February 20, 2019

Dear idiots, Marx got profit and exploitation wrong

Comment on Peter May on ‘A communist manifesto for money?’

Blog-Reference and Blog-Reference and Blog-Reference

Peter May recaps: “Marx is saying that money ― a monetary production economy ― is the basis for capitalism since capitalists use money to produce goods for sale for more money ― investment is for return, that is, profit. The profit comes from the wage being less than the market price of commodities produced by wage labor. The end-in-view is not to provide a rationale for abolishing money but rather for terminating the extraction of economic rent in the form of ‘surplus value,’ profit accruing from unpaid labor time.”

Marx’s definition of profit is ultimately based on the Labour Theory of Value which does not relate to the economy as a whole.#1 But Marx applied also macroeconomic reasoning: “How can they continually draw 600 p. st. out of circulation, when they continually throw only 500 p. st. into it? From nothing comes nothing. The capitalist class as a whole cannot draw out of circulation what was not previously in it.”

This, indeed, is the crux of Profit Theory. To come to the point, Marx got the answer wrong.#2 Here is the short proof.#3

(i) The objectively given and most elementary systemic configuration of the economy consists of the household and the business sector which in turn consists initially of one giant fully integrated firm.

(ii) The elementary production-consumption economy is defined by three macroeconomic axioms: (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.

(iii) The focus is here on the nominal/monetary balances. For the time being, real balances are excluded, i.e. X=O.

(iv) The monetary profit of the business sector is defined as Q≡C−Yw,

(v) The monetary saving of the household sector is defined as S≡Yw−C.

(vi) Ergo Q≡−S.

The balances add up to zero. The counterpart of household sector saving S is business sector loss −Q. The counterpart of household sector dissaving (−S) is business sector profit Q.

For a start, the household sector’s budget is balanced, i.e. C=Yw. From this follows that macroeconomic profit is zero. The market-clearing price is given by P=W/R and from this follows W/P=R, i.e. the real wage is equal to the productivity. The workers get the whole product.

Now, the owner of the single macroeconomics firm can do what he wants, i.e. lengthen the labor time or cut wages, nothing happens to profit and the real wage.#4 In Marx’s impeccable logic: “From nothing comes nothing. The capitalist class cannot draw more out of circulation than they throw into it.” They throw Yw in and get C out and because of C=Yw macroeconomic profit is zero.

The business sector can only get more out of the circulation if the household sector throws more in, that is, if the household sector deficit-spends/dissaves. This is what the most elementary version of the Profit Law says, i.e. Q≡−S. The logical minimum condition of deficit spending is a banking system that creates money and lends it to households.

So, profit does NOT come from exploitation but, in the most elementary case, from the growth of the household sector’s debt. And this, in turn, means that Capitalism does not end with a revolution of the exploited workers but as soon as the growth of private and public debt ends.#5

Egmont Kakarot-Handtke


#1 Basics of Value Theory
#2 Profit for Marxists
#3 Profit Theory in less than 5 minutes
#4 Capitalism, poverty, exploitation, and cross-over exploitation
#5 MMTers make capitalism work

Related 'Karl Marx, fake scientist' and 'MMT and Marxism ― blather as immunizing stratagem' and 'Marx’s bicentennial ― nothing to discuss, nothing to celebrate' and 'Here is the long overdue scientific death certificate for Marx and Marxists' and 'Marx and the curious coexistence of provably false economic theories' and 'Confounding sociology and economics' and 'Marxism is one of four instances of proto-scientific garbage' and 'Links on Karl Marx' and 'Ricardo, too, got profit theory wrong'.