August 15, 2017

Profit and the decline of labor’s nominal share (I)

Comment on Asher Schechter on ‘The Rise of Market Power and the Decline of Labor’s Share’

Blog-Reference and Blog-Reference on Aug 16 and Blog-Reference on Sep 21 adapted to context

Every economist can know from the Palgrave Dictionary that the profit theory is false (Desai, 2008). Or, as Mirowski put it: “... one of the most convoluted and muddled areas in economic theory: the theory of profit.” In other words: economists have NO idea of what the foundational concept of their subject matter is.#1

It is pretty obvious that without the true profit theory there is no true distribution theory.#2 In order to arrive at the true profit theory, the analysis has to let the false Walrasian microfoundations and the false Keynesian macrofoundations behind and to be based on the correct macrofoundations.#3

For the elementary production-consumption economy then follows:
Qm≡C−Yw      profit Qm is household sector’s spending C minus wage income Yw
Sm≡Yw−C      saving Sm is wage income Yw minus consumption expenditures C

The business sector’s monetary profit Qm is equal to the household sector’s dissaving. This is the most elementary form of the macroeconomic Profit Law. From this relationship follow some essentials about profit for the economy as a whole:
• The business sector’s revenues can only be greater than costs if, in the simplest of all possible cases, consumption expenditures are greater than wage income.
• Overall profit does neither depend upon the agents’ personal qualities, motives, their ideas about what profit is, nor on profit-maximizing behavior or on markup setting.
• In order that profit comes into existence for the first time in the elementary production-consumption economy, the household sector must run a deficit at least in one period. This presupposes the existence of a credit-creating entity.
• Profit/loss is, in the most elementary case, determined by the increase and decrease of the household sector’s debt.
• Monopoly power is irrelevant for total profit and affects only the DISTRIBUTION of total profit BETWEEN firms.
• There is no relation at all between profit, capital, marginal or average productivity. Automation affects only the DISTRIBUTION of total profit AMONG firms (and countries).
• Profit is a factor-independent residual and qualitatively different from wage income. Therefore, it is the most elementary mistake to maintain that total income is the sum of wages and profits.
• 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. Microfounded profit theory is one big Fallacy of Composition.

The axiomatically correct macroeconomic Profit Law is given for the GENERAL case as Qm≡Yd+(I−Sm)+(G−T)+(X−M) and reduces to Qm=(I−Sm)+(G−T) for Yd, X, M = 0; Legend: Qm total monetary profit, Yd distributed profit, I investment expenditures, Sm monetary saving, G government expenditures, T taxes, X exports, M imports.

The nominal labor share λ is defined as the quotient of wage income Yw and the sum of wage income and monetary profit Qm, that is, λ≡Yw/(Yw+Qm)≡1/(1+Qm/Yw).

It is obvious now that market power or automation cannot account for a falling nominal labor share λ. The MAIN drivers of increasing overall profit have been in the past decades the increasing debt of the household- and the government sector.

Egmont Kakarot-Handtke

#1 The Profit Theory is False Since Adam Smith. What About the True Distribution Theory?
#2 See also Essentials of Constructive Heterodoxy: Profit
#3 (A0) The objectively given and most elementary configuration of the economy consists of the household and the business sector which in turn consists initially of one giant fully integrated firm. (A1) Yw=WL wage income Yw is equal to wage rate W times working hours. L, (A2) O=RL output O is equal to productivity R times working hours L, (A3) C=PX consumption expenditure C is equal to price P times quantity bought/sold X. For a start X=O.

Related 'Profit and distribution: a primer' and 'Profit and the decline of workers’ nominal share (II)' and 'There is NO such thing as a “labor share of income”' and 'Links on McKinsey’s A new look at the declining labor share of income in the United States' and 'Profit'. For details of the big picture see cross-references Profit.