January 1, 2015

Inequality, wage and profit

Comment on 'Inequality and the culprit economists overlook -- their own wage theory


From Jonathan Schlefer's historical overview everybody gets the impression that neither orthodox nor heterodox economists have a clear idea of the fundamental economic concepts income and profit. As a matter of fact, what is known with certainty from the structural axiomatic analysis is that the conventional approaches are logically deficient (2014).

An in-depth analysis shows that there is no such thing as “a share of profit in income” but there is “a share of distributed profit in income”. Most economists do not realize that profit and distributed profit are fundamentally different economic entities. Profit is not a factor income and it cannot be functionally attributed to capital. Because of this, the distribution of the period output has nothing to do with any marginal product of labor or capital (2012).

From the refutation of marginalism, though, does not follow that the alternative approaches of Keynes or Kalecki or Kaldor or Keen, for example, are substantially better. For Kalecki see on this blog.

The correct Profit Law reads for the investment economy:

Qm =Yd+I-Sm: (2014, p. 8, eq. (18))

Legend: Qm: monetary profit, Yd distributed profit, Sm: monetary saving, I investment expenditure.

The Profit Law, which is testable with an accuracy of two decimal places, gets a bit longer as soon as foreign trade and government is included. The crucial thing is that profit for the economy as a whole does not at all depend on capital and productivity and this makes the Cambridge Capital Controversy pointless. The productivity-profit nexus holds for a single firm and cannot be generalized for the economy as a whole. This is the fallacy of composition -- the trademark of conventional economic thinking (2013).

Changes of the valuation price of assets are captured by nonmonetary profit Qn. This is a separate and lengthy issue to be dealt elsewhere (2011).

The profit theory is false since Adam Smith. Without exception, the currently available distribution theories are hanging in the air.

This is the actual state of economics: a perfect scientific vacuum.

Egmont Kakarot-Handtke

Kakarot-Handtke, E. (2011). Primary and Secondary Markets. SSRN Working Paper
Series, 1917012: 1–26. URL
Kakarot-Handtke, E. (2012). Income Distribution, Profit, and Real Shares. SSRN
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Kakarot-Handtke, E. (2013). Confused Confusers: How to Stop Thinking Like
an Economist and Start Thinking Like a Scientist. SSRN Working Paper Series,
2207598: 1–16. URL
Kakarot-Handtke, E. (2014). The Three Fatal Mistakes of Yesterday Economics:
Profit, I=S, Employment. SSRN Working Paper Series, 2489792: 1–13. URL