June 28, 2017

Profit and stupidity

Comment on Barkley Rosser on ‘Comments on Profit and Capital’


The Palgrave Dictionary summarizes: “A satisfactory theory of profits is still elusive.” (Desai, 2008). This translates into: after 200+ years economists still do not know what profit is.

Barkley Rosser quotes Marx, Piketty, Ricardo, the Austrians, and the textbooks in order to show how economists have dealt with profit and closely related concepts. Yes, all economists/schools had their own definition of profit which only proves, in Popper’s words: “This shows that they are not all true. For if they conflict, then at best only one of them can be true.” In fact, ALL are provable false.#1

In his lengthy post Barkley Rosser throws in a host of phenomena that are superficially related to profit (capital, machinery, depreciation, waiting, roundaboutness, risk, profit distribution, etcetera) and thus thoroughly messes the whole issue up. This is the tried and tested swampification strategy of confused confusers. In order to determine profit all these related phenomena have to be put aside in the first round for reintroduction at a later stage. The lethal analytical mistake is to automatically couple profit and capital. Both have to be properly kept apart. Barkley Rosser’s methodological incompetence reveals itself already in the thread’s title.

For the determination of monetary profit of the economy as a whole one has to start with the most elementary case of a pure consumption economy without investment, government, and foreign trade.#2 In this elementary economy three configurations are logically possible: (i) consumption expenditures are equal to wage income C=Yw, (ii) C is less than Yw, (iii) C is greater than Yw.
In case (i) the monetary saving of the household sector Sm≡Yw-C is zero and the monetary profit of the business sector Qm≡C-Yw, too, is zero.
In case (ii) monetary saving Sm is positive and the business sector makes a loss, i.e. Qm is negative.
In case (iii) monetary saving Sm is negative, i.e. the household sector dissaves, and the business sector makes a profit, i.e. Qm is positive.

It always holds Qm+Sm=0 or Qm=-Sm, in other words, loss is the counterpart of saving and profit is the counterpart of dissaving. This is the most elementary form of the Profit Law. Note that profit has NOTHING at all to do with capital. To mindlessly couple profit and capital has been the crucial analytical blunder of the founding fathers from which economics has not recovered until this day. These 200+ years of analytical sloppiness and confusion are a telling metric for the scientific incompetence of economists.#3

Profit for the economy as a WHOLE has NOTHING to do with productivity, the wage rate, the working hours, exploitation, competition, capital, power, waiting, risk, greed or the smartness of capitalists. Overall profit/loss is determined in the most elementary case by the change of the household sector’s debt.#4 This is a testable proposition.

Egmont Kakarot-Handtke

#1 See ‘The Profit Theory is False Since Adam Smith
#2 The macrofoundations approach starts with three systemic (= behavior-free) axioms: (A0) The objectively given and most elementary configuration of the economy consists of the household and the business sector which in turn consists initially of one giant fully integrated firm. (A1) Yw=WL wage income Yw is equal to wage rate W times working hours. L, (A2) O=RL output O is equal to productivity R times working hours L, (A3) C=PX consumption expenditure C is equal to price P times quantity bought/sold X. For a start it holds X=O.
#3 See also ‘How the intelligent non-economist can refute every economist hands down
#4 For more details see cross-references Profit

Immediately following 'Economists: scientists or political clowns?'