; and in this share consists his profit.⁶⁴

In these passages, Smith actually advances two views that upon examination are astonishing, and which I shall immediately consider in the next two subsections.

Smith's Failure to See the Productive Role of Businessmen and Capitalists and of the Private Ownership of Land

First, he advances the view that the division of labor, and the consequent rise in the productivity of labor, has no connection with the activities of businessmen and capitalists, nor with the institution of private property in land, and might have developed just as well in their absence. This is the meaning of the passage just quoted, "Had this state continued, [i.e., the absence of the appropriation of land and the accumulation of `stock'--viz., capital], the wages of labour would have augmented with all those improvements in its productive powers, to which the division of labour gives occasion."

In this and the next passage previously quoted, Smith expresses the belief that the only effect of the activities of businessmen and capitalists and of the existence of private ownership of land is that it denies to the wage earners the ability to keep the whole produce of their labor or its full value. He appears totally unaware of all the ways in which the division of labor vitally depends on the activities of businessmen and capitalists and thus could not have developed without them--namely, on their function of creating, coordinating, and improving the efficiency of the division of labor.⁶⁵ He appears equally unaware of the vital contribution to the division of labor made by the institution of private ownership of land, which was demonstrated in earlier portions of this book. . . .⁶⁶

The Primacy-of-Wages Doctrine

The second, possibly even more astonishing notion that Smith advances in the passages quoted above is what I call the primacy-of-wages doctrine. This is the doctrine that in a precapitalist economy--the "early and rude state of society"--in which workers simply produce and sell commodities, and do not buy in order to sell, the incomes the workers receive are wages. Wages are the original income, according to Smith. All income in the precapitalist society is supposed to be wages, and no income is supposed to be profit, according to Smith, because workers are the only recipients of income. At the same time, of course, Smith advances the corollary doctrine that profit emerges only with the coming of capitalism and businessmen and capitalists, and is a deduction from what is naturally and rightfully wages.

The primacy-of-wages doctrine and the notion that profits and the other nonwage incomes are a deduction from what is naturally and rightfully wages constitute the conceptual framework of the exploitation theory. They are the starting point for Marx's detailed development of the exploitation theory.

In a precapitalist economy, production, says Marx, is characterized by the sequence C-M-C. In this state of affairs, a worker produces a commodity C, sells it for money M, and then buys other commodities C. In this state of affairs, there is no exploitation, for there are no profits, no "surplus-value"; all income is, supposedly, wages. Surplus-value--profit--emerges only with the development of capitalism, according to Marx. Here the sequence M-C-M' applies. Under this sequence, the capitalist expends a sum of money M in buying materials and machinery and in paying wages. A commodity C is produced, which is then sold for a larger sum of money, M', than was expended in making it. The difference between the money the capitalist expends and the money he receives for the product is his profit or surplus-value.⁶⁹

Profits, then, according to both Smith and Marx, come into existence only with capitalism, and are a deduction from what naturally and rightfully belongs to the wage earners.

This is not yet the exploitation theory itself, only the conceptual framework of the exploitation theory. The exploitation theory proper, of course, builds on two further doctrines, also largely supplied by Adam Smith--with a major assist from David Ricardo--and then grossly distorted by Marx: namely, the labor theory of value and the "iron law of wages."

A full critique of the exploitation theory, to be sure, needs to deal both with the labor theory of value and with the iron law of wages, and ours shall do so in due course. First, however, what it is essential to show is the enormity of the errors involved in the conceptual framework of the exploitation theory--in the doctrines of the primacy of wages and of the deduction of profits from wages.

A Rebuttal to Smith and Marx Based on Classical Economics: Profits, Not Wages, as the Original and Primary Form of Income

As indicated, classical economics itself provides the basis for demonstrating the enormous errors in the conceptual framework of the exploitation theory. Classical economics implies that it is false to claim that wages are the original form of income and that profits are a deduction from wages. This becomes apparent as soon as we define our terms along classical lines:

"Profit" is the excess of receipts from the sale of products over the money costs of producing them--over, it must be repeated, the money costs of producing them.

A "capitalist" is one who buys in order subsequently to sell for a profit. (A capitalist is one who makes productive expenditures.)

"Wages" are money paid in exchange for the performance of labor--not for the products of labor, but for the performance of labor itself.

On the basis of these definitions, it follows that if there are merely workers producing and selling their products, the money which they receive in the sale of their products is not wages. "Demand for commodities," to quote John Stuart Mill, "is not demand for labour."⁷⁰ In buying commodities, one does not pay wages, and in selling commodities, one does not receive wages. What one pays and receives in the purchase and sale of commodities is not wages but product sales revenues.

Thus, in the precapitalist economy imagined by Smith and Marx, all income recipients in the process of production are workers. But the incomes of those workers are not wages. They are, in fact, profits. Indeed, all income earned in producing products for sale in the precapitalist economy is profit or "surplus-value"; no income earned in producing products for sale in such an economy is wages. For not only do the workers of a precapitalist economy earn product sales revenues rather than wages, but also those workers have zero money costs of production to deduct from those sales revenues.

They have zero money costs precisely because they have not acted as capitalists. They have not bought anything in order to make possible their sales revenues, and thus they have no prior outlays of money to deduct as costs from their sales revenues. Having made no productive expenditures, they have no money costs. [Productive expenditure is expenditure for the purpose of making subsequent sales. It includes all expenditure by business firms for capital goods and labor.]

The profit-difference between sales revenues and zero money costs of production is the full magnitude of the sales revenues. If, for example, one sells a product for $1,000 and has costs of $500, resulting from previous outlays of $500 made in order to bring in the sales revenues, then one's profit is $500. If one sells a product for $1,000 and has costs of only $100, resulting from previous outlays of only $100 made in order to bring in the sales revenues, then one's profit is $900. If, going further, one has sales of $1,000 and costs merely of $10, resulting from previous outlays merely of $10 to bring in the sales, then one's profit is $990. If, going still further, one has sales of $1,000 and costs of just $1, resulting from previous outlays of just $1 to bring in the sales, then one's profit is $999. If, finally, one's sales are $1,000, and one's costs are zero, resulting from zero previous outlays to bring in the sales, then one's profit is $1,000--the full magnitude of the sales revenues.

Precisely, this last is the situation of the workers in Smith's "early and rude state of society" and under Marx's "simple circulation." Those workers, selling their commodities, not their labor, earn sales revenues, not wages. And precisely because they are not capitalists, and are not employed by capitalists, there is no buying for the sake of selling, and thus there are no money costs to deduct from those sales revenues.

To state matters in Marxist terminology, the M of Marx's simple circulation is, in effect, an M' that has not been preceded by any M to bring it in. This is because in the absence of capitalists, there is no productive expenditure and thus no such prior M. Only with capitalistic circulation does an M appear to be deducted from M'. Hence the full magnitude of the M of Marx's precapitalist, simple circulation is profit.

Thus, in the precapitalist economy, only workers receive incomes, and there are no capitalists and no money capital. But all the incomes that the workers receive are profits and none are wages. In the precapitalist sequence C-M-C, everything is "surplus-value"--100 percent of the sales revenues and an infinite percentage of the zero money capital. In the sequence of capitalistic circulation M-C-M', a smaller proportion of the incomes are "surplus-value."

This same conclusion, that in the precapitalist economy all income is profit, and no income is wages, can be arrived at by way of Ricardo's badly misunderstood proposition that "profits rise as wages fall and fall as wages rise."⁷¹ The wages paid in production, according to Ricardo, are paid by capitalists, out of savings and capital, not by consumers. If, as in the precapitalist economy, there are no capitalists, then there are no wages paid in production, and if there are no wages paid in production, the full income earned in Ricardo's framework must be profits.

Smith and Marx are wrong. Wages are not the primary form of income in production. Profits are. In order for wages to exist in the production of commodities for sale, it is first necessary that there be capitalists. The emergence of capitalists does not bring into existence the phenomenon of profit. Profit exists prior to their emergence. The emergence of capitalists brings into existence the phenomena of productive expenditure, wages, and money costs of production.

Accordingly, the profits that exist in a capitalist society are not a deduction from what was originally wages. On the contrary, the wages and the other money costs are a deduction from sales revenues--from what was originally all profit. The effect of capitalism is to create wages and to reduce the relative amount of profits. The more economically capitalistic the economy--the more the buying in order to sell relative to the sales revenues--the higher are wages relative to sales revenues, and the lower are profits relative to sales revenues.

Thus, capitalists do not impoverish wage earners, but make it possible for people to be wage earners. For they are responsible not for the phenomenon of profits, but for the phenomenon of wages. They are responsible for the very existence of wages in the production of products for sale.

Without other people existing as capitalists, the only way in which one could survive in connection with the production and sale of products would be by means of producing and selling one's own products, namely, as a profit earner. But to produce and sell one's own products, one would have to own one's own land, and produce or have inherited one's own tools and materials or the money to buy them. Relatively few people could survive in this way. The existence of capitalists makes it possible for people to live by selling their labor rather than attempting to sell the products of their labor. Thus, between wage earners and capitalists there is in fact the closest possible harmony of interests, for capitalists create wages and the ability of people to survive and prosper as wage earners.

And if wage earners want a larger proportion of income in the form of wages and a smaller proportion of income in the form of profits, they should want a higher economic degree of capitalism--that is, in the terminology of Marx, more M relative to M'. For precisely this represents productive expenditure, wages, and costs being higher, and profits being lower, relative to sales revenues. To achieve such change, what the wage earners require is more and bigger capitalists.

Historical confirmation for the theory I am propounding can be found in F. A. Hayek's Introduction to Capitalism and the Historians. There we find such statements as: "The actual history of the connection between capitalism and the rise of the proletariat is almost the exact opposite of that which these theories of the expropriation of the masses suggest. . . . The proletariat which capitalism can be said to have `created' was thus not a proportion of the population which would have existed without it and which it degraded to a lower level; it was an additional population which was enabled to grow up by the new opportunities for employment which capitalism provided."⁷²

The correct theory, as well as the actual history, is the exact opposite of the doctrine of the primacy of wages.

Notes

64. Ibid., chap. 8 [1:73­74]. [References are to Adam Smith, The Wealth of Nations (London, 1776), bk. 2, chap. 3; reprint of Cannan ed. (Chicago: University of Chicago Press, 2 vols. in 1, 1976), 1:351­371. Specific page references to the University of Chicago Press reprint appear in brackets.]

65. On the productive activity of businessmen and capitalists, see above, pp. 462­464.

66. See above, especially p. 304 and pp. 310 ­317. See also above, pp. 27­31, 63­71, 135­139, and 303­304.

..................................................................................................................................................

69. Cf. Karl Marx, Capital, trans. from 3d German ed. by Samuel Moore and Edward Aveling; Frederick Engels, ed.; rev. and amplified according to the 4th German ed. by Ernest Untermann (New York: 1906), vol. 1, pt. 2, chap. 4; (reprinted, New York: Random House, The Modern Library), pp. 163­173.

70. John Stuart Mill, Principles of Political Economy, Ashley ed. (1909; reprint ed., Fairfield, N. J.: Augustus M. Kelley, 1976), pp. 79­88.

71. David Ricardo, Principles of Political Economy and Taxation, 3d ed. (London, 1821), chap. 6 passim; reprinted as vol. 1 of The Works and Correspondence of David Ricardo, ed. Piero Sraffa (Cambridge: Cambridge University Press, 1962), pp. 110­111, passim. (Where appropriate, from now on, specific page references to the Sraffa edition will be supplied in brackets.)

72. F. A. Hayek, Capitalism and the Historians (Chicago: University of Chicago Press, 1954), pp. 15, 16.