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  • Last month, Rep. 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, which suggests that economies run into trouble when workers can’t afford to buy the products they’re 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 argued.
  • 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 is against the idea of a guaranteed minimum wage because she doesn’t “think most Americans, in their heart, want to be given something.”

“People want to work for what they get,” Trump said. “So I think 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

Before 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 $100 on a pair of shoes is that even though $100 is quite expensive, it’s a lot easier than making a pair of shoes by hand, yourself, Smith said.

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 was 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 each day makes five pairs of shoes, which sell for $100 each. The factory makes $500 a day in sales. The worker’s wage is $10 an hour for a 10-hour day. So the worker is paid $100 a day. The worker can afford to buy only one pair of shoes, even though they have made five.

At first this doesn’t feel like a problem, because, obviously, there are billions of people on the planet who need shoes — the factory can sell those other four pairs to someone, somewhere. What concerned Marx was 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. Additionally, 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 their productivity and make 10 pairs of shoes a day, or maybe the same number of shoes at a lower price.

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

Alexandria Ocasio-Cortez (@AOC) February 26, 2019

Alexandria Ocasio-Cortez


As a person who actually worked for tips & hourly wages in my life, instead of having to learn about it 2nd-hand, I can tell you that most people want to be paid enough to live.

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

Alexandria Ocasio-Cortez


In fact, wages are so low today compared to actual worker productivity that they are no longer the reflections of worker value as they used to be.

Productivity has grown 6.2x more than pay:

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

That is a vast oversimplification 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 labor, 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.

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 are paid. Over the past few years, a surprising number of investment-bank analysts at Citi, HSBC, and Macquarie have published research finding that 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 (though, like Marx, they are economists). But also 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.


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,” the Citi analysts Tobias M. Levkovich and Lorraine M. Schmitt told their clients in 2015.

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

“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,” she added. “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.”

“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 to keep all the shoemakers employed. You need workers with enough money to buy shoes too. And that means — as Ocasio-Cortez tweeted last month, and 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.