The profit theory is false since Adam Smith.#1 Economists have NO idea of the pivotal magnitude of their subject matter. This includes the four main sects Walrasianism, Keynesianism, Marxianism, Austrianism, and, of course, Fred Moseley and Peter Dorman.
There are three things that are intertwined but have to be analytically kept apart: (i) Theory of Value, (ii) Theory of Profit for the economy as a WHOLE, (iii) DISTRIBUTION of overall profit between sub-sectors (production, banking, land use, etc.) and individual firms.
The Law of Value says that relative prices in the pure production-consumption economy are inverse to the productivities.#2 This Law replaces the Labour Theory of Value.
The Profit Law for the pure production-consumption economy says that OVERALL profit depends on the expenditure ratio and the distributed profit ratio.#3
It holds in particular:
• Overall profit does neither depend upon the agents’ personal qualities, motives, their ideas about what profit is, nor on profit-maximizing behavior. These subjective factors are irrelevant, profit for the economy as a whole is OBJECTIVELY determined.#4
• In order that profit comes into existence for the first time in the pure production-consumption economy the household sector must run a deficit at least in one period.
• Profit is, in the simplest case, determined by the increase and decrease of the household sector’s debt. There is a close relation between profit/loss and the expansion/contraction of credit for the economy as a whole.
• Wage income is the factor remuneration of labor input. Profit is NOT a factor income. Since capital is nonexistent in the pure production-consumption economy profit is not functionally attributable to capital.
• There is no relation at all between profit, capital, marginal or average productivity. Proudhon’s increasing returns theory of profit is plain rubbish.#5
• Profit has NO real counterpart in the form of a piece of the output cake. Profit has a monetary counterpart.
• The existence and magnitude of overall profit do not depend on the ownership of the firms that comprise the business sector. The Profit Law is the SAME in capitalism and communism.
• The value of output is, in the general case, DIFFERENT from the sum of factor incomes. This is the defining property of the monetary economy.
• Profit is a factor-independent residual and qualitatively different from wage income. Therefore, it is an elementary mistake to maintain that total income is the sum of wages and profits.#6
• There is NO antagonism between total wages and total profits, and the distribution of consumption good output has nothing at all to do with profit.
• Innovation and efficiency are IRRELEVANT for the profit of the business sector as a WHOLE. It is a Fallacy of Composition to trivially generalize what can be observed in an individual firm.
The classical/neoclassical and Keynesian/Post-Keynesian theories of value/profit are provably false or, as Mirowski put it, “... one of the most convoluted and muddled areas in economic theory: the theory of profit.”#7 Time for Fred Moseley and Peter Dorman to end this HiFred-HiPeter Punch and Judy Show.
#1 The Profit Theory is False Since Adam Smith
#2 The Pure Logic of Value, Profit, Interest
#3 Essentials of Constructive Heterodoxy: Profit
#4 See the Profit Law for the elementary production-consumption economy on Wikimedia AXEC08
#5 Increasing Returns and Stability
#6 When Ricardo Saw Profit, He Called It Rent: On the Vice of Parochial Realism
#7 One way to get it right, many ways to get it wrong
Immediately preceding The thing with profit and exploitation.