You can absolutely underpay your employees, sell goods to employees of others firms who do not, and profit. There is a clear benefit to a single company doing this.

It is not clear the benefit is greater than increasing wages, but that's another thing.

But if everyone does this, to the point that there are not enough potential consumers for the majority of products, then there is no benefit to lowering wages. You can't sell anything to anyone.

In the end, no one wins the race to the bottom.

Parent post is not arguing about underpaying, but the feasibility of increasing wages. The idea is that if we treat all companies and their employees as one grand company, then the company will have to sell everything to its employees in order to get revenue, but that revenue will have to be distributed to the employees as wages, in full, in order for everything to be bought. That leaves no margin for profit.

The answer to the question lies in what is missing from the equation: the existence of stockholders. They are potential customers too. You don't need to sell everything to just employees, that means you can underpay them and still be sustainable as long as stockholders buy things too.

But there are limits to how many things a customer wants to buy. Once the stockholders' needs are satiated, the rest of the profit won't be spent. At that point, in order for businesses to be sustainable, this balance has to be redistributed as increase in wages.

This sounds kind of like one of those games where the Nash equilibrium leaves everyone with fewer points than they'd get if they all cooperated in the right way. There may be something to that.

I have to say, though, paying my employees more so that my competitors have to pay their employees more so that their employees will buy more stuff from me sounds like a pretty dubious business strategy. And one that certainly won't work at all if there's enough of a labor surplus, because my competitors can keep their wages low and still find employees even if I'm paying an order of magnitude more.

I came to say the same thing.

Of course businesses shouldn't sacrifice all of their revenue.

Consumers are largely employees of businesses. If consumers do not have money to buy things from businesses then everyone loses. Instead of engaging on a senseless endeavor to lower wages as much as possible, strive for a FAIR wage that will allow consumers to do business with businesses.

The thing you are missing is that money spent isnt thrown into a black hole, its spent again, and again, and comes back to you several times. The economy does not function like a household budget.

Say my profit margin is 5%. I could pay my employee an extra dollar, but that dollar has to come back to me 20 times for the pay raise to have been worth it. Is that really going to happen?