High Wages and Low Profits

There may be a million men and women on the dole next winter. This at least is what some economic soothsayers are predicting.

Many people are mistakenly blaming the government. Their attitude is understandable in view of the extravagant claims made about governments being able to control the level of employment.

The number of unemployed—or the size of what Marx aptly called the industrial reserve army—is something governments cannot control any more than they can the level of production. Employment and production depend on the working of the capitalist economic system which runs on profits and not according to governments’ decrees. As has been demonstrated time and again, capitalism controls governments not governments capitalism.

Unemployment is rising at the moment because the falling rate of profit is discouraging capitalists from investing. Profit margins, as capitalists call the rate of profit, are falling because wages have been rising faster than prices.

Geoffrey Bell, writing in The Times (2 March) about “The Dangerous Pressure on Profits”, notes this about the current crisis:

Profits have fallen, are falling and show every sign of continuing to fall relative to the growth of gross national product in the United Kingdom. Wage earnings are rising at nearly twice the pace of retail prices. This gap between wage costs and price increases is clearly greater than the growth in productivity and any improvement in the terms of trade. As a result, profit margins are being reduced further after a decade of being squeezed . . .
The United Kingdom suffers from inadequate industrial investment and perhaps the major reason for this inadequacy is a lack of profit on such investment. It should be stressed that this point is made not with a view that there is some ’natural’ or ‘correct’ level of profit margins in the United Kingdom but simply because unless margins are improved then investment will continue to suffer and hence economic growth more generally.

This is a refreshing change from the usual nonsense we hear from the politicians about wage increases causing inflation. Insofar as wage increases outstrip rising prices they cut into profits and this is what worries the capitalist class and their agents, the government.

Trade unionists and reformists like to think that wages can be pushed up indefinitely without any effect on investment and employment. This is an illusion. Capitalism runs on profits and any threat from rising wages to the rate of profit will lead to a “downturn” (i.e., a slump) in production and a rise in unemployment. Unemployment will reduce the pressure on profits from wages and eventually restore the conditions for an expansion of production and employment. This is the normal business cycle of capitalism, something analysed by Marx a hundred years ago and still operating despite Keynes and governments pledged to maintain “full” employment and to end “stop-go”.