In this post we’ll follow our aspiring capitalist, Mr. C, as he sets out to hire employees for his new machine shop. Our goal is to learn something of the true nature of the capitalist relations of production.

According to modern economic theory Mr. C is going to have to pay his employees the going rate for the region he has set-up shop in. This rate is determined by the supply and demand curves for the labor market. According to the theory if wages go up more people will make the decision to enter the labor market. If wages go down less will. If demand for labor increases wages will increase. If demand shrinks, wages stagnate or shrink. Wages in the labor market behave like prices in the product market.

All Mr. C has to do is offer a wage competitive with the other machine shops in his area. He may choose to hire a few exceptionally talented individuals and pay them a little more ( what economists term rent), but even these rents will be more or less in line with what his competitors are paying.

This all sounds very fair and equitable until we consider one thing. This competitive model of perfect markets in which wages adjust to balance supply and demand neglects something. Perfect markets are predicated on the idea of “free” actors pursuing their own enlightened self-interests. Each actor must be free to walk away from the deal if the terms are unsuitable. This is how true prices are determined. If you and I are freely negotiating the price at which you will be willing to sell me your car we will arrive at one price. If I put a gun to your head we may well arrive at a lower price.

In the labor market the supplier, the would-be employee has, so to speak, a gun to his or her head. The supplier is not free in any economic sense of the term — they must sell. It is true, they do not have to sell their labor to Mr. C. They are “free” to go across the street or down the road and sell it to whomever. But sell they must. There may be marginal differences making one choice more appealing. Maybe Mr. C seems like a nicer guy to work for, or the job is less of a commute. Maybe the work seems more interesting or the fringe benefits are good. These marginal considerations are real but they do not change the fact that no matter where one seeks employment in one’s field the wages, according to modern economic theory, are going to be set by supply and demand. And due to real-life contingencies that curve is going to be distorted.

But isn’t Mr. C in the same position? He doesn’t have to hire you but he has to hire somebody. Isn’t he equally as constrained? In our abstract model it appears so, but in the real world the situation is different. In the real world the employer holds almost all the cards. Unless you are exceptionally talented in your field and able to command rents (higher wages), and thereby seem too good to pass up, the employer has the luxury of time to sift through the stream of hopeful applicants. A large portion of those who make up the labor market do not have the luxury of time. They need a paycheck and they need it now. Economic urgency often places them under duress. The capitalist enterprise is generally free to walk away from the deal, that is free to not hire out of compulsion (except in unusual circumstances), but the proletariat must always be hired by someone. Thus, the labor market is demand driven. Despite Say’s so-called-law, if more people apply for a given position it does not create more job openings.

In order for the labor market to be a true, perfect market the proletariat would have to be free of economic constraints. Imagine if every person had an adequate supply of money already sitting in their bank accounts. Imagine no one needs to sell their time in order to survive. Now, an employer comes along with a job offer, “Would you like to spend all day, every day pushing buttons on this machine to make these parts so that I can enrich myself?” Sure, some people would still say, “Yes.” But how many? At what price point will supply equal demand? It will obviously be one heck of a lot higher than under the current social conditions.

 The relations of capitalist production artificially suppress wages because under capitalism the relationship between employer and employee is asymmetrical. It is not a true “market” relationship.

This asymmetry is only increased once the applicant becomes an employee. Once in, the new hire is in a precarious position. He or she must please the new boss, often throughout a formal probationary period, before being fully accepted. Yes, of course, the newbie could quit, but this would only extend the period of economic uncertainty and risk and the whole process would have to be begun anew down the road. Probably better to stay and make it work out.

Once the probationary period has ended the relationship does not balance out. The employer still dictates the terms of the relationship. What time you start work and stop, when you eat, whether you may or may not speak to fellow employees, if you are permitted to have facial hair or smoke cigarettes (even outside of work!), and sometimes even how many times a day or for how long you may use the bathroom. This is not rhetoric, as I’ve said I have worked in machine shops all my life and have seen all this and more.

Once he controls you, the capitalist can even dictate how much of your life you will sell him.

Returning to modern economic theory for a moment, we are taught about a “backwards-bending labor supply curve.” This means that people who make very little money are willing to work more hours (I wonder why?), but after a certain point paying more money does not entice them to work more. They may even decide to work less hours. The solution for this, according to the theory of pure markets, would be for the employer to offer higher wages for extra hours. If the legal mandate of time-and-a-half for more than 40 hours worked is not sufficient enticement the employer must offer even more. Eventually the sweet spot will be found where employees will be willing to give up their weekends to make the company even more profitable. But this is not really how it works. Instead, as we all know, the employer simply mandates that from now until further notice everyone must work Saturday or be subject to disciplinary action.

Economic models can never account for all the vagarities of real-world existence, so I will be kind and suggest that perhaps this is why the modern theories do not seem to account for this asymmetry. Still, it seems like an awfully large thing to have missed.