Salman Ahmed Shaikh
Marx said that labor creates surplus value in production process which the capitalists extract in an exchange. The surplus accumulates and this is exploitation of labor by capitalists. However, we note few observations below.
First, the payoffs to the labor and the capitalists are different. Labor gets fixed wage. Capitalists earn random profits from the sale of goods or services in the exchange process. In statistical sense, if labor gets fixed wage of Rs 10,000 per month and capitalist has 50% chance of earning Rs 20,000 per month and 50% chance of no profit, then, the expected value of the payoffs is the same for both.
Capitalists provide certain important functions to which Marx seemed to have given little importance. Capitalists provide employment to labor. Labor gets fixed wage irrespective of profit to the capitalists which could be negative as well. Tendency of losses at the height of industrial revolution was rare, but that did not suggest that profits are the necessary outcome of every production process for the capitalists.
Capitalists compete among themselves and their competition in theory may bring prices down to the level of marginal cost. If there is allocative efficiency, then the producer price is only as much as the cost of production which only includes normal profit for the entrepreneur.
Looking at data, we see that 75% of the total gross national income goes to the labor. Furthermore, per capita income in the same countries where labor was exploited during the industrial revolution has increased manifold. We also know that most of the new startups fail. So again, all capitalists are not always able to reap greater benefits than labor from the production and exchange process. Capitalists take the risk of random profits, prices and sales fluctuations and they must have an incentive to take the risk. The incentive is the ability to make a profit from the sale of commodities. But, profits can be negative as well. As long as they are earning profits from the sale of goods (with intrinsic value) sold to willing buyers at competitively set market prices, it does not seem to be exploitation.
Also, social relations are not mutually exclusive these days. Employee stock ownership plans, general and limited partnership and joint stock companies have pretty much modified factor relations. In a joint stock company, there is no one big capitalist. There are small shareholders in large numbers. These shareholders are workers in other organizations. So, present day labor-capitalist relations are not as black and white as they used to be. Now, scientists, programmers and artists can have copyrights and patents.
As per Marx, labor has only one thing which he can use to earn income, i.e. labor power. However, why the labor does not become a capitalist? It maybe because he has lack of wealth. In most developed countries, there is much less borrowing constraints. Why then majority of people do not become entrepreneurs by choice? If working class is always greater in number than the capitalists, why then most democracies do not overthrow market system?
Social relations have changed a lot ever since Marx. Nowadays, financial institutions with fractional reserve banking and credit money creation ability can exploit capitalists. These institutions demand compound interest on fiat money lent to businesses. In case of default, they take back the assets of the borrower.
Class tension is definitely there in history. It is between powerful and weaker groups. It may be between powerful nations versus weaker nations. Within nations, it could be between capitalists and labor. It could also be seen as between wealthy and poor. Poor capitalist is also exploited by its financier (bank or any money lender) with exorbitant rate of interest as in micro finance.
Markets create incentives, encourage competition and that allows capital accumulation, technological change, economic growth and transaction of wide range of goods as well as services.
Maybe, the value based approach is not the only way necessary to look at the production processes. People specialize and trade. That trade must be voluntary. The market must be competitive and sufficiently regulated. The income distribution must not be too unequal and that can be dealt with progressive taxes and removing fixed compensation to capitalists in the form of interest on wealth. The endowments inequality (which is primarily responsible for alienation and exploitation in Marxist approach) can also be reduced with tax on wealth.
Almost all of the exploitative practices against labor had either been rectified to a certain extent or can be rectified in current capitalism practice. But, there are two reasons why wealth inequality may still persist in a capitalist society, i.e. 1) interest bearing capital accumulation and 2) incapacitated wealth redistribution mechanisms.
Both the absence of broad based wealth taxes and the legal decree of allowing compound interest on money capital are the prime sources of wealth concentration. If both are corrected, capitalists would not be able to systematically exploit in competitive markets. Competitive forces are also encouraged by egalitarian wealth and income distribution and wide circulation of wealth rather than hoarding wealth.