Alexandria Ocasio-Cortez's Tweet About Workers Being Paid 'Less Than The Value They Create' Is Essentially A Restatement Of Marx's Labour Theory Of Value — Here's Why That's Interesting (Demo)

If all workers are paid less than the value they create, then there will never be enough workers to buy the things they make

Before Marx, the “value” of any product was regarded as pretty much the same as its price in the marketplace. It’s how much you would pay to avoid making the product yourself, according to Adam Smith(1723-1790). The reason you might spend $100 on a pair of shoes is that even though $100 is quite expensive, it’s a lot easier than making a pair of shoes by hand, yourself, Smith said.

Marx (1818-1883), who was a big fan of Smith, was more interested in how products acquire value as they come into existence. A cow doesn’t slaughter itself and magically transform into a pair of leather shoes — that happens only because workers apply labor to the cow’s corpse, turning its skin into leather and then sewing that leather into shoes. Only after labor has been applied do shoes have any value. It’s the labor that creates the value, not just the fact that the shoes can be traded for cash.

If you accept that, then it becomes immediately obvious that what Ocasio-Cortez said is correct. Workers in a shoe factory are paid far less than the value they create. They have to be. If 100% of the money from shoe sales was paid directly to the workers, then the factory would go out of business — there would be no money left to pay for electricity, and there would be no profits to invest in more efficient shoe-making machines to help the factory compete in the future.

But that raises a contradiction: If all workers are paid less than the value they create, then there will never be enough workers to buy the things they make.

Let’s say our shoe factory has one worker who each day makes five pairs of shoes, which sell for $100 each. The factory makes $500 a day in sales. The worker’s wage is $10 an hour for a 10-hour day. So the worker is paid $100 a day. The worker can afford to buy only one pair of shoes, even though they have made five.

At first this doesn’t feel like a problem, because, obviously, there are billions of people on the planet who need shoes — the factory can sell those other four pairs to someone, somewhere. What concerned Marx was that ultimately every single worker on the planet, in every office and factory, is paid less than the value of the goods they create. It is not possible for all the goods being produced to be bought by all the workers making them. Additionally, there is almost always a reserve army of unemployed people who can’t afford to buy anything, exacerbating the problem.

The tendency is for the system to collapse, Marx believed

The tendency is for the system to collapse and for recessions to destroy shoe factories whose customers are too poor, or not numerous enough, to buy all the shoes, Marx believed. This collapse can be staved off, he argued, if the shoe factory goes to great lengths — for instance, by investing in new technology allowing that shoe worker to double their productivity and make 10 pairs of shoes a day, or maybe the same number of shoes at a lower price.

But the collapse is only pushed into the future. New technology will also be acquired by all the competing shoe factories, squeezing profits — and squeezing some factories out of business. And if the factory buys shoe-making machines instead of hiring new workers, it still faces the problem of producing more shoes than can be bought by the workers making them.

By an amazing coincidence, Ocasio-Cortez also tweeted a chart of workers’ pay increases compared with their productivity increases to make the point that even when labor becomes more valuable, it does not share the rewards:

It is impossible for capitalists to pay workers the full value of their labor without going bankrupt

That is a vast oversimplification of Marx’s analysis, but you get the gist.

Marx thought capitalism was inherently unstable precisely because workers are not paid the full value of their labor, and precisely because it is impossible for capitalists to pay them the full value without going bankrupt. It’s one of the internal contradictions that capitalism cannot resolve.

Of course, not all profits are invested in new equipment. Factory owners take a slice for themselves, and it tends to be a much bigger slice than the workers get. There are reasons for this, of course. It was the capitalists’ money that brought the factory into existence, and the inevitable collapse can be avoided if the profits are diverted into a new venture, like a hat factory, that might create new jobs (for workers who can then buy shoes).

Whatever they do, the bosses get richer than the workers. Now you have two sets of people, both doing the same thing (making shoes), but being paid wildly unequal sums for doing so.

Which is another way of saying that “workers are often paid far less than the value they create,” as Ocasio-Cortez tweeted.

AOC and the investment banks are on the same side of the debate

She isn’t alone in worrying about what workers are paid. Over the past few years, a surprising number of investment-bank analysts at Citi, HSBC, and Macquarie have published research finding that inequality and low pay may lead to recessions, or at the very least hold back economic growth (which, ironically, even makes the rich poorer).

These people are not Marxists, obviously (though, like Marx, they are economists). But also like Marx, they are concerned that inequality in the US and the West is becoming so extreme that ordinary people won’t have enough money to keep the economy going.

The charts in this story all show the same thing: The share of national income going to the top 1% of earners is increasing, while the share of income going to the bottom 50% of people is declining. The rich are getting richer. And the rest of us are sharing an ever-smaller slice of the pie. The bottom 50% of people in the US and Europe now share just 13% of national income.

HSBC

What if we run out of rich people?

The top 0.1% own close to 20% of all household wealth in the US, according to a paper by Gabriel Zucman, an economics professor at the University of California, Berkeley.

This is a problem, the investment-bank people say, because there aren’t enough people with money to keep capitalism ticking over.

“Income inequality is cited as another factor in the stagnation process as a few wealthy individuals cannot drive an economy by themselves,” the Citi analysts Tobias M. Levkovich and Lorraine M. Schmitt told their clients in 2015.

Two analysts at Macquarie, Viktor Shvets and Perry Yeung, said something similar last year. They cited work by Moritz Kuhn and Moritz Schularick published by the Federal Reserve Bank of Minneapolis, and by Emmanuel Saez and Thomas Piketty, which said:

• The bottom 25% of households had a negative net worth (i.e., they are in debt).
• The population between 25% and 50% owned only 2% of national wealth.
• The share of the “middle class” between 25% and 75% had dropped to about 8% from 15% in 1989.
• The top 10% controlled about 77% of national wealth.
• Over time, the top 1% increased its share to about 40% in 2013 from 27% in 1989.

• HSBC

“In other words, wealth has not just accrued to the top 10%, but it went almost entirely to the top 1%,” they told clients. “The middle-class creation in 1950s-70s has clearly been replaced by a middle-class compression over the last three decades, certainly since late 1980s.”

If the West goes into recession, the fortunes of the rich might make it worse

Janet Henry, an economist at HSBC, told clients in 2018 that the accumulation of wealth by a tiny minority might actually hold the economy back.

“Income inequality suppresses consumption given the lower marginal propensity to consume of higher earners and can be negative for growth if the savings of higher earners do not push up productive investment spending but get parked in property or government bonds,” she wrote.

“Income inequality, which often goes hand in hand with a lack of social mobility, also creates disparities in life expectancy, education, skills levels and labour mobility that will impact on future productivity and growth potential,” she added. “This has implications for government revenues and their ability to fund public services and future liabilities. Given the huge structural factors — from demographics to technology — that are contributing to the growing income polarisation, it is not something that will miraculously dissipate on the back of one or two years of robust growth.”

Worse, if the West goes into recession, then the fortunes of the rich will make it worse, she said, because the poor don’t have enough money to withstand it.

“The depth of any downturn, when it finally happens, could be amplified by this income and debt distribution,” she told clients in a note late last year.

In other words, the richest 1% might buy a lot of shoes, but they cannot possibly buy enough to keep all the shoemakers employed. You need workers with enough money to buy shoes too. And that means — as Ocasio-Cortez tweeted last month, and as investment bankers have been worrying about since the 2008 financial crisis, and as Marx wrote 200 years ago — that it is very important to consider what workers are paid in relation to the value they create.