Profit/Distribution: cross-references

Posts and abstracts

• Keynes―Marx―Profit: The abysmal scientific failure of economics   here
• Profit: The most powerful formula of economics   here
• Profit   here
• MMTers: too stupid for simple math   here
• There are NO crank scientists in economics because economics is NOT a science   here
• How Randall Wray takes the piss out of the House Budget Committee   here
• Marx and Marxists ― too stupid for the elementary algebra of profit   here
• Exploding the Household Fallacy   here
• Gosh! the One Percent have gotten $21 trillion richer: Links on Distribution   here
• Keynes ― the poster boy for the weakness of the economist’s mind   here
• The dirty secret of Capitalism: Economists have NO idea how Capitalism works   here
• Profit analysis ― another exercise in economic deception   here
• Profit and Distribution Theory is false for 200+ years   here
• Economics: failure, fake, fraud   here
• Macroeconomics: Economists are too stupid for science   here
• Safe assets ― how the State pampers the Oligarchy   here
• The CCC ― a monument of economists’ utter scientific incompetence   here
• Yes, economists are really that stupid   here
• Dear idiots, it is deficit spending that creates the distribution people complain about   here
• Dear idiots, MMTers are Wall Street’s agenda pushers   here
• The public-debt and private-profit pushers   here
• How counterfeiters save America with an extra profit and make WeThePeople pay for it   here
• Some nasty MMT surprises behind the time horizon   here
• Basics of Value Theory   here
• MMT: Distribution is the drawback NOT Inflation   here
• Profit and macrofoundations   here
• Deficit-spending, public debt, and macroeconomic profit/loss   here
• Links on James Petras’ ‘Big Business Strikes Back: The Class Struggle from Above’   here
• MMT and the overall political corruption of economics   here
• Very busy these days: Wall Street’s agents   here
• MMT, Warren Mosler, and the little helpers from Wall Street and Academia   here
• If we only had classes   here
• Heterodox economics: When stupidity becomes a public danger   here
• Why the MMT benefactors of humanity never talk about profit   here
• There is NO such thing as a “labor share of income”   here
• Good news for the one-percenters   here
• Go! ― test the Profit and Employment Law   here
• Economists simply don’t get it   here
• How to get rid of inflation and deflation   here
• How Keynesians, Lernerians, MMTers make the oligarchy great   here
• The Magic Money Tree is real ― too bad that the magic is a fraud   here
• The inexorable paradigm shift in economics   here
• Wikipedia and the promotion of economists’ idiotism (II)   here
• Truth by definition? The Profit Theory has been axiomatically false for 200+ years   here
• MMT: How mathematical incompetence helps the Kelton-Fraud   here
• The Kelton-Fraud   here
• Profit: after 200+ years, economists are still in the woods   here
• It has been said before but economists still don’t get it   here
• Nietzsche, entropy, full employment, and NO class war   here
• The Third Way: Towards the Happy Zero-Tax economy   here
• How economists missed out on the essential relationship of economics   here
• The demise of phony experts: macroeconomics is provably false   here
• How MMT enlightens Washington   here
• Profit and the Private-Property-Irrelevance Theorem   here
• Profit: after 200+ years still elusive   here
• Marx today   here
• Capitalism, poverty, exploitation, and cross-over exploitation   here
• The curious non-existence of profit in economics   here
• Note on “Era of Austerity coming to an end...”   here
• DSGE and profit―forget it! MMT and profit―forget it!   here
• MMT is idiocy and fraud   here
• Fiscal policy and the Humpty Dumpty Fallacy here
• The perennial conundrum: profit and distribution   here
• Ricardo and the invention of class war   here
• Profit, income, and the Humpty Dumpty Fallacy   here
• MMT = proto-scientific junk + deception of the 99-percenters   here
• Down with idiocy!   here
• Keynes, Lerner, MMT, Trump and exploding profit   here
• The profit theory is false since Adam Smith   here
• Economists understand neither Capitalism nor Socialism   here
• Saving NEVER equals investment   here
• MMT: Just political heat, no scientific light   here
• MMT: Money-making for the one-percenters   here
• The profit effect of a Job Guarantee   here
• National Accounting: scientific incompetence or political fraud?   here
• Profit and the decline of workers’ nominal share   here
• MMT ― the economics moron as problem solver   here
• Where modern macroeconomics went wrong   here
• Why economists don’t know what profit is   here
• Rectification of MMT macro accounting   here
• Karl Marx, fake scientist    here
• Profit and the decline of labor’s nominal share   here
• MMT and the magical profit disappearance   here
• Economists: scientists or political clowns?   here
• Profit and stupidity   here
• Just revealed: IS-LM is dead for 80+ years   here
• Profit and distribution: a primer   here
• Where MMT got macro wrong   here
• Austerity and the idiocy of political economists   here
• Rethinking the Distribution   here
• Where economics went wrong   here
• A vacuous analysis of profits and productivity   here
• Windmill economics   here
• Profit and price ― solving the mystery   here
• How the 99 percent can bring overall profit of the 1 percent legally down to zero in 2017   here
• Inequality: Market failure or theory failure?   here
• Income distribution: No market failure but theory failure   here
• The economic machine is broken? Don’t call the heterodox repairman!   here
• The distribution theory is false because the profit theory is false   here
• Macro for dummies   here
• The monetary circuit and how economists got it wrong   here
• Why economists know nothing   here
• Economists still don’t get Econ 101 right   here
• Rethinking the Profit Law   here
• Rethinking deficit spending   here
• How to end the Punch and Judy show about profit   here
• The thing with profit and exploitation   here
• Wikipedia and the promotion of economists’ idiotism (I)   here
• The final implosion of MMT   here
• Economics between science and magic   here
• A new episode of one of the worst blunders of economics   here
• Keynesian macrofoundations are defective   here
• The general theory of scientific incompetence   here
• How Keynes got macro wrong and Allais got it right   here
• Keynesianism: The triumph of blathering over thinking   here
• Clueless about money and profit   here
• Demystifying employment theory and policy   here
• The unfinished Keynes (III)  here
• Making the economy the focus of the economists’ dialogue   here
• Stock prices, profit, and other self-fulfilling idiocies   here
• History and future of the monetary economy   here
• There is no thrift paradox, or, How economists fell over their own feet   here
• Enough! Economists, retire now!   here
• The actual distribution is unacceptable? Do NOT seek economic advice!   here
• Fatal defects of profit and market theory   here
• The scientific self-elimination of Heterodoxy   here
• The tiny little problem with economics   here
• The great economic equations   here
• Hayek or how economists miss their subject matter for more than 200 years   here
• The unintended consequences of deficit spending   here
• Economic policy has gone wrong because economic theory has gone wrong   here
• High profits and low economics   here
• The solemn burial of marginalism   here
• How Keynes messed macro up   here
• As Napoleon said: don’t listen to economists   here
• How the American working class can bring overall profits down to zero without bloody revolution   here
• Profit, marginalism, and other anomalies   here
• Your profit theory is false   here
• “As goes GM, so goes America” — A rather ordinary fallacy of composition here
• How the intelligent non-economist can refute every economist hands down   here
• Wages and profits are NOT the components of income   here
• Heterodoxy, too, is scientific junk   here
• Confounding sociology and economics   here
• The very real problem of zero scientific utility   here
• No culpa, only stultitia   here
• Who said what to whom — and does it matter?  here
• Essentials of Constructive Heterodoxy: profit  here
• Income, profit, distributed profit: a radical simplification  here
• Refocusing the debt/profit issue  here
• The Profit Law  here
• Inequality, wage, and profit  here
• Kalecki's wrong definition of profit and income  here
• The universal Profit Law and the multitude of unique historical circumstances  here
• The profit theory is false since Adam Smith. What about the true distribution theory?  here
• What the Top 20 heterodox economists say  here
• Profit for Marxists  here
• Where is profit?  here
• Profit is the key  here
• Flawed logic  here

Profit is the pivotal concept for the analysis of how the economy works. Without a correct profit theory, economics is vacuous. The conventional profit theory is logically indefensible. Economists have no true conception of the most important phenomenon in their universe.

Working papers

• How the intelligent non-economist can refute every economist hands down   SSRN
• The profit theory is false since Adam Smith. What about the true distribution theory?  SSRN
• The emergence of profit and interest in the monetary circuit   SSRN
• Profit for Marxists   SSRN
• Primary and Secondary Markets   SSRN
• Debunking squared   SSRN
• Understanding profit and the markets: the Canonical Model   SSRN
• Income distribution, profit, and real shares   SSRN
• When Ricardo saw profit, he called it rent: on the vice of parochial realism  SSRN
• Schumpeter and the essence of profit   SSRN
• Uniform profit ratios   SSRN
• Keynes' missing axioms   SSRN

Meta references

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Graphic AXEC143d AXEC® Profit Law and Balances Equation (with the increasing complexity of the economy)

Key Issues: Profit

Neither orthodox nor heterodox economists have a clear idea of the fundamental concepts of income and profit. What is known with certainty from the elementary macro-axiomatic analysis is that the conventional approaches are logically deficient.



Dear representative economist, if you apply a conception of total monetary profit that is, in the elementary case, different from Qm≡EC−Y+DN ⇓, your theory is demonstrably false and therefore inappropriate for the solution of real-world problems. The definition of profit is not a matter of personal taste but of logical and material consistency. Ultimately, the selection of axioms determines analytical success or failure.

If you are a businessman, you know the particular profit determinants of your firm, but this does not give you the determinants of total profit for the business sector as a whole. The generalization of partial truths is prone to the Fallacy of Composition. From individual experience, no correct profit theory follows. Because of this, business people do not know better than average citizens how the economy works.

If you are a consultant or advisor and your background knowledge contains assertions like: the value of the product equals the value of factor incomes, total income is the sum of wages and profits, distributed profit is equal to profit, or saving equals investment, your advice is not based on state-of-the-art analysis and is, at best, useless.

If you are a student, you are expected to find out whether your teacher's theory is true or false, or incomplete. Growth of knowledge is what science is all about. The acceptance of basic tenets of conventional economics is indicative of a lack of scientific acumen. From a student who has accepted supply-demand-equilibrium as an explanation, not much is to be expected.

With regard to the formal foundations of a Paradigm, it is not the case that anything goes. John Stuart Mill clearly stated the key question:

What are the propositions which may reasonably be received without proof? That there must be some such propositions all are agreed, since there cannot be an infinite series of proof, a chain suspended from nothing. But to determine what these propositions are, is the opus magnum of the more recondite mental philosophy.

Neither Orthodoxy nor Heterodoxy has accomplished the opus magnum. Economics is still at the stage of a proto-science. A 'sequence of models' (Koopmans) is no substitute for a comprehensive theory that realizes both formal and material consistency.

By looking at a single firm, it seems that profit depends on (List A):

• exploitation of the workforce
• innovation
• risk-taking
• capital accumulation
• monopolistic practices
• market imperfections
• the combination of the factors of production
• wage rate and employment
• the talent of managers and the motivation of the workforce
• aggressive expansion at home and abroad
• bamboozling the consumer
• speculation, financial manipulation, fraud, cheating
• corruption, cronyism, gaming the system
• the loss of other firms.

These factors play a role when it comes to the distribution of profits between firms. But these factors cannot explain the profit of the business sector as a whole. The conventional view is that total profit must be zero in equilibrium under the condition of perfect competition. This is an analytical conclusion because one cannot directly observe this limiting case in the real world. The conclusion depends, as with every theory, logically upon the premises. Hence, it all depends on whether the axioms are true or false.

By looking at the economy as a whole, which can be done with the help of an objective formal starting-point that radically reduces the complexity of the real thing, it follows that the total profit of the business sector is determined in the elementary case of a production-consumption economy by two factors (List B):

• by the relation of consumption expenditures to total income,
• by distributed profits in the period under consideration.

This theoretical conclusion can be verified with the accuracy of two decimal places by the proper application of national accounting. It does not depend on fantastic assumptions about human behavior, equilibrium, perfect competition, or other figments of the imagination. The explanations given in List A are obviously different from those in List B. In more general terms, List A is subjective/behavioral, while List B is objective/systemic and contains the elementary version of the AXEC profit theory. The profit formula Qm≡C−Y+DN is a logical implication of the structural/systemic axiom set. The elementary formula becomes more sophisticated as soon as investment, government, and foreign trade are added.

The first important conclusion of the macro-axiomatic analysis is that 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. The second conclusion is that there is a close relation between profit/loss and the expansion/contraction of credit for the economy as a whole. Therefore, it is an elementary mistake to identify profit with a physical surplus. The third conclusion is that there is no antagonism between total wages and total profits, and that the distribution of output has nothing at all to do with the behavioral concept of marginal productivity. The fourth conclusion is that innovation and efficiency are irrelevant for the profit of the business sector as a whole. It is a Fallacy of Composition to trivially generalize what can be observed in an individual firm. This applies to many other microeconomic observations.

The crucial point is that profit for the economy as a whole cannot be derived from the behavior of the individual firm. That is, the standard microeconomic approach cannot, as a matter of principle, deliver the correct profit theory. And when the profit theory is false, the other parts of a comprehensive approach are open to doubt. What is immediately obvious is that, as collateral damage, the familiar theories of income distribution and wealth distribution are wrong by logical implication.

A correct theory is the precondition of economic policy. This, of course, is not new: “We have long known that the conduct of economic policy requires the policy-maker to have a theory of how the economy works.” (D. Laidler). The conventional economist's combination of a sense of mission, flawed theory, and self-delusion is not of great help, if any.

Profit is a subject to which economists have addressed themselves for at least two hundred years, but without much success. For there is at the moment no general theory of profits which commands anything approaching universal acceptance either among academic economists or among men of affairs. (A. Wood)

His Collected Writings show that Keynes wrestled to solve the Profit Puzzle up till the semi-final versions of his General Theory but in the end he gave up and discarded the draft chapter dealing with it. (G. Tómasson and D. Bezemer)

A satisfactory theory of profits is still elusive. (M. Desai, New Palgrave Dictionary)

In the practical affairs of trade, industry and finance no concept is more fundamental or more familiar than profit. Yet to the questions what profit is, and by what causes it is shaped and determined, economic science has not as yet supplied answers which command general agreement. (R. G. Hawtrey)

"What determines profits?" is a key question for understanding how our economy works. (H. Minsky)

... one of the most convoluted and muddled areas in economic theory: the theory of profit. (P. Mirowski)

We need to know what profits have been, how they have been made, to what uses they have been put, ...: no light on these matters is shed by the analyses of value, of utility and disutility, that have preoccupied so many of us for so long. (C. Parry)

Much of what is usually offered as profit theory will be seen to be without merit. (M. Obrinsky)

But in my opinion contemporary profit theory is floundering in eclecticism and has lost touch with the major economic changes of the past twenty-five years. Until we have clearly established what it is we are talking about, what we say is not going to have much value. (P. Bernstein)

Profit theory has been largely concerned with specifying and isolating the 'function' for which profit is the 'reward.' This is scientifically irrelevant. (A. Murad)

Of all the traditional branches of economics, the theory of profits has had the greatest difficulty in attaining the "safe path of a science." Our knowledge of the causes determining value, or wages, is indeed incomplete; but in these fields we do not find, and have not found for some considerable time, that fundamental disagreement among competent writers about the mere direction of approach, or that utter failure of promising lines of inquiry to yield results of any great importance, which Kant declared to be the marks of a science still groping in the dark. (J. R. Hicks)

Nor do the modern variants add anything whatever on this score. For Debreu profits are simply a nonissue, while Arrow and Hahn make only passing reference to profits — and that only as a historical introduction. Whatever may be the usefulness of these idealized theoretical constructs, they cannot be said to throw any light on the profit issue; surely, therefore, they fail to capture the essence of a capitalist market economy. (M. Obrinsky)

Profit is the pivotal concept for the analysis of how the economy works. Without a correct profit theory, economics is vacuous. The conventional profit theory is logically indefensible. It is a unique fact of the history of economic thought that neither Classicals, nor Walrasians, nor Marshallians, nor Keynesians, nor Marxians, nor Institutionalists, nor Monetary Economists, nor Austrians, nor Sraffaians, nor Evolutionists, nor Game theorists, nor Econophysicists, nor RBCers, nor New Keynesians, nor New Classicals ever came to grips with profit. Hence, they 'fail to capture the essence'. There are many opinions but no scientific understanding of the market economy, neither on the national nor on the global level. Rational economic policy or the implementation of a rational economic order is, therefore, a priori impossible. Economists have no true conception of the most important phenomenon in their universe.

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Graphic AXEC204

Profit: after 200+ years, economists are still in the woods

Comment on Brian Romanchuk on ‘Primer: The Kalecki Profit Equation (Part I)’

Blog-References and Blog-Reference

“A satisfactory theory of profits is still elusive.” (Palgrave Dictionary, Desai, 2008) #1 Isn’t this strange? Economists never get tired of producing microeconomic and macroeconomic models and of giving policy advice, but do not know what profit is? Strange but true, the fact is that Walrasians, Keynesians, Marxians, Austrians, MMTers, and Pluralists are groping in the dark. Because of this, the whole of economics is scientifically worthless.

The ultimate blunder of economics is that both microfoundations and macrofoundations are provably false. As a result, one has multiple profit theories but not the materially and formally correct one.

Brian Romanchuk discusses the Kalecki profit equation and the Levy profit equation. This is a rather pointless exercise because all these equations are provably false. #2, #3, #4, #5, #6

Because economists messed up macroeconomics, more specifically, the axiomatic foundations of economics, #7, #8, economics still stands at square one.

To make the argument short, the macroeconomic Profit Law for the open economy with a government is given as Q=Q_m+Q_n with Q_m=Y_d+(I−S_m)+(G−T)+(X−M). Legend: Q total profit, Q_m monetary profit, Q_n nonmonetary profit,#9 Y_d distributed profit, S_m monetary saving, I investment expenditures,#10 G government spending, T taxes, X export, M import. Because all variables are measurable, the Profit Law is testable.

From the axiomatically correct Profit Law follows immediately that Keynes’ I=S and MMT’s balances equation (X−M)+(G−T)+(I−S)=0 are provably false. #11

The Profit Law is an important relationship for the monetary economy. For 200+ years now, the Profit Theory is false because economics has not been correctly macro-axiomatized. #12 As Mirowski put it, “... one of the most convoluted and muddled areas in economic theory: the theory of profit.”

Egmont Kakarot-Handtke


#1 Profit: after 200+ years still elusive
#2 What is Wrong with Heterodox Economics? Kalecki’s Profit Theory as an Example
#3 Rethinking deficit spending
#4 Kalecki got it wrong, Allais got it right
#5 Heterodoxy, too, is proto-scientific garbage
#6 For details of the big picture, see cross-references Profit/Distribution
#7 From false micro to true macro: the new economic paradigm
#8 Essentials of Constructive Heterodoxy: Profit
#9 Primary and Secondary Markets
#10 Squaring the Investment Cycle
#11 Rectification of MMT macro accounting
#12 The Profit Theory is False Since Adam Smith. What About the True Distribution Theory?

Related 'DSGE and profit―forget it! MMT and profit―forget it!' and 'The curious non-existence of profit in economics' and 'MMT and grassroots movements' and 'Macroeconomics for retarded economists' and 'The final implosion of MMT' and 'Infantile model bricolage, or, How many economists can dance on a non-existing pinpoint?' and 'Mathiness is NOT the problem — scientific incompetence is' and 'Economists: only good at excuses' and 'Ricardo and the invention of class war' and 'The Common Error of Common Sense: An Essential Rectification of the Accounting Approach' and 'MMT: How mathematical incompetence helps the Kelton-Fraud'.

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Graphic AXEC137b Macrofoundations

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REPLY to djrichard on Jul 2

You say: ”I’ve been looking for something that gives a treatment/overview on Kalecki’s equation.”

The real question is why economists in general and you, in particular, don’t know what profit is. The short answer is that economists are scientifically incompetent. In fact, Walrasians, Keynesians, MMTers, Marxians, Austrians, and Pluralists have NO idea of profit ― the pivotal concept of their subject matter. From the viewpoint of science, economics is a failure; from the viewpoint of the general public, economics is a fraud. #1

To establish material consistency, one needs measurement, and one of the most important measurement tools of economics is National Accounting. The importance of National Accounting for testing economic models is comparable to CERN for testing in physics. Economists neither understand the significance nor the elementary mathematics of National Accounting.

Economic theory and accounting are like hands and gloves. Therefore, it is of utmost importance that the foundational concepts are consistently defined and the SAME in theory and accounting. It is the worst mistake to play accounting against theory/model. At a deeper level, they have a common conceptual/formal core, i.e., the axioms of economics.

Because the nominal magnitudes of accounting are a subset of a comprehensive theory that is composed of nominal and real variables, the concepts have to be consistently defined in theory and then applied one-to-one in National Accounting. Theory has to take the lead.

It holds: “The only way to arrive at coherent languages is to set up axiomatic systems implicitly defining the basic concepts.” (Schmiechen) The fact is that Walrasian microfoundations and Keynesian macrofoundations are axiomatically false. #2 This is why economics is a failed science and why Michal Kalecki’s and Brian Romanchuk’s profit theory is false. #3

#1 DSGE and profit―forget it! MMT and profit―forget it!

#2 The miracle cure of economists’ micro-macro schizo

#3 For details, see cross-references Kalecki

The Distribution Theory is false because the Profit Theory is false

Comment on Lars Syll on ‘New study shows marginal productivity theory has only a “negligible” link to reality’

Blog-Reference and Blog-Reference and Blog-Reference on Dec 31

Every economist can know from the Palgrave Dictionary that the profit theory is false (Desai, 2008). Or, as Mirowski put it, “... one of the most convoluted and muddled areas in economic theory: the theory of profit.” In other words: the confused confusers of economics have NO idea what the pivot of their subject matter is. In still other words, this bunch of scientific deplorables does not know how the market economy works and is talking nonsense since Adam Smith.

It is pretty obvious that without the true profit theory there is no true distribution theory.#1 So everybody can know without bothering much about the insane behavioral assumptions of utility and profit maximization that the marginal theory of income distribution must be dead wrong.

The trouble with distribution theory started with Ricardo who got the distinction between wage, profit and rent wrong.#2 Then Marx got the class theory of profit wrong.#3 Neoclassical marginal distribution theory, of course, is unsurpassable idiocy, but Keynesianism did not perform much better, and Heterodoxy has actually multiple profit theories that do not fit together.#4

Distribution theory has always been the deepest swamp of economics. Do not expect that the retarded brotherhood of orthodox and heterodox muddleheads will find a way out any time soon.

Egmont Kakarot-Handtke


#1 Essentials of Constructive Heterodoxy: Profit
#2 When Ricardo Saw Profit, He Called It Rent: On the Vice of Parochial Realism
#3 Profit for Marxists
#4 Heterodoxy, too, is proto-scientific garbage

Related 'The Profit Theory is False Since Adam Smith. What About the True Distribution Theory?' and 'Ricardo, too, got profit theory wrong' and 'The Three Fatal Mistakes of Yesterday Economics: Profit, I=S, Employment' and 'Profit and the collective failure of economists' and 'The solemn burial of marginalism' and 'Dear idiots, it is deficit spending that creates the distribution people complain about' and 'True macrofoundations: the reset of economics'. For details of the big picture see cross-references Profit.

Profit and the decline of labor’s nominal share (I)

Comment on Asher Schechter on ‘The Rise of Market Power and the Decline of Labor’s Share’

Blog-Reference and Blog-Reference on Aug 16 and Blog-Reference on Sep 21 adapted to context

Every economist can know from the Palgrave Dictionary that the profit theory is false (Desai, 2008). Or, as Mirowski put it: “... one of the most convoluted and muddled areas in economic theory: the theory of profit.” In other words, economists have NO idea of what the foundational concept of their subject matter is. #1

It is pretty obvious that without the true profit theory, there is no true distribution theory. #2 In order to arrive at the true profit theory, the analysis has to let the false Walrasian microfoundations and the false Keynesian macrofoundations behind and be based on the correct macrofoundations. #3

For the elementary production-consumption economy, then follows:
Q_m≡C−Y_w      profit Q_m is the household sector’s spending C minus wage income Y_w
S_m≡Y_w−C      saving S_m is wage income Y_w minus consumption expenditures C
-------------
Q_m≡−S_m.

The business sector’s monetary profit Q_m is equal to the household sector’s dissaving. This is the most elementary form of the macroeconomic Profit Law. From this relationship follow some essentials about profit for the economy as a whole:
• 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.
• Overall profit does not depend upon the agents’ personal qualities, motives, their ideas about what profit is, nor on profit-maximizing behavior or on markup setting.
• 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/loss is, in the most elementary case, determined by the increase and decrease of the household sector’s debt.
• Monopoly power is irrelevant for total profit and affects only the DISTRIBUTION of total profit BETWEEN firms.
• There is no relation at all between profit, capital, marginal, or average productivity. Automation affects only the DISTRIBUTION of total profit AMONG firms (and countries).
• Profit is a factor-independent residual and qualitatively different from wage income. Therefore, it is the most elementary mistake to maintain that total income is the sum of wages and profits.
• Innovation and efficiency are irrelevant for the profit of the business sector as a whole.
• It is a Fallacy of Composition to trivially generalize what can be observed in an individual firm. Microfounded profit theory is one big Fallacy of Composition.

The axiomatically correct macroeconomic Profit Law is given for the GENERAL case as Q_m≡Y_d+(I−S_m)+(G−T)+(X−M) and reduces to Q_m=(I−S_m)+(G−T) for Y_d, X, M = 0; Legend: Q_m total monetary profit, Y_d distributed profit, I investment expenditures, S_m monetary saving, G government expenditures, T taxes, X exports, M imports.

The nominal labor share λ is defined as the quotient of wage income Y_w and the sum of wage income and monetary profit Q_m, that is, λ≡Y_w/(Y_w+Q_m)≡1/(1+Q_m/Y_w).

It is obvious now that market power or automation cannot account for a falling nominal labor share λ. The MAIN drivers of increasing overall profit have been, in the past decades, the increasing debt of the household and the government sector.

Egmont Kakarot-Handtke


#1 The Profit Theory is False Since Adam Smith. What About the True Distribution Theory?
#2 See also Essentials of Constructive Heterodoxy: Profit
#3 (A0) The objectively given and most elementary configuration of 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. For a start, X=O.

Related 'Profit and distribution: a primer' and 'Profit and the decline of workers’ nominal share (II)' and 'There is NO such thing as a “labor share of income”' and 'Links on McKinsey’s A new look at the declining labor share of income in the United States' and 'Profit'. For details of the big picture, see cross-references Profit.

Inequality: Market failure or theory failure?

Comment on Asher Schechter on ‘Nobel Laureates: Eliminating Rent Seeking and Tougher Antitrust Enforcement Are Critical to Reducing Inequality’

Blog-Reference and Blog-Reference and Blog-Reference on Jan 12

Every economist can know from the Palgrave Dictionary that the profit theory is false (Desai, 2008). Or, as Mirowski put it, “... one of the most convoluted and muddled areas in economic theory: the theory of profit.” In other words: the confused confusers of economics have NO idea what the pivot of their subject matter is.

It is pretty obvious that without the true profit theory there is no true distribution theory.#1 So everybody can know for sure, without bothering much about the insane behavioral assumptions of utility and profit maximization, that the standard marginal theory of income distribution must be dead wrong. More, because neither Walrasianism, Keynesianism, Marxianism, nor Austrianism gets profit right all other distribution theories are false, too. This includes the theory of rent-seeking which stood in the center at this year’s ASSA discussions.

The trouble with distribution theory started with Ricardo who got the distinction between wage, profit, and rent wrong.#2 Then Marx got the class theory of profit wrong.#3 Neoclassical marginal distribution theory, of course, is unsurpassable idiocy, but Keynesianism did not perform much better, and Heterodoxy has actually multiple profit theories that do not fit together.#4

Distribution theory has always been the deepest point in the swamp of economics. Do not expect that orthodox or heterodox economists who spent their clueless lives there will find a way out any time soon. The profit theory is false since Adam Smith#5 and the folks at the ASSA are lost in a parallel universe. Let this sink in: NOT ONE of the participants has an idea about the pivotal concept of economics.

Economics has produced NOTHING of scientific value in the last 200+ years. The current state of economics is that of a cargo cult or fake science.#6 The proof is in the distribution theory.

Egmont Kakarot-Handtke


#1 Essentials of Constructive Heterodoxy: Profit
#2 When Ricardo Saw Profit, He Called It Rent: On the Vice of Parochial Realism
#3 Profit for Marxists
#4 Heterodoxy, too, is proto-scientific garbage
#5 The Profit Theory is False Since Adam Smith. What About the True Distribution Theory?
#6 The real problem with the economics Nobel

Related 'Economists’ real job problem' and 'The GDP-death-blow for the economics profession'. For details of the big picture see cross-references Profit/Distribution.

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REPLY to Bob on Jan 11

After more than 200 years, economists cannot tell the difference between the foundational concepts of profit and income. This is comparable to medieval physics before the concepts of energy, mass, force, etcetera were clearly defined and properly understood.

For details see The false foundations of economics.

Profit and macrofoundations

Comment on James Galbraith on ‘A global macroeconomics ― yes, macroeconomics, dammit ― of inequality and income distribution’*

Blog-Reference

James Galbraith observes with regard to the JEL classification codes: “Under Macroeconomics there is nothing, unless you count E25 ‘Aggregate Factor Income Distribution,’ which surely means the analysis of factor shares ― Wages, Profits, Rent ― also known as the functional distribution.” and “From a theoretical standpoint distribution is the essence of micro, of market relations and of supply-and-demand. The discipline exists, largely, to explain factor returns. If it doesn’t explain ― I don’t say ‘justify’ ― the pay of the worker and the return to capital, then the rest of what it does would not sustain it.”

What is even more remarkable: the keyword Profit neither appears under Microeconomics nor Macroeconomics. The first problem of Distribution Theory is that economists obviously do not know what profit is.

Fact is: “A satisfactory theory of profits is still elusive” (Desai, Palgrave Dictionary) and this is the most damning verdict about economics. After 200+ years, economists cannot tell the difference between profit and income. This is the present state of economics: the major approaches ― Walrasianism, Keynesianism, Marxianism, Austrianism ― are mutually contradictory, axiomatically false, materially/formally inconsistent, and all got the pivotal concept of the subject matter ― profit ― wrong. #1, #2, #3

Because Profit Theory is false, Distribution Theory is false by logical implication.

James Galbraith identifies the point where things went wrong: “Lucas made the wrong choice. He decreed that micro takes precedence ― that the house is built on microfoundations. Godley did not have patience for this. Surely the house is better built on solid steel-and-concrete pilings, on macrofoundations, with micro-shingles on the roof?”

Indeed, that’s it. Economics needs a Paradigm Shift from false microfoundations to true macrofoundations. At this point, though, James Galbraith stops and turns to the prospects and problems of empirical research. He does not specify what the true macrofoundations are.#4, #5

From the true macrofoundations follows the macroeconomic Profit Law as Qm≡Yd+(I−Sm)+(G−T)+(X−M). Legend: Qm monetary profit, Yd distributed profit, Sm monetary saving, G government expenditures, T taxes, X exports, M imports. This reduces to the core Qm≡−Sm, i.e., the business sector’s profit is equal to the household sector’s dissaving, and vice versa, the business sector’s loss is equal to the household sector’s saving.

Macroeconomic profit has nothing to do with greed/exploitation/productivity but with growing/shrinking debt. Lo and behold, this is one of James Galbraith’s key findings: “1. There are global turning points in the path of pay inequality. They occur around 1971, around 1980, and around 2000. These correspond in each case to major shifts in the worldwide financial regime: to the breakdown of Bretton Woods, to the outbreak of the global debt crisis, and to return to low interest rates and rising commodity prices that followed the NASDAQ slump and the 9/11 attacks, along with the rise of China in world trade.”

Macroeconomic profit is an objectively given and well-defined magnitude. The first thing to notice is that profit is qualitatively different from income.#6 Loss or profit is NOT income. Distributed profit is income. Because of this, it is inadmissible to speak of ‘profit income’ because profit is the difference of flows and not a flow like wage income. Wage income and profit cannot be added together to total income, and profit is not a share of total income. In their utter scientific incompetence, economists get the basics of distribution theory wrong from Adam Smith and David Ricardo onward to this day. #7, #8, #9

James Galbraith is right: “A global macroeconomics ― yes, macroeconomics, dammit” is the key to Profit Theory and Distribution Theory. Microfoundations are proto-scientific garbage since Jevons/Walras/Menger. Economics has to be based on macrofoundations. Get it: If it isn’t macroaxiomatized, it isn’t economics.

Egmont Kakarot-Handtke


* Review of Keynesian Economics
#1 Profit and distribution: a primer
#2 Essentials of Constructive Heterodoxy: Profit
#3 The Profit Theory is False Since Adam Smith. What About the True Distribution Theory?
#4 First Lecture in New Economic Thinking
#5 From false microfoundations to true macrofoundations (II)
#6 Macro for dummies (II)
#7 Profit and distribution: a primer
#8 There is NO such thing as a “labor share of income”
#9 Ricardo, too, got profit theory wrong

Related 'The actual distribution is unacceptable? Do NOT seek economic advice!' and 'Income distribution: No market failure but theory failure' and 'The Levy/Kalecki Profit Equation is false'. For details of the big picture, see cross-references Profit/Distribution.

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AXEC109i

Rethinking the Profit Law

Comment on David F. Ruccio on ‘Value and the Marxian critique of political economy’

Blog-Reference

David F. Ruccio writes: “When I ask students to compare Marx’s theory of profits with the neoclassical theory of profits, they have no idea what I’m talking about.”

It’s worse, economists, in general, have NO idea about what profit is. This includes the four main sects Walrasianism, Keynesianism, Marxianism, and Austrianism. The Palgrave Dictionary summarizes: “A satisfactory theory of profits is still elusive.” (Desai, 2008)

The Profit Theory is false since Adam Smith. #1 Economists have NO idea about the pivotal magnitude of their subject matter. This includes, of course, David F. Ruccio. #2

There is three things that are intertwined but have to be analytically kept apart: (i) Theory of Value, (ii) Theory of Profit for the economy as a WHOLE, (iii) DISTRIBUTION of overall profit between sub-sectors (production, banking, land use, etc.) and individual firms.

The Law of Value says that relative prices in the elementary production-consumption economy are inverse to the productivities. #3 This Law replaces the Labour Theory of Value.

The Profit Law for the elementary production-consumption economy says that overall/macroeconomic profit depends on the expenditure ratio and the distributed profit ratio. #4, #5

It holds in particular:

• Overall profit does not depend upon the agents’ personal qualities, motives, their ideas about what profit is, nor on profit-maximizing behavior. These subjective factors are IRRELEVANT. Profit for the economy as a whole is OBJECTIVELY determined.
• Profit/loss of the business sector is, in the simplest case, determined by the increase/decrease of the household sector’s debt.
• Wage income is the factor remuneration of labor input. Profit is NOT a factor income.
• 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 overall profit do not depend on the ownership of the firms that comprise the business sector. The macroeconomic Profit Law is the SAME in Capitalism and Communism.
• It is an elementary mistake to maintain that total income is the sum of wages and profits.

The classical/Marxian/neoclassical and the Keynesian/Post-Keynesian theories of value/profit are provably false or, as Mirowski put it, “... one of the most convoluted and muddled areas in economic theory: the theory of profit.” One thing has always been equally distributed between the major economic sects, viz., scientific incompetence.

Egmont Kakarot-Handtke


#1 The Profit Theory is False Since Adam Smith
#2 Profit for Marxists
#3 The Pure Logic of Value, Profit, Interest
#4 Essentials of Constructive Heterodoxy: Profit
#5 See the Profit Law for the elementary production-consumption economy in ratio-form on  Graphic AXEC08

Related 'Why economists know nothing' and 'Economics ― a doctor worse than the disease' and 'How the intelligent non-economist can refute every economist hands down' and 'True macrofoundations: the reset of economics' and 'First Lecture in New Economic Thinking' and 'Profit'

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

How to end the Punch and Judy Show about profit

Comment on Fred Moseley and Peter Dorman on ‘It’s Red Friday and Time to Discuss the Role of Exploitation in Profit’

Blog-Reference

The profit theory is false. It has been false since Adam Smith. #1 Economists have NO idea of the pivotal magnitude of their subject matter. This includes the four main sects: Walrasianism, Keynesianism, Marxianism, Austrianism, and, of course, Fred Moseley and Peter Dorman.

There are three things that are intertwined but have to be analytically kept apart: (i) Theory of Value, (ii) Theory of Profit for the economy as a WHOLE, (iii) DISTRIBUTION of overall profit between sub-sectors (production, banking, land use, etc.) and individual firms.

The Law of Value says that relative prices in the pure production-consumption economy are inverse to the productivities. #2 This Law replaces the Labour Theory of Value.

The Profit Law for the pure production-consumption economy says that OVERALL profit depends on the expenditure ratio and the distributed profit ratio .#3

It holds in particular:
• Overall profit does not depend upon the agents’ personal qualities, motives, their ideas about what profit is, nor on profit-maximizing behavior. These subjective factors are irrelevant; profit for the economy as a whole is OBJECTIVELY determined. #4
• In order that profit comes into existence for the first time in the pure production-consumption economy, the household sector must run a deficit at least in one period.
• Profit is, in the simplest 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 credit for the economy as a whole.
• Wage income is the factor remuneration of labor input. Profit is NOT a factor income. Since capital is nonexistent in the pure production-consumption economy, profit is not functionally attributable to capital.
• There is no relation at all between profit, capital, marginal, or average productivity. Proudhon’s increasing returns theory of profit is plain rubbish. #5
• 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 overall profit do not depend on the ownership of the firms that comprise the business sector. The Profit Law is the SAME in capitalism and communism.
• 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. #6
• 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 a Fallacy of Composition to trivially generalize what can be observed in an individual firm.

The classical/neoclassical and Keynesian/Post-Keynesian theories of value/profit are provably false or, as Mirowski put it, “... one of the most convoluted and muddled areas in economic theory: the theory of profit.” #7 Time for Fred Moseley and Peter Dorman to end this HiFred-HiPeter Punch and Judy Show.

Egmont Kakarot-Handtke


#1 The Profit Theory is False Since Adam Smith
#2 The Pure Logic of Value, Profit, Interest
#3 Essentials of Constructive Heterodoxy: Profit
#4 See the Profit Law for the elementary production-consumption economy Graphic AXEC08 

#5 Increasing Returns and Stability
#6 When Ricardo Saw Profit, He Called It Rent: On the Vice of Parochial Realism
#7 One way to get it right, many ways to get it wrong

Immediately preceding The thing with profit and exploitation.

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Graphic AXEC143d