Smith, Ricardo, and Marx: On the market price of wages

In his book "The Wealth of Nations," which will surpass 250 years next month, Adam Smith analyzes wages during years of abundance and scarcity in production. By stating, "...There can be no doubt that a little more than ordinary plenty makes some workmen idle... Years of dearth are generally among the common people years of sickness and mortality, which cannot fail to diminish the produce of their industry... The wages of both servants and day-labourers are, upon these occasions, frequently reduced," Smith essentially concedes that labor is at the mercy of market conditions and envisions this phenomenon as natural pricing.

David Ricardo (a stockbroker living at the beginning of the 19th century), who did not see Smith but read him closely, went even further, equating the surplus value derived from the laborer's work with the profit rate. Thus, according to Ricardo, if the worker works hard, everyone will be happy, and the land and differential rent derived from nature will turn into profit.

However, Karl Marx, also a close follower of classical political economy, added a new meaning to the world operating with the labor theory of value in the 1850s, analyzing profit rates differently by associating them with the exploitation created by "surplus value." Marx sees major errors in Smith's labor theory of value. First of all, by making the laborer a part of wages determined by the supply and demand of goods in the market, Smith commodifies the laborer. According to Marx, unlike in feudalism, the laborer in capitalism can commodify not themselves, but only their labor power. Smith could not herald the end of feudalism to the wage earner; Marx provides the theoretical analysis of this as well.

MARX'S INTERVENTION

On the other hand, according to Marx, Ricardo also has two false assumptions in his view of capital and labor. The first is the error of attributing the increase in rent to a decline in agricultural productivity. The second, and more important for our subject, is equating the increase in the profit rate with the increase in surplus value. And seeing this equality only as the equivalent of a decrease or increase in wages. According to Marx, regardless of the periods of abundance and scarcity in production, profit can rise or fall without an increase in surplus value. For example, profit rates can rise whether labor productivity in agriculture increases or decreases relative to fixed capital. How? Just as in the inflationary environment that Smith named as dearness, where the laborer is strained, and capital (and to some extent the state) benefits from this and increases their profits (temporarily). Moreover, if there is an inflation measurement problem as in the case of Turkey, and tax evasion increases because inflation accounting cannot be implemented, and indirect taxes constantly erode wages, the effect of dearness on profits will increase exponentially with its effect on wages.

Aside from Smith linking wages only to conditions in the market, his persistent avoidance of investigating the background of value constantly makes the economic side of liberalism questionable. Accordingly, Smith acts with a number of misconceptions when analyzing slave and female labor in his own time. For example, it is a significant misconception to foresee the wealth gap between bosses and laborers as reasonable according to the wealth gap between a king and his subjects in the tribal life of Africa, where slaves came from. Today, the wealth of the richest billionaires in the USA has almost reached half of their own country, the USA, let alone buying the African continent.

WHAT ABOUT WOMEN'S LABOR?

Unfortunately, the construct in the founding book of market economics could not foresee the importance of women's labor today either. Because, first and foremost, Adam Smith does not reserve a special place for women's labor in his book. Yet we know that Adam Smith never married and lived his life in palace-sized houses with his mother's cooking. There is even a British female author who wrote a book titled "Who Cooked Adam Smith's Dinner?" However, today in Turkey, women's participation in the labor force is not only half that of men, but female unemployment is twice as high as that of men.

Marx's concept of the rate of surplus value, m/v, is accepted as the ratio of the value produced by the laborer in the production process but not paid to the worker—the exploited value (m)—to the value received by labor, that is, the wages which are the market price (v). You can increase the rate of surplus value up to a point by constantly using live labor with technologies like AI and by lowering real wages through inflation; after a point, profit rates will fall (and that is what is happening). But until that stage is reached, wages determined by the market price coming from the world of Smith and Ricardo will continue to increase exploitation and surplus value in an inflationary environment, as Marx very aptly identified.

How long will this phenomenon last? Until the next article..