May 1, 2019

Mad but true: 200+ years after Adam Smith economists still have no idea what profit is

Comment on Bill Mitchell on ‘Marxists getting all tied up’

Blog-Reference and Blog-Reference and Blog-Reference on May 2

Bill Mitchell derides neoclassical economists: “I was attracted to the writing of Karl Marx was because I considered his brilliant discussion of the differences between the superficial relationships we see in the market (so-called ‘exchange relations’) and the essential relationships that tie worker to the capitalist and create the conditions for surplus value production. A student studying neoclassical economics stays forever at the exchange relations level and can never appreciate the origins of profit. They think that somehow profit is created in the market via exchange of goods and services.”

Bill Mitchell claims that he knows how capitalism works: “A defining feature of capitalism is that the capitalist owns the productive means and the worker, while free to choose which capitalist to work for, has to work to survive. Survival requires the worker to agree to work for, say 8 hours to get the wage which might be equivalent to 2 hours of production. This is the wage form. It was a brilliant exegesis by Marx that provides a penetrating insight into the dynamics of our systems and continues to resonate. It is why class (in Marx’s terms) has to be at the forefront of the analysis. Nothing in MMT denies that status!”

Bill Mitchell is right, neoclassical economists have no idea about the origins of profit. However, neither do Marxists nor MMTers nor Bill Mitchell himself. As the Palgrave Dictionary has it: “A satisfactory theory of profits is still elusive.” (Desai, 2008)#1, #2, #3

The present generation of economists (Walrasians, Keynesians, Marxians, Austrians, MMTers) is lost and has to be written off. The following explanation of profit serves as a starting point for a more competent new generation.#4, #5

The elementary production-consumption economy is defined with this set of macroeconomic axioms: (A0) 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.

Under the conditions of market-clearing X=O and budget-balancing C=Yw in each period, the price as the dependent variable is given by P=W/R (1a). The price is determined by the wage rate W, which takes the role of the nominal numéraire, and the productivity R.

The macroeconomic Law of Supply and Demand (1a) implies W/P=R (1b), i.e. the real wage is always equal to the productivity no matter how the wage rate W is set or how long the individual or aggregate working time L is. The workers get the whole product O.

The focus is here on the nominal/monetary balances. For the time being, real balances are excluded, i.e. it holds X=O. The condition of budget balancing, i.e. C=Yw, is now skipped. The monetary saving/dissaving of the household sector is defined as S≡Yw−C. The monetary profit/loss of the business sector is defined as Q≡C−Yw. Ergo Q≡−S.

The balances add up to zero. The mirror image of household sector saving S is business sector loss −Q. The mirror image of household sector dissaving (-S) is business sector profit Q. Q≡−S is the elementary version of the macroeconomic Profit Law.

The Profit Law becomes progressively more complex#6 and summarizes the interactions between household, business, and government sector at some intermediary point as Q=(I−S)+(G−T) which reduces to Q≡(G−T), i.e. Public Deficit = Private Profit.

Conclusions: In the most elementary case of a production-consumption economy, macroeconomic profit does NOT depend on labor time or the wage rate or on exploitation or on market power or on innovation or on risk-taking but alone on the deficit-spending of the household sector. The MMT policy of government deficit-spending/money-creation pushes overall profit and benefits the Oligarchy.#7

Because Bill Mitchell and the rest of the MMT crowd does not understand what profit is the MMT approach as a whole including the personage consisting of scientifically incompetent academics, stupid social media trolls, corrupt political promoters, journalistic propagandists, Marxist fellow travelers, and open/hidden oligarchic sponsors has to be expelled from the sciences.

Egmont Kakarot-Handtke


#1 Profit for Marxists
#2 Profit and the collective failure of economists
#3 For details of the big picture see cross-references Profit
#4 True macrofoundations: the reset of economics
#5 The canonical macroeconomic model
#6 Wikimedia AXEC143d Profit Law (with increasing complexity) and Balances Equation

For more about the Profit Law see AXECquery.

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Wikimedia AXEC109i