November 26, 2016

The thing with profit and exploitation

Comment on Peter Dorman on ‘It’s Red Friday and Time to Discuss the Role of Exploitation in Profit’

Blog-Reference and Blog-Reference on Nov 28

The Palgrave Dictionary summarizes: “A satisfactory theory of profits is still elusive.” (Desai, 2008)

This perhaps surprises the general public: economists do not know until this day what profit is. As a consequence, they have NO idea about how the monetary economy works. More specifically, economics consists of four main approaches, Walrasianism, Keynesianism, Marxianism, Austrianism, and NONE of them gets profit right.#1

As a consequence, economic policy guidance never has had sound scientific foundations. Because economists never captured the essence of the market economy, whatever they have said for or against capitalism, communism or socialism has been based upon provable false theories about how the monetary economy works.

Since Ricardo and Marx, both orthodox and heterodox economists believe that there is a fundamental antagonism between the firm’s owners (= capitalists) and the employees/workers.

The idea that antagonism between classes is built into the economic system, though, rests on an optical illusion. And this optical illusion ultimately derives from the theory of the firm. It is obviously true that an individual firm can increase profit by lowering the wage rate. But this is NOT true for the economy as a whole. To generalize what is true for an isolated part of a system is known in methodology as Fallacy of Composition.

In the most elementary case, the interdependencies of the economic system have the unintended effect that if firm A makes a profit by lowering the wage rate, firm B (= the rest of the economy) makes a loss under the initial macroeconomic condition that total consumption expenditure is equal to total wage income.#2 And, by the same token, the real wage of the workers of firm A decreases and that of the workers of firm B increases. So, what happens is that a redistribution of profit between firms and a redistribution of output between households takes place.

In political terms, this means that there are NO CLASSES with a common interest. Put differently, what appears as an exploitation of the workers of firm A is only part of the complete picture of a REDISTRIBUTION of profits WITHIN the business sector and a REDISTRIBUTION of output WITHIN the household sector. In other words: the exploitation of workers in firm A benefits the workers in firm B. And the profit increase of firm A’s capitalists comes from firm B’s capitalists. Taking all capitalists together their profit does not change. Taking all workers together their real share of output does not change.

Conclusion: the naive concept of exploitation has to be replaced by the concept of crossover exploitation.

Economists are supposed to be experts on the economy. So it is quite natural to think that they know how the profit mechanism works; after all, this is the foundational phenomenon of their subject matter. Yet, this is definitely not the case. Economists are incompetent scientists and, after 200+ years, they are still stuck in the Fallacy of Composition. So, economists have NOTHING to contribute to the discussion about how the economy, markets, and firms should be organized.

Economists have discussed the role of exploitation and profit without ever coming to the core of the matter. It is Red Friday and time for them to retire now for good.

Egmont Kakarot-Handtke

#1 How the Intelligent Non-Economist Can Refute Every Economist Hands Down and
The Profit Theory is False Since Adam Smith. What About the True Distribution Theory? and Profit for Marxists.
#2 Essentials of Constructive Heterodoxy: Profit

Immediately following How to end the Punch and Judy show about profit.

REPLY to Tom Hickey on Nov 27

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 are inverse to the productivities.#1 This Law replaces the Labour Theory of Value.

The Profit Law for the pure consumption economy says that OVERALL profit depends on the expenditure ratio and the distributed profit ratio.#2

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.
• In order that profit comes into existence for the first time in the elementary production-consumption economy, the household sector must run a deficit for 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 elementary production-consumption economy, profit is not functionally attributable to capital.
• There is no relation at all between profit, capital, marginal or average productivity.
• 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 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.#3
• There is no antagonism between total wages and total profits, and the distribution of consumption goods 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.

In sum: The classical/neoclassical and Keynesian/Post-Keynesian Theories of Value/Profit are provably false.

#1 The Pure Logic of Value, Profit, Interest
#2 Essentials of Constructive Heterodoxy: Profit
#3 When Ricardo Saw Profit, He Called It Rent: On the Vice of Parochial Realism

COMMENT on Andrew Anderson on Nov 28

You say: “A very interesting thing to me is that in the Bible profit is good but profit taking ISN’T(!) good ...”

It is common knowledge that the Bible belongs to the sphere of religion/belief/storytelling and that economics belongs to the sphere of science/knowledge/proof.

Both spheres do not mix, never have, and never will. Your post is out of place.

REPLY to jrbarch on Nov 29

It is common knowledge that content and level of economic discussion are far below zero. There is NO need for you or anybody else to deliver more examples.

For details see FakeNews, FakeScience: economics in the information age.

REPLY to jrbarch on Nov 30

You say: “I do have an issue with ‘trust me, I’m a scientist’.”

There is NO issue at all, there is only your abysmal ignorance and confusion. Science is NOT about trust or credibility or belief or authority, but only about proof, more specifically, about the logical and empirical consistency of a theory. A theory, in turn, is the best humanly possible mental representation of reality.

Since the ancient Greeks introduced the distinction between opinion (= doxa) and knowledge (= episteme) NO scientist has ever said believe me. As Popper put it: “... a critical discussion is well-conducted if it is entirely devoted to one aim: to find a flaw in the claim that a certain theory presents a solution to a certain problem.”

So, there is NO issue at all. I have given you the Profit Law and if you have qualms about it you are invited to refute it. Of course, you cannot. But you can endlessly waffle about Love, the Divine, your Australian aboriginal brothers, and all the other good vibration stuff.

Here is the ultimate test to practically find out the difference between doxa and episteme for yourself: You have the choice to board an aircraft that has been designed/constructed by your good vibration folks and one that has been designed/constructed by scientists/ engineers. Who do you REALLY trust?

OK, and now get out of economics.