Samezō Kuruma; 1946

Are Prices and Wages in a Vicious Circle?

First published: May 1946 issue of the journal Kaizō
Source: Chapter 7 of Kyōkō kenkū (Investigation of Crisis), Tokyo: Otsuki Shoten, 1965;
Translated: for by Michael Schauerte;
CopyLeft: Creative Commons (Attribute & ShareAlike) 2008.

The reader would no doubt welcome it if the professors below were to actually get together for a discussion, which has not been possible given how busy they are all as of late. So I have decided to conduct a sort of experiment by describing a hypothetical meeting between them. This is a mere substitute, of course, but it allows me to gather together whomever I like and for them to express themselves after careful thought, since there is no time limit (although I really should not exceed the space that has been allotted me for this article). And in this sense perhaps it will not be a fruitless endeavor on my part. – Kuruma

Chairman: Since the end of the war, the demand for a rise in wages has been spreading from every corner like a wild fire. Newspaper articles report that those demands – at least up to now – have met with great success; but as you know, it is often claimed that the rise in wages and the increase in prices constitute a “vicious circle. ” That is to say, the increasing prices stimulate a rise in wages, while those increasing wages in turn lead to rising prices. There is said to be a tendency where they develop in a spiral, each attracting the other; and if this tendency is left to develop, there is said to be the danger that general prices (including wages) will continue to rise. The need arises to put an end to this vicious circle, somehow, and the central problem for most people is where and how to put a stop to it in the most rational way. What are your thoughts on this C?

C: It’s just as you described it. I’ve been reading in the newspapers about labor disputes since last autumn. And at least in terms of the demands for wage increases, it seems to be thought that the demands on the workers’ side are excessive. It may seem unreasonable to demand a three- or five-fold increase in wages, but if one considers the prices on the black market, which we must depend on to some extent now in order to live, it is certainly not an excessive demand. However, it is not thought that it is unreasonable for capitalists to also demand appropriate profits. Therefore, in the case where a rise in wages would mean a loss, or at least an absence of profit, were the products to be sold at the same price as before, then the need to raise prices would have to be recognized. But this would mean that the vicious circle mentioned earlier has arisen, which would even call into question the future of Japan. I have been giving this matter some thought on my own, but I’m afraid that I had not been able to sort it out; and it was just around that time that I heard about this meeting and I have been eagerly looking forward to hearing all of your valuable opinions.

Chairman: I see. Our task seems to be taking on considerable importance. My own view is that the most appropriate approach to this issue would be to begin by clarifying whether wage rises and price rises are indeed in a relation that can be described as a vicious circle, as it appears at first glance.

Everyone: Agreed!

Chairman: Could you tell us your views, E?

E: My understanding is that it is not the case that a rise in wages can become the cause of a general rise in prices – and so a vicious circle would not be set off by an increase in wages. Ricardo already fully clarified this long ago in pointing out that what determines the value of a commodity is the quantity of labor needed to produce it, so that wages and profit are merely the parts of this given value that are then distributed to the two main classes involved in production. Thus, even while an increase in wages will necessarily lead to a drop in profit, Ricardo said, it will have not have any impact on the value of the commodity. If it were the case that wages and profit – instead of being distributed parts of value – were the elements that compose value, then an increase in one of the elements would lead, not to a decrease in the other element, but rather to an increase in the value of the product. However, that is not possible given the essence of value. That is basically the argument of Ricardo. And despite the various defects in his theory, I think that his view (at least as it concerns this issue) is not mistaken. Marx can also be said to share the same basic view as Ricardo regarding this point –although Marx introduces the separate term “surplus-value” to avoid the confusion that arose in Ricardo’s case from using the term “profit” to describe two distinct relations.

An important point to note, however, is that the law of value just mentioned is the most fundamental, and at the same time the most general and abstract, principle concerning the commodity; and it does not apply directly – as is – to the individual matters under developed capitalist production relations. That is to say, with the development of the capitalistic commodity, the commodity comes to be exchanged in accordance with production price, rather than value. That is not to suggest, however, that the law of value, or the law of surplus-value based upon it, somehow become meaningless. Production price is, as you all know, the sum of the capital expended on production plus average profit, but average profit itself is the total profit of society distributed in accordance with the amount of capital advanced. And that total profit is simply the total surplus-value viewed from a separate perspective. It is only on the basis of the law of value that the existence and quantitative determination of surplus-value is first clarified, so ultimately production price cannot be clarified without the law of value.

However, the law of value and the law of surplus-value only operate indirectly as the fundamental laws that ultimately determine production price. As I noted a moment ago, the average profit that characterizes production price is nothing but the total surplus-value redistributed in line with the magnitude of the capital advanced, so the total sum of average profit is equal to the total sum of surplus-value. Thus, clearly, the total sum of production price is equal to the total sum of value. And this means that as long as we are dealing with the total product of society, the laws of value and surplus-value continue to apply, without any change, even when value is transformed into production price. This also means that the argument of Ricardo, which I mentioned a moment ago as the fundamental answer to the issue of the vicious circle, continues to be applicable even when value develops into production price – as long as we are dealing with the total product of society. So, if I were to repeat the argument but now employ the term production price, a rise in wages will bring about a decrease in surplus-value (and therefore a decrease in the general rate of profit), but it will certainly not be the cause of a rise in the production prices of all commodities.

Y: I have a question.

E: Go ahead.

Y: Your explanation touched on various points, but would it be fair to say that your argument comes down to the idea that a rise in wages will not be the cause of an overall price rise?

E:Yes, that sounds about right.

Y: It seems to me, though, judging from the current situation, that that is not case. Isn’t that precisely why the problem of inflation has arisen and we are holding this sort of meeting? Currently, the price for rail transportation is being raised not only by capitalists but also by the government that is implementing policies to counter inflation; and they are saying that this increase is due to the rising wages. If this is indeed the general situation, it seems to clearly contradict the explanation you just offered. I think it goes without saying that theory must account for reality. How useful would a theory be that says a rise in wages cannot be the cause of an overall rise in prices when it comes to explaining the polar opposite reality? Or do you mean to say that the theory just described pertains to basic principles, whereas currently there are special conditions that have led to the opposite situation? If so, shouldn’t we begin with the special conditions, as our aim is to clarify the issue we are facing? In contrast, the explanation of the basic principles would seem somewhat beside the point. What are your thoughts on this?

E: I think that the doubt you expressed is a natural one. It is of course true that the fundamental laws I spoke of do not explain the particular phenomenon of the “vicious circle” that is generally thought to exist. Nevertheless, clarifying those laws is, I believe, the first condition for thoroughly clarifying the issue at hand. I say this because our task is to elucidate whether the vicious circle, generally thought to exist, is indeed a vicious circle. My view is that the apparent vicious circle, which most people uncritically accept, is based on a fundamental misperception; namely the mistaken idea that the value of a commodity is composed of wages and profit (and of the value of the means of production). This view is clearly based on the error of directly conflating production price with value, rather than analyzing production price so as to reduce it to value. For a capitalist that view is a natural one, but even those who are not capitalists find it quite difficult to shake free of this fetishism. The brilliant economist Adam Smith – who arrived at a firm understanding of the fundamental law whereby the value of a commodity is determined by the quantity of labor needed for its production – nonetheless at the same time remained under the sway of the mistaken idea that the value of a commodity is composed of wages and profit. It was on this basis that Smith advanced a mistaken economic doctrine. The argument of Ricardo that I introduced a moment ago was mainly introduced to point out that contradiction within Smith's thought and drive out his mistaken view. However, even though Ricardo was able to indicate the contradiction of Smith, and emphasized the fundamental principle against the vulgar viewpoint taken in by phenomena, he proved incapable of explaining (on the basis of that fundamental principle) why such phenomena arise. Therefore, Ricardo fell into the contradiction that led ultimately to the collapse of the Classical school of political economy. This speaks to how difficult it is to shake free of the fetishism particular to the capitalist mode of production. Marx later elucidated – with no room for doubt – the basis of that fetishism and solved the problem of production price. Of course, relatively few people are familiar with Marx's theory and therefore most people continue to think that a rise in wages brings about a general rise in prices (or at least precious few have an adequate theoretical grounding to confirm that this is not the case). Yet without establishing that understanding, it is impossible to truly understand the problem at hand. It is on the basis of that understanding that we can correctly pose the problem and put our analysis on the right track. And so . . .

Y: I don’t think you need to go any further. You have convinced me. I didn’t understand that reason and I’m sorry to have taken up so much time.

Chairman: OK then, why don’t we listen to some more of E’s explanation, while bearing in mind the points he just made now.

E: Fine. A moment ago I tried to clarify that a rise in wages – seen from the perspective of the total product of society – will not have any influence at all on the total sum of production price; but this does not mean that it is impossible for a vicious circle (or the phenomenon thought to be a vicious circle) to arise. So we need to consider why the phenomenon thought to be a vicious circle actually occurs. That phenomenon could only arise from “moments” pertaining to price other than those two factors. And now I want to consider what each of those moments are so that we can investigate the potential for the phenomenon of a “vicious cirle” to arise.

The first factor to consider is the influence that a rise in wages will have on the production price of a particular commodity. I think that if we reflect on the point I made earlier about the relation between value and production price it will be self-evident, but to make this even clearer I should add the following details. The value of a commodity consist of the value of the means of production that are used up for its production and the new value added in production; and the latter itself consists of the compensated value part paid to workers as wages and the surplus-value part created above and beyond that paid labor. Given this, if we assume that the same quantity of labor is paid the same wage, then the rate of the surplus-value part to the value-part paid as wages (= “rate of surplus-value”) will be always the same. But this does not necessarily mean that the rate of surplus-value to the total capital advanced (= “profit rate”) will be the same. This is because the advanced capital is made up of the value of the means of production and the value paid as wages; and the proportion of each is not the same in every industry. If the rate of surplus-value is the same, then the profit rate will be lower in those industries where the proportion of the value of the means of production is relatively large vis-à-vis the total capital advanced; just as the opposite will hold true in the opposite case. Therefore, if a product is sold in line with its value, the result will be that the rate of profit will vary among industries. This is a natural outcome in terms of the law of the production of surplus-value. Yet in terms of the essential instinct of capital as self-valorizing value, this is an impermissibly unjust state of affairs, because the difference in the rate of profit does not arise from a difference in the individual capacities of the capitalists themselves. And so this must somehow be rectified. This is done by having the surplus-value redistributed according to the amount of capital advanced, rather than returning directly into the hands of the capitalist who produced it. Of course, having said that, this is not carried out through some arrangement among all of the participants, based on an impartial observation. Just like every other relation among commodity producers, it takes place outside of the capitalists' consciousness, as the functioning of an economic law; and hence arises as the outcome of the laws of things. That is, if there is a difference in profit rates among sectors of production, capital will leave those sectors with a low rate and gravitate towards those where the rate is high. As a result, supply in the former will fall so as to increase prices, whereas the supply will be excessive in the latter so that prices will fall. This movement of capital will continue – unless hindered by special conditions – until rates of profit in the various sectors are averaged out. And "production price" is the price that makes it possible to secure the average profit, which is the ultimate objective of the entire process.

If we consider, then, what sort of influence a rise in wages will have on production price, it would mean that for those products in sectors where wages are a relatively high proportion of the capital advanced, their production prices would rise higher; whereas products in the opposite sector would see their production prices fall. I think this should be clear from what I have said thus far, but I will demonstrate it numerically just in case. Here c will stand for constant capital (i.e., the value of the means of production used up in production); v will stand for variable capital (i.e., the value part that is spent on wages); s will indicate surplus-value; and p will indicate profit. To simplify matters, I will assume that there are only two “organic compositions of capital” (which refers to the ratio between constant and variable capital); and that all of the industries of society can in this sense be divided into Department A or Department B depending on their compositions. Such assumptions, of course, do not correspond to direct reality, but that does not matter as far as our present task is concerned.

Let’s first look at the production for the total capital of society, for Department A and B, in terms of the following value relations.

A. 9,000c + 3,000v + 3,000s = 15,000

B. 3,000c + 3,000v + 3,000s = 9,000

12,000c + 6,000v + 6,000s = 24,000

The average profit rate would thus be:

6,000s ÷ (12,000c + 6,000v) × 100 = 33 1/3

Therefore the production price would be as follows:

A. 9,000c + 3,000v + 4,000p = 16,000

B. 3,000c + 3,000v + 2,000p = 9,000

12,000c + 6,000v + 6,000p = 24,000

Clearly, in Department A, the production price is higher than value; whereas the opposite is the case for Department B. Now, let’s consider what happens to the value relation if there is a 20% increase in wages:

A. 9,000c + 3,600v + 2,400s = 15,000

B. 3,000c + 3,600v + 2,400s = 9,000

12,000c + 7,200v + 4,800s = 24,000

In this case, the average profit rate would be:

4,800s ÷ (12,000c + 7,200v) × 100 = 25%

And production prices would be:

A. 9,000c + 3,600v + 3,150p = 15,750

B. 3,000c + 3,600v + 1,650p = 8,250

12,000c + 7,200v + 4,800p = 24,000

We can see in the equation above that the production price for Department A decreases from 16,000 to 15,750, while the production price increases in Department b from 8,000 to 8,250. I think that this generally shows that the outcome of a rise of wages is that the production prices will fall in those sectors where the organic composition of capital (c/v) is higher than average, and will increase in those sectors where the organic composition is lower than average.

Let’s consider whether this fact can indeed become the cause of a vicious circle or the vicious-circle-like phenomenon. What is at issue in this case, needless to say, is the increase in production price in Department B; but if the increase in wages only leads to an increase in the prices of some products, that alone does not immediately constitute a vicious circle. That problem would only occur if it so happened that the bulk of the industries that produce the goods used by workers belonged to Department B. In such a case, part of the impact of the rise in wages would be counteracted by the rise in the prices of goods that the wage increase would cause; so in order to meet the original goal the wages would have to rise again, bringing about a phenomenon that at first glance would ressemble a vicious circle. However, this is certainly not a true vicious circle because the total sum of the increase in the production prices of the goods used by workers would certainly not reach the same level as the total sum of the increase in wages. If we look at the figures I mentioned a moment ago: the increase in wages was 1,200 (as the difference between 6,000 and 7,200); while the increase in the production prices of all products in department B was only 250 (as the difference between 8,000 and 8,250). (Moreover, of those products from Department B, one would assume that there are things other than goods for use by workers, just as there would be some goods for workers produced in Department A; so at the difference between the wage increase and the increase in production prices would be even larger.) The figures I am using are based on arbitrary and hypothetical numerical relations, so of course various differences could occur depending on the assumptions made, yet in in any case there is no question that there would be a considerable gap between the wage increase and the price increase. Therefore, we are not dealing with a process that has the propensity to unfold in a spiral shape that spins around and around. At some point it would have to settle down; and the tendency would be for the rise in prices expected at the outset to be carried out and reach that expected goal at an early stage.

However, the influence exerted on prices from a rise in wages is not solely from the change in production price arising from the relations I have just described. The rise in wages would also increase the demand for goods used by workers, which would likely bring about a certain increase in the market prices of those goods. And so we need to examine whether or not a vicious circle can arise from that relation.

The first thing that one notices is that the price increase in this case is essentially different from the sort of case generally considered to be a vicious circle. The general theory of a vicious circle is based on the idea that a rise in wages will lead to an increase in the cost of production that will in turn cause an increase in prices. But in the case we are dealing with here the rise in prices arises solely from the disequilibrium between supply and demand. It is not a rise in market prices that stems from the rise in the cost of production (and hence the rise in the production price), but rather the divergence of production price from market price. According to the general theory of the vicious circle, the overall rise in wages triggers an overall rise in the price of goods, whereas in our case it only brings about an increase in the prices of goods for use by workers. And because the rise in wages should necessarily bring about a decrease in surplus-value, if all other conditions are the same, it will at the same time reduce demand among capitalists and therefore decrease the prices of the goods for use by capitalists. (In the case of goods consumed by both workers and capitalists, the increase in demand on the one side would be offset by the decrease in demand on the other, so the fluctuation of market prices would be diminished to that extent.) Moreover, the rise in prices that occurs from disequilibrium between supply and demand is essentially a transitory state of affairs with the intrinsic propensity to be eliminated. That is, when the market price of a certain commodity rises above its production price, the production sector of that commodity will attain higher than average profit, so that capital would be attracted to that sector and the supply of the commodity would rise, thus bringing the market price back in line with the production price.

However, this does not guarantee that increasing the supply will in every case be easily carried out. Therefore, depending on the situation, there may be cases where a temporary phenomenon can pose major problems. For instance, in a case where the rise in wages occurs along with a rise in the prices of primary foodstuffs due to a poor harvest, the need for increase supply because of increased production might not be able to be met until the next harvest. Thus, if importing food is not an option, there might be an entire year where the suppliers of good are in an advantageous position as monopoly suppliers. This would mean that the market prices of agricultural produce could continue to rise as long as the purchasing power directed towards that demand would be able to rise; and that the bulk of the rise in wages would end up having little effect. In such a case, then, there would once again be felt the need to raise wages, but if they were raised the outcome would again be an increase in the market price of food products, so that a sort of vicious circle would arise – albeit different from that in the proper sense of the term. The same case resulting from a poor harvest would occur in a situation where a country that tends to import most of its food were to suddenly lose that option. Still, whereas in the case of a poor harvest the market price will return to the level of production price once a decent harvest is obtained, in the case of the latter situation – as long as imports are not available – the only option is to expand domestic agricultural production, so it would probably take longer to return to the equilibrium between supply and demand as compared to the case of even a very bad harvest. And even when that state of equilibrium is reached, the production price would likely remain some degree higher than the prior production price. Yet whether relatively high or low, once the market price settles around that level, wages would be decided with that price as the standard, so that the problem of the vicious cycle would be dissolved. The problem, in short, is limited to a temporary period from the time equilibrium between supply and demand is lost, up to the point it is recovered; and during that period, as I have said, it seems that a sort of vicious circle has arise. However, like all other conceptions regarding a vicious circle, it is an illusion that arises from the bedazzlement of the overwhelming operation of inflation. The case we are dealing with here is a major disequilibrium between productive sectors, and what necessarily emerges from that situation is a sort of economic crisis, not an economic boom. And normally people would not imagine that in the case of a crisis – even a crisis based on a poor harvest – a vicious circle would arise that is due in part from a rise in wages. Nevertheless, that way of thinking does emerge because of the illusion created by inflation. Indeed, inflation leads to a variety of other illusions as well, and we could look at one of the many examples from economic theory in recent years. In order to avoid that illusion, we need to examine various phenomena in clear distinction from the operations of inflation; and we should not forget to critically examine the operation of inflation that gives rise to those various phenomena. In other words...

Chairman: I’m sorry to interrupt just as you are raising an interesting point, but we will have to leave the discussion of inflation for another day, as our aim here is to first quickly touch on the issue of the vicious circle.

C: As for our topic today, I have already more or less expressed my conclusion, which is that wages and prices certainly do not rise together in a vicious circle; and that the idea that there is indeed a vicious circle is nothing but an illusion generated by the operation of inflation. But I would like to conclude by also mentioning my view regarding the simple question of why this sort of illusion arises. My view is that inflation ultimately signifies a lowering in the quantity of gold that forms the unit of price, which brings about a general rise in prices. In the case of wages as well, which is the price of a type of commodity called “labor-power,” its price rises for the same reason as in the case of prices of other commodities. However, the overall rise in prices in the case of labor-power does not occur all at once in the form, for instance, of the quantity of gold represented by “yen” being lowered from .750g to .375g. Rather the increase is in waves, where the price of one commodity rises and then the prices of related commodities rise as well; and then commodities related to those commodities rise, and so on – like the rising of the tide. Therefore, with the continuation of inflation and the repetition of that process, it seems that a vicious circle has arisen. But to think that when prices of goods rise due to inflation, it is because wages have increased, is like thinking that because the tide is higher during a typhoon it it is due to it being high-tide at that moment. Moreover, wages certainly do not increase to a greater extent than the rise in the price of goods. It is in fact the contrary, as wages are gasping to keep up with rising prices of goods

Chairman: Thank very much for your observations. I would like to bring our meeting to a close now, as I’m sure that everyone is a bit worn out. Normally I would suggest that you all relax and have a cigarette, but – à propos of our topic today – that item has become rather precious these days. So perhaps we can just a cup of have socha [low-grade tea] instead.