From the vaults: Two articles on Wages, profits & lies and Capitalist crisis

A number of us at Redline were involved at various times in the Marxist magazine revolution, which was produced between 1997 and 2006. A total of 26 issues were produced during that time. We’re slowly getting up on Redline features from the magazine that are still of relevance. Here we reproduce two closely-related pieces that appeared several years apart on wages, profits, crisis.

The piece below appeared in issue #15, June/July 2001, as part of the magazine’s restatement section, which dealt with various fundamentals of Marxism.

images (2)Wages, profits and lies

by Linda Kearns and Keith Tompson

In the first year of the Labour/Alliance coalition government, real wages in New Zealand have fallen. No wonder business is happier with the current regime than they were in the final years of the previous National (and NZ First) government. This is the first time real wages have fallen in five years. Given that wage indexes include some very highly-paid people, like politicians, whose incomes expanded, the fall in the real wages of most working people is particularly pronounced.

The last Labour government (1984-1990) oversaw a substantial decline in real wages; indeed it drove wages down immensely in order to help business. In the 1970s and 1980s Labour and National politicians attacked ‘greedy workers’ for causing inflation and undermining NZ’s competitiveness in the world market. And, despite the overall decline in real wages since 1984, businesspeople and politicians from the two major parties often still argue that wage claims represent a ‘threat’ to the ‘recovery’.

But what do wages actually represent? Do wage claims cause inflation? What is the relationship between wages, profits and economic crisis?

Antagonistic classes

Capitalist production rests on two fundamentally antagonistic classes. Capitalists own the means of production. Workers own merely their ability to work, that is their labour-power.

In capitalist society, labour-power has become a commodity. That is, it is bought and sold on the market, and has a value and a price, like all other commodities.

Workers must sell their commodity, labour-power, on the market in order to live. Capitalists must buy labour-power in order for their means of production to operate and surplus-value to be created.

The value of labour-power

The value of a commodity is determined by the labour time that is socially necessary for its production. In the case of the commodity labour-power, this value is comprised of the necessities of life consumed by workers in order to maintain themselves at a level where they can turn up for the capitalist every day and carry out their allocated work. Thus if the socially necessary labour time to make the food, clothing, shelter, transport etc that an individual worker requires equates to, say, $500 a week, then the value of that worker’s labour-power is $500 a week.

However, this value is different from the value created by workers when their labour-power is cnsumed by the employer, the capitalist. This is because the worker, using the means of production, can reproduce the value of their own labour-power, say the $500, in perhaps 20 hours. They cannot then pack up and go home, however, as they have been forced to agree to work 40 hours.

They thus spend 20 hours reproducing the value of their own labour-power and 20 hours creating a new, separate value – surplus-value – for their boss.

Wages are the money expression of the value of labour-power. More precisely, they are the price of labour-power, since the price of any commodity can deviate from its value.

In the case of wages, the extent of the deviation of price from value is determined by the accumulation process – that is the process of profit-making and reinvestment of profit in new/expanded machinery, technology, labour-power, and thus new rounds of production – and the class struggle. Where the balance of forces favours the employers they can lower wages, where it favours the workers they can get a better price for their labour-power. In both situations, however, they continue to produce surplus-value.

At the same time, the value of labour-power tends to decline through the accumulation process as cheaper and cheaper ways are found of producing the necessities of life as technology and economies of scale develop further.

Wages and surplus-value

Capital accumulation is the aim, object and end of capitalist production. Not meeting human need, but expanding surplus-value over and over, is the imperative of the capitalist system. If the intensity of labour and the size of the workforce are fairly constant, the amount of value extracted from workers can be increased in two ways.

One is through making workers work longer, ie extending the work day (and week). (Indeed, today, Labour wants to extend work longer by raising the retirement age – eds.) Making workers work longer produces absolute surplus-value. But this method is also limited by the fact that there are only so many hours in the day and workers get tired, becoming less productive.

Capital is therefore often forced to use the second method, which involves shortening that part of the working time in which workers reproduce the value of their own labour-power. This method produces relative surplus-value and necessitates substantial technological innovation, development and investment. However, as with absolute surplus-value, so the production of relative surplus-value comes up against obstacles. These obstacles are inherent in the capitalist production process itself.

Relative surplus-value requires mounting investments in means of production (constant capital) relative to labour-power (variable capital). The organic composition of capital – the ratio of constant to variable capital – therefore rises. The amount of surplus-value each worker produces increases, but fewer and fewer workers are employed by a given amount of capital. The surplus-value, meanwhile, is now measured over an ever greater mass of constant capital.

Thus, although the rate of exploitation and surplus-value increases (surplus-value divided by the value of labour-power (ie variable capital), the rate of profit (surplus-value divided by the sum of variable and constant capital) falls. Falling profitability makes it increasingly difficult for capitalists to invest at the levels necessary to expand – or, eventually, even maintain – the production process. Capital accumulation, and thus the production process, is thrown into crisis.


Capitalists use a variety of means to resist the fall in the rate of profit. For instance, far from workers’ wage demands causing inflation, inflation is driven by capitalists raising the prices of their commodities well above their values in order to maintain profit rates. This drives up the cost of the necessities of life, forcing workers to make bigger pay claims in order simply to maintain living standards. The capitalists, and their mouthpieces, then accuse workers of ‘being greedy’ and causing inflation!

Although there are a number of counter-tendencies to the faling rate of profit, and various measures which bosses and governments deploy as well (see the second article here and Revolutionary Marxist #2*), ultimately profitability can only be restored by a ruthless attack on the working class. Capitalism turns to driving down the price of labour-power (wages) below its value, even though the value is the basic amount workers need to live and reproduce. Capitalists intensify the rate of work and increase the work time. This means workers are working harder and faster, for a longer period of time, for less real wages. (For material on how this worked in NZ, see revolution #1, #5 and #9 in particular.**)

The movement of wages, then, is determined by the process of accumulation. In an economic boom, capital can grant wage rises. As falling profitability – an in-built tendency of capital accumulation and nothing to do with wage rises won by workers – sets in, and crisis eventually results, the exploiting class try to drive down wages.

This has nothing to do with the unpleasantness or otherwise of individual capitalists; it is an imperative of the system. In the crisis, capitalist production can only continue by denying workers the wages required to purchase their customary necessities of life. Wages must be driven down and workers’ consumption levels curtailed in order for profitable conditions for capital to be restored.

The ability of capitalists to drive down wages depends on a number of factors – for instance, a militant and highly conscious working class may be able, for a time, to resist such attacks. On the other hand, trade union leaders and Labour Party politicians will usually try to talk workers into accepting such cuts – often, Labour in government will oversee the imposition of cuts in wages and living standards.

Additionally, in a crisis, as profit rates fall to particularly low levels, large numbers of workers will be laid off. A growing pool of unemployed then makes it easier for the exploiting class to convince workers still lucky enough to have jobs to accept working longer and harder for less.

The class struggle and the unions

There is no simple mechanism by which wages rise and fall. The extent of wage movements is mediated by the class struggle. Workers are not automatically granted big wage rises in boom times; wage rises still have to be fought for. It is just that it is easier in a boom for bosses to grant rises and appear more ‘generous’.

Given that surplus-value expands more in a boom than wages anyway, the gap between capitalists and workers continues to grow. Even at the height of a boom, workers are often getting a smaller and smaller share of the total value being produced by their labour-power.

Trade unions have been the traditional defence organisations of workers. They were created by workers to maintain or improve wages and conditions, through collective bargaining with employers. However, in New Zealand and elsewhere, employers use the state as a means of restricting workers’ rights – eg laws against the right to strike, take solidarity action, and so on.

In New Zealand, the ability of workers and unions to engage in collective bargaining with employers was whittled away at for many years. Then, in 1991, the ECA legislation codified the near-demise of collective bargaining. Trade unions, unable to play their traditional (albeit highly bureaucratic) role went into severe decline, and show little sign of recovery.

In fact, trade unions were always limited in their struggles by the wage-labour/capital relation. Their historical aim of preventing the reduction of wages below the value of labour-power always involved acceptance of this fundamental relationship. Yet it is this very relationship which is the problem.

Marx recognised this and advised the international labour movement not to fight merely for improved wages and conditions, as important as these might be in the short-term, but to struggle in a way that raised the fundamental issue – the capital/wage-labour relation – and resolve it by the overthrow of cpaitlaism itself. Workers, said Marx,

“ought not to exaggerate to themselves the ultimate working of these everyday struggles. They ought not to forget that they are fighting with effects, but not with the causes of those effects; that they are retarding the downward movement, but not changing its direction; that they are applying palliatives, not curing the malady. They ought, therefore, not to be exclusively absorbed in these unavoidable guerrilla fights incessantly springing up from the never-ceasing encroachments of capital or changes of the market. They ought to understand that, with all the miseries it imposes on them, the present system simultaneously engenders the material conditions and the social forms necessary for an economical reconstruction of society. Instead of the conservative motto “A fair day’s wage for a fair day’s work!”, they ought to inscribe on their banner the revolutionary watchword, “Abolition of the wages system!” (Marx, Wages, Price and Profit, in Marx and Engels, Selected Works, London, Lawrence & Wishart, 1968, pp225-6.)

Today, unions are not even “retarding the downward movement” of wages. The government they, and much of the radical left, support has overseen a clear “downward movement”. More than ever, Marx’s words need to become our battle-cry.

* Revolutionary Marxist was a larger theoretical journal that accompanied revolution.
** Some of this material is up on Redline; see the further reading suggestions at the end of the next article (below).

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The article below appeared in the restatement section of issue #5 of revolution magazine, March/April 1998.

The falling rate of profit and capitalist crisis

by Philip Ferguson

Major economic problems have beset the capitalist world for more than 25 years. (This was written in 1998, so we could now say for 40 years – Redline.) The post-World War II boom, which saw an unprecedented growth in productive output, had ground to a halt in the early 1970s. Since then, every ‘recovery’ has been weaker and less stable than the last and each recession has cut deeper than the one before. After nearly three decades, each set of ‘solutions’ – Keynesian, monetarist, and ‘free market/new right’ – has failed to generate any sustained recovery, let alone bring about a new burst of productivity to compare with the postwar boom.

The inability of governments and economists to solve the problems of economic decay has led to the breakdown of economics as a discipline. Bourgeois economists have given up trying to deal with ‘the big picture’ and retreated into micro-economics, game theory, number-crunching, trend monitoring, and consumer psychology. Irrationalism and superstition run amok in economics departments and think tanks. In 1992, for instance, the Nobel Prize for economics went to Gary Becker. Truly an economist for our times, Becker had abandoned any focus lon objective features of capitalist economies – such as national output, productivity and trade balances – for a study of individual motivation. Psychology replaces economics. Even sunspot theory got raised again.

The intractability of the problems faced by bourgeois economists have even led to somethig of a renewed interest in Marx among the more sophisticated. For instance, he has been discussed recently in such prestigious papers as the New York Times, with suggestions that he is really the only person who understood how capitalism works.

The falling rate of profit

What contemporary non-Marxist analysts have been unable to get to grips with is the root mproblem behind today’s debilitating economic trends: the law of the tendency of the rate of profit to fall. As Marx commented in his workbooks for Capital, subsequently published as the Grundrisse, this is “the single most important law of modern poltical economy.” It is a law which flows from the inner workings of capital in the sphere of production and therefore capital cannot escape it.

Essentially, capitalists are forced to raise the level of productivity as they compete with each other to stay afloat. One of the main ways they do this is by investing in technology and more and more sophisticated machinery. Yet these can only transfer theirown value, piece by piece, to the new products; they cannot create new, additional value. Only human labour-power does this.

For instance, a worker may sell their labour-power at its actual value – Marx doesn’t assume some form of ‘cheating’ in the transaction – but can reproduce that value in the form of new commodities in 20 hours of work. The worker cannot then pack up and go home, or head off to the beach, but must perform another 20 hours of labour, as they are contracted for a 40-hour week. In that extra 20 hours, they are performing surplus-labour, creating surplus-value – ie, a value over and above the combined value of their labour-power and the other inputs into the commodities they produce (wear and tear on machines, the raw materials used, etc). (See also, the restatement section on exploitation in revolution #1, April-May 1997.*)

The process of increasing productivity through the purchase and utilisation of more sophisticated machines and technology (constant capital) means that the variable capital (the funds expended on human labour-power, the source of surplus-value) falls in relation to constant capital (the funds spent on buildings, equipment and raw materials). Each commodity now contains less labour-power and therefore less value. Even if total profit has increased through the number of commodities produced going up substantially, the rate of profit falls because it is measured over the total capital outlay in which the constant capital (which produces no new, expanded value) has increased in proportion to the variable capital (which produces the new, expanded value – surplus-value).

Falling profit rates in the productive sphere – which is the sphere which allows everything else in the world to go round – means that capitalists have to invest greater and greater amounts just to maintain the same amount of profit.

For instance, a $100 million investment at a 10% rate of profit yields a $10 million profit but, as the rate of profit falls to say 5%, then $200 million would have to be thrown into the next round of the production process to maintain the $10 million profit.

Eventually, capital reaches the point at which, regardless of the size of the mass of profit – which can be enormous – it is insufficient for the scale of investment in new and more productive machines, labour-power and raw materials which is needed to keep the production process going and maintain a competitive edge over rival capitalist economies.

Capital is forced to cut costs by laying off workers, increasing the rate of exploitation and so on, as we look at elsewhere in this issue of revolution.** Many individual capitalists, and often whole sectors, go bust. Also, since social programmes are financed out of total surplus-value, thereby lessening the amount which can be converted into private (company or individual) profit, capitalists argue for cuts to such forms of social spending.

The artificial sphere

As the rate of profit falls in the productive sphere in their own national economies, capitalists also invest elsewhere. In other words, if manufacturing was yielding a 5% rate of profit in your own country but a higher one abroad, capital would go offshore. Alternatively, and especially if massive new rounds of expanded investment were required to boost the rate of profit in manufacturing, capitalists might shift towards financial, currency, land or some other speculative sphere that was yielding 10% or 20%, or even higher, profit rates.

The result of capital shifting into the non-productive sphere – ie the sphere that doesn’t produce surplus-value but sucks it out of the areas where it is produced – is usually a huge speculative boom – this can be seen in both the late 1920s and the 1980s. In New Zealand in the late 1980s, it largely took the form of an expansion of financial services and share-buying and share speculation. For instance, capitalists bought shares in each other’s companies on an unprecedented scale, sending share prices up without increasing the real value of the companies (which is, at base, rooted in production, productivity and real output). A raft of new companies with no solid productive bases were also set up. Capitalists, the great champions of kiwi patriotism, also speculated against the NZ dollar. The artificial economy boomed, while the real economy stagnated and declined.

The artificial boom – which finance minister Roger Douglas, his capitalist friends and the overnight yuppies and new money folk took to be a genuine boom – simply disguised the fact that the real economy was collapsing. The bourgeoisie which, as the great Hungarian revolutionary Gyorgy Lukacs noted, is never able to gain any real insight into their own predicament, thought things were going well simply because there was a lot of buying and selling going on. They were taken by surprise when the real economy eventually brought down the bubble economy in a dramatic crash. The crash stunned the capitalist class and even many of the more sophisticated lost a packet, although of course the working class lost a lot more.

Counteracting tendencies

Falling profitability is not simply a linear development. The same changes in the organic composition of capital – the ratio of constant to variable capital – that bring about the tendency of the rate of profit to fall set off counteracting tendencies. One kind arises out of the production process itself. Basically, the rise in productivity cheapens the cost of machines, technology, raw materials and consumer goods, since there is a fall in the socially necessary labour time required to produce them.

The second kind of counter-tendencies arise out of the market. The workday is extended in hours and/or intensified through speed-up (see the feature on Fisher & Paykel in this issue).*** Also, there are attempts to reduce wages below the value of labour-power (see issue #1 of revolution for information on this process in New Zealand).

The third set comprises ‘artificial’ measures, specifically forms of action through which capital seeks to break free of its own laws of motion – eg, export of capital, state intervention, monopoly formation.

The counter-tendencies are able to slow down, but not halt, the decline in profit rates. Eventually, falling profitability, and the problems it creates right across the economy, bring about a crisis.

The trigger point for the crisis can be any number of things – there is not a fixed relationship between the tendency of the rate of profit to fall and crisis – but the underlying factor is falling profitability in the sphere of production.

For example, a major crash such as 1987 is widely seen as a share market or financial sector crash, but the massive expansion of share-trading, financial speculation and so on – constituting the false economy – arose out of falling profitability in the real economy. People experience the crash as a financial crash and therefore, logically, tend to believe that’s what it was and don’t seek further enlightenment. Bourgeois economists, incapable of going beneath the surface appearances of capital, ‘explain’ crises in such ways. They simply add some figures and fancy words to the person in the street’s interpretation.****

Exhaustion of capitalism

Falling profitability is a sign that capitalism has become an obstacle to the further development of society. At the most basic level this can be seen in the way massive industrial capacity is not utilised, or in some cases not even developed.

From the point of view of humanity, the massive development of industry and technology is wonderful or potentially so), since it means that the capacity exists to solve the problems of the world. But, for capital, it is actually a problem.

After all, capitalism is not about producing goods; it is about producing private profit. Production of goods is merely a means to that end.

So when the investments in machinery and technology lead to a fall in the rate of profit, it is a sign that more wealth is invested in means of production than can profitably be used. Marx refers to this situation as ‘overaccumulation of capital’ and, when it occurs, a large chunk of capital value has to be destroyed. Typically, through a recession or even a full-scale depression.

Today, both capitalists and bourgeois economists know that profitability falls (see, for instance, the 1977 OECD study by T.P. Hill, Rates of Return). However, because they have long since rejected a materialist analysis of value, they cannot explain why it falls and continue to be left puzzled by this ever-recurring problem and its ramifications. (Bourgeois economists abandoned the labour theory of value in the mid-1800s as the growth of the working class made them fearful of the consequences of such insights into the problems of capitalism by the towering figures of capitalist political economy itself, Adam Smith and David Ricardo.)

We will leave it to Marx to have the last word on the significance of the law of the tendency of the rate of profit to fall:

“Capitalist production seeks continually to overcome these immanent barriers, but overcomes them only by means which again place these barriers in its way and on a more formidable scale.

“The real barrier of capitalist production is capital itself. It is that capital and its self-expansion appear as the starting and the closing point, the motive and the purpose of production; that production is only production for capital and not vice versa, the means of production are not mere means for a constant expansion of the living process of the society of producers. The limits within which the preservation and self-expansion of the value of capital resting on the expropriation and pauperisation of the great mass of producers can alone move — these limits come continually into conflict with the methods of production employed by capital for its purposes, which drive towards unlimited extension of production, towards production as an end in itself, towards unconditional development of the social productivity of labour. The means — unconditional development of the productive forces of society — comes continually into conflict with the limited purpose, the self-expansion of the existing capital. The capitalist mode of production is, for this reason, a historical means of developing the material forces of production and creating an appropriate world-market and is, at the same time, a continual conflict between this its historical task and its own corresponding relations of social production. . .

“The contradiction between the general social power into which capital develops, on the one hand, and the private power of the individual capitalists over these social conditions of production, on the other, becomes ever more irreconcilable, and yet contains the solution of the problem, because it implies at the same time the transformation of the conditions of production into general, common, social, conditions.” (Emphases in original)

* This is reproduced on Redline. See: What is exploitation? 
** The other articles referred to will be going up on Redline in the near future.
*** We will be getting this material on F&P up in the next few weeks.
**** The classic recent case of course is the ‘subprime crisis’ in the USA and its expansion into a wider crisis in the global financial sector. But why did subprime mortgages, and the other toxic financial instruments, exist in the first place?

Further reading:

What is exploitation?

How capitalism works – and why it doesn’t

4,000 words on Capital

Karl Korsch on “tremendous and enduring” impact of Marx’s Capital (1932)

Marx’s critique of classical political economy

Capital, the working class and Marx’s critique of political economy

Capital and the state

For New Zealand economy and society

Coming apart down under: the decay of New Zealand capitalist society from the 1970s to 1993 

The state of the working class in New Zealand (1997)

The Key-English government in the context of capital accumulation in New Zealand today


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