Understanding Labor and Capital

What is the Difference Between Labor and Capital?

Labor and capital are economic terms that describe 1. workers and their labor power and, 2. capitalists and their material and financial capital.^[1]

• In terms of politics, labor and capital are two distinct classes that coexist in a capitalist society (a society based on the exchange between labor and capital).
• In terms of economics, labor and capital are the two main factors of production in the capitalist economy (and the only two if we consider land, machines, businesses, stocks, bonds, “money,” etc as types of capital).
• In terms of classist implications, capital AKA the bourgeoisie capitalists are the owners of the means of production and employers of wage labor, and labor AKA the proletariat workers are the wage laborers who, having no means of production of their own, are reduced to selling their labor power in order to live.

When people say labor and capital, they can mean any or all of the above definitions.

The Socioeconomics of Labor and Capital

To the above point, the class divide doesn’t happen because people are evil, it happens because [in the capitalist mode of production based on the factors of production of the capitalist system]:

• Labor controls their own labor only and thus must trade their labor power for a paycheck (so they can buy resources, pay debts, pay rent, and pay taxes).
• And meanwhile, the capitalist controls everything else, tends to be owed interest and rent, and works for profit, trading a portion of their profits to the worker as value in the money-form, in-trade for the workers’ labor power (treating labor as human capital from an economic perspective).

In this relationship the capitalist assumes most of the risk and responsibly, but as trade-off, they are generally privy to higher profits if all goes well.

Profiting off the factors of production, and reinvesting capital back into that system to create more profits, is capitalism.

Of course, “it isn’t for the benevolence of the butcher” that they trade their meat for capital and pay their workers, it is for their own self-interest.

To the above point, capitalism unrestrained can create some good things (employment, technological advances, the wealth of nations, “stuff”)… but it can also create some not good things (like extreme inequality and a wealth gap, and thus power gap, where a small number of capitalists end up owning all the means of production over time, and thus society becomes a type of oligarchy).

The problem here is that the monopolization of capital can result in capitalists cutting costs by reducing wages, increasing work hours, and reducing safety requirements in an effort to increase profits.

Over-time, this system, if the money isn’t taxed back out, can result in dynastic oligarchies, and that can result in capital oppressing labor to the degree they revolt, and this is why Marx and Engels said:

“What the bourgeoisie [the upper-class capitalists of the third estate] therefore produces, above all, are its own grave-diggers.” – The Communist Manifesto

Of course, Communism in-action tends to produce its own grave diggers as well… and this is why companies like [insert X modern company] and governments like the United States use a mixed system designed to protect both capital and labor.

All that Marxist lingo aside, the reality is if you want to understand economics, you’ll have to understand both the capitalist and socialist economists. So that means knowing the gist of Smith and Marx, Locke and Friedman, Keynes and Mises, etc… and that means understand the relationship between labor and capital.

The wealth gap and income gap: The problems with the wealth gap are many, but one of the main problems is that capital returns outpace economic growth over time. This means the rate that wages rise can’t compete with the rate of return on capital on average. That is “the problem of Capital in the Twenty First Century.”… but that doesn’t mean the solution is revolution, in fact, the solution proposed is a moderate estate tax.

Labor value theory says “labor creates value.” With this in mind, one might ask, “if the working class does all the work, why does the capitalist class make the bulk of the money?!” The answer is capital does a lot of work and assumes a lot of risk (in general), and higher skill workers (who are also in high demand) tend to be paid more. One could argue that the capitalist or managerial class do less physical labor than some workers, and one could argue that intergenerational wealth gives some capitalists an unfair advantage in the open market, but ultimately everyone making money is doing so kind of work (or someone is managing an account, in which case the account manager is doing the work and the owner of the account is taking a risk). That doesn’t make every situation fair, but that is the general answer. In the relationship of capital and labor there is no inherent inequality, instead inequality tends to arise as an advent of the system over-time as visible hands override the natural invisible hand that guides free-markets.

Social capitalism: Social capitalism is about bridging the gap between labor and capital. This can be done in many ways, but a good symbolic way of doing this is to extend company stock to workers (like many modern companies do; we are in a sort of era of social capitalism, unlike Marx in the mid-1800s). Workers with 401ks, HSAs, and company stock aren’t just workers any more, they are capitalists.

Capital and Labor in Summary

To resummarize the above:

• Labor refers to workers, their tradable asset labor power, and the amount of work needed to produce a good or service.
• Capital refers to the capitalist, their capital (financial, material, or other materials of production).
• Capitalism is the free-exchange between these forces of production based on the materials of production in a given age.
• Socialism is a system that uses collective power to draw control of capital away from the capitalist and redistribute it to the worker.

TIP: In terms of taxation labor pays the income tax, but the capitalist pays the corporate tax and long term capital gains tax. The capitalist always pays a lower tax in America, but as a trade-off the capitalist must take risk and invest in the nation’s businesses (who themselves pay a number of taxes). Likewise, where the worker may get assistance, the capitalist at best gets tax breaks. Each class has incentive, and a fair and well-oiled capitalist system ensures that neither naturally arising class abuses the other.

1. What is the difference between labour and capital?