Since Adam Smith and Karl Marx economists have not figured out how the price- and profit mechanism works. For this reason, they do not understand until this day the relationship between discrimination, profit, exploitation, and poverty.#1
Because economics is a failed science, economists can neither solve economic nor social problems. Economic debate always and everywhere degenerates within a split second into political rhetoric, moralizing, scapegoating, mutual motive speculation, and sitcom blather.
So, what first of all has to be done is to rise above the proto-scientific level of political economics. The utter failure of economics is due to microfoundations. Economics has to be based on macrofoundations.
The elementary production-consumption economy
The macrofoundations approach starts with objective-systemic axioms that define the elementary production-consumption economy: (A0) The objectively given and most elementary configuration of the economy consists of the household and the business sector which in turn consists initially of one giant fully integrated firm. (A1) Yw=WL wage income Yw is equal to wage rate W times working hours. L, (A2) O=RL output O is equal to productivity R times working hours L, (A3) C=PX consumption expenditure C is equal to price P times quantity bought/sold X.
Under the conditions of market-clearing X=O and budget-balancing C=Yw in each period, the price is given by P=W/R (1), i.e. the market-clearing price is equal to unit wage costs. This is the most elementary form of the macroeconomic Law of Supply and Demand. It translates into W/P=R (2), i.e. the real wage is equal to the productivity. For the graphical representation see Wikimedia.#2
Monetary profit of the business sector is defined as Qm≡C−Yw and monetary saving of the household sector is defined as Sm≡Yw−C. It always holds Qm≡−Sm, in other words, the business sector’s surplus = profit equals the household sector’s deficit = dissaving. Vice versa, the business sector’s deficit = loss equals the household sector’s surplus = saving. This is the most elementary form of the macroeconomic Profit Law. Under the condition of budget-balancing C=Yw total monetary profit is zero.
Macroeconomic profit depends, in the most elementary case, alone on deficit spending, that is, on the increase of the household sector’s debt. It does NOT depend on labor time, or wages, or productivity, or risk-taking, or monopoly power, or exploitation, or greedy capitalist.#3, #4
In the elementary production-consumption economy, the wage rate for all employees (employees = labor = working-class = blue-collar workers + white-collar workers + management + executives) is equal, labor gets the whole product according to (2), and profit for the business sector as a whole is zero because of C=Yw.
Obviously, there is NO antagonism of wages and profits in the elementary production-consumption economy. If the wage rate W goes up the market-clearing price goes up according to (1) and the real wage remains unchanged according to (2).
All changes in the system are reflected by the market-clearing price. As a matter of principle, the elementary production-consumption economy can go on indefinitely at any level of employment L.
The living standard of the employees is, with equal labor time per person, alone defined by the productivity. So, poverty in one production-consumption economy is due to the lower productivity compared to the other economy.
Now the employees are arbitrarily split into two groups of equal size. The wage rate of group 1 is then increased by the factor 1.5 and the wage rate of group 2 is halved thus that the total wage income Yw=WL=W1L1+W2L2 remains unchanged. All other things, i.e. output O, consumption expenditures C, and the market-clearing price P remain unchanged.
Accordingly, the real wage of group 1, i.e. W1/P, increases 1.5 fold and the real wage of group 2 halves. The macroeconomic profit is still zero because of C=Yw. The unchanged real product O is redistributed among the employees, that is, group 1 is better off at the expense of group 2. The relative poverty of group 2 is due to social discrimination among the employees and has nothing to do with capitalism, here defined as ownership of the business sector/firms.
The profit of the business sector is zero without discrimination and with discrimination. So, it is NOT the case that the capitalist class exploits group 2 but that group 1 of the working class exploits group 2 of the working class. Exploitation and poverty is ultimately an issue WITHIN the working class and NOT between the working class and the capitalist class.
The business sector is now split into two identical firms and firm 1 is supposed to cut the wage rate W1 arbitrarily by half. From this follows that the market-clearing price P declines if all other variables are unchanged. Firm 2 is affected because total income Yw falls and with it consumption expenditures C and the market-clearing price P.
The reduction of the wage rate W1 increases the profit of firm 1 and produces a loss in firm 2. When we look alone at firm 1 we see what Smith, Mill, Ricardo, and Marx have seen before, to wit, wages down ― profit up. This fits the time-honored stereotype of wages and profits as antagonists.
The error/mistake/blunder of economists since the Classicals has been to generalize what is true for a single firm and this is known as Fallacy of Composition.
If profits have been zero in the initial period because of budget-balancing C=Yw then firm 2 makes now a loss that is exactly equal to firm 1’s profit. Hence, the arbitrary wage rate cut of firm 1 does NOT increase the profit of the business sector as a whole but only REDISTRIBUTES profit/loss between the firms that constitute the business sector.
Seen from the perspective of a single firm, the antagonism of wages and profits is absolutely real. This, though, is parochial realism. The complete picture reveals that firm 1 is better off to the disadvantage of firm 2 and the workers of firm 2 are better off to the disadvantage of the workers of firm 1 because at a lower market clearing price they absorb a bigger share of output O with their unaltered income. The situation of the business sector as a whole is unchanged and the same is true for the household sector as a whole. If there is exploitation it happens within the sectors. A partial wage rate change leads only to a redistribution of profits between the firms and of output between the workers. A global wage rate change leads under the condition of budget balancing and market clearing only to a price change in the same direction.
For the economy as a whole, the antagonism of wages and profits is an optical illusion. The concept of exploitation of the working class by the capitalist class has to be replaced by the concept of cross-over exploitation WITHIN the classes. This makes the idea of class struggle obsolete.
When Capitalism is roughly defined as ownership of the firms that make up the business sector by profit-seeking capitalists then the capitalists taken as a whole cannot increase overall profit by discrimination among the workers according to race, religion, gender, nationality or any other social criterion. Only the individual capitalist can increase his profit through discrimination at the expense of the other capitalists. The individual capitalist’s pursuit of profit does NOT increase the profit of capitalists as a whole. The inner contradictions of capitalism lie within the classes and not between them. In the strict sense, classes ― defined by a common class interest ― do not exist.
Overall monetary profit cannot be increased by social discrimination among the employees but is given by the macroeconomic Profit Law Qm≡Yd+(I−Sm)+(G−T)+(X−M). So, exploitation or other social pathologies are NOT a feature of the capitalist economy per se but of pathological individuals. The major defects of the market system lie elsewhere.#5
#1 Ricardo and the invention of class war
#2 Wikimedia AXEC31 Elementary production-consumption economy
#3 The profit theory is false since Adam Smith
#4 Proﬁt for Marxists
#5 Major Defects of the Market Economy
Related 'Making the economy the focus of the economists’ dialogue' and 'Karl Marx, fake scientist' and 'No exploitation, no classes' and 'Mathematical Proof of the Breakdown of Capitalism'. For details of the big picture see cross-references Profit.