November 10, 2015

Profit and the poverty of economics

Comment on Lars Syll on ‘Neoclassical distribution theory’

Blog-Reference and Blog-Reference

All heterodox economists agree that neoclassical distribution theory is a failure and has to be replaced. The all-important question is wherewith?

Distribution theory suffers from the known fact that, after more than 200 years, economists cannot tell the difference between income, profit, distributed profit, and retained profit. As the Palgrave Dictionary summarizes: “A satisfactory theory of profits is still elusive.” (Desai, 2008)

Therefore both, the defenders and attackers of the market economy, have one property in common: they have no idea of what they are talking about. As a consequence, distribution theory has come down to psychologism and sociologism. There is nothing wrong with psychology and sociology per se, except that is not economics. Economics has to explain how the actual economy works and how the system produces the distributions we observe.

The economist, who in his manifest professional incompetence has not yet managed to exactly determine the difference between the pivotal concepts of his trade — income and profit — regularly takes refuge to moral outrage: ‘The rich man may feast on caviar and champagne, while the poor woman starves at his gate.’ (See intro)

Is there a relationship between profit and poverty? For a crash course in elementary economics take the formula Wikimedia AXEC06:

This is the fundamental economic law that contains the interrelation between the consolidated business sector’s cost/profit situation ρF, the real ρX and the nominal ρE side of the product market, and the income distribution ρD. It’s all in this formal nutshell.

How the economy evolves over time as an open system is defined by Wikimedia AXEC25:
This formula explains how the income distribution develops. For details see:

Economists do not help anybody by pointing out that poverty has a moral dimension. This has already been found out by non-economists long ago. It will be a first step in the right direction to stop the senseless filibuster of political economics and to start with scientifically sound theoretical economics. With neoclassical distribution theory economists have done a poor job so far. Heterodoxy is supposed to perform much better. More than 200 years of economists’ scientific failure did not help much to end poverty.

Egmont Kakarot-Handtke