Capital and wage-labor

Posted: 1 April 2016 in Uncategorized
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Politics 0333

Capitalism is an economic system in which most people receive a wage or salary working in corporations for a small number of people who run those corporations and appropriate the resulting surplus in the form of profits.

That’s not a definition you’ll find in mainstream economics textbooks or most political debates these days. But it does capture what is distinctive about capitalism compared to other economic systems.

In particular, it focuses our attention on the tension between profits and workers’ compensation, and therefore on the relationship between capital and wage-labor.

And, it’s clear, capital is winning.



They dipped in 2105 but, over the long haul (especially since the mid-1980s), corporate profits in the United States have continued to climb to record levels.


And, as a share of national income, corporate profits have more than doubled—from about 7 percent in 1986 to 14.7 percent in 2015. Capital’s share of the economic pie has clearly been growing.

In other words, capital has been gaining during the current recovery and, with some short-term downturns, it’s been gaining for decades. (As an aside, when capital is not gaining, when the profit share does fall, as it has done periodically over the course of capitalism’s history, we get recessions and depressions—which persist until the conditions for corporate profitability are restored.)


Capital has been gaining—and workers have been losing. Labor’s share of the economic pie has been declining for decades, falling from about 59 percent in 1970 to just under 50 percent in 2014.

The fact that capital is winning actually has some commentators worried. Larry Summers is concerned that high corporate profitability is incompatible with his secular stagnation thesis. The best he can do, though, is focus on “increased monopoly power” to account for the divergence between the profit rate and the behavior of real interest rates and investment.

Justin Fox, in contrast, is looking in the right direction:

Starting in the early 1990s, then, employees lost ground to corporations and, to a lesser extent, sole proprietors and landlords. In other words, capital gained at labor’s expense. In the high-growth 1990s one could argue that this was still a good deal, because everybody was making more money. After 2000, though, slow economic growth and a declining share of that growth going to workers combined to put much of the country in a long funk. . .

Faster economic growth would make this question less pressing — as in the 1990s, a growing pie would make the relative size of one’s slice less important. But if continued slowish growth is what the future has in store for us, and lots of economists think it is, it seems clear that it would be better for the country — if not necessarily its investors — for corporations and other capitalists to ease up and let employees have more of the pie. It’s less clear that the capitalists would do this voluntarily.

Capital has indeed gained at labor’s expense. But, within capitalism, there are simply no mechanisms that can resolve the tension between profits and wages.

The fact is, the conflict between capital and wage-labor can only be eliminated by moving beyond capitalism.

  1. Pavlos says:

    This wouldn’t matter too much f shares or corporations were widely held, for example in personal pension plans or sovereign wealth funds. So inequality of capital is the greater problem. If capital were equally shared there would still be the problem that the structure of a corporation makes work unfulfilling. That’s a tension between creativity, satisfaction, etc. and profits.

    Also you argued yourself that shareholders as owners and beneficiaries of a corporation is a bit of a fiction. In reality an upper class of managers, whose asset is membership in that class, act as de-facto owners of corporations and take a disproportionate share of surplus. Managers may take their pay as share options, but they compete with bona-fide savers who invested.

  2. […] economists (such as Larry Summers and Paul Krugman) are clutching at straws to try to explain capitalism’s poor performance, […]

  3. […] been growing and the share going to the bottom 90 percent has been falling is the fact that, as I’ve shown before, the profit and wage shares have also been moving in opposing directions in recent […]

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