Alexandria Ocasio-Cortez's tweet about workers being paid 'less than the value they create' is essentially a restatement of Marx's Labour Theory of Value — here's why that's interesting

Hollis Johnson / Business Insider; Win McNamee / Getty ImagesAOC slammed Ivanka Trump on Twitter for not understanding how wages work.
  • Alexandra Ocasio-Cortez tweeted, “Workers are often paid far less than the value they create.”
  • That is essentially a restatement of Karl Marx’s “Labour Theory of Value.”
  • The theory suggests that economies run into trouble when workers can’t afford to buy the products they are making.
  • Investment bank analysts at Citi, HSBC, and Macquarie are worrying over the same issue.
  • There are so few rich people, and so many people sharing a declining portion of wealth, that the next recession might actually be exacerbated by the inequality that low pay has created, these analysts argue.
  • You can’t successfully run an economy based on the spending power of a tiny number of rich people.

Late last month, US Rep. Alexandria Ocasio-Cortez tweeted a criticism of Ivanka Trump, who had said she was against the idea of a guaranteed minimum wage because “I don’t think most Americans, in their heart, want to be given something. … People want to work for what they get. So, I think that this idea of a guaranteed minimum is not something most people want.”

Ocasio-Cortez responded, “A living wage isn’t a gift, it’s a right. Workers are often paid far less than the value they create.”

That caught my eye because it is essentially a restatement of Karl Marx’s “Labour Theory of Value,” and it’s not often you see that discussed in the mainstream media.

If all workers are paid less than the value they create, then there will never be enough workers to buy the things they make

Prior to Marx, the “value” of any product was regarded as pretty much the same as its price in the marketplace. It’s how much you would pay to avoid making the product yourself, according to Adam Smith (1723-1790). The reason you might spend $US100 on a pair of shoes is because even though $US100 is quite expensive, it’s a lot easier than making a pair of shoes by hand, yourself, Smith said.

Marx (1818-1883), who was a big fan of Smith, was more interested in how products acquire value as they come into existence. A cow doesn’t slaughter itself and magically transform into a pair of leather shoes. That only happens because workers apply labour to the cow’s corpse, turning its skin into leather and then sewing that leather into shoes. Only after labour has been applied do shoes have any value. It’s the labour that creates the value, not just the fact that the shoes can be traded for cash.

If you accept that, then it becomes immediately obvious that what Ocasio-Cortez said is correct. Workers in a shoe factory are paid far less than the value they create. They have to be. If 100% of the money from shoe sales were paid directly to the workers then the factory would go out of business: There would be no money left to pay for electricity, and there would be no profits to invest in more efficient shoe-making machines to help the factory compete in the future.

But that raises a contradiction. If all workers are paid less than the value they create, then there will never be enough workers to buy the things they make. Let’s say our shoe factory has one worker who makes five pairs of shoes per day, and these sell on the market for $US100 each. The factory makes $US500 per day in sales. The worker’s wage is $US10 an hour for a 10-hour day. So the worker is paid $US100 per day. The worker can only afford to buy one pair of shoes even though she has made five.

At first, this doesn’t feel like a problem because, obviously, there are billions of people on the planet and they all need shoes. The factory can definitely sell those other four pairs to someone, somewhere. What concerned Marx was the fact that, ultimately, every single worker on the planet, in every office and factory, is paid less than the value of the goods they create. It is not possible for all the goods being produced to be bought by all the workers making them. In addition, there is almost always a reserve army of unemployed people who can’t afford to buy anything, exacerbating the problem.

The tendency is for the system to collapse, Marx believed

The tendency is for the system to collapse, and for recessions to destroy shoe factories whose customers are too poor, or not numerous enough, to buy all the shoes, Marx believed. This collapse can be staved off, he argued, if the shoe factory goes to great lengths, for instance by investing in new technology allowing that shoe worker to double her productivity and make 10 pairs of shoes per day (or maybe the same number of shoes at a lower price).

But the collapse is only pushed into the future. New technology will be also be acquired by all the competing shoe factories, squeezing profits – and squeezing some factories out of business. And if the factory buys shoemaking machines instead of hiring new workers, then it still faces the problem of producing more shoes than can be bought by the workers making them.

By amazing coincidence, Ocasio-Cortez then tweeted a chart of workers’ pay increases compared to their productivity increases, to make the point that even when labour becomes more valuable it does not share the rewards:

It is impossible for capitalists to pay workers the full value of their labour without going bankrupt

That is a vast over-simplification of Marx’s analysis, but you get the gist.

Marx thought capitalism was inherently unstable precisely because workers are not paid the full value of their labour, and precisely because it is impossible for capitalists to pay them the full value without going bankrupt. It’s one of the internal contradictions that capitalism cannot resolve.

Of course, not all profits are invested in new equipment. Factory owners take a slice for themselves, and it tends to be a much bigger slice than the workers get. There are reasons for this, of course. It was the capitalists’ money that brought the factory into existence, and the inevitable collapse can be avoided if the profits are diverted into a new venture, like a hat factory, that might create new jobs (for workers who can then buy shoes).

Whatever they do, the bosses get richer than the workers. Now you have two sets of people, both doing the same thing (making shoes), but being paid wildly unequal sums for doing so.

Which is another way of saying that “workers are often paid far less than the value they create,” as Ocasio-Cortez tweeted.

AOC and the investment banks are on the same side of the debate

She isn’t alone in worrying about what workers get paid. Over the last few years, a surprising number of investment bank analysts at Citi, HSBC, and Macquarie have published research that says inequality and low pay may lead to recessions, or at the very least hold back economic growth (which ironically even makes the rich poorer).

These people are not Marxists, obviously (although like Marx they are economists). But, like Marx, they are concerned that inequality in the US and the West is becoming so extreme that ordinary people won’t have enough money to keep the economy going.

The charts in this story all show the same thing: The share of national income going to the top 1% of earners is increasing, while the share of income going to the bottom 50% of people is declining. The rich are getting richer. And the rest of us are sharing an ever-smaller slice of the pie. The bottom 50% of people in the US and Europe now share just 13% of national income.

HSBCHSBC

What if we run out of rich people?

The top 0.1% own close to 20% of all household wealth in the US, according to a paper by Gabriel Zucman, an economics professor at the University of California, Berkeley.

This is a problem, the investment bank people say, because there aren’t enough people with money to keep capitalism ticking over. “Income inequality is cited as another factor in the stagnation process as a few wealthy individuals cannot drive an economy by themselves,” Citi analysts Tobias M Levkovich and Lorraine M Schmitt told their clients in 2015.

Two analysts at Macquarie, Viktor Shvets and Perry Yeung, said something similar last year. They cited work by Moritz Kuhn and Moritz Schurlarick, published by the Federal Reserve of Minneapolis in 2018, and by Emmanuel Saez and Thomas Piketty, which said:

  • The bottom 25% of households has a negative net worth (ie they are in debt).
  • The population between 25% and 50% only owns only 2% of national wealth.
  • The share of the “middle class” between 25% and 75% dropped from 15% in 1989 to only about 8%.
  • The top 10% control about 77% of national wealth.
  • Over time, the top 1% increased its share from 27% in 1989 to about 40% in 2013.
  • HSBCHSBC

“In other words, wealth has not just accrued to the top 10%, but it went almost entirely to the top 1%,” they told clients. “The middle class creation in 1950s-70s has clearly been replaced by a middle class compression over the last three decades, certainly since late 1980s.”

If the West goes into recession the fortunes of the rich might make it worse

Janet Henry, an economist at HSBC told clients in 2018 that the accumulation of wealth by a tiny minority might actually hold the economy back. “Income inequality suppresses consumption given the lower marginal propensity to consume of higher earners and can be negative for growth if the savings of higher earners do not push up productive investment spending but get parked in property or government bonds,” she wrote.

“Income inequality, which often goes hand in hand with a lack of social mobility, also creates disparities in life expectancy, education, skills levels and labour mobility that will impact on future productivity and growth potential. This has implications for government revenues and their ability to fund public services and future liabilities. Given the huge structural factors – from demographics to technology – that are contributing to the growing income polarisation, it is not something that will miraculously dissipate on the back of one or two years of robust growth,” she said.

Worse, if the West goes into recession then the fortunes of the rich will make it worse, she says, because the poor don’t have enough money to withstand it. “The depth of any downturn, when it finally happens, could be amplified by this income and debt distribution,” she told clients in a note late last year.

In other words, the richest 1% might buy a lot of shoes, but they cannot possibly buy enough shoes to keep all the shoemakers employed. You need workers with enough money to buy shoes, too. And that means – as AOC tweeted last month, as investment bankers have been worrying about since the 2008 financial crisis, and as Marx wrote 200 years ago – that it is very important to consider what workers are paid in relation to the value they create.

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.