Risk as Profit

Two assumptions are made by the capitalist in justifying retaining surplus value for himself: (1) that he took the labor in setting up the paperwork for the business, getting permits from the government, conducting feasibility studies, etc., and (2) that due to the inherent risk of the business' failure, where in the meantime he would have to pay wages, maintain machinery, and settle his electric bills. These factors, according to him, come at a loss in the first case, and a possible loss in the second case. So, the fruits of surplus labor should be expended to (1) compensate him for realized losses, and (2) maintain a reserve fund (controlled by himself) to pay for possible losses. 

This fallacy has already been attacked by Marx in his manuscript "Theories of Surplus Value," where he addresses the "Bourgeois Conception of Profit as Reward for Risk." Here, he presents a dialogue between a capitalist (A)  and his employee, a worker (B).  

A starts off by making the argument mentioned above: "Perhaps I may not sell them at all.  That is risk No. 1.  Secondly, perhaps I may sell them at less than their price.  That is risk No. 2.  And thirdly, in any case it takes time to sell them.  Am I to take on both risks on your behalf without recompense?" 

A therefore makes a hypothetical scenario. Suppose he, as a seller, were to face a buyer (C), who would not be willing to buy the product at its current selling price. Faced with the possibility of not making a sale (and further presuming that the thing he's selling has a shelf-life), A would have to sell to C at a lower price. But in the meantime, B would receive the same amount of wages. So the loser in this equation is A. 

But B can also make an argument, applying the same analogy of buyer and seller. After all, B sells his labor power to A, the buyer of such labor power. And this labor power is used to produce a profit for A. Put another way, B is selling something to A below its value. But A wants C to buy what he sells for above its value! Since A and B can both be looked at as sellers, is there something different between the labor power and the finished product which justifies the former being sold for below its value? 

But again, A claims that there is - he is risking something, whereas the worker is not risking anything, right? After all, B is assured of his wages, whereas the capitalist has to continue the business at a loss. 

On the contrary, contends B, he is also assuming a risk. First, despite the fact that there may be a period where A is losing money, that can't go on forever, can it? Eventually, he'll have to shutter his business, putting B out of work. Thus, just as A had to set up the business, hire workers, make contracts, etc., B also had to apply for the job, assent to the contract, etc., which he'll now have to do again to get another job. After all, workers who can't get a job don't eat. Therefore, B's security of work is based on A's prosperity. 

And then there's the question of what happens to A? At best, he can change his line of business - from selling shirts to selling food, for example. At worst, he'll have to go sell his labor, like B. So in fact, this "risk" isn't exactly trending against A, and in fact, it trends heavily against B. 

Second, A completely discounts the fact that just as there's a risk of loss, there's also the risk of profit. And since no one just blindly charges headfirst into setting up a business without doing due diligence on market trends, etc., in order to mitigate profit, there's a bias towards making profit than losing it. In fact, if the risk of profit was just equal to the risk of loss (around 50%), then it would be a hard sell to get anyone to invest. The average profit would then be 0% - profits and losses cancel each other out. So obviously, the average rate of profit is not 0%, since we see most capitalists (those with small to medium sized businesses) riding the economic upturns and downturns, and being able to make profits in the meantime. In total, profit triumphs risk by varying percentages, but always in favor of profit. But do the wages of workers increase in proportion to new profits? They don't. 

 

To further stress, any contention that "but neither do workers take a proportional pay cut when losses are incurred and thus there is no risk on their part" is wrong, because we've already proven above that losses already adversely impact a worker more than the capitalist. Another thing - workers often do take pay cuts, just as long as the wage paid isn't below the minimum wage (since any pay below this would be illegal). And it's not as if the minimum wage (P570) is especially high, or more than the value added to the business through B's labor, is it? 

Let's look at the reality of things - corporations and the business owners are different entities, and under the law limited liability attaches. When a business goes bottom-up, it's only the capital of the business subject to liability, not those of the owners (despite the fact that they're the ones who steered the company into bankruptcy). If the business undergoes financial rehabilitation (under the FRIA law) claims of its laborers are stayed in the meantime. When the laborers are eventually let go, in case of unsuccessful rehabilitation, or dissolution of the corporation (under the Corporation Code), they're entitled to a pittance of severance pay. But the capitalists get to keep everything they've seen fit to pay themselves (the profit as salary). And it bears repeating that even if these capitalists somehow have no money left or are in debt, they are still only left as workers. 

Third, if we assume that A is a big capitalist, especially those multinational corporations, then the problem gets even worse. In fact, big corporations have a lesser chance of risk than small corporations. Let's look at McDonalds or Philips. Unless something huge happens, their revenue remains consistent. There are also banks deemed "too big to fail" and receive government handouts when they do (like in 2008), sourced from the taxes primarily paid for by the people. On the other hand, if B decided to quit his job tomorrow and use his meager savings to start a food stall, he would be more exposed to risk (not having much savings or anything else to turn to in case of a downturn in profits). But if Philips decided to start a food stall, it'd be able to do so with far less risk, even if the costs would be the same, since it could just rely on its sale of other (more established) goods. So we have here a situation where a lot more profit is made by a large firm, taking on much less risk. This is a complete contradiction to the contention that "risk deserves profit, and thus bigger risks deserve bigger profits." 

Moreover, even assuming for the sake of argument that risk entitles profit, is there no point where a big corporation might say "the profits I've accumulated have already, more than enough, paid for the risk I incur?" In these huge firms, of course there isn't a cap. 

Fourth, risk by itself does not entitle anyone to a profit. A gambler may win P10M at the slots, but this isn't justification for him to make more money than an average 9-5 worker. After all, the latter undeniably produces value, whereas the former doesn't - he just got lucky. 

Finally, we can't deny that all successful businesses run the way A claims is valid - businesses, their owners, and especially the investors, turn a profit because money is pooled into a venture, and they are always aware of that "risk". But that isn't an argument for "profit" so much so as it is merely describing what profit under capitalism is. In other words, just because capitalists gain profit from unpaid labor doesn't mean they are entitled to it, despite all other businesses doing the same. For sure, you could say that if a business suddenly decided to give more to the laborers at their loss, it would fail. But that's a feature of capitalism - it wants you to use these profits in the "right, economical, and competitive" way, but that doesn't mean that it's just for the laborers. During the pre-colonial days, the most successful Datus were those who went to war and raided barangays. Does this mean they were entitled to the spoils of war? Under feudalism, this was accepted and if you were a Datu who didn't raid and obtain spoils from that, you were at a huge disadvantage. But this doesn't mean that they earned such "profit" validly - they didn't create any value. And in that case, they took the risk of even dying during war, which the capitalist, no matter how wretched his form may be after losing his business, does not. 

Conversely, a business which decides to stop the system of wage labor exploitation would also not be as competitive as those run under such a system. But even in limited contexts, such as cooperatives, where risk is spread out between employees who also decide the path that the cooperative treads, the book Capital and the Debt Trap finds that cooperatives "tend to have a longer life than other types of enterprise, and thus a higher level of entrepreneurial sustainability." 

Of course, this isn't at all to say that capitalists don't give value to the finished product of a commodity - not even Marx would say that. He provides the raw material and tools which the laborer uses, as well as some mental labor (advertising, making sure the workplace is organized, etc.) but at the end of the day, this never reaches more than the value of labor - the raw materials would rot and the machinery would rust if labor power isn't added to those products to make them more than the sum of their parts. It's just that everything more than that sum goes to those who claim "risk" when in fact, we've proven that (1) there's no reason for the laborer to be paid less than the value of his labor whereas the capitalist, who puts less value into the things he sells, can sell it for more, (2) the laborer actually risks more in times of a business downturn, (3) the risk of profit usually outweighs the risk of loss, and (4) the biggest corporations, possessing the greatest amount of wealth, have little to no risk and yet entitle themselves to all the work of the laborer.