In Defence of Profits Part II

In the Part I of this article, we examined the most important reason why profits are not derived from exploiting workers. Essentially, they are an implicit form of interest that workers are willing to pay for the capital that is implicitly loaned to them by capitalists. Workers may receive less than the market value of the additional output they bring to a firm, but they see this as a desirable arrangement because they can produce so much more overall due to their access to their employers’ capital, so that their income is higher than it could ever be if they only worked for themselves.

But that is not all that profits are.

In Part I, we used the example of a builder constructing a house that he knows will sell for $1 million dollars when it is completed in five years’ time. Even in this case, he is willing to accept less than $1 million in wages from a capitalist employer for five years work on the house.

For one thing, his labour is not the only input into the house: in reality, he requires raw materials- timber, bricks, mortar and glass-, which he must produce or purchase himself in the absence of an employer. He must therefore sink his own capital (if he has any) into these materials, knowing that he will not see a return on them for several years. A capitalist, however, would relieve him of this burden, but would require a premium (another form of implicit interest) as an inducement to delay his own consumption by doing so. Furthermore, the capitalist will probably provide his builder with capital equipment- wheelbarrows, jackhammers and angle grinders- and the implicit rent that must be paid for these tools (all of which have alternative uses) is ultimately taken out of the builder’s take-home pay and chalked up as ‘profit’ for the capitalist.

Speaking of capital, if profits are derived from the exploitation of workers, it would surely be the case that labour-intensive industries would be wildly more profitable than highly mechanised and computerised ones. So how is it that Microsoft, with a paltry 114,000 employees, turns a bigger profit than Walmart, with a whopping 2.3 million employees? Unless anti-capitalists contend that employers exploit computers and robots…

Moreover, in the real world, the builder has no guarantee that he house will fetch $1 million. This may be the expected price, but it could sell for far less or far more. Suppose the builder sinks $500,000 of raw materials into it, plus five years of his own labour, only for the house to sell for just $500,000. He has completely wasted five years of his life. He can either take this risk himself, or work for a capitalist, receiving a fixed wage regardless of whether the house fetches $500,000 or $1.5 million. In the latter scenario, the capitalist gets to pocket the additional boon of $500,000, but in the former, he loses his shirt. However, in return for shouldering this uncertainty, the employer will require an additional premium, which the employee will be willing to provide in return for the certainty that he will pocket a stable wage. This is yet another reason why he will happily work for less than this marginal revenue product: because the market places a premium on certainty. This is why insurance companies can profit by literally charging a ‘premium’ for providing policy holders with certainty (like the certainty that they will not be financially ruined by a house fire) that is greater than the expected cost of a house fire (the cost of rebuilding a house multiplied by the chance that it will burn down).

Just as insurers pocket a premium by insulating customers from potential disasters, capitalists pocket a premium by protecting workers from the potential disasters of operating in an unpredictable market. In no way is that exploitative.

For example, in 2005, United Airlines posted a loss of $21 billion. Did any of its workers not get paid? Of course not. Every steward and pilot and engineer got their check in the mail every fortnight. It is the shareholders who own the company that must go without their dividends and potentially lose their shirts should the share price plummet.

Which raises another question: if profits are derived from exploiting workers, where do corporate losses come from? Surely, if it is just a question of gouging workers for their effort, that should never be unprofitable.

More about that in Part III.

John Hajek

John Hajek is the IPA Campus Coordinator at the University of Melbourne.

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