April 1, 2016

How the American working class can bring overall profits down to zero without bloody revolution

Comment on anne on ‘Corporate profits are near record highs. That’s a problem’

Blog-Reference

Thank you for the reproduction of Summers’s article about his troubles with profits: “This is an apparent problem for the secular stagnation hypothesis I have been advocating for some time ...” It has to be emphasized that the real problem of Larry Summers is that he is advocating scientific garbage for too long a time.

In his article, Larry Summers evaluates several logically possible explanations for the record high of profit, among others productivity and monopoly power. Now, these factors are indeed effective for a SINGLE firm or a sub-sector. But what is true in partial analysis is NOT true for the economy as a whole. This false generalization is known as fallacy of composition. Most of standard economics consists of this fallacy. Economists are feeble thinkers.

For the economy as a WHOLE neither productivity nor monopoly power plays a role; overall profit for the closed investment economy is given by Qm=Yd+I-Sm. Legend: Qm monetary profit, Yd distributed profit, I investment expenditures, Sm monetary saving. With the trade balance and government added the equation becomes a bit longer.

The structural-axiomatic Profit Law says that for the economy as a WHOLE it is NOT wages that are the antagonist of profits but monetary saving Sm (see the minus sign). Put the other way round: it is deficit spending/dissaving of the household sector (and the government sector) that is a major profit determinant. Distributed profit, investment and an export surplus are the others. None of these factors appear in Larry Summers’s musings.

So, the height of OVERALL profit is not an indicator that American firms are particularly productive or that American business people are particularly smart or greedy or monopolistically. Overall profits are in the main the mirror image of GROWING private and public debt.*

The profit equation tells the working class how to bring down overall monetary profits: save and pay back your debt. No further action is needed (if prices fall proportionally).

Larry Summers is groping in the dark because all commonsensical partial profit theories are false and he has not gotten this since Econ 101.**

Egmont Kakarot-Handtke


* See chart St. Louis Fed
** See ‘The Profit Theory is False Since Adam Smith. What About the True Distribution Theory?

Immediately preceding 'Profit, marginalism, and other anomalies'