What's wrong with this argument?

Economics Economics Questions
1

Profit is made when the costs of production are lowered either through introduction of labour saving technology or lowering of wages.

Labourers, as a cost of production, are also consumers. There is an inherant contradiction between these two roles because lowineing wages or laying off workers will mean that the output of production cannot be bought. Insufficient demand is the reslt.

For capitalism to operate with this contradiction, constant growth is needed to hide the impact of this lack of demand. That is why economies with less that 3% growth are said to be in a bad shape.

So what is wrong with this arument?

Ready… steady… Go!

2

Economics in one lesson has a whole chapter on this if I remember correctly.

3

As I understand it, profit is the result of consumers subjectively valuing products at a price greater than the costs of production. Profits are then used to increase production which drives prices down. Doesn’t the argument assume that wages necessarily must be lowered or that prices will not drop?

4

Workers don’t get to buy anything. The exploiting capitalists would be using their profits to buy and gorge on each other’s products while throwing just enough bread crumbs off the table to keep the workers alive.

Z.

5

lol

6

  1. The error is in the first sentance. Profit is made by having a lower cost of production than sale price of produced good. Perhaps you mean “increasing profit” instead of “profit”?

  2. In the first setance you admit that you can increase profit by introducing labor saving technology so an increase in profit can be achieved through that method as well if decreasing the cost of labor is not an option.

  3. I presume we are working with an economy that produces exactly one good and all members of this economy are laborors or managers (who get the profits) and this one good is needed to survive and be happy and the managers desire as much happiness as they can acieve for themselves. If this is the case then it’s in the manager’s best interest to not reduce wages to the point where his workers quit and go work for someone else. Assuming there are many competing companies (each with one manager) what will end up happening is the manager will make about the same as the laborer, adjusted slightly depending on which job is more desireable and which job requires more up front cost (education) to complete.

7

There is no contradiction between laying off workers and lost consumers whatsoever.

That belief wrong assumes that layed off workers will not find work elsewhere. Of course they will.

If workers are not needed in one area of production - they will transition to find useful purposes elsewhere. There will be a slight lag - but eventually they will all find jobs - and the buying power will still exist. And there will be lower prices so the economy gains.

(Now, granted, with the current UE benefits running 2-3 years - the gov’t has perverted the transition timeline (incentivizing being unemployed) - but that cannot last forever - and eventually the UE will find new jobs and start earning on their own again.)

8

The wages that workers get are not higher than the costs of production - by definition they must be less because labour is itself part of the cost of production. So how can they purchase products at a price above this level? Workers only have as much to spend as they have been paid.

9

The wages that workers get are not higher than the costs of production - by definition they must be less because labour is itself part of the cost of production. So how can they purchase products at a price above this level? Workers only have as much to spend as they have been paid.

I will try to simplify the world in order to kep the answer short - let’s assume the society has a single producing company. Workers do not get all the output - obviously! As you said, there are other factors contributing to cost of production - land and capital owners. Why would you want to deprive them of their share of the output?

10

Assume that, at the limit, the idiot workers are paid $0+bread+water. Evil capitalists use the resulting hefty profits to buy each other’s products while the workers can’t/don’t buy a thing. How is this a contradiction, or in any way unsustainable? Who says that the workers must be able to buy everything produced?

Z.

11

“I will try to simplify the world in order to kep the answer short - let’s assume the society has a single producing company. Workers do not get all the output - obviously! As you said, there are other factors contributing to cost of production - land and capital owners. Why would you want to deprive them of their share of the output?”

Who said anything about depriving anyone of anything? Not me! You read that into my question yourself.

12

“Assume that, at the limit, the idiot workers are paid $0+bread+water. Evil capitalists use the resulting hefty profits to buy each other’s products while the workers can’t/don’t buy a thing. How is this a contradiction, or in any way unsustainable? Who says that the workers must be able to buy everything produced?”

Ok, this is the answer that does it for me. Cheers!

P.S I’m one of those ‘idiot’ workers. I gues that makes you an ‘evil’ capitalists eh? :wink:

13

Been discussed before here: https://forum.freecapitalists.org/t/a-question-regarding-production-purchasing-power/16944/13

My contribution was:

OK, let’s get the Math straight. Bill Gates pays his workers, say, ten dollars to priduce one widget. He sells it for twelve dollars, which they cannot possibly afford. Therefor, Capitalism is doomed.

Well, not exactly. The workers work 40 hours a week. Each one produces many many widgets, and gets paid much more than the cost of one widget. So he buys one, and lives happily ever after.

“Ah,” one may argue. “Who is going to buy all those excess widgets that are produced?”

“People who work at other jobs, like milking cows.”

OK, let’s do the math. Every week 10,000 widgets are produced by 5,000 workers, and 10,000 gallons of milk are produced by 5,000 other workers. The milkmen get paid $2 for every gallon of milk, and milk is sold for $3 a gallon. The widget workers get, as before, $10 per widget, which is sold for $12.

Each widget worker gets $20 for making two widgets, and each milkman gets $4 for producing two gallons. To buy a widget and a gallon of milk cost $15. So the widget workers are doing fine. The milkmen buy a gallon of milk, cannot afford the widget, and have $1 to save. After 12 weeks, they buy the widget from their savings. Capitalism rules.

EDIT: “But there are still too many widgets being made.”

“True. So widget prices will go down,”

“But the widget workers’s salaries will have to go down too.”

“True. However, they still get their widgets and their milk at the lower wage, plus a bit more to save. Meanwhile the milk workers can afford more widgets. Everyone benfits.”

14

Dave,

You can verify the relevant post as an answer.

Only if I could cheat you into exchanging your labor for mere bread and water.

Z.

15

Hang on one darn second! I’ve had a 1am thought (best time for 'em if you ask me).

What about the capitalists’ profts after 10 weeks in Smiling Daves example? At the end of the 10 week process the capitalists have paid out $1,200,000 in wages and produced 100,000 widgets and 100,000 gallons of milk.

With widgets at $12 that means $1,200,000, and with milk at $3 a gallon that is $300,000. So a total of $1,500,000 is needed to buy everything. The employees still have not bought all the output.

OK, so in an alternate scenario the capitalists sell the goods at prices coming to $1,200,000 in the knowledge that this is the only way they will clear their stock. The employees can now afford to buy the output, but the idiot () capitalists have made no profit whatsoever.

16

At the end of the 10 week process the capitalists have paid out $1,200,000 in wages and produced 100,000 widgets and 100,000 gallons of milk. Check.

With widgets at $12 that means $1,200,000, and with milk at $3 a gallon that is $300,000. So a total of $1,500,000 is needed to buy everything. Check.

The employees still have not bought all the output. Check.

But you forget that the entrepeneurs have $300K in profit. They use it to buy themselves widgets and milk.

They can lower prices to as much above $1,200,000 as they feel will leave them comfortable with widgets and milk and yet encourage people to buy..

17

“But you forget that the entrepeneurs have $300K in profit. They use it to buy themselves widgets and milk.”

Except that they haven’t made any profit. It’s impossible to do so because there is only 1.2 million sloshing around for people to buy stuff with. You can talk about people saving up to buy stuff later, but that is just delaying the point where both sides of the balance sheet have to equal.

18

I understand your point, but even so.

Workers spend $1,200K, from which the employers have some profit. Then a short while later [2 and a half weeks], workers get paid out $300K and employers get some profit as well, $75K. Thus a bit more than $375k is spent by the workers and employers together. This clears the original $1,500K worth of products plus $75K more. A few more widgets and milk have been produced, 500 of each to be exact, but clearly they will be used up easily next round.

The math is doable to figure out how many hours it will take to give the workers plus employers money to buy the 500 [plus the few odd ones produced in the third round]. but it’s late at night. Clearly it’s not a problem. Perhaps someone following this thread will work it out.

Bottom line, it looks like the original claim that the workers can’t buy what they produce has been answered. In words, there are plenty of other people out there to buy things. And the workers can save up to buy what they need if it’s too expensive to get with a week’s wages. Which happens all the time, right?

19

Workers spend $1,200K, from which the employers have some profit.

No, there is not profit here; the employers have paid workers 1.2 million. The profit is zero.

Then a short while later [2 and a half weeks], workers get paid out $300K and employers get some profit as well, $75K.

Sorry, where does the $75K profit come from exactly?

Bottom line, it looks like the original claim that the workers can’t buy what they produce has been answered.

Not really. Maybe the claim needs clarifying a little. At the price level that would be required for the capitalist sector to make a profiit, there is not enough money to pay for all the goods. In order to clear the goods the price level must come down to a point where profit is impossible.

Now, I have an incling of why this analysis seems problematic, and maybe counter-intuitive, and this is because I am relying on a static analysis. What I am discussing is similar to the idea that in ‘equalibrium’ profits would be zero. Of course, equilibrium is a constant moving target that is never reached, which is why the effects of the contradiction stated above do not always seem apparent. That is why in my original post I spoke about how constant growth is needed to keep the system chugging along. Exponential growth is the only way that profit can be realised.

20

Yes, you are right that I assumed 1500k was sold. So let’s do it your way:

1500k worth [i.e. that is retail price]of widgets are produced in the first round. workers get 1200K, and buy 1200K worth of widgets and milk. The employers are left with 300K worth of widgets and milk, all for themselves. That is their profit. If they wish they can drink that milk and play with the widgets. If they want they can sell them next round. But the point is, those 300K worth of goods are theirs, pure profit, for all expenses have been paid.

Next round. which lasts 2 and a half weeks, they pay the workers 300K, which is used by them to buy 30K worth of stuff, and the employers profit is 75K worth of goodies, to consume or to sell.

Note that everyone has plenty of milk and widgets, the workers and the employers.

Even if growth is zero, but production chugs along at the same rate, everyone gets richer as time goes on, as shown in the example.