One of the key propositions advanced by the Spartacists, in their defense of the trade union form of organization, is that any examination of the objective effects of the globalization of capitalist production in driving down the wages and social conditions of the working class is tantamount to adopting a “present-day version of what in the 19th century was called the ‘iron law of wages.’” 
Because this forms such a vital component of their political perspective it is necessary to reveal, in some detail, the distortions and outright falsifications that they make.
The underlying thesis of the “iron law” was that any attempt by workers to increase wages by trade union or other forms of action would result in a general rise in the prices of commodities, thereby wiping out the effect of the increase in wages.
Marx took up this conception in his pamphlet Wages, Price and Profit, written in 1865 in reply to George Weston, a member of the General Council of the First International. The Spartacists never review what Marx actually wrote, nor the social and economic context in which he examined this question. Nonetheless, they charge that in analyzing the objective impact of globalized production on living standards, and the incapacity of the trade unions to sustain even the most basic interests of the working class, the International Committee has reverted to the “iron law of wages” and abandoned a “basic Marxist position.”
In his address to the First International, Marx showed that the “iron law”, as advanced by Weston, was based on the fallacious conception that the prices of commodities were determined and regulated by wages. While Weston’s propositions were the immediate subject of Marx’s analysis, his real target was the followers of Proudhon, whose politics exerted considerable influence in the French and other sections of the International.
The social base of Proudhonism consisted of the petty-bourgeois artisans and craftsmen, especially in Paris, who still worked outside the major industrial factories. The narrow outlook of this social layer was reflected in the main planks of the Proudhonist program: opposition to trade union action, opposition to political action to secure regulation by the state of working conditions, opposition to women entering the workforce, and the establishment of a people’s bank.
The basic program of Proudhonism, reflecting the interests of its petty-bourgeois artisanal social base, was not the overthrow of the social relations of capitalism, but rather the removal of monopolistic constrictions on the operation of the free market, together with the provision of large amounts of cheap credit to small producers through the people’s bank.
Marx regarded the defeat of the petty-bourgeois anarchist conceptions of Proudhonism as essential for the development of the workers’ movement, which was being brought into being by the growth of capitalist industrialization. The Proudhonists were the political spokesmen for social forces that were being pushed back by changes in the capitalist economy.
Here there is a direct parallel with the role of the Spartacists. Like the Proudhonists, they speak for petty-bourgeois layers whose social existence is bound up with economic, social and political relations that are being undermined by vast changes in the capitalist economy.
Marx had conducted a continuous exposure of the petty-bourgeois illusions of Proudhonism since writing the Poverty of Philosophy in 1847. At the time of his reply to the Proudhonist conceptions of Weston, he had made one of his most important discoveries: the origins of surplus value, which revealed how it was that the exploitation of the working class necessarily arose out of the very operation of the market.
The value of any commodity, he explained, was determined by the amount of socially necessary labor contained within it, that is, by the time taken on average to produce it. What was commonly considered the value of labor was, in fact, the value of labor power, the capacity of the laborer to work. Like any other commodity, its value was determined by the quantity of labor needed to reproduce it. In other words, the value of labor power was the value of the commodities needed to sustain the worker and his family.
The origin of surplus value, Marx explained, lay in the fact that the value of labor power was vastly different from the value which the worker added in the course of the working day. Whereas the average amount of necessaries to sustain the laborer and his family might require six hours for their production, the laborer engaged in 12 hours of work for the capitalist. This difference formed the basis of the unpaid labor or surplus value extracted from the worker in the course of the working day.
On the basis of this analysis, Marx explained that an increase in wages would not bring about a general increase in commodity prices. Rather, it would alter the distribution of the social produce between profits and wages. Consequently, between the maximum level of profits (determined by the minimum wage level) and the minimum level of profits “an immense scale of variations is possible”. The actual level of wages at any point in time is determined by the continuous struggle between capital and labor, with the matter resolving itself “into a question of the respective powers of the combatants.”
This is the point at which the Spartacists leave off their presentation of the issue, in order to introduce their falsifications. Having presented the iron law of wages as “a doctrine that wages could not be permanently raised above a fixed level regardless of the actions—economic and/or political—taken by the working class”, the Spartacists imply that Marx stated the opposite.
In fact, as Marx makes clear at the outset, he hopes that Weston “will find me agreeing with what appears to me the just idea lying at the bottom of his theses”. This “just idea” is that, in the long run, the economic and political action of the working class cannot permanently raise the level of wages, irrespective of objective economic conditions.
Having shown that the struggle over wages comes down to a question of the strength of the combatants, Marx then points to the processes which determine its outcome. He points out, in opposition to Weston, that farmers, for example, faced with an increase in the wages of agricultural laborers, were not able to increase the price of corn and had to submit to its fall. They countered the rise in wages not by increasing prices, but through the introduction of machinery and more scientific methods. They thereby diminished the demand for labor by increasing its productive power, and made the agricultural population again “relatively redundant.”
“This is the general method in which a reaction, quicker or slower, of capital against a rise of wages takes place in the old settled countries. Ricardo has justly remarked that machinery is in constant competition with labor, and can often be only introduced when the price of labor has reached a certain height, but the appliance of machinery is but one of the many methods for increasing the productive powers of labor. This very same development which makes common labor relatively redundant simplifies on the other hand skilled labor and thus depreciates it.” 
Marx went on to explain that, in the course of development of industry, the growth of capital far outpaced the growth of demand for labor and that, while the demand for labor increases, it will only “increase in a constantly diminishing ratio as compared with the increase of capital.”
The Spartacists attempt to invoke Marx as a supporter of their reformist thesis that through trade union action the working class is able to secure a permanent increase in wages and living standards. In fact, Marx draws the opposite conclusions. Having pointed to the reaction of capital to an increase in wages, he writes:
“These few hints will suffice to show that the very development of modern industry must progressively turn the scale in favor of the capitalist against the working man, and consequently the general tendency of capitalist production is not to raise but to sink the average standard of wages, or push the value of labor more or less to its minimum limit.” 
Having drawn out the main tendency of development, Marx then made clear that this by no means implied that workers should renounce resistance against the encroachments of capital or “abandon their attempts at making the best of the occasional chances for their temporary improvement.”
But, Marx insisted: “[T]he working class ought not to exaggerate to themselves the ultimate working of these everyday struggles. They ought not to forget that they are fighting with effects, but not with the causes of those effects; that they are retarding the downward movement, but not changing its direction; that they are applying palliatives, not curing the malady. They ought, therefore, not to be exclusively absorbed in these unavoidable guerrilla fights incessantly springing up from the never-ceasing encroachments of capital or changes of the market. They ought to understand that, with all the miseries it imposes upon them, the present system simultaneously engenders the material conditions and the social forms necessary for an economical reconstruction of society. Instead of the conservative motto, ‘A fair day’s wage for a fair day’s work!’ they ought to inscribe on their banner the revolutionary watchword, ‘Abolition of the wages system!’” 
The Spartacists attempt to base their indictment of the International Committee on one of the conclusions drawn by Marx from his analysis.
“Trade unions work well as centers of resistance against the encroachments of capital ... They fail generally from limiting themselves to a guerrilla war against the effects of the existing system, instead of trying to change it, instead of using their organized forces as a lever for the final emancipation of the working class, that is to say, the ultimate abolition of the wages system.”
According to the Spartacists: “The Northites now openly repudiate this basic Marxist position. They maintain that trade unions can no longer function as centers of resistance to the predations of capital, and they counterpose a socialist transformation to the defense of workers’ interests within capitalism.” 
The thesis that “trade unions work well as centers of resistance against the encroachments of capital” is not some kind of “basic Marxist proposition.” It was a conditional assessment by Marx at a definite point in time—the mid 1860s—when trade unions were only just beginning to make their appearance in a number of countries. It was an assessment made at a definite historical stage in the development of capitalism, not some kind of absolute pronouncement. But even as he emphasized the importance of the unions, Marx pointed to their inherent limitations.
Already, by the end of the 19th century, those limitations were coming to the fore and were being analyzed by the most prominent Marxists of the day, while by the end of the 1930s, Trotsky pointed to the growing tendency of the unions to become incorporated into the apparatus of the capitalist state—a tendency that accelerated greatly during World War II and during the post-war boom, when the trade unions functioned as co-administrators of the social welfare state.
However, when the postwar boom came to an end in the mid-1970s, and capital changed its orientation from one of limited concessions to the working class to never-ending reductions in real wages and working conditions, the trade unions, far from “working well”, proved completely incapable of resisting capital’s encroachments. The record in all the major capitalist countries is the same over the past two decades: real wages have declined, the working class has suffered a series of defeats, and conditions won in an earlier period have been severely cut back.
Not only have real wages been reduced, but social welfare provisions are being cut back in all the major capitalist countries as a direct consequence of the globalization of production. The bourgeoisie is now able to relocate different sections of the production process, not only to take advantage of lower wages, but to minimize taxation payments. The capitalist nation states are consequently in a competition with one another to attract transnational corporations to their territory by reducing tax and other payments. Furthermore, the globalization of finance means that even where corporations are required to pay tax, they can avoid most of it.
A recent report by the Australian Tax Office, for example, concluded that multinational companies, both domestic and foreign-based, paid virtually no company tax at all.
The pressure for lower wages comes not only from traditional low-cost areas. As one recent study concludes: “ ... the alignment of labor conditions across countries does not take place only because of competition from low-cost areas: it also forces Europe, America and Japan to converge. The pressures towards greater flexibility of the labor market and toward the reversal of the welfare state in Western Europe come less from the pressures derived from East Asia than from competition with the United States. It will become increasingly difficult for Japanese firms to continue life employment practices for the privileged 30 percent of its labor force if they have to compete in an open economy with American competitors practicing flexible employment.”