February 22, 2018

The perennial conundrum: profit and distribution

Comment on Chris Dillow on ‘Stable Exploitation’

Blog-Reference and Blog-References

The Palgrave Dictionary summarizes: “A satisfactory theory of profits is still elusive” and this is the most damning verdict about economics. After 200+ years economists cannot tell the difference between profit and income. The major approaches ― Walrasianism, Keynesianism, Marxianism, Austrianism ― are mutually contradictory, axiomatically false, materially/formally inconsistent and all got the pivotal economic concept of profit wrong. Because the profit theory is false, the distribution theory, too, is false.#1, #2

One of the most crippling blunders since Ricardo is to equate profit with exploitation.#3

The very first thing to do is to get the profit theory right.#4 The axiomatically correct macroeconomic Profit Law is given with Qm≡Yd+(I−Sm)+(G−T)+(X−M); 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 given as the quotient of wage income Yw and the sum of wage income and monetary profit Qm, that is, λ=Yw/(Yw+Qm).

This gives one the determinants of λ. Monetary profit Qm for the world economy as a whole is determined by growth expressed as investment expenditures I, monetary saving/ dissaving Sm, and government deficit/surplus (G−T). This is a testable proposition because all variables are measurable. Roughly speaking, the growth of private and public debt explains the decline of λ in the US. This share has NOTHING to do with the usual suspects (mark-ups, relative productivity, monopoly, monopsony, etc.) which determine only the distribution of overall profit Qm between firms. To generalize phenomena that can be observed at the microeconomic level is known as Fallacy of Composition.

Egmont Kakarot-Handtke

#1 Profit and distribution: a primer
#2 Profit and the decline of labor’s nominal share
#3 Ricardo and the invention of class war
#4 Ricardo, too, got profit theory wrong

Related 'The Profit Theory is False Since Adam Smith. What About the True Distribution Theory?'