Where do profits come from? Conventional economists say profit is the reward for risk-taking or for being patient with your capital. However, for classical political economists like Adam Smith, David Ricardo, and Karl Marx, the source of profit was the exploitation of labor.
To understand what we mean by the term “the exploitation of labor,” we can give a couple of concrete examples. Now, we can intuitively see that if Starbucks sells a cup of coffee for $6 then logically, it must have cost less than $6 to make. Why is that? Because if they sold them for exactly what it cost to produce them, then Starbucks wouldn’t make any money! To make profit, Starbucks must sell at a price above its costs of production per cup. Where does this extra money come from? Marx argued that the only input that could produce more value than what it costs is human labor.
Say you work for 8 hours a day at Starbucks as a barista. Your job is to take orders, make coffee, serve customers, clean the store and stock the shelves. You produce $20/hour of coffee so $160 of coffee a day. You earn $10 an hour or $80 a day. This means you spent half the day, four hours, earning your own paycheck. The other four hours, you are working for free for your boss, helping make him rich! Those extra four hours are essentially unpaid labor time, because the money that you created during those four hours went to your boss, not you. Starbucks is able to earn a lot of profits because your productivity, what you produce per hour, is higher than your wage, what you get paid per hour. As a worker you are exploited!
Now say your boss is unsatisfied with the current level of profits and wants to make even more money. They have two options. The first is for the workers to simply work harder or faster or for extra hours.
For example, your boss can demand that you work a longer shift for the same pay. In this case your wage remains $80 a day but you now work for 10 hours and produce $200 per day. You now create $120 a day in surplus value for the bosses. Your supervisor can also demand that you work faster or harder, creating even more products than is normal or average for an eight hour shift by pressuring you to work at a less humane pace. The effect on surplus value creation is the same.
The second option for the boss to make even more money is to introduce technology that will make you more productive per hour. For example, Starbucks can install new coffee machines in their stores that brew coffee faster and increase your productivity to $40 per hour. Your wages remain at $80 per day. So you now earn your full wage after two hours or work and perform six hours of unpaid or surplus labor time for your boss. The new machines allow you to produce $320 worth of surplus value for Starbucks each day, making the boss more money
If other coffee stores do not start using similar machines they will fall behind Starbucks in terms of profitability. Starbucks will enjoy extraordinarily high profits until its competitors catch up in terms of technology. This competition-induced drive towards technological development is what gives capitalism its dynamism and is for many its main selling point.