July 16, 2019

Profit analysis ― another exercise in economic deception

Comment on Michael Roberts on ‘A profits recession?’*

Blog-Reference and Blog-Reference

Michael Roberts reports: “Much is made of the large profits that the top tech companies, the so-called FAANGS, make. But this hides the situation for the majority of US companies. Those with a market value of $300m to $2bn look set to experience a 12% drop in earnings from this time last year after a 17% drop in Q1 2019. So small to medium size American companies are suffering a sharp profits decline.” and “And even with the larger companies, profits are not as good as portrayed. That’s because earnings per share have been boosted by the large companies buying back their own shares (same earnings but with less shares available).” and “Underlying this decline in profits are higher wage costs as fuller employment forces companies to concede wage increases to keep skilled workers – it’s a different story with the less skilled outside the tech sector. Also the cost of other non-labour inputs (energy, raw materials etc) are rising.” and “Most important, even the tech sector will experience an 11.9 per cent fall in earnings and a 1.1 per cent drop in revenues. This is important because it is this sector above all that has driven profits growth in American companies over the period since the Great Recession. If the FAANGS show a decline on profits, then American capital is in trouble.” and “According to Montier, when you dig down into the market you find that a staggering 25-30 per cent of firms are actually making a loss.”

These factoids are seemingly objective information but the only effect of this bombardment with incoherent and mostly irrelevant details is disinformation.

The point at issue is macroeconomic profit, i.e. the sum of profits and losses for the economy as a whole. In principle, this number can be calculated with the precision of two decimal places from the profit-and-loss accounts of all firms taken together under the condition, of course, that the firms’ accounting systems reliably register all transactions. The first thing to note is that the economic measurement and control systems are thoroughly corrupted as the case of Enron and the audit firm Arthur Andersen has shown.

The remarkable difference between the genuine science physics, for example, and the fake science economics is that while physicists continuously improve the precision of their measurement devices, economists have not shown much ambition to develop a consistent and reliable measurement system from the level of the individual firm upwards to National Accounting. Economists prefer to stay in the swamp where “nothing is clear and everything is possible.” (Keynes) Or, as the brain-dead Post-Keynesian motto has it: “It is better to be roughly right than precisely wrong!”

This is NOT how science works. Vague theory and vague data are the means of survival of incompetent scientists because, as Feynman put it: “Another thing I must point out is that you cannot prove a vague theory wrong.”#1 In political economics, it is possible to “prove” any point with a selection of incoherent and unreliable data.

The correct route to the determination of macroeconomic profit is via macroeconomic theory.

The axiomatically correct Profit Law is given by Q≡Qm+Qn with Qm≡Yd+(I−Sm)+(G−T)+(X−M) Legend: Qm monetary profit/loss of the business sector, Yd distributed profit, I investment expenditure, Sm monetary saving/dissaving of the household sector, G government expenditures, T taxes, X exports, M imports. Total profit Q is the sum of monetary and nonmonetary profit/loss. Roughly speaking, monetary profit is determined by the excess of business sector investment over household sector saving, the government’s deficit, and the excess of exports over imports. All variables are measurable with the precision of two decimal places.

Note that the Marxist economist Michael Roberts does not mention the macroeconomic Profit Law once. The reason is simple: Marxian Profit Theory is false for 150+ years.#2, #3 As a result, the whole barrage of Michael Roberts’ factoids (earnings per share, buybacks, partial wage increases, profit margins, productivity, real wages, etc.) is nothing but confused blather.

However, this does not hinder Michael Roberts to push a story: “Underlying this decline in profits are higher wage costs as fuller employment forces companies to concede wage increases to keep skilled workers ― it’s a different story with the less skilled outside the tech sector. … So profit margins (profits per unit of production) are falling.”

And from this crappy argument (a fall in margins does NOT mean a fall in macroeconomic profit which is determined by the Profit Law) he derives a gloomy prophesy: “If the profits crash materialises and is sustained through the year, a sharp fall in investment and eventually employment and spending will follow, despite the stock market boom ― in effect a new recession.”

Michael Roberts delivers a fine example of how political economics works and how stupid/corrupt political economists are.

Egmont Kakarot-Handtke

* Michael Robert’s blog
#1 And the answer is NCND ― economics after 200+ years of Glomarization
#2 Profit for Marxists
#3 Ricardo and the invention of class war

Related 'The Common Error of Common Sense: An Essential Rectification of the Accounting Approach' and 'It is better to be precisely right than roughly wrong'. For details of the big picture see cross-references Profit/Distribution and cross-references Accounting.

REPLY to jlowrie on Jul 17

You say: “Funny how nobody recognised Ricardo’s ‘garbage’ at the time, not even his opponents!”

Fact is that Profit Theory is provably false from Adam Smith onward to Ricardo to Marx to Keynes to Michael Roberts and jlowie.#1-#4 This is not funny but proves that economists are too stupid for science.

#1 Ricardo, too, got profit theory wrong
#2 The Profit Theory is False Since Adam Smith
#3 Capitalism, poverty, exploitation, and cross-over exploitation
#4 For more details see cross-references Profit/Distribution

REPLY to vm on Jul 17

You say: “Mr Karakot i don’t think you have ever cared to understand what marx wrote.”

It is pretty obvious that you don’t even know the difference between thinking and brain-dead blathering.

The point at issue is macroeconomic profit and whether there is a profit recession. In order to answer the question, you must know what profit is. If you “think” the macroeconomic Profit Law is false you are free to logically/empirically refute it.

Marx is a side issue, he is only one of many who did not know what profit is.#1, #2

#1 Karl Marx, fake scientist
#2 Marx’s bicentennial ― nothing to discuss, nothing to celebrate

REPLY to ucanbpolitical on Jul 18

You say: “Firstly the origin of the system of national accounts from which you draw your categories is based on volume 2 of Das Capital. There Marx compiled the first input output tables when he described simple and expanded reproduction.”

Take notice that input-output tables deal with real magnitudes while national accounting deals with nominal magnitudes. These are quite different things as every economist should know.

Marx proved nothing except that he was an incompetent scientist who NEVER understood what profit is and how the economy works.#1, #2, #3, #4 The same holds for his followers to this day. The proof is in Michael Roberts profit analysis and your confusion about input-output and national accounting.

#1 Dear idiots, Marx got profit and exploitation wrong
#2 If we only had classes
#3 The thing with profit and exploitation
#4 Socialism and scientific incompetence

REPLY to Boffy on Jul 20

You say: “As Marx points out, Adam Smith’s ‘absurd dogma’ that the value of commodities is resolvable into revenues (wages, profits, rent, interest and taxes) is also applied to the national output, and this absurd dogma was continued, as Marx says, by economists after Smith. It is what lies behind the current equation of National Income and National Output, as also used by Keynesian economists.”

Marx’s scheme of simple/expanded reproduction is no less absurd. Here is the axiomatically correct macroeconomic Profit Law with increasing complexity
  1. Qm≡−Sm in the elementary production-consumption economy (= simple reproduction),
  2. Qm≡I−Sm in the elementary investment economy (= expanded reproduction,
  3. Qm≡Yd+I−Sm in the investment economy with profit distribution,
  4. Qm≡Yd+(I−Sm)+(G−T)+(X−M) in the general case with government in an open economy.
All equations consist of measurable variables and are, as a matter of principle, testable with the precision of two decimal places. This settles the matter.

It is time for you and Michael Roberts to get out of economics because you are too stupid for the elementary mathematics that underlies macroeconomics. Marxians are scientifically incompetent just like non-Marxians and all together are only employable as clowns and useful idiots in the political Circus Maximus.


REPLY to Michael Ballard on Jul 21 and Blog-Reference on Jul 22

You say: “Apparently, he writes a lot”. See in particular on SSRN
Essentials of Constructive Heterodoxy: Profit

Marx asked the right question: “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.” Marx never figured it out.

Macroeconomic profit is given by Q≡Qm+Qn with Qm≡Yd+(I−Sm)+(G−T)+(X−M). This means in practical detail:

• The business sector’s revenues can only be greater than costs if, in the simplest of all possible cases, consumption expenditures are greater than wage income.

• Macroeconomic profit does neither depend upon the agents’ personal qualities, motives, their ideas about what profit is, nor on profit-maximizing behavior.

• In order that profit comes into existence for the first time in the elementary production-consumption economy, the household sector must run a deficit at least in one period. This presupposes the existence of a credit-creating entity.

• Profit is, in the most elementary case, determined by the increase and decrease of the household sector’s debt. There is a close relation between profit/loss and the expansion/contraction of debt for the economy as a whole. The macroeconomic Profit Law boils down to Public Deficit (G−T) = Private Profit Qm. This is the life formula of Late Capitalism.

• Wage income is the factor remuneration of labor input. Profit is not a factor income. Since capital is nonexistent in the elementary production-consumption economy profit is not functionally attributable to capital.

• There is no relation at all between profit, capital, marginal or average productivity.

• Profit has no real counterpart in the form of a piece of the output cake. Profit has a monetary counterpart.

• The existence and magnitude of macroeconomic profit do not depend on the ownership of the firms that comprise the business sector. The macroeconomic Profit Law holds for capitalism and communism and everything in-between.

• The value of output is, in the general case, different from the sum of factor incomes. This is the defining property of the monetary economy.

• Profit is a factor-independent residual and qualitatively different from wage income. Therefore, it is an elementary mistake to maintain that total income is the sum of wages and profits.

• There is NO antagonism between total wages and total profits, and the distribution of consumption good output has nothing at all to do with profit.

• Innovation and efficiency are irrelevant for the profit of the business sector as a whole. It is the Fallacy of Composition to trivially generalize what can be observed in an individual firm.

The crucial point is that macroeconomic profit cannot be derived from the behavior of the individual firm or individual capitalist. That is, the standard microeconomic approach cannot, as a matter of principle, deliver the correct profit theory. Neither can the Marxian approach. This is why economics is a failed science to this day.#1

#1 Profit and the collective failure of economists


Wikimedia AXEC143d  Profit Law (with increasing complexity) and Balances Equation

Jul 21

REPLY to Michael Ballard on Jul 23

I have given the link to Profit for Marxists already in my first post, see #2. So, anyone interested in “why Marx knew virtually nothing about how profit is generated” has already read it.