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!
Economics in one lesson has a whole chapter on this if I remember correctly.
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?
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.
lol
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.
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.)
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?
Dave_Chappell: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.
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?
"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.
"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? ;)
Been discussed before here: http://mises.org/Community/forums/p/22125/391565.aspx
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."
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It's easy to refute an argument if you first misrepresent it. William Keizer
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.
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.