Blog-Reference and Blog-Reference
Marx got Profit Theory wrong and his followers did not get it right to this day.#1 This, of course, does not hinder them to give policy advice about how to better the economy and humanity. Needless to emphasize that economic policy that is not based on valid theory tends to worsen the situation.#2 As Stigum put it: “In order to tell the politicians and practitioners something about causes and best means, the economist needs the true theory or else he has not much more to offer than educated common sense or his personal opinion.”
To this day, Marxianism is merely opinion and NOT science, just like mainstream economics. Both get the foundational magnitude of economics ― profit ― wrong.#3
To make matters short, the axiomatically correct macroeconomic 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 Qm is determined by the excess of business sector investment over household sector saving, the government’s deficit, and the excess of exports over imports.
In order to derive the profit rate π the Profit Law is first simplified to Q≡I−Sm which says that macroeconomic profit is equal to the difference of business sector investment I and household sector monetary saving Sm.#4 Note that profit is gross, i.e. that depreciation D has been set to zero, i.e. Qn=−D=0. The point to notice is that investment is NEVER equal to saving and this means that Keynes’ I=S is false and with it the whole of Keynesianism.
To simplify further, household sector saving is set to zero. As a result, one gets Q=I, i.e. (gross) profit is equal to (gross) investment.
The profit rate is defined as π≡Q/K, i.e. profit in relation to capital. Now capital in period t is the sum of all previous investments, i.e. K≡ ∑ I. Mathematically, investment is the change of the capital stock, i.e. the derivative, and the capital stock is the sum of the changes, i.e. the integral. In the most elementary case (with zero depreciation), the profit rate depends alone on investment I.
This, though, gives one a positive feedback loop: “If company management see their profits or earnings slowing, they reduce their investment expansion and employment hiring and even reverse it.” But because of Q=I this reduces profit further. The analog holds for increasing profit. And this positive feedback explains the business cycle. The market economy is NOT an equilibrium system because of the positive feedback between profit and investment. This means that the whole of Walrasianism and Austrianism is false. All equilibrium models are proto-scientific garbage.
Whether the profit rate falls or rises depends in the most elementary case on the time profile of investment expenditures I. In the early phase of Capitalism investment, i.e. the growth of the capital stock, drives profit. For late Capitalism, the Profit Law tells one Qm≡(I−Sm)+(G−T), i.e. profit is mainly driven by public deficit spending. This means that the profit rate depends on the growth rate of public debt. The so-called free-market economy is on the full life support of the state.
* Michael Roberts Blog HM1 ― Marx’s double-edge law
#1 Links on Karl Marx
#2 Econogenics: economists pose a hazard to their fellow citizens
#3 The real trouble with Capitalism: stupid/corrupt economists
#4 For more details see section 6.2 of Squaring the Investment Cycle
Related 'Proﬁt for Marxists' and 'Economists cannot do the simple math of profit — better keep them out of politics' and 'Wikipedia, economics, scientific knowledge, or political agenda pushing?' and 'The GDP-death-blow for the economics profession'.