Why Rich People don’t earn their Money

Christian Patterson
2019-03-08
Underground Mall

Juche statue and architecture in North Korea

One of the most common arguments I hear from pro-capitalists is that capitalists earn their money, and they deserve all of the profits they get. In this post, I’ll do my best to debunk that idea.

On a surface level, it’s easy to think “if you made that much money, then you earned it”. But that assumes a lot of things. Primarily, it assumes there’s no power embedded within money. It assumes money is just a flat value that you either have or don’t. It assumes money works how it does in a video game, like once you earn enough gold you’re able to afford a special sword in the game! And how dare you suggest you get a special sword for less, when everyone else saved up for the sword.

Another thing that capitalist defenders are missing, is they have such a simplistic understanding of the economy, that they assume the price of something is an accurate representation of its value. They assume the exchange-value, use value, economic value, and price are all the same thing – they are all cleanly reduced to the mere price.

In this post, I will break down how a capitalist economy works. I will get very granular about the meaning of things. I won’t graze over anything that doesn’t benefit my point, and I won’t manipulate anything to make my point stronger.

I will also be transparent and say the analysis in this post is based on Marx’s Das Kapital, but spelled out in my own way, with my own terms. Keep in mind that the ideas in this post are purely economical in nature, and should be treated as non-ideologically as possible, just as if I was explaining the ideas of Ricardo or Smith.

Also keep in mind that differentiating between exchange value, use value, economic value, and price is not entirely a Marxist principle, and in fact, as far back as Aristotle, economics were being written about in these terms. Even many of Smith’s (the father of capitalist theory) ideas about the economy use these terms. In other words, because of the fear mongering about Marxism, people who have never read him have a very warped view of what his writing is like, but his economic ideas aren’t nearly as divergent as we’re led to believe (although the political implications are).

department store in North Korea

Comparing feudal and capitalist markets

When I break down what capitalism is, I start by comparing it to feudalism because it shows which elements of our economy predate capitalism and which elements developed with, or because of, capitalism. A basic understanding of feudalism strips away a lot of presumptions about capitalism.

A great way to think about the transition from feudalism to capitalism is to think about the currencies used in the economic systems. Under feudalism, the way people held economic power was by controlling land. Aristocrats were like a synthesis of politicians, employers, and landlords. The feudal elite were similar to politicians in a capitalist context but, with much less consolidated, state-like power. They were like a federation of landowners who worked with a similar class interest. They also functioned like employers/capitalists, because they took a significant amount of value from the labor that’s performed on their land. And they also functioned like landlords because the previously stated economic power comes from the fact that they control land.

Of course, these dynamics manifested differently in different societies, just as capitalism does. But, this shows that the primary valuable object of exchange is land. Feudalism is a land-motivated economic system. By owning land, the feudal aristocracy controlled everything, because everything was tied to the land. Any type of production took place on land as opposed to now, where so much value exists digitally. Under feudalism, owning land enables someone to tell peasants what to do and take the products produced by the workers. Owning land is what made people on the dominant side of social exchanges.

The transition from feudalism to capitalism signifies the transferring of economic power from land ownership to capital ownership. Land, of course, still has value, but only because its a capitalist investment. Under feudalism, if you had enough land, you could obtain anything you want. Now, if you own enough land under capitalism, you could buy anything, but only if you liquidated the capital investment in the land. However, you would usually want to continue owning the land, because it passively generates money for you (assuming it’s in use).

People often think that capitalism is simply a market of free exchange. Then, they look through history and see that exchange with money has existed for much of human history. However, this type of market exchange was historically very different than it is under capitalism. Under feudalism, the aristocracy gained their power by claiming plots of land, and taking most of the food and goods generated on their land. Under capitalism, the bourgeoisie gained their power by claiming property, and taking most) of the money generated with their property.

Under feudalism, and prior economic systems, there was monetary transactions, but the aristocrats didn’t actually make these transactions, because they didn’t need to. They got theirs by leeching off the labor of people on their land. The “free market” was a lot more free back then, because there were no power structures in the transaction, no corporations leeching off the transaction. Exchanging things at a market was something commoners did amongst themselves, to get what they needed. It was not the realm of corporate gain.

Simply put, feudalism was a land-motivated economic system with a supplemental free market system. Capitalism is a profit-motivated economic system that revolves around a free market system.

massive seaport with cranes

Economic value under capitalism

But how does capitalism create power through the market? Capitalism is indeed a profit-motivated economic system, but what mechanisms make profit powerful, and consequently, singularly motivating?

We must look at what economic value is and what it comes from. On a surface level, if a chair costs $100, then that’s its value. However, that’s only its price. But, prices are always fluctuating, so it’s very difficult to pinpoint the actual exchange value of the chair.

For example, let’s say there’s a big sale, and the chair normally has a price of $200. In theory, the exchange value and price both were $200, and now are $100. But that’s not the case, because you could then, theoretically, bring that chair to your own furniture store, and sell it for $200. Or, you could, theoretically, exchange the chair directly for something else that has the approximate value of $200.

This shows that the price is an approximation of the exchange value, and that prices fluctuate for reasons separate from the conventional exchange value. For example, the store likely wants to rotate stock quicker, so they accept a smaller profit margin on sale items. This change in price has nothing to do with the chair itself.

There’s also, however, a difference between exchange value and use value. When you buy a chair, you usually aren’t buying the chair to sell; you buy a chair to use. You are spending the price, in order to use the chair for sitting, which is its use value. When you buy a chair as a business owner, to sell, you’re buying it as an object with exchange value.

The impact of this is business owners sell commodities with an exchange value, and a use value. We buy the thing for the use value, and the process of the transaction causes the business owner to make more money than they originally had. So, within every commodity, an object has dueling values: it both functions to convert money (capital) into more money (profit) for the capitalist, while still providing use value to the consumer.

screenshot from Russian building footage

The source of economic value and the commodity supply chain

But further than all of that, there’s the more raw, economic value. Think about an object before it’s ever brought to market and imbued with an exchange value and price. There’s a value that lies underneath: the economic value. Under capitalism, this Value means nothing without the exchange value, but under a different economic system, those things could exist separately.

We have to figure out how value is generated in the most basic sense. Let’s go back to the chair example. To make things simple, assume it’s a purely wooden chair, to prevent the complication of upholstery or other labor that could go into a chair.

To make the chair have value, first trees need to be cut down. Then, the wood from the trees has to be made into boards. Then, the boards need to be crafted into a chair.

From this, we can determine that economic value is, in the most rudimentary sense, generated by a combination of raw material (the trees) with labor (the lumberjack). Then, by a combination of the raw material (the refined wood) and the labor (the woodworker).

If the entire economy was reduced to these basics, we could determine the most economically fair way of distributing. For example, let’s say the woodworker wants to trade a chair for a pair of shoes. The cobbler could determine that it takes two hours to make one pair of shoes, and the woodworker could determine it takes an hour to make one chair, so they trade two chairs for one pair of shoes.

Another way to formulate money is labor vouchers. How this would work is that, after you make eight chairs in eight hours, you clock out, and get paid in eight labor vouchers. Then, if you want shoes (which take two hours of labor to make a pair), you trade two labor vouchers for the shoes.

The effect of this is, unlike money, you are essentially directly trading your labor for the fruit of an equivalent amount of labor. Unlike our current money, once a labor voucher is spent, it’s not able to be accumulated and used again.

Parliament railway station in Melbourne Australia

Under capitalism, there’s a lot more value changing hands within a transaction. There’s a lot of monetary levers and pullies involved in what becomes a market exchange.

First, a private capitalist starts by buying the means of production. With the example of the chair, it would mean a capitalist buys logging equipment. Then, the capitalist hires some workers to cut down the trees, and some workers to process the logs into boards and planks.

Let’s say the capitalist has hired six employees, and their labor was able to generate $1,000 an hour. Under capitalism, maybe $50 of that $1,000 goes to rent and overhead (overhead can be expensive but $50/hour is rounding up, really). Then, he pays each worker $50/hour. The business owner then walks away with $650 in profits, and the workers walk away with $50 in the form of wage, every hour.

Even so far, it seems clear that the capitalist getting $650 in profit didn’t earn that money. Divorced from our everyday understanding of the world, the capitalist in this scenario is a sociopath, or at least, an asshole. And yet, this economic relationship is the core to capitalism. Jeff Bezos’s entire existence revolves around this process, except on an inconceivably larger scale. Jeff Bezos makes $4.5 million/hour, every hour of every day, while most of his workers make about $15/hour.

But this is just the beginning of this commodity supply chain. To illustrate the capitalist dynamic on a larger sale, let’s imagine the chair making company. For accuracy to the global commodity supply chain, let’s say the owner is American, and the chair-making factory is in Vietnam and only hires Vietnamese workers. However, in this example, the chair-making factory employs 200 people, rather than six.

The American capitalist determines that his 200 workers are able to craft 200 chairs an hour. This means that in a week, assuming they work 40 hours (third world workers usually work much more), they make 80,000 chairs per week. The American capitalist then sells the chairs, for $40 a piece, making $3,200,000.

So, the factory revenue is $3,200,00 a week. The monthly minimum wage for urban regions of Vietnam is $171, which is $42.75 a week. Let’s round that up to $50 a week, per worker (although, no American capitalist is that “generous”, and would more likely be operating in a provincial area with a lower minimum wage anyway). So take away $10,000 ($50 x 200) in the form of wages, and maybe another $10,000 a week for overhead. The capitalist is making $3,180,000 (before tax) in weekly profits, and the workers make $50.

You may notice the logging company and the chair company provide different illustrations. In the logging company example, I was using funny money, untethered to real life currency, to illustrate the basic tenants of a capitalistic relationship. In the chair company example, I tried to more accurately represent an Imperialist-Capitalist dynamic, although that’s more simplified too. The point of this post is to properly illustrate how the capitalist dynamic works practically, and I’m no expert about the specifics of the global commodity exchange.

We could then follow the thread on this, and see how the chairs get to the port, then loaded on a cargo ship, then unloaded in America, etc. All of these involve the capitalistic relation to material exchange, as illustrated above, etc.

construction of the new Panama Canal locks

The Labor Theory of Value

The way to make sense of this illustration of capitalism is Marx’s labor theory of value. What this theory argues is that the value of an object, a commodity that one can buy, is determined by the labor put into the commodity. Or more specifically, value in an economic sense is material + labor.

Using my examples earlier, we had trees and loggers. The trees are valueless economically until the loggers perform labor on them (cut the trees down and form them into logs and planks). Similarly, the planks themselves have a limited consumer use value, because they’re mostly only used to make more commodities (furniture, chairs, houses, etc). The woodworkers then perform labor on the wood to further create value out of the wood.

Let’s go back to the chair-making factory. The factory gets over $3 million in profit a week for the capitalist owner. The 200 workers each get $50 as a weekly wage. The chairs are sold for $40 a piece, and each worker makes one chair an hour.

This means that, every week, a woodworker gets paid for 1 hour and 12 minutes of work. And yet, they’re working at least 40 hours a week. The capitalist, on the other hand, gets paid for 38 hours and 48 minutes of work per week, for all 200 workers in the factory.

This is the juxtaposition between necessary labor and surplus labor. If you are working for a wage, you will perform a certain amount of work that corresponds with your wage. This is necessary labor. However, once you work the amount of necessary labor to pay for your wage, every hour you work after that is wholly generating profit for the capitalist employing you.

This is true for every job, everywhere. Capitalism is a profit-motivated economic system. What this means is there’s no motivation to have employees at all, except for the fact that they will perform surplus labor, causing the capitalist to profit off of their employees labor.

For example, per employee, McDonald’s makes $55,650 in the form of revenue (ie, profit, before subtracting overhead expenses). That means McDonald’s makes more in profit, per employee, than most individual employees make in income. And this isn’t unique to McDonald’s. Most American companies make about the same, or more, in profit per employee, than the average employee makes in a wage.

aerial photo of major seaport

One argument against the labor theory of value is that prices factor in things like rent and overhead. For example, I can’t just charge $40/chair, and the worker get 100% of that $40, because the factory must pay rent and building maintenance.

However, this is a misrepresentation. All companies have constant capital. This includes (1) the factory, and means of production, (2) the raw material that the workers work on and (3) and the “faux frais of production,” which are ancillary expenses, like fixing machinery, or other maintenance.

But companies also have variable capital. The variable capital is the labor, or more specifically, labor power. Labor power is variable because it signifies the potential to perform labor, it’s not the materially performed labor in itself.

In other words, constant capital cannot factor into a fluctuating price, because constant capital is constant. Variable capital does factor into the price, because it’s variable. If a capitalist brings a commodity to the market, the price already always factors in the constant capital.

There are several reasons that labor power is variable. For one, when someone is hired at the chair factory, they’re hired for their potential to make approximately one chair per hour. They may make one chair every 45 minutes, or one chair every hour and 15 minutes.

Another factor that makes labor power variable, is if profits are low, workers can be laid off. Their wages can be lowered. They can have benefits taken away. The constant capital stays the same, unless the capitalist sells the means of production and buys new means, which would functionally just be forming a new company.

When people want to increase profit margins, they manipulate the variable capital, not the constant capital. I wrote a post about the recent Activision-Blizzard layoffs. You’ll notice when lay-offs are meant to increase profit margins, rather than because the company is ceasing to exist, the company will always lay people off before they sell offices and buy cheaper one. Workers will always be laid off before buying cheaper constant capital, if given the option. Labor power is much, much easier to manipulate and change.

St. Albert Place in St. Albert Alberta Canada

Conclusion

What we can discern from all of this is that the key factor fueling capitalism is profit-motivation. This is the singular, root turn from feuadalism to capitalism. Under feudalism, people are motivated to control land, because that’s where power is. Under capitalism, people are motivated to control capital (which necessarily leads to profit), because that’s where power is.

But what exactly, does power entail? Under capitalism, if you have a lot of money, then you have the freedom to do a lot more things. Richer people have the freedom to travel more than poor people. Rich people have the freedom to healthcare that many people do not. Rich people have the freedom to own their home and poor people don’t. In the U.S., we don’t usually think of freedom to do, we think think of freedom from. Freedom in the U.S. means freedom from participating in socialized healthcare, or freedom from helping others, rather than the freedom to access those things.

However, even still, freedom doesn’t necessarily entail power, although it can. Part of having freedom is having more access to more things that can give one power. But, imagine a poor person wins the lottery. They now have much more freedom to do things they couldn’t afford previously, but they don’t have more power, just from the money itself.

That money only becomes powerful when it’s converted into a capital. Capital is money that has been converted into a non-functioning form (non-functioning in the sense that it is no longer liquid and can no longer be used to buy things), where money is now a self-generating machine: capital is the value generated from labor, converted into something that generates value itself. As Marx said, capital is “dead labor”.

The reason this alchemical transformation of money to capital gives people power, is because possession of capital gives you the ability to dictate the character of the workforce. You determine the wage of workers, you determine how much they work, and how many people work. If you control capital, you gain the Power to make value off of the labor of others.

The possession, descendancy from, and/or proximity to capital in general is what brings someone into the capitalist class, which is the dominant class. This goes back to the example of a poor person winning the lottery. Winning the lottery doesn’t make someone a member of the capitalist class, even if they’re richer than a lot of capitalists.

brick laying machine on European street

The way to think about power in money is to look at political power under feudalism and capitalism in tandem. Under both systems, markets existed and money existed. But money per se, in and of itself, isn’t giving people power in either system, even though it goes hand-in-hand with power dynamics.

This is why capitalism is called capitalism – it’s named after capital, the mechanism that allows profit accumulation. Every government, since the history of time, has had a class character. The government primarily represents a singular class or group, and that informs the economic system. The U.S. government not only enables private property (ie, concentrations of capital) to exist, but sets the framework for its existence. The U.S. government issues money that allows capitalist enterprise to exist.

When people talk about rich people who earned their money, they are usually talking about a specific type of person, who seldomly exists. They’re talking about someone who made some crucial invention or contribution to society that gets used by an entire industry or many industries, and consequently, makes a bunch of money.

However, making a lot of money as compensation for valuable labor isn’t how the capitalist class makes money. No one has exerted economic and political power merely and exclusively because they had a lot of money.

For example, Peter Thiel and Elon Musk were both founders of PayPal, and this made them initially rich. Of course, they got this money through capitalist economic structures, but let’s assume they actually really did work hard for it. Now, imagine Musk and Thiel took that money, and retreated into quiet, rich lives. They would currently have no impact on the power structures in society. But instead, they reconverted the money they received into capital, and now have tremendous influence on capitalist power structure.

A way to fix all of these issues, is in fact, making money that functions like labor vouchers. Remember those from earlier? I used labor vouchers to illustrate a simplified version of a non-capitalist economy. But within it lies the solution to ensuring people actually earn what they deserve: it’s money that corresponds directly with labor, and cannot be further accumulated in the form of capital.

Jimmy Dore class consciousness intensifies

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