<p>At the end of the day, currency (such as $) is just a means of purchasing real goods and services in an economy. Roughly, utility corresponds to consumption. Since you assume the capitalist isn't allowed to consume, there is nothing for the capitalist to gain even if they capture all the currency. </p>

<p>Here is a slightly modified thought experiment.</p>

<p>Suppose there is one employer and one employee in an economy. Both are consumers. There is only one good: tomatoes. In other words, every credit is spent on purchasing tomatoes, and the real GDP of this economy is the number of tomatoes produced. If the employee earns less wages, then the employer has a larger slice of the revenue, and the employer now can purchase more tomatoes.</p>

<p>Now what if the employer tries to pay the employee almost nothing? The employee might just quit: no tomatoes are produced, and everyone is worse off as no one gets tomatoes. Even if the employee doesn't quit, at some point the employee will be less productive because they are starving from not being able to consume tomatoes. In other words, for the employer that wants to consume as many tomatoes as possible, there is a balance between taking as large a share from the existing pie of tomatoes and increasing the pie by allowing the employee to have enough to be productive.</p>

CC BY-SA 4.0
2019-10-17T20:13:45.937Z
2019-10-17T20:13:45.937Z
Kent Shikama
<p>Accounting profit is revenue minus costs. One of the largest costs is wages. The owner of a business does not want to increase costs all else constant. Profits are split mainly two ways. One way to direct profits is to reward investors with interest and dividends. In a simplified world, that reward is spent so it becomes revenue. The other way to direct profits is into a type of "saving" which is in the form of incremental investment in the business. That "savings" is revenue for the supplier of the resources that go into a business, for example, materials, land, structures, machinery, knowledge, training, software, advertising, relationship building...</p>

<p>So to address the matter of your confusion I suggest that you do not overlook that interest and dividends become revenue (get spent) and do not overlook that profit retained in the business becomes revenue (gets spent). Do not think there is a narrow minded capitalist that wants to reduce wages and a holistic capitalist that wants to increase wages. When all else is constant lower wages increase profits and this is a concern of every capitalist.</p>

<p>You wrote</p>

<blockquote>
  <p>prevent other classes from accumulating savings</p>
</blockquote>

<p>One class does not have an interest in preventing another class from "saving" if adequate inflation creates the incentive to minimize saving in the form of money holdings while the remainder of the savings go into revenue in the economy. Some of that "saving" will be lent through banks or through the purchasing of the bonds of governments and businesses. Some of it will be revenue for suppliers of resources that go into businesses possibly by way of an investment fund. </p>

<p>The one form of saving that is not immediately revenue (for whomever receives revenue in the economy) is money holdings. There is pressure to minimize holdings of money because of the loss of purchasing power caused by inflation. If we succeed in avoiding deflation that is helpful to minimizing holdings of money.</p>

<p>This chart shows Federal Reserve assets which are balanced by the money holdings of every household and business. This shows money holdings are more than they were 11 years ago. The same thing has happened at other major central banks such as the ECB. It might be that people expect an inflation rate that is lower than the expectation in the past. There might be the expectation that in the next recession the U.S. might have deflation like the slight deflation that Japan has had in some years in recent memory. The U.S. and world economies are bigger now so that creates a natural need for money. There is an incentive to use the USD in international transactions. Another important change is that the Fed started to pay interest in 2008. No doubt a combination of reasons would be needed to explain the higher level of money holdings. One thing to consider is that U.S. net worth is immeasurable but it might be approximately 100T USD so if the money holdings go from 1% of that to 4% of that in the context I described, how would we interpret the meaning of the 4% as to whether it is a high number or a low number or just right? Non-linear relationships might apply.</p>

<p><a href="https://i.sstatic.net/RJiTr.png" rel="nofollow noreferrer"><img src="https://i.sstatic.net/RJiTr.png" alt="fed assets"></a></p>

<p>Note that if every private bank decided to hold less money that would be impossible because they cannot as a homogeneous group buy bonds from the Fed in order to get rid of their money if the Fed does not want to sell bonds. However, an individual bank does not face this problem so what we have is many individual banks deciding to hold much more money than 11 years ago.</p>

<p>If you are willing to accept that what is an excessive money holding is not easily identified, then we cannot be sure if the current level of money holdings is excessive. If it is not excessive then perhaps money holdings are not depressing revenue (spending).</p>

<p>You wrote</p>

<blockquote>
  <p>The spending of the capitalists, even if that's minuscule in
  comparison</p>
</blockquote>

<p>Capitalist spending is not minuscule. Private pension funds distribute interest and dividends and a significant portion of the population relies upon and spends this significant quantity. Tax funded government pensions are not usually thought of as capital but they are in a sense because taxes are collected from taxpayers and taxpayers are entities that will produce value in the future. An entity that produces value in the future is one definition of capital. If the taxpayer is a company it can have a very long life. </p>

<p>You wrote </p>

<blockquote>
  <p>if the "surplus value" from the workers going to the capitalist is
  what's needed to be spent in the market to buy all the produced goods
  and services then they would only be recirculating what they have, not
  earning, saving and reinvesting</p>
</blockquote>

<p>Yes, this is re-circulation but why describe this as "only" re-circulation? Wealthy people and non-wealthy old people will want to spend some portion of what they have before the end of their lives.</p>

CC BY-SA 4.0
2019-10-17T22:37:25.337Z
2019-11-28T22:46:23.863Z
2019-11-28T22:46:23.863Z
H2ONaCl
<p>It seems obvious that an individual company increases their profits when they reduce wages or increase automation or some such.</p>

<p>But if wages fell universally because of this, wouldn't that decrease profits, since ultimately the earnings of all those companies rely on wage-earning consumers?</p>

<p>It would seem to me, then, that an industrialist, in the sense of an owner of a particular company, should want to reduce wages, but a true capitalist, in the sense of someone with their finger in many pies, would actually want to increase wages - and that their interest would be to prevent other classes from accumulating savings by making sure that those increased wages are channeled into as much additional consumption as possible.</p>

<p>Is this correct? How can I understand this better?</p>

<p>In my innumerate way I have tried to reduce this to a simple thought experiment and here is where things get messy and confusing for me:</p>

<p>Suppose there is just 1 capitalist and 1 worker &amp; consumer.</p>

<p>Suppose that the worker produces $100 worth of goods and services.</p>

<p>In order for them to be purchased from the market, that worker will need to also earn $100.</p>

<p>So there doesn't appear to be any profit for the capitalist at all in this picture. And yet isn't profit surplus value? Where is that coming from?</p>

<p>Clearly I am getting this wrong, both because the above situation could not exist, and because if it did, it could not grow/change. But what is my error?</p>

<p>My gut sense is that factors involved here include:</p>

<ul>
<li>That a proper consideration of the role of currency is needed to pair with the goods, since we are not just dealing with the value of the goods, but the denotation of that value in money, the circulation of which behaves differently than that of the goods.</li>
<li>That time intervenes between production and consumption causing a circulating effect that somehow (through market &amp; financial intermediaries?) magnifies apparent value involved.</li>
<li>Consumer credit - like credit cards - would seem to have a distorting effect on this process, but that's still in expectation of future wages, right?</li>
<li>The existence of different tiers of wage earners and consumer, whether by class in the same economy, or maybe more importantly, in different economies - high earning "consumers" in Western nations having a codependent relationship with low earning "laborers" in developing nations. This one in particular seems relevant to me.</li>
<li>The spending of the capitalists, even if that's minuscule in comparison. But if the "surplus value" from the workers going to the capitalist is what's needed to be spent in the market to buy all the produced goods and services then they would only be recirculating what they have, not earning, saving and reinvesting.</li>
</ul>

<p>What also seems relevant:</p>

<ul>
<li>"Semi-fungibility" of different goods. What's an arch-capitalist going to do with a few million more bushels of grain? It would seem to me that money approximates fungibility to large extent but at the end of the day you can't eat a yacht.</li>
</ul>

<p>But this is all inchoate musing and I feel helpless to understand much less really explain any of it.</p>

<p>Any direction you could give me would be much appreciated!</p>

<p>Thank you,</p>

<p>Jenna</p>

<macroeconomics><reference-request><labor-economics><self-study><wages>
The relationship between profit and wages
JennaTaylor
# The relationship between profit and wages

(Asked by: username_0 on 2019-10-15)

It seems obvious that an individual company increases their profits when they reduce wages or increase automation or some such.

But if wages fell universally because of this, wouldn't that decrease profits, since ultimately the earnings of all those companies rely on wage-earning consumers?

It would seem to me, then, that an industrialist, in the sense of an owner of a particular company, should want to reduce wages, but a true capitalist, in the sense of someone with their finger in many pies, would actually want to increase wages - and that their interest would be to prevent other classes from accumulating savings by making sure that those increased wages are channeled into as much additional consumption as possible.

Is this correct? How can I understand this better?

In my innumerate way I have tried to reduce this to a simple thought experiment and here is where things get messy and confusing for me:

Suppose there is just 1 capitalist and 1 worker & consumer.

Suppose that the worker produces $100 worth of goods and services.

In order for them to be purchased from the market, that worker will need to also earn $100.

So there doesn't appear to be any profit for the capitalist at all in this picture. And yet isn't profit surplus value? Where is that coming from?

Clearly I am getting this wrong, both because the above situation could not exist, and because if it did, it could not grow/change. But what is my error?

My gut sense is that factors involved here include:

* That a proper consideration of the role of currency is needed to pair with the goods, since we are not just dealing with the value of the goods, but the denotation of that value in money, the circulation of which behaves differently than that of the goods.
* That time intervenes between production and consumption causing a circulating effect that somehow (through market & financial intermediaries?) magnifies apparent value involved.
* Consumer credit - like credit cards - would seem to have a distorting effect on this process, but that's still in expectation of future wages, right?
* The existence of different tiers of wage earners and consumer, whether by class in the same economy, or maybe more importantly, in different economies - high earning "consumers" in Western nations having a codependent relationship with low earning "laborers" in developing nations. This one in particular seems relevant to me.
* The spending of the capitalists, even if that's minuscule in comparison. But if the "surplus value" from the workers going to the capitalist is what's needed to be spent in the market to buy all the produced goods and services then they would only be recirculating what they have, not earning, saving and reinvesting.

What also seems relevant:

* "Semi-fungibility" of different goods. What's an arch-capitalist going to do with a few million more bushels of grain? It would seem to me that money approximates fungibility to large extent but at the end of the day you can't eat a yacht.

But this is all inchoate musing and I feel helpless to understand much less really explain any of it.

Any direction you could give me would be much appreciated!

Thank you,

Jenna

**Tags:** macroeconomics, reference-request, labor-economics, self-study, wages

---

## 2 answers

### Answer by username_1 on 2019-10-17. Score: 3

At the end of the day, currency (such as $) is just a means of purchasing real goods and services in an economy. Roughly, utility corresponds to consumption. Since you assume the capitalist isn't allowed to consume, there is nothing for the capitalist to gain even if they capture all the currency.

Here is a slightly modified thought experiment.

Suppose there is one employer and one employee in an economy. Both are consumers. There is only one good: tomatoes. In other words, every credit is spent on purchasing tomatoes, and the real GDP of this economy is the number of tomatoes produced. If the employee earns less wages, then the employer has a larger slice of the revenue, and the employer now can purchase more tomatoes.

Now what if the employer tries to pay the employee almost nothing? The employee might just quit: no tomatoes are produced, and everyone is worse off as no one gets tomatoes. Even if the employee doesn't quit, at some point the employee will be less productive because they are starving from not being able to consume tomatoes. In other words, for the employer that wants to consume as many tomatoes as possible, there is a balance between taking as large a share from the existing pie of tomatoes and increasing the pie by allowing the employee to have enough to be productive.


---

### Answer by username_2 on 2019-10-17. Score: 1

Accounting profit is revenue minus costs. One of the largest costs is wages. The owner of a business does not want to increase costs all else constant. Profits are split mainly two ways. One way to direct profits is to reward investors with interest and dividends. In a simplified world, that reward is spent so it becomes revenue. The other way to direct profits is into a type of "saving" which is in the form of incremental investment in the business. That "savings" is revenue for the supplier of the resources that go into a business, for example, materials, land, structures, machinery, knowledge, training, software, advertising, relationship building...

So to address the matter of your confusion I suggest that you do not overlook that interest and dividends become revenue (get spent) and do not overlook that profit retained in the business becomes revenue (gets spent). Do not think there is a narrow minded capitalist that wants to reduce wages and a holistic capitalist that wants to increase wages. When all else is constant lower wages increase profits and this is a concern of every capitalist.

You wrote

> prevent other classes from accumulating savings

One class does not have an interest in preventing another class from "saving" if adequate inflation creates the incentive to minimize saving in the form of money holdings while the remainder of the savings go into revenue in the economy. Some of that "saving" will be lent through banks or through the purchasing of the bonds of governments and businesses. Some of it will be revenue for suppliers of resources that go into businesses possibly by way of an investment fund.

The one form of saving that is not immediately revenue (for whomever receives revenue in the economy) is money holdings. There is pressure to minimize holdings of money because of the loss of purchasing power caused by inflation. If we succeed in avoiding deflation that is helpful to minimizing holdings of money.

This chart shows Federal Reserve assets which are balanced by the money holdings of every household and business. This shows money holdings are more than they were 11 years ago. The same thing has happened at other major central banks such as the ECB. It might be that people expect an inflation rate that is lower than the expectation in the past. There might be the expectation that in the next recession the U.S. might have deflation like the slight deflation that Japan has had in some years in recent memory. The U.S. and world economies are bigger now so that creates a natural need for money. There is an incentive to use the USD in international transactions. Another important change is that the Fed started to pay interest in 2008. No doubt a combination of reasons would be needed to explain the higher level of money holdings. One thing to consider is that U.S. net worth is immeasurable but it might be approximately 100T USD so if the money holdings go from 1% of that to 4% of that in the context I described, how would we interpret the meaning of the 4% as to whether it is a high number or a low number or just right? Non-linear relationships might apply.

[![fed assets](https://i.sstatic.net/RJiTr.png)](https://i.sstatic.net/RJiTr.png)

Note that if every private bank decided to hold less money that would be impossible because they cannot as a homogeneous group buy bonds from the Fed in order to get rid of their money if the Fed does not want to sell bonds. However, an individual bank does not face this problem so what we have is many individual banks deciding to hold much more money than 11 years ago.

If you are willing to accept that what is an excessive money holding is not easily identified, then we cannot be sure if the current level of money holdings is excessive. If it is not excessive then perhaps money holdings are not depressing revenue (spending).

You wrote

> The spending of the capitalists, even if that's minuscule in
> comparison

Capitalist spending is not minuscule. Private pension funds distribute interest and dividends and a significant portion of the population relies upon and spends this significant quantity. Tax funded government pensions are not usually thought of as capital but they are in a sense because taxes are collected from taxpayers and taxpayers are entities that will produce value in the future. An entity that produces value in the future is one definition of capital. If the taxpayer is a company it can have a very long life.

You wrote

> if the "surplus value" from the workers going to the capitalist is
> what's needed to be spent in the market to buy all the produced goods
> and services then they would only be recirculating what they have, not
> earning, saving and reinvesting

Yes, this is re-circulation but why describe this as "only" re-circulation? Wealthy people and non-wealthy old people will want to spend some portion of what they have before the end of their lives.


---

