From the Marx Memorial Library’s “Full Marx” Q&A Series

August 29, 2022  Morning Star (UK)


Wage rises don’t cause inflation – inflation is a tool of capital used to reduce the real value of wages in order to boost profits, says the Marx Memorial Library.

There was anger earlier this year when Andrew Bailey, then the recently appointed governor of the Bank of England (salary £575,000 per year — three times as much as the prime minister — plus perks) said that while it would be painful for people to accept that prices would rise faster than wages, at the same time they should understand that moderation was required to prevent inflation rising even further; “we do need to see restraint,” he said.

Even Prime Minister Boris Johnson had to dissociate himself from Bailey’s remarks, though primarily for presentational reasons in an attempt to maintain his phoney “levelling- up” agenda.

A more robust response came from labour movement representatives. Unite general secretary Sharon Graham declared that “pay restraint is nothing more than a call for a national pay cut” and asked why ordinary people should “pay for the failures of the energy market and the total shambles of government policy.”

Bailey was just rehearsing the conventional economic explanation for “wage push” inflation to be found in economic textbooks.

Here’s an example: “Wage push inflation is an overall rise in the cost of goods and services that results from a rise in wages.

“To maintain corporate prof- its after an increase in wages, employers must increase the prices they charge for the goods and services they provide.”

Working-class organisation and struggle is needed if workers are to take more of the surplus than the bare minimum of wages

At least this one acknowledges that corporate profits are central. Bailey’s predecessor as governor of the Bank of England, Mark Carney, was perhaps more circumspect and maybe a little brighter than Bailey. Aware that other factors were critical in determin- ing the course of the economy, he declared in 2018 that as the economic crisis worsens, “Marx and Engels may again become relevant.”

They always have been.

In 1865, while completing Volume I of Capital, Marx delivered a series of lectures in answer to John Weston, a fol- lower of the progressive British industrialist Robert Owen.

Weston had argued, in a meet- ing of the International Workingmen’s Association (the First International) held in London in 1864, and which Marx had attended, that wage increases would lead to price increases.

He believed that these price increases would outstrip wage increases, meaning there would be no advantage for workers in securing a higher wage and that employers should, rather, be persuaded simply to treat their workers better.

Others too argued that fighting for wage increases simply drove up inflation — and wages struggle was therefore self-defeating.

Far better, they said, to campaign for political reform and to secure the vote for working people.

Weston’s arguments were based on John Stuart Mill’s Iron Law of Wages — the fallacy of a fixed amount of money capital (a “wages fund”) from which capitalists pay the wages of workers.

The theory holds that attempts by workers to increase money wages will be ineffectual because capitalists will respond, either by raising the prices of necessities (thereby bringing real wages back to their previous level) or by reducing the number of workers employed.

The theory has been refined as a classic weapon in the hands of capitalists and their political representatives ever since.

Marx’s lectures weren’t found until 1898 (after both Marx and Engels’s death) when they were published by Marx’s daughter Eleanor under the title Wages, Price and Profit (or in some editions Value, Price and Profit).

Here Marx explains (relatively) simply the nature of capitalist exploitation and in particular the relationship between the value that workers produce, the wages they receive and the profits made by the owners of the “means of production” — a relationship developed at length in Capital.

Wages, Marx argued, are not the result of a normal market transaction, somehow settling at an average rate that is fair to both worker and employer.

Rather, the “labour market” is institutionally rigged in capital’s favour. The labour power that is purchased by capital is unlike any other commodity.

Labour alone can produce new value. Workers are paid, roughly, only what they and their families need to survive and produce the next genera- tion of workers.

The remainder of the value they produce is expropriated by the employer, to be realised as profit and invested in new exploitative capital, used for personal consumption or taken by other owners of capital as interest or rent.

Working-class organisation and struggle is needed if workers are to take more of the surplus than the bare minimum of wages.

Today that applies also in the public sector where, although workers do not directly produce surplus value for an employer, profit is nevertheless creamed off by capital via rent, interest and (especially in the health sector) the supply chain.

The activities of the drug company Pfizer — a firm with a history of bribing doctors and suppressing adverse trial results, which increased its charges to the NHS for its life-saving epilepsy drug phenytoin from £2 million to £50m in a single year, which has more than doubled its profits during the pandemic and has another bumper year forecast in 2022 from its Covid- 19 pill Paxlovid — are merely the tip of the iceberg.

Fighting to defend and enhance wages (including, today, the “social wage” — health, education, the state pension and other public services, themselves secured through long working-class struggle) reduces the amount that capital gets, the rate of exploitation. It does not, of itself, produce inflation.

Capital fights back through its control of the state machinery, the police, the media, through anti-union legislation and attacks on public spending.

Employers seek to increase their take of surplus value through increasing the work- load of their employees including unpaid (voluntary or involuntary) overtime, reducing their wages bill through outsourcing, zero- hours contracts, fire and rehire, and a host of other means.

This battle over the surplus is at the heart of capitalist economics and politics, its outcomes reflected today in rising prices and increasing inequality.

For example, while the pay gap between top executives and their employees narrowed during the Covid pandemic as production levels and bonus payments fell, it has widened by 85 per cent in the first quarter of 2022 to an average ratio of 63:1, up from 34:1 in 2021.

Profit margins for Britain’s largest (FTSE 350) companies were 73 per cent higher at the end of last year than in 2019, before the pandemic.

Inflation is on course to reach as much as 15 per cent by the end of the year.

About 40 per cent of retail price increases can be attributed to rising costs including the effect of Covid on supply chains — itself made much worse by labour shortages due to years of attacks on workers’ pay and conditions.

Those costs are passed on to consumers as companies seek to maintain their previous levels of profit. But some 60 per cent of recent inflation is accounted for by an escala- tion of corporate profits, including “price gouging” — using media-fuelled expectations of price increases to charge even more than this to increase their profit even further.

Wage rises don’t cause inflation: on the contrary, inflation is a tool in the hands of capital used to reduce the real value of wages in order to maintain and enhance profits.

A Marxist approach reveals that crisis is inherent in capitalism and that its super-profits are based on the exploitation of both our planet and its people — and that there is an alternative.

As transport workers’ leader Mick Lynch told members at the RMT union’s AGM in Birmingham: “It is a myth put round by the Establishment that workers’ wages are the cause of inflation: it is the profit-making protecting the wealth of the super-rich that is responsible for inflation.”

Marx himself couldn’t have put it more concisely than that!


■ Earlier Full Marx Q&A features (this is number 83) can be downloaded from the Marx Memorial Library’s website, on which you can find details of its autumn programme of lectures on economics, the state and industrial relations, and of its online courses. The next, an Introduction to Marxism, starts on September 6.