December 1, 2016

Rethinking the Profit Law

Comment on David F. Ruccio on ‘Value and the Marxian critique of political economy’


David F. Ruccio writes: “When I ask students to compare Marx’s theory of profits with the neoclassical theory of profits, they have no idea what I’m talking about.”

It’s worse, economists, in general, have NO idea about what profit is. This includes the four main sects Walrasianism, Keynesianism, Marxianism, Austrianism. The Palgrave Dictionary summarizes: “A satisfactory theory of profits is still elusive.” (Desai, 2008)

The Profit Theory is false since Adam Smith.#1 Economists have NO idea about the pivotal magnitude of their subject matter. This includes, of course, David F. Ruccio.#2

There is 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 elementary production-consumption economy are inverse to the productivities.#3 This Law replaces the Labour Theory of Value.

The Profit Law for the elementary production-consumption economy says that overall/macroeconomic profit depends on the expenditure ratio and the distributed profit ratio.#4, #5

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.
  • Profit/loss of the business sector is, in the simplest case, determined by the increase/decrease of the household sector’s debt.
  • Wage income is the factor remuneration of labor input. Profit is NOT a factor income.
  • 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 macroeconomic Profit Law is the SAME in Capitalism and Communism.
  • It is an elementary mistake to maintain that total income is the sum of wages and profits.
The classical/Marxian/neoclassical and the 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.” One thing has always been equally distributed between the major economic sects, viz. scientific incompetence.

Egmont Kakarot-Handtke

#1 The Profit Theory is False Since Adam Smith
#2 Profit for Marxists
#3 The Pure Logic of Value, Profit, Interest
#4 Essentials of Constructive Heterodoxy: Profit
#5 See the Profit Law for the elementary production-consumption economy in ratio-form on  Wikimedia AXEC08

Related 'Why economists know nothing' and 'Economics ― a doctor worse than the disease' and 'How the intelligent non-economist can refute every economist hands down' and 'True macrofoundations: the reset of economics' and 'First Lecture in New Economic Thinking' and 'Profit'


Wikimedia AXEC143d Profit Law (with increasing complexity) and Balances Equation