September 21, 2017

Profit and the decline of workers’ nominal share (II)

Comment on Noah Smith on ‘Why Workers Are Losing to Capitalists’

Blog-Reference and Blog-Reference

Every economist knows 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 clue about the foundational concept of their subject matter.#1

Without the true profit theory, there is no true distribution theory. The axiomatically correct macroeconomic  Profit Law is given as Qm≡Yd+(I−Sm)+(G−T)+(X−M) [1] and this reduces to Qm=(I−Sm)+(G−T) [2] for Yd, X, M=0; Legend: Qm total monetary profit/loss, Yd distributed profit, I investment expenditure, Sm monetary saving/dissaving, G government expenditures (consumptive), 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) with Qm given by [1] above.

Noah Smith concludes: “In other words, the two most conventional explanations for rising inequality and falling wages might both be correct. A perfect storm of robots and free trade … could be shifting power from the proletariat to the capitalists.” This conclusion is based on the traditional = false profit theory.

The fact is that market power and automation cannot account for a falling nominal labor share λ. The main drivers of increasing overall profit have been the increased deficit spending of the household- and the government sector in the past decades. Market power and automation can only account for the distribution of overall profit Qm among firms but NOT for the total amount.#2

Traditional distribution theory is merely a stubborn Fallacy of Composition.

Egmont Kakarot-Handtke

#1 The Profit Theory is False Since Adam Smith. What About the True Distribution Theory?
#2 For details of the big picture see cross-references Profi/Distribution.

For more about the so-called wage/profit share see AXECquery.


Wikimedia AXEC129d On closer inspection it turns out that the concept of labor/share is formally/dimensionally defective because profit is a balance and wage income is a flow. This blunder is called Flow-Balance Inconsistency.