Marxists hate capitalism and want to replace it with socialism because they believe that profits are stolen from wages. They begin with the idea that originally there were workers but no capitalists and that the value of the products the workers produced and sold was all wages. But then allegedly came the capitalists, who proceeded to deduct a part of wages and claim it as profits. Adam Smith expresses this idea in paragraphs 1,2, & 5-8 of his chapter on wages in bk. I of The Wealth of Nations.
Marx took over Smith’s view of profits and went on to claim that the alleged deduction of profits from wages would be so great as to leave the wage earner with nothing more than minimum subsistence, for which he would have to work unbearable hours in unbearable conditions.
I will now show that PROFIT, not wages, is the original and primary form labor income and that this follows both from the actual nature of Smith’s “original state of things” and from Marx’s version of it that he called “simple circulation.”
In simple circulation, “C-M-C,” workers produce commodities, “C,” sell them for money, “M,” and use the money they receive, to buy other commodities, “C.” I say that the money the workers receive in exchange for the sale of their commodities is not wages but sales revenues. (To my knowledge, I am the first economist to identify this, and its implications. I was inspired by reading Henry Hazlitt’s discussion of John Stuart Mill’s proposition “demand for commodities is not demand for labor.”) Wages are money paid in exchange for the performance of labor. Here, money is paid not in exchange for the performance of the workers’ labor but for the workers’ commodities. Thus, the workers have sales revenues, not wages.
However, because this is simple circulation, not “capitalistic circulation,” there are NO COSTS to deduct from these sales revenues. Costs appear only in capitalistic circulation, “M-C-M,” where they are the reflection of the first “M.”
(Costs in business are the prior expenditures of money for the purpose of bringing in the sales revenues. If there are no such expenditures, there are no costs to deduct. Simple circulation is characterized precisely by the fact that there are no such expenditures.) (For the benefit of those unfamiliar with Marx, capitalistic circulation means the outlay of money, “M,” for the purpose of producing commodities, “C,” which are to be sold for a further sum of money, “M,” [or “M’,” to indicate a larger sum of money].)
As I say, given the absence of capitalistic circulation and its first “M,” there are no costs to deduct from the sales revenues and thus the entire amounts of the sales revenue is profit. In addition, because there is no first “M,” there is no monetary capital. The workers of simple circulation have not spent anything for tools or materials, let alone the labor of other workers. Thus, the amount of capital on their books is zero. It follows that in simple circulation profits are both 100% of sales and an infinite percentage of capital invested, which capital is zero.
As I’ve shown, the workers of simple circulation are not wage earners. Because they sell their commodities rather than their labor, they are more correctly described as small businessmen. They are small businessmen without costs and without capital. Simple circulation morphs into capitalistic circulation as and when some of these worker/businessmen begin to save and productively expend a portion of their sales revenues and profits rather than consume them all. These worker/businessmen are now worker/businessmen/capitalists
Their productive expenditure (i.e., their expenditure for the purpose of making subsequent sales) is the first “M” in capitalistic circulation. It buys capital goods and labor and has the following further major consequences: it brings into existence costs of production in the income statements of business and capital with a monetary value on their balance sheets. Thus, it reduces both the percentage of sales revenues that is profit and, doubly, the percentage that profit bears to capital invested.
I say that the rate of profit on capital is doubly reduced because, per dollar of sales revenue, not only is the amount of profit reduced but also the amount of capital on the books is increased. Marx’s sequence for capitalistic circulation can be used to provide a simple formula for measuring the economic degree of capitalism, namely, the higher is the ratio of “M” to “M’,” the more economically capitalistic is the economic system.