July 5, 2016

The actual distribution is unacceptable? Do NOT seek economic advice!

Comment on David Ruccio on ‘Globalization, inequality, and imperialism’


Assume somebody argues as follows:
(i) We have reliable numbers about income and wealth distribution in our country and worldwide. They show extreme inequality.
(ii) I have come to the conclusion that this inequality is unacceptable for several reasons (economic, social, political, ethical, historical ...)
(iii) It turned out that there is a vast majority of fellow citizens who have come to the same conclusion.
(iv) We have decided in a referendum to take political action X in the immediate future that will lead to a more equal distribution in our country. There will be some negative effects but we believe the positive effects will be far greater.
(v) It is to be expected that other counties will act in like manner. So, we will have a more equal distribution worldwide soon.

Nobody should have any qualms with this argument and action plan. The point is that it belongs ENTIRELY to the political sphere. It contains not much economics and needs not much economics.

The qualms begin when economics comes in. Economists cannot explain how the monetary economy works, what profit is, how profit relates to exploitation, which built-in feedback loops stabilize and increase inequality, and how the distribution of income/wealth develops over time. What we know for sure is that the standard marginal productivity theory of distribution is false.

Unfortunately, other distribution theories are also false. Marx was, like the classics, a political economist and mainly concerned with society and the underlying laws/trends of societal evolution. As a matter of fact, he was rather good at descriptive sociology but failed as an economist. Like Smith, Ricardo, and other classical economists he got profit theory wrong (2014a). And this fate the Marxian school shares with the other schools until this very day: “A satisfactory theory of profits is still elusive.” (Desai, 2008, p. 10)

So we have Walrasianism, Keynesianism, Marxianism, Austrianism and all got profit theory wrong. Economics has NOTHING to say about the ultimate driving forces that have produced the observed inequality. And economics has NOTHING to offer in the way of effective measures that equalize the distribution without much collateral damage. Economists can describe the phenomenon of increasing inequality and talk much about it but they do not understand it. The profit and distribution theories are provably false since Adam Smith (2014b).

When Keynesian economists come one day to understand the relationship between income, profit, distributed profit, investment, saving, and deficit spending they will realize with horror that nothing has deteriorated the income distribution more than well-meant Keynesian deficit spending.#1 What economists lament today is an unintended consequence of their own policy advice and ultimately due to theory failure.

So, for a society that politically decides to change the income distribution, it would be a waste of time to seek the expertise of economists. Neither those who support the decision nor those who oppose it have a scientifically valid theory of how the actual monetary economy works.

Egmont Kakarot-Handtke

Desai, M. (2008). Profit and Profit Theory. In S. N. Durlauf, and L. E. Blume (Eds.), The New Palgrave Dictionary of Economics Online, 1–11. Palgrave Macmillan, 2nd edition. URL
Kakarot-Handtke, E. (2014a). Profit for Marxists. SSRN Working Paper Series, 2414301: 1–25. URL
Kakarot-Handtke, E. (2014b). The Profit Theory is False Since Adam Smith. What About the True Distribution Theory? SSRN Working Paper Series, 2511741: 1–23. URL

#1 Profit and the collective failure of economists and Keynesianism as ultimate profit machine