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

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

Another thing capitalist defenders are missing, is they have such a simplistic understanding of the economy, 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 are all cleanly reduced to just the price.

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

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 written about in these terms. Even many of Adam Smith’s (the father of capitalist theory) economics use these terms.

department store in North Korea

Comparing feudal and capitalist markets

When I break down capitalism, 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 presumptions about capitalism.

The transition from feudalism to capitalism is a transition in the the currencies and commodities function in relation to each other. Under feudalism, people held economic power by controlling land. Aristocrats were a synthesis of politicians, employers, and landlords. The feudal elite were similar to politicians in capitalism but with less consolidated, state-like power. They were a federation of landowners who also took a significant amount of value from the labor that’s performed on their land.

These dynamics manifested differently in different societies, as capitalism does. But in general, under feudalism, the primary valuable exchange object was land. Feudalism is a land-motivated economic system. By owning land, the feudal aristocracy controlled everything tied to the land (ie most or all things). Any type of production took place on land as opposed to now, where so much value exists digitally. Under feudalism, land ownership enables someone to tell peasants what to do, and take the production of their labor. Owning land 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 because its a capitalist investment. Under feudalism, acquiring land was the ultimate motivation under socialism. Under capitalism, land is a motivation, but only because it’s a capital investment.

People will portray capitalism as simply a market with free exchange. Then, they see free market exchange throughout human history. Except, older market exchanges were different from capitalism. “Markets” as we understand them are complicated systems of mass distribution, and are completely different than anything resembling markets in the past. Under feudalism, the aristocracy gained power by claiming plots of land, and consequently taking the food and goods generated on that land. Under capitalism, the bourgeoisie gained their power by claiming property, and taking most, of the money generated with their property.

Under past economic systems, there were money transactions, but the upper class didn’t gain power from these transactions. They gained power by taking the products of labor from their land. The “free market” was more free back then, because there were no power structures in the transaction, no corporations leeching off the transaction. Commoners exchanged things at market amongst themselves. It was not the realm of upper-class gain.

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 makes profit powerful, and consequently motivating?

Let’s say a chair has a price of $200. In theory, the exchange value and price both are $200. But what if it becomes half off and is now $100? Is both the price and exchange value now $100? No, because you could buy that chair for your own furniture store, and sell it for $200. Or, you could exchange the chair directly for something else worth $200.

This shows price is an approximation of exchange value. But prices fluctuate for many reasons separate from exchange value. For example, stores lower prices to rotate stock quicker.

There’s also a difference between exchange value and use value. When you buy a chair, you usually buy a chair to use. You spend the cost amount to use the chair for sitting, its use value. When you buy a chair as a business owner, you’re buying it as an object with exchange value.

Companies sell commodities with exchange values and use values. We buy commodities for the use value, companies sell the commodity for the exchange value. Within every commodity, there are dueling values: it both converts 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

To make the economy more functional and “synced up”, we have to figure out how value is generated. Let’s go back to the chair example. 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 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 economically fair method of distribution. 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.

This exchange system would be possible if we used labor vouchers instead of fiat money. How this would work is 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 directly trading your labor for the fruit of an equivalent amount of labor. Unlike 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 levers and pullies involved in a market exchange.

Underlying every capitalist money exchange are these dynamics: First, a private capitalist buys the means of production. With the example of the chair, it would mean buying 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 hired six employees, and their labor generates $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 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, while working.

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. The chair-making factory employs 200 people.

The American capitalist determines 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 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 is through Marx’s labor theory of value. What this theory argues is that an commodity’s value is determined by the labor put into the commodity. Or more specifically, value in an economic sense is material + labor.

Using my examples earlier, 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 the value of the 38 hours and 48 minutes of work per week, for all 200 workers in the factory, in the form of profit. Every time a worker makes a new chair, they are now purely creating value for the capitalist in the form of profit.

This is the juxtaposition between necessary labor and surplus labor. If you work for a wage, you perform work that corresponds with your wage. This is necessary labor. In the chair example, making 1 and 1/5th of a chair corresponds to your wage – $50/week. Once you work the amount of necessary labor 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. 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. In other words, for most jobs, you really only legitimize your labor the first half of the work week, or less. The rest of it is solely generating profit.

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 ancillary expenses, like general maintenance.

But companies also have variable capital. The variable capital is the labor, or more specifically, labor power. Labor is the actual work we perform on material. But we aren’t hired for our labor per se, we are instead hired for our labor power, which is our potential to perform labor. We are hired for our labor power, to potentially perform labor for an hourly wage.

Constant capital doesn’t factor into fluctuation of price usually, because constant capital is constant. If a capitalist sells a commodity, the price already factors in constant capital. Variable capital does factor into the price, because it’s variable.

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. Also, if profits are low, workers can be laid off. Their wages can be lowered. They can have benefits taken away.

When people want to increase profit margins, they manipulate the variable capital, not the constant capital. I wrote a post about the Activision-Blizzard layoffs. You’ll notice lay-offs are meant to increase profit margins, and the company will always lay people off, or worsen work conditions, before they sell offices and buy cheaper one. Variable capital / labor power is much easier to manipulate than constant capital.

St. Albert Place in St. Albert Alberta Canada

Conclusion

The key factor fueling capitalism is profit-motivation. This shift in motivation signifies the turn from feudalism to capitalism. Under feudalism, people are motivated to control land, because that’s where power is. Under capitalism, people are motivated to control capital, because that’s where power is.

But what does power entail? Under capitalism, if you have money, then you have freedom to do more things. Rich people have the freedom to travel more than poor people. They have freedom to healthcare, freedom to own homes and poor people don’t. In the US, we don’t think of freedom to do, we think of freedom from. Freedom in the US means freedom from participating in socialized healthcare, or freedom from helping others in general, rather than the freedom to access those things.

Part of having money is access to more things that give power. Even still, just because someone has a lot of freedom to do things through their wealth, it doesn’t mean they’re powerful. But, imagine a poor person wins the lottery. They now have much more freedom to do things they couldn’t afford before, but they don’t have more power, just from the money itself.

That money 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’s no longer liquid), where money is 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”.

This alchemical transformation of money to capital gives power because capital gives the ability to dictate the workforce, the wage of workers, 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

To see power in money, look at political power under feudalism and capitalism in tandem. Under both systems, markets existed and money existed. But money per se, doesn’t give people power in either system, even though it goes hand-in-hand with power dynamics.

But when money is converted into land under feudalism, and money is converted into capital they gain power. Capitalism is called capitalism, because capital is the mechanism that allows profit accumulation. Every government has a class character. The government represents a class or group, and that informs the economic system. The US government enables private property (ie, concentrations of capital) to exist and sets the framework for its existence. The US government issues money that allows capitalist enterprise to exist.

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

However, making 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 invented something that made them a lot of money. But the money can be used to gain power.

For example, Peter Thiel and Elon Musk were founders of PayPal, and this initially made them rich. Of course, they got rich through profit in a capitalist economic structures. But let’s assume they really did work hard to earn 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, turning money into labor vouchers. Under a labor voucher system, if you make 40 chairs a week, then you would get 400 labor vouchers. If you make 20 pairs of shoes a week, then you would also get 400 labor vouchers. If the chairmaker wants shoes, then they could pay 20 labor vouchers for a pair. If the shoemaker wants a chair, then they could pay 10 labor vouchers for a pair. Then, the labor voucher becomes taken out of circulation, so it can’t be accumulated.

Jimmy Dore class consciousness intensifies

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