This is Richard Wolff from Democracy At Work responding to another Ask Prof Wolff question
from our patreon community and this one comes from Comrade Rue Rue. This comrade asks a question:
what is the relationship, in effect that's what the question asks, between prices and
wages? Comrade Rue Rue has learned as have so many in school and from newspapers and casual
comments by politicians and so on that there's something called a wage price spiral. The idea
here is that sometimes prices go up and then wages go up and then prices go up kind of chasing each
other and producing one of those great mysteries of the capitalist system inflation about which
as much nonsense is written as about any other topic you can think of. So let's get very basic
and very simple so we can understand this issue and then look at what Comrade Rue Rue wants us
to. Namely is capitalism, a system of private enterprises organized hierarchically in each
enterprise more or less vulnerable susceptible to these kinds of spirals than an economy would be
if it were based on worker co-ops? Enterprises in which workers are not only the people who do
the work but are likewise the people who run the enterprise, something fundamentally different from
capitalism. All right, let's begin. There is no necessary relationship between prices and wages.
What do I mean? There are plenty of examples in history where prices go up because the businesses
who run the economy raise them. Let's remember how a price goes up, the seller
raises the price. In a capitalist system the people who own or run the enterprise, the owner,
the board of directors of a corporation, they decide when and how much to raise prices for
what they sell. Can prices go up without wages going up? Absolutely, happens all the time.
In business school where modern capitalists learn their trade they learn that you should
always charge as much as the market will bear. Here's the idea: the more the price is raised
the more profit you will be able to earn. After all, you know what your costs are if you're a good
capitalist you've already purchased your inputs hired your workers both of those at the lowest
possible price you need to pay. Then you put them to work, they produce an output and now it's in
your interest of course to sell that output at the highest price that you can. You have to be
careful not to raise the price so far that fewer people will buy it because that'll eat into your
profits. So you've got to find that delicate point where you've raised it as much as you can
and still get enough people to buy it to maximize your profit and that's what you're taught to do.
If you've done that then let's suppose wages go up by a bit.
Sure if you have to pay higher wages you would like to raise prices so that you stay
even but the fact that a capitalist would like to do that doesn't mean that he can.
If in fact the only way you could raise a price when wages go up would risk you losing business
because people can't afford to pay a higher price then you won't do it because it would be
non-profit maximizing. You're not going to do that. You know what happens then? You suck it up
as a capitalist. That's right you pay higher wages and you cannot because it is not rational for you,
raise prices. It'll cost you in sales more than the price increase will help you. In other words
there's no necessary relationship. Let me give you another example, maybe easier to understand.
Suppose wages go down maybe because workers are desperate to hold on to jobs and you can lower
their wages and they'll still stay working for you. Or maybe immigrants will come into an area.
Or maybe people in an area like teenagers or women coming out of the home will be desperate for work
and so they will accept lower wages. Or maybe our business has moved from one part of the country
or one part of the world to another to be able to pay lower wages. Does that necessarily mean
that this capitalist will lower prices, not at all. The history of the last 40 years has been
hundreds, thousands of american companies closing work here. Closing factories, stores, offices,
warehouses and moving them to other parts of this country or abroad to be able to pay lower
wages and they kept the difference between the lower wages and the prices they did not lower
correspondingly because that fattens their profits and that's what they're in business to do.
In other words there's no necessary relationship. Don't make the mistake of thinking that what a
capitalist might like to do will be possible for him in fact to do. And don't make the mistake
of thinking that if something is cheaper for a capitalist such as hiring workers that that will
necessarily bring down the prices. It might but that will depend on other circumstances and the
calculations that capitalists make since they're the key decision makers on all these issues.
Having said that, let's look at what happens if we have an inflation and we want to control it.
We think there are people suffering from higher prices pricing them out of the ability to buy
the items whose price is rising, milk for their children, gasoline for their car, a home for their
family whatever it is. In capitalism it's very hard to control inflation. You know why? Because
of the private enterprise system. Capitalists do not want anyone interfering in their freedom to
raise and lower prices as they see fit; that's how they maximize their profits. So they resist
any social control over prices which means if they're believing that price rises will enhance
their profits they want the freedom to do that. They do not want any responsibility for the
consequences of their freedom which is always a very dangerous sign for any hope of democracy.
The United States became an independent country fighting against Britain because they did not want
to suffer from the freedom of King George III in England to do all kinds of things, for example
taxing them without their having some say in all of this. They wanted King George to be accountable
for the consequences of what he did and we went to war in the United States
to establish that idea. But capitalists don't want to be accountable for the inflation
that will result if they raise their prices so they resist. If worker co-ops were the economy
they wouldn't need to because it's all the same people who do the work and run the businesses.
They don't care if they raise their prices but it comes back to haunt them
that they can't then afford to buy what the higher prices cost. Then they won't do that
because they're just as dependent on the prices they pay as they are on the prices they earn.
Worker co-ops for example would be much more ready to pass a law that says you cannot raise
your prices, nobody can. If a law like that is passed we don't have an inflation. Not really
very hard to control if you think about it. On august 15th of 1971 a conservative President of
the United States, Richard Nixon, imposed a wage price freeze on the U.S. Economy. He announced
that any capitalist who raised the price would be arrested and go to jail. Guess what the inflation
of that time collapsed and we didn't have one. Are there consequences to fixing prices and wages?
Sure there are just like there are consequences not doing that. The whole point is do you have
a democratic way to think about, discuss and decide which way to go? The answer in capitalism,
not at all. That decision is basically dominated by the tiny minority of people
who are capitalist employers. This is Richard Wolff for Democracy At Work.