August 31, 2018

Economists simply don’t get it

Comment on Chris Dillow on ‘What’s behind the rising US profit share?’

Blog-Reference and Blog-Reference and Blog-Reference on Sep 3

Chris Dillow argues: “Diane Coyle says the fact that different countries have seen different changes in labour’s share of income in recent years ― with it falling in the US but not UK ― shows that ‘institutions are playing a big part’ in driving factor shares. This is true. But it’s only part of the story. I say so for a simple reason. Imagine aggregate wages were to fall for some reason ― technical change, globalization, whatever. Would this raise the profit share? Not necessarily. If every £1 fall in wages causes workers to cut their spending by £1, profits would also fall.”

False, profit would stay the same. The obvious fact of the matter is that economists do not understand to this day what profit is: “A satisfactory theory of profits is still elusive.” (Palgrave Dictionary, Desai, 2008) This is obviously disqualifying for economists in general and Chris Dillow, in particular.#1

Chris Dillow cites Kalecki and derives from “basic national accounts identities … an identity for profits: P=(C−W)+(I−D)+(G−T)+NX (i).”

This, of course, is proto-scientific garbage because economists are too stupid for the elementary mathematics that underlies National Accounting.#2, #3, #4 Distribution theory has always been false because Profit Theory has always been false.

To make matters short, here is the axiomatically correct macroeconomic Profit Law: Q≡Yd +(I−Sm) + (G−T)+NX (ii). Legend: Qm monetary profit/loss, Yd distributed profit, I investment expenditures, Sm monetary saving/dissaving, G government spending, T taxes, NX export minus import. Total profit Q is the sum of monetary profit Qm and nonmonetary profit Qn, i.e. Q≡Qm+Qn (iii).#5

Eq. (iii) determines the nominator of the so-called profit share and explains why it is rising. Roughly speaking, neither Diane Coyle’s institutions nor market power nor automation account for a rising profit share. The main drivers of increasing overall profit have been in the past decades the increasing deficit-spending of the government- and household sector which translates into ever-increasing public/private debt.#6

As Mirowski put it: “... one of the most convoluted and muddled areas in economic theory: the theory of profit.” No surprise then, that neither Diane Coyle nor Chris Dillow ever understood how the economy works, what profit is, and why the profit share rises. This is the essential prerequisite of trash-blogging.

Egmont Kakarot-Handtke

#1 The Profit Theory is False Since Adam Smith
#2 Profit: after 200+ years, economists are still in the woods
#3 Truth by definition? The Profit Theory is axiomatically false for 200+ years
#4 Wikipedia and the promotion of economists’ idiotism (II)
#5 For details of the big picture see cross-references Profit
#6 Profit and the decline of labor’s nominal share (I)

Related 'Macroeconomics ― dead since Keynes' and 'Feeble thinkers, feeble rethinkers: The perennial misery of economics' and 'Go! ― test the Profit and Employment Law' and 'MMT and the single most stupid physicist' and 'Kalecki and Keynes: The double macroeconomic false start' and 'Truth by definition? The Profit Theory is axiomatically false for 200+ years'.

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