Marxists say it is stolen from the worker. Capitalists say it comes from risk-taking and managerial work. Who is really doing the work?
One of the pillars of Marxism is that capitalists steal labor from workers. All profits come from excess labor done by workers by the sweat of their brow, which capitalists, through various nafarious means, appropriate for themselves. The workday, for instance, is an artificial construct. What if all the necessary work could be done in three hours? Well, the labor agreement means that the employer has the right to eight. Therefore, employers extract as much value as possible from that time regardless was really needed to fulfill the actual job- value that ends up as profit in the pockets of owners, who do no work at all.
On the opposite side, Chicago school economists hold to a theory of marginal value, where every factor in production is fairly paid for its individual contribution, through the magic of the various markets- commodity, labor, financial, etc.- that they come from. Each of these markets is assumed to be efficient, thus rendering each input to production fairly bid for its contribution, and leading also to a dynamic re-ordering of production systems when conditions change, such as when some inputs become scarce (and their price goes up), or new technologies expand the availability of other inputs, like, say, computation power.
It should be obvious that each of these theories is a fairy tale, (a panglossian one in the neoclassical case), heavily motivated by ideology, while carrying grains of truth. Labor markets are not efficient at all, and businesses work night and day to keep them that way. At the same time, businesses capture profits from countless other streams than the exploited labor of their workers. And in fact, the whole purpose of business is to exploit miss-priced market opportunities- otherwise profit could not exist.
A recent pair of posts on Bill Mitchell's blog delved into the Cambridge controversy- an economist's spat of the early 1960's which was formative in left-wing economics. Many tangential issues came up, such as whether economic growth is more demand-limited or supply limited. But it also dealt with issues of the value of capital, the source of profits, and the accuracy of marginal value theory. To summarize rather brutally, left-wing economists from Cambridge, England argued that business profits were not market-based, but based on social and power relations, cultural tradition, and many other factors besides the markets. Economists from Cambridge, Massachusetts (MIT) argued a classical theory that profits were based in marginal theory on all the market ingredients, and particularly could be approximated by the current interest rate, representing the default alternative to business investment- that is, the marginal value of capital.
The result of the controversy was that the British school successfully pointed out some flaws in the American analysis, which the Americans admitted, to the effect that the general profit rate does not always follow capital intensity, and nor does the individual firm's investment schedule necessarily follow the logic of interest rate-driven margins either. From this molehill, the left made a triumphant mountain, while the mainstream regarded it as a minor hiccup from their ever-more baroque modeling of perfect markets and ideal economies.
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| Joan Robinson, principal proponent of the Cambridge England end of the Cambridge controversies. |
All that said, it is worth being more specific about where profit comes from, and here I confess to going off the reservation of economic convention. While stealing extra labor is surely one of the time-honored methods of making a profit, it is far from the only way. Indeed, businesses can be seen as miners, always on the hunt for those special gems in the environment that cost less than they should, or can be sold for more than they cost. And the opportunities of this sort are endless in variety and scale.
- difference between supply and demand
- difference between efficient producers and inefficient
- difference between using family members and paying workers from the labor market
- difference between dumping toxic waste and disposing it properly
- difference between hiring an amoral accountant and a lawful one
- difference between buying lower grade inputs for manufacturing
- difference between lying to customers, or not
- difference between running marketing campaigns, or not
- difference between paying taxes, or not paying taxes
- difference between suing competitors successfully, or not
- difference between buying competitors or competing with them
- difference between doing research to find new technologies, or not spending that money, or stealing that technology
- difference between lobbying the government successfully to make protective laws, or not
The scope for finding money and making profit goes far, far beyond the conventional notion of arbitrage between capital goods and interest rates. Labor is also only part of the picture. Being a typically large part of most company's costs, its treatment and mistreatment is, however, an endlessly fruitful area for losses and gains, not to mention wider social tension. Money and profit can be found under any number of rocks, which is where the mantra of a "business model" comes from. Everyone and every business has some angle by which they make a living.
Are these gems of profit fairly priced in their factor markets? Don't be ridiculous. A coal company only makes money because coal is free. The earth makes no contracts, and nor does the air for the pollution sent up by the power plant that burns the coal. Turning free things, like enslaved or cowed labor, or personal data, or natural resources, or computer power, or shady accounting, or corrupt laws, into money, is the essence of "business models". Finding a way around markets, by collusion, by substitution, by doing without, by corruption, even by clever new technologies, are a business person's top priorities. So not only are markets, when they are used, hardly "fair" in any financial or social sense, but they do not begin to address all the sources of business profit or return to capital.
We can grant that most of this work of finding profitable gems is done by the capitalist or her managerial minions, thus should be accounted to the returns of capital, not to wages stolen from workers. Only in the classical mass industrial enterprise where the raw material costs are negligible and labor is the overwhelming factor would these converge into the same thing as envisioned by Marx. (Though the modern fast food industry, and gig "economy" come to mind as well.) Some of these gems can be valued financially, and can be regarded as capital, obtained via savings and investment and even competitively priced in a marginal accounting. But many cost nothing, and characterize the pursuit of business as more than a dry exercise in accountancy or economics, but rather as a cultural mode, descended from a long tradition of opportunistic ownership / exploitation / employment of others, of technological innovation, trade, and plunder.
Not to put a fine point on it, business is about greed, and in its natural state reverts to rapine and pillage. The Vikings were consummate businessmen, converting earnings into capital- long-boats and other weapons-, which were the backbone of their centuries of pillage all over coastal Northern Europe. Today, we can see a similar process in Afghanistan. The Taliban leverages ruthless terror into power., plundering as it goes along. They can then tell everyone how to live, collect the taxes, and run their many businesses, corrupt or not.
Whether their state is "business-friendly", their example points to the intertwined nature of state systems and business systems of exploitation. States set the rules, in the ideal case driving business from brutal mafia and gang activities, which are generally socially destructive, if not entirely zero-sum, towards level and transparent playing fields that are at least somewhat constructive, pulling their profits from the mute vaults of nature and its resources instead of from social oppression. But all this depends on the wisdom and foresight of the state. Many "business model" gems mentioned above involve skirting the law, or engaging in activities the law has not even (or yet) contemplated, to make a buck. There is a constant arms race going on, between the "innovation" of private greed, and the capacity of the state to conceptualize, measure, and legislate against new areas of long-term harm. When the business class and Republicans bleat about taxes and "freedom", they (and their pet economists) are explicitly taking one side of this conflict, the side of irresponsible regression to unregulated, irresponsible, and destructive styles of "business".
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