Ask Prof Wolff: Wages, Prices & Inflation - YouTube

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.