January 19, 2017

How the 99 percent can bring overall profit of the 1 percent legally down to zero in 2017

Comment on David Ruccio on ‘Mind the growing gap’

Blog-Reference and Blog-Reference on Jan 23 and Blog-Reference on Jan 26 adapted to context

David Ruccio summarizes: “In recent years, corporate profits have been rising because they’ve been able to squeeze their own workers, by forcing more of them to work not for themselves but for corporate giants and, when they do, paying them a smaller and smaller share of the value that is created. ...”

This story has been told again and again since Adam Smith. It is commonsensically convincing but, on closer inspection, nothing but soapbox economics. The scientific fact of the matter is that economists do NOT know what profit is. More specifically, the four main approaches ― Walrasianism, Keynesianism, Marxianism, Austrianism ― are mutually contradictory, axiomatically false, and ALL got profit wrong.#1 As Mirowski put it, “... one of the most convoluted and muddled areas in economic theory: the theory of profit.”

By consequence, everything economists have said since Adam Smith about distribution is scientific rubbish.#2 It does not matter which political flag an economist is waving, ALL economists are scientifically incompetent.

The mistake/error/blunder of economists is that they argue from the micro perspective of the firm or the worker. Thus, they inevitably crash against a logical wall. The run-of-the-mill-best-and-brightest economists correctly observe that profit rises, for example, with productivity or increasing monopoly power or lower wages. Now, these factors are indeed effective for a SINGLE firm or a sub-sector. But what is true in partial analysis is NOT true for the economy as a whole.#3 This false generalization is known since antiquity as Fallacy of Composition. Most of the economics consists of this Fallacy.

For the economy as a WHOLE neither productivity nor monopoly power plays a role; overall profit for the closed investment economy is given by the macroeconomic 2-sector Profit Law Qm≡Yd+I−Sm. Legend: Qm monetary profit, Yd distributed profit, I investment expenditures, Sm monetary saving. With the trade balance and government added the equation becomes a bit longer.

The systemic Profit Law says that for the economy as a WHOLE it is NOT wage income that is the antagonist of profit but monetary saving Sm (see the minus sign). Put the other way round: it is deficit spending/dissaving of the household sector (and the government sector) that is a major profit determinant. Distributed profit, investment, and an export surplus are the others.

The size of OVERALL profit is NOT an indicator that American firms are particularly productive or that American businesspeople are particularly smart or greedy or monopolistically. These factors only influence the distribution of profits WITHIN the business sector. Overall profit is in the main the mirror image of GROWING private and public debt.#4

The Profit Law tells the ninety-nine-percenters how to bring overall monetary profit down to zero: save and pay back your debt. No further action is needed (if prices fall proportionally).#5

ALL commonsensical partial profit theories are false and neither orthodox nor heterodox economists have realized it to this day. Economics is a failed science and the proof is in the profit and distribution theory.

Egmont Kakarot-Handtke

#1 The Profit Theory is False Since Adam Smith. What About the True Distribution Theory?
#2 Inequality: Market failure or theory failure?
#3 How the intelligent non-economist can refute every economist hands down
#4 Rethinking deficit spending
#5 Mathematical Proof of the Breakdown of Capitalism