Editor’s Note: Everyone could use a little refresher in the basics of Marxist economics from time to time. In this mini-lesson, People’s World contributor Laurent Ross looks at the basics of supply and demand in a capitalist economy and how prices (and wages) are set.
In order to understand and critique the capitalist economy, it’s vital to understand how supply and demand work to set prices. As Robert Heilbroner points out in his brilliant history of economic thought, The Worldly Philosophers, Karl Marx in his analysis of how capitalism works “erects the most rigorous, the purest capitalism imaginable, and within this rarefied abstract system, within an imaginary capitalism in which all obvious defects of real life are removed, he seeks his quarry.”
It behooves us, then, to understand just how supply and demand work in the mind of bourgeois economists. Marx’s critique assumes that the way these economists think of supply and demand is the way it actually is.
So, how are prices determined in a perfect capitalist market? Let’s start with demand. Many people like to drink coffee in the morning (and at other times as well). The amount of coffee that people in the United States will drink will depend on the price. The higher the price of coffee, the less people will drink it. The lower the price, the more people will drink it. When the price goes down, people will drink more coffee. There will be a greater “demand” for coffee.
For any particular price of coffee, there will be a particular demand. If the price of coffee goes down, we will expect the demand for coffee to rise. If the price of coffee goes up, we will expect the demand for coffee to go down. You may be addicted to coffee and willing to pay whatever price is charged for it. But there are thousands of people, who drink perhaps two cups of coffee per day, who would be likely to reduce their demand to one cup in the morning should the price of a coffee rise high enough. And, going the other way, there may be a whole group of people who never drink coffee at all, but if the price goes low enough, might just be willing to try out that morning coffee. Lowering prices will increase demand.
Now, who supplies all the coffee that all these Americans drink? Coffee farmers. As the price of coffee goes up, coffee farmers might be willing to dedicate more acres to coffee production. My now deceased father-in-law was a coffee farmer, but also a tobacco farmer. If the price of coffee rose far enough, it was to his advantage to plow under some of his tobacco acres in order to convert them to coffee acres. And the opposite might occur if coffee prices got too low. And, some coffee farmers will just quit altogether. So, the amount of coffee beans that coffee farmers are willing to produce also depends on the price of coffee. The “supply” of coffee will rise when prices go up and fall when prices go down.
So, how do prices now get set by the market? If the price of coffee is far too high, coffee farmers will end up producing too much coffee in pursuit of a higher price for their crops, while coffee drinkers, meanwhile, will consume less coffee because of those same higher prices. Pretty quickly, too much coffee will be produced and end up sitting around in warehouse unused. Smart capitalists with too much coffee on their hands will begin to lower their prices in order to get rid of it. When prices are too high, the tendency therefore will be for the prices to eventually drop.
Let’s take the other scenario. What if prices are too low? In that scenario, coffee farmers will cut production, eventually making too little coffee to provide for all the coffee drinkers. And some of those coffee drinkers, especially the addicted ones, will be willing to pay a higher price for the now limited-supply coffee just to get their fix. This creates a tendency in the market for prices to rise if the current price is too low.
Eventually, the whole supply and demand system reaches equilibrium when the amount of coffee that farmers are willing to produce matches the amount of coffee that consumers want to drink. That perfect Goldilocks match will happen at a particular price that allows the supply produced by coffee farmers to exactly match the demand of coffee consumers in the U.S.
When we reach this perfect match, we are at what is called “equilibrium.” Marx’s only addition to this analysis of supply and demand was to note that this “equilibrium” was constantly in flux, with the changing conditions throughout the world tending to raise and lower prices. However, the long-run trend will be that prices of any goods will generally hover around the cost to produce them.
Coffee prices are at an all-time high right now. That’s because the winter of 2024-25 in Brazil, a major coffee producer, was very cold, damaging much of the crop. In this situation, we have the coffee farmer involuntarily deciding to produce less coffee. They didn’t really “decide.” The frost got to their crop and destroyed much of it. As the supply of Brazilian coffee goes down, U.S. coffee drinkers, and coffee drinkers the world over, are willing to pay higher and higher prices for their coffee, just so that they get their morning fix.
At the same time, mango farmers and tobacco farmers the world over who might have never thought about going into coffee farming, might now be considering it, given the extremely high prices that coffee beans are fetching on the world market. This, in the long run, will end up helping to lower coffee prices.
Now that we’ve examined the price mechanism for a generic commodity like coffee, let’s look at the price for a very peculiar commodity—labor.
Wages are the sum of money that workers receive from capitalists for a particular amount of time they work or a particular quantity of output they produce, which is usually labeled as piecework. Most of us are workers. Even those with salaries are receiving a certain sum of money for a particular number of hours per week, usually 40 hours or so in most countries.
But the word “wages” is just a special name for the price of labor. Our labor power, our ability to work, is a commodity, sold and bought on the open market, just like coffee, bread, potatoes, or automobile tires.
Workers sell the commodity they own, their ability to work, called labor power in Marxist economics, to the capitalist for money. In exchange for a day’s/month’s/year’s labor, the worker gets so much money as agreed upon between themselves and the capitalist.
When the worker labors, they produce a product. Suppose I work in a pencil factory making pencils. The capitalist and I agree on some hourly wage. They then provide me with the lead, wood, metal, and rubber I need to make pencils, as well as the machine that takes those materials and converts them into pencils. The capitalist also supplies the building, or factory, where I can do this work, plus facilities such as light, heat or air conditioning, bathrooms, etc. that make it possible, or easier, to do my work.
Suppose I can make 100 pencils every hour with the equipment and materials that the capitalist supplies me. And further suppose that the price of a pencil in the market is $1. The capitalist can then take those pencils to the market and make $100 in income.
But the fact that the capitalist is paying me $15/hour for my work, does not mean that $15 is my share of that income. Not at all. I have probably been paid before the capitalist ever takes the pencils I’ve made out to the market for sale. He doesn’t pay me from the income he gets for making the pencils, just like he didn’t buy the raw materials from that income. He pays all the expenses for making the pencils up front from his own reserves (which, granted, may have come from earlier pencil sales).
Let’s look at a few market possibilities. Suppose there’s a glut of pencils on the market, and the capitalist can’t even sell a single one. It’s also possible that there’s a glut of pencils on the market, but the capitalist can still manage to get 15 cents for each pencil, thereby just being able to recover my wages (not to mention the benefits I may be receiving from him). Or, perhaps there’s a scarcity of pencils, and the capitalist is actually able to sell them for $3 apiece, making a huge profit on my pencils compared to the usual $1 price.
All of that has nothing to do with me. I produced my pencils, and the capitalist and I have an agreement on how much he’ll pay me for one hour’s worth of them.
The capitalist has produced these pencils with the things that belong to him. The lead, the wood, the metal, the rubber all belong to him. The machinery belongs to him. The facilities belong to him. And, my labor belongs to him for the amount of time agreed upon between us. Therefore, my wages aren’t my share of what I produce, they are part of the commodities that the capitalist purchases to produce pencils every day—just like the lead, the wood, the metal, and the rubber, none of which get a “share,” either.
All these concepts work in the virtual world just as well as in the physical world. If I’m paid to be the editor of an online newspaper, and assuming I’m paid to actually edit the grammar, spelling, and writing of the various reporters, then I’m paid a certain amount of money to produce one hour’s worth of newspaper article editing. We can determine how much I’m paid per hour by simply counting the number of hours I work in a year and dividing that into my salary.
Just like the pencil factory worker, the newspaper owner has no idea up front how many people will pay to purchase the newspaper or, in a different model, how many advertisers will pony up money to support the newspaper in return for virtual advertisements of their products. So, just like the pencil factory worker, my income per hour is not my share of the newspaper, economically speaking.
Remember, Marx’s critique of capitalism was based on the ideal capitalist system. Returning again to Heilbronner, if Marx could “prove that the best of all possible capitalisms is…headed for certain disaster, it is certainly easy to demonstrate that real capitalism will follow the same path, only quicker.”
This is why it’s important for any person who seriously wants to critique capitalism to understand the theoretical mechanisms that drive the capitalist market.
We hope you appreciated this article. At People’s World, we believe news and information should be free and accessible to all, but we need your help. Our journalism is free of corporate influence and paywalls because we are totally reader-supported. Only you, our readers and supporters, make this possible. If you enjoy reading People’s World and the stories we bring you, please support our work by donating or becoming a monthly sustainer today. Thank you!
CONTRIBUTOR
