Moving beyond “cost of living” to understand capitalist exploitation in high-cost cities.
This is the second of a series of three essays on Money, Income, and Class.
In the last essay, we showed that money is, in the modern economy, merely an expression for socially necessary labor-time, i.e. exchange-value and labor-value are two expressions of the same thing, value. In a broad sense, an economy is a machine where you put in concrete labor or commodities of one type, and take out concrete labor or commodities of some other type. Money is a transitory stage, facilitating the sequence of exchanges C₁-M-C₂. One starts with a commodity C₁ (usually, one’s labor-power), then they exchange it for an amount of money M, and then exchange that money for another commodity C₂. This has, in principle, merely simplified the otherwise onerous process of bartering commodities C₁-C₂ directly. In this aspect, the economic machine is of benefit to humanity, and the explosion of productivity caused by processes of centralization and specialization allows human beings to work less overall, and put a greater part of their labor towards things not directly tied to base material survival. However, this machine also has the terrible “feature” of unequally distributing value, so that one class gets out more than they put in, and everyone else gets out much less than they put in.
The question we will attend to here is, what do we mean by “the value people get out”? It is not enough to understand this as the labor-hours which people actually consume. While it is certainly true that some people consume much more than others, a huge fraction of income does not go towards consumed commodities as such. Are you “more exploited” if you spend your whole paycheck on commodities, or if you put half of it in a savings account? In one case, you consume more commodities, and thus literally “take out” more labor-value from the economy, but in the second case you build up security and potentially accumulate assets or even “passive income” from interest on the savings. We will reject this idea — certainly no matter how you choose to use your income, for investment, savings, or consumption, it has no impact on the overall fraction of the economy which falls to you, or how that amount compares to what you “put in.”
Yet, it is also clear that what you get out of the economy also cannot be reduced to merely your nominal money income. It is readily acknowledged that a worker making $15.00/hr is making a “living wage”(which, remember, is merely ⅕ of the value that worker produced) in Tennessee or Kentucky, but is severely rent-burdened and impoverished in a coastal city in California. The standard account for this is that different areas have a different “cost of living” but this neutral formulation is very misleading. What is different? In terms of labor costs, i.e. the hours of labor contained in any commodity, most commodities are already shipped in from overseas and there is very little substantial difference between shipping to this city or that one, and service workers don’t lavish extra labor-hours on your food or your haircut. It takes the same length of time and so by definition (the Labor Theory of Value) you receive the same amount of value. Housing is neither more luxurious nor filled with more amenities; on the contrary it is generally worse in the richest cities on the west coast, with terrible sanitation and overcrowding. Yet, the “cost” of housing is higher. If the “value of living” in expensive cities is not higher in commodity labor-hours received, then the “cost of living” can only be higher if sellers of commodities are extracting more from you than those commodities are really worth.
To analyze class in a meaningful sense, we must only deal with what you get to keep for yourself and your family, and which is not expropriated further by a whole other class of exploiters who sell you necessities at tremendous markup. In the best case of a good-paying employer, this replaces the missing workplace exploitation, and then your exploitation is just different, rather than less, than a low-wage worker in a less expensive region. In the worst case, this simply burns one’s candle at both ends simultaneously, taking one’s low wages and squeezing them lower. We also have to account for the mechanisms, besides your wage, which accumulate value to you — appreciation on your house, inflation of stocks, etc. While these non-labor effects, per the labor theory of value, do not create any value, this does not means they do not transfer value to you; indeed this is exactly what capital is designed to do.
To account for all of these complications, both of these components — consumption and accumulation — must be combined. Let cᵥ be the overall labor-value consumed by an individual, in the form of goods and services (i.e. commodities), and let ∆W be the total change in their wealth (i.e. assets). I will define the material income Iₘ to be the sum of these two terms:
First, we will explore the meaning of this relation when each of Iₘ, cᵥ, and ∆W are held constant with the other quantities variable. Then, we will explore the relationship between Iₘ and the “money income” or “real income” Iᵣ¹.
a. Holding Iₘ constant, cᵥ and ∆W variable
This is the situation recognized by conservatives stressing a logic of “personal responsibility.” Basically, in this situation, the more that a person spends on personal consumption cᵥ, the less they have left to spend on building their asset wealth and setting themselves up for future prosperity, ∆W. It should not be denied that, given a particular material income Iₘ, the distribution of that income into these two categories is, as Marx says, “an act of will.” ² It is true that all the value placed into wealth is “renounced” from consumption. However, this removes the aspect of the magnitude of Iₘ itself. It is much easier to “renounce” 90% of your consumption in favor of asset-building, if the remaining 10% is more than enough for you to survive, than it is to “renounce” any of your income, if the full 100% would not pay all your bills. If a person is externally cared for, or can provide for themselves outside the market (e.g. by subsistence farming), they would be able to put all their income into assets. If one’s personal consumption cᵥ becomes cheaper due to improved productivity in the economy, then they can put more of their income towards savings. If consumption cᵥ becomes more expensive, then less can go into savings, or savings may even have to be drawn down.
A special case of this scenario is when Iₘ is zero. This would be the case, for example, for a retired person who will continue to live off of their savings. As they still have material needs for consumption, they must subtract an amount of money from their wealth (savings, etc.) to account for the lack of income they receive. Thus the first term cᵥ is positive, and the second term ∆W is negative, exactly canceling out. In this way, the retired person (assuming no passive income) continues to consume normally, but does not receive a material income, which is only appropriate, considering they do not perform labor and thus do not create value.
b. Holding cᵥ constant, Iₘ and ∆W variable
This is the situation which appears more natural to the Left, and to Marx.² The logic here is that every human being has a certain need for material goods and services, rendered by the constant cᵥ, and once those goods and services are accounted for, any new income which exceeds the average person’s consumption goes directly into assets or savings. As one’s income fluctuates throughout their life, either increasing at a moment when labor is strong relative to capital, or decreasing in response to capitalist crisis-induced layoffs, more or less income goes into savings and wealth, accordingly. If one’s income decreases so much that it falls below the constant value cᵥ, this means that ∆W is transformed from positive (savings) into negative (debt or drawdown of savings), in order to sustain this level of consumption.
This relation can also be interpreted in reverse; while on the one hand the income determines the value saved, on the other hand if an asset is already owned, it can change in value through speculation or asset-inflation, totally independent of one’s work or non-work. This means that the material income of a person is augmented by the appreciation of value in their assets, and is threatened by their depreciation. Thus, people whose salaries or wages are under attack in a moment of capitalist crisis may well respond, not with workplace organizing, but rather with absolutist defense of their property values, to salvage their material wealth in an individualistic, atomized way.
c. Holding ∆W constant, Iₘ and cᵥ variable
This would appear to be a more or less irrelevant case — in what circumstances would someone keep their asset-building constant, possibly at the expense of their normal human consumption? Yet, this is the case for a large fraction of the so-called “middle class.” Many people are taught from an early age to prioritize long-term assets, investment, and wealth-building, and will establish hard commitments to themselves (pay this amount towards mortgage payments, put this much into savings, save this fraction into retirement). With a loss of income, they will choose to sacrifice their day-to-day consumption, their time off, and any amount of “unnecessary” expense, all for the chance at a mystical “retirement,” where they will finally receive all the pleasures they have deprived themselves of during their working life. The analogy of retirement for this class to the Christian afterlife is quite clear.
Thus, one’s material income is distributed into two categories, one of assets which remain within the economy but are nonetheless captured by one’s own gravitational orbit (∆W), and another of commodities which are consumed, i.e. actually “removed” from the economy (cᵥ). What is the difference between this and the “real” money income Iᵣ? In modern economies, the capitalists have discovered another avenue for extraction of surplus-value from workers; instead of merely paying them less in wages than the value they produce, which is still the case, they also extract surplus-value by overcharging for the commodities they use, and for entry into wealth-building³. For example, the rent you pay is much higher than the value of housing you get to keep, which is nothing, and also much higher than the value the landlord provides you in maintenance, administration, etc.; the same is true in healthcare, banking, and other well-known exploitative sectors. Thus, your money income is distributed not into two terms, accumulation and consumption, but three: accumulation, consumption, and extraction. This third term, extraction, is another form of surplus-value, taken from workers in exchange for neither services, commodities, or equity, i.e. for nothing. With ∆W and cᵥ as wealth-building and consumption, as before, let R be the further value extracted from a worker. The letter R is used to indicate “rent” in the economist’s sense (i.e. “rent-seeking behavior”), which is not interchangeable with rent paid for housing, though it is closely related. The worker’s pre-extraction money income is the sum of all three:
To compare the situation of different persons, either in different regions or merely different financial circumstances, one must convert the real income Iᵣ into the material income Iₘ = Iᵣ − R.⁴ The calculation of R is not trivial to perform, but the easiest way to attempt it is to determine Iₘ by estimating the labor-hours you actually receive in sectors which you deem likely to be exploitative, such as housing, banking, or insurance. Multiply those labor-hours by the money value of an hour of labor ($78), and add this amount to your spending on everything else, which by assumption is sold at its value. Then, add this to the change in your net worth which results from your savings or equity payments.
Let us walk through the example of a person who only pays for rent and food. Imagine a worker who makes $3600/month, or about $22/hr full-time (160 hours per month). She pays $1800 in rent, and receives in exchange from her landlord about 3 hours of work on an average month, and the landlord also pays $200 of utility payments and taxes, for a total value of 3hrs · $78/hr + $200 = $432⁵. She also buys food, for $500/month, presumably at its value, and for simplicity puts the rest ($1300) into savings. Her change in net worth ∆W = $1300 and her value consumed cᵥ = $500 + $432 = $932, so her material income is Iₘ = $1300 + $932 = $2232. This is only 62% of her real income. Extracted from her by the landlord is surplus-value R = $3600 − $2232 = $1368, or 38% of her real income.
At this point, it doesn’t matter if the landlord keeps R, if they have to give it to a bank, whether this rental is still the most affordable option, if renting is more flexible than buying, etc. All of these are important concerns, yet they have no impact on the conclusion that the renter receives less value than they pay for — therefore they are exploited. This essay is not the solution to the problem of housing under capitalism, but merely confirmation of the problem itself: our housing market is an ethical failure.
There are two common mistakes made by economists and laypeople about R, and we will address them here — this is to lump the extraction term R in with either the consumption term or the accumulation term. If this is done, the distinction between material income and real income vanishes, and with it any ethical injunction. It appears that you really use your whole income, and that the excess of your costs over the value you receive is merely a misunderstanding. Let us analyze these two cases separately.
- Iᵣ = (cᵥ + R) + ∆W
Grouping together extraction with consumption is to say, you are living “above your means” by living in an extractive environment. You are “choosing” to live somewhere with, for example, high rents/property values/healthcare costs, and thus you are consuming “too luxurious” a lifestyle. This is pure victim-blaming. Just because you are bearing costs which it might be possible for you to avoid, does not exonerate the capitalists for subjecting you to them. You do not deserve to have more surplus-value extracted out of your (already) inadequate income, merely because you chose to live somewhere which you found appealing (e.g. because of weather, family, or culture), any more than an emotionally abused spouse deserves their terrible treatment, merely because they chose to marry their abuser. No one deserves to be exploited, and reciprocally no one deserves to exploit others. Justice is the abolition of exploitation, not its rationalization on account of the real, but irrelevant fact that it is avoidable (by subjecting yourself to some other terrible things). The capitalist class should not be considered as a form of impersonal “divine judgement” — as if their proper role is to abuse those too stupid or lazy to escape them. No, they’re merely normal human people, and what they are doing is benefiting off of our exploitation. That must be stopped, and if the side effect is to also remove this avenue for judgement, that is a secondary benefit. - Iᵣ = cᵥ + (∆W + R)
Grouping together extraction with asset building, rather than consumption, is to say, the surplus-value extracted from you is merely the “cost of doing business.” You need to contribute this value to the capitalist system, in order for them to reward you with stability, and a future promise of rents you can extract by using your accumulated asset. Call it a kind of economic Karmic principle, if you will. What these economists are conveying to you is, “Accept others’ exploitation of you now, to get into the game, and you will have others to exploit in the future.” Unfortunately, capital does not work in this mystical kind of way. Rent is not part of a grand cycle of life, but a third, completely independent term R, with its magnitude determined by the class power of its wielder. Capitalism makes much of schemes where people accept exploitation for some time, and then (if they are very lucky and pass through successfully), they become the exploiters. See, for example, the stock market, higher education, or homeownership. While rent (or interest on a mortgage) is the cost of doing business, that doesn’t make it right — the system is fundamentally exploitative.
The majority of exploitation indeed takes place at the workplace, and thus Marx’s analysis is close to sufficient. However, applying the lessons of material income can help explain how, in the modern day, exploitation comes both from above and from below — efforts to reduce rents, cheapen housing, slash pharmaceutical costs, and other consumer-facing advances, are not so irrelevant to the Socialist project as it would initially seem, even if on a purely quantitative footing they are less important than the means of production. This second exploitation by bankers, landlords, insurance and health services, in fact, is applied so arbitrarily and unavoidably, that it tends towards disaster in a way that exceeds even overwork and unemployment. As Marx put it in Capital, Volume I:
“[In Belgium] we find…a normal Belgian labourer’s family, whose yearly income…and whose conditions of nourishment are then compared with those of the soldier, sailor, and prisoner.[…]In fact, in this “Paradise of capitalists” there follows, on the smallest change in the price of the most essential means of subsistence, a [great] change in the number of deaths and crimes!” ⁶
As such, it also tends towards a radicalization that all other organizing can rarely match.
Footnotes
¹ I use the variable Iᵣ for “money income” because Iₘ is already taken and medium.com has an absolutely atrocious system for equation writing — only a few letters can be used as subscripts, because they have to be available as individual unicode characters. So, even though I argue the material income is more consequential than the money income, I will still refer to Iᵣ as “real income” occasionally to reinforce the variable name.
² See page 738 of the Penguin Classics edition of Capital, Volume I. In the version at marxists.org they use the (in my opinion inferior) translation “It is his deliberate act” on page 417.
² In fact, Marx takes this situation as totally absolute, arguing that proletarian workers will necessarily see their incomes reduced to their material consumption cᵥ, which is thus called the value of labor-power. We will criticize this position in detail in a future work.
³ This was not unknown to Marx, who did occasionally reference direct exploitation by landlords and banks in parts of Volume I (e.g. “In undertakings that involve much capital outlay…[the contractor] exploits the labourers in two-fold fashion — as soldiers of industry and as tenants,” page 462). Yet, lacking the terminology of material income, and seeing this form of direct exploitation as in any case minor compared to exploitation of labor, he chose in Volume III to analyze merely the case where one capitalist, e.g. a farmer, is exploited by another, e.g. a landlord. When one capitalist exploits another, it merely means that the surplus-value, originally extracted from a wage-laborer, is divided up by multiple exploiters. While this analysis was incredibly useful, and indeed forms the basis for my more general argument, it is ultimately lacking rigor when it is time to analyze direct exploitation by landlords, bankers, or other non-employer exploiters. Contemporary socialists intuitively understand landlords and banks as exploitative, but they usually are reduced to idealistic complaints, such as the problem with landlording having something to do with the fact housing is a necessity, or the fact that the landlord has a dominating relationship with the tenant like an employer. From a materialist standpoint, the problem is neither — the rent is merely too damn high, and is kept high because the tenant class has a systematic lack of power. The surplus-value extracted through rents is split up between the three classes of landlords, homeowners, and bankers, whose rivalries appear to be (and are) political conflicts. However, a change which would emancipate the tenant will never be presented by their debate.
⁴ The “cost-of-living” approach, incidentally, is astonishingly simple-minded. What is done is, they figure out the average amount a person spends per month, in each city, and then scale by one’s income. It is assumed that if you make $200K, you spend twice as much on consumption etc than someone who makes $100K — this is patently untrue.
⁵ One might foresee a problem here: if $78 = I/L, should I not be adjusted to account for the total material, instead of real, income? The answer is yes, but the correction is outside the scope of this article. See the forthcoming Appendix, which will be released after this series. In short form, the income received by a worker is not all “taken out” of the economy by them. It is counted as taken out by the worker in the official statistics, but then it is counted again as “taken out” by the landlord after the rent-payment, i.e. it is “double-counted.” But only the landlord, and not the worker, gets to spend or save this value. The total extraction from consumers ought to be subtracted from the value I, and thus $78/hr is an overestimate of the value of labor. If 10% of the gross national income is paid towards rent/interest/other extractive payments, then the value of an hour is 10% lower ($70).
⁶ https://www.marxists.org/archive/marx/works/download/pdf/Capital-Volume-I.pdf, page 466
