# The relationship between profit and wages

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

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.

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.

There is one form of saving that is not immediately revenue (for whomever receives revenue in the economy). It 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.

One class does not have an interest in preventing another class from "saving" because inflation creates the incentive to minimize money holdings and 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.

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. 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.

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.