Profit and the decline of workers’ nominal share (II)

Comment on Noah Smith on ‘Why Workers Are Losing to Capitalists’

Blog-Reference and Blog-Reference

Every economist knows 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 clue about the foundational concept of their subject matter. #1

Without the true profit theory, there is no true distribution theory. The axiomatically correct macroeconomic  Profit Law is given as Q_m≡Y_d+(I−S_m)+(G−T)+(X−M) [1] and this reduces to Q_m=(I−S_m)+(G−T) [2] for Y_d, X, M=0; Legend: Q_m total monetary profit/loss, Y_d distributed profit, I investment expenditure, S_m monetary saving/dissaving, G government expenditures (consumptive), 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) with Q_m given by [1] above.

Noah Smith concludes: “In other words, the two most conventional explanations for rising inequality and falling wages might both be correct. A perfect storm of robots and free trade … could be shifting power from the proletariat to the capitalists.” This conclusion is based on the traditional = false profit theory.

The fact is that market power and automation cannot account for a falling nominal labor share λ. The main drivers of increasing overall profit have been the increased deficit spending of the household and the government sector in the past decades. Market power and automation can only account for the distribution of overall profit Q_m among firms, but NOT for the total amount. #2

Traditional distribution theory is merely a stubborn Fallacy of Composition.

Egmont Kakarot-Handtke


#1 The Profit Theory is False Since Adam Smith. What About the True Distribution Theory?
#2 For details of the big picture, see cross-references Profi/Distribution.

Related 'How the Intelligent Non-Economist Can Refute Every Economist Hands Down' and 'Profit and the decline of labor’s nominal share (I)' and 'Austerity: Who takes the little man for a ride?' and 'The abject failure of orthodox and heterodox distribution theory' and 'Debunking Squared' and 'Intellectual deficit spending' and 'The GDP-death-blow for the economics profession'.

For more about the so-called wage/profit share, see AXECquery.

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Graphic AXEC129d On closer inspection, it turns out that the concept of labor/share is formally/dimensionally defective because profit is a balance and wage income is a flow. This blunder is called Flow-Balance Inconsistency.

There is NO such thing as a “labor share of income”

Comment on Stephen Gordon on ‘Why do we care about the labour share of income?’

Blog-Reference

Stephen Gordon summarizes: “A lot has been said and written about the decline in the labour share of income, usually calculated as total employee compensation divided by nominal GDP. This decline is generally regarded as a negative development: the reduction in the share of income going to workers is interpreted as a symptom of suppressed wage growth and of increased income inequality.”

Indeed, a lot has been said and written about income, wages, profits, and all is false because economists failed for 200+ years to get the concept of profit straight. As the Palgrave Dictionary summarizes: “A satisfactory theory of profits is still elusive.” (Desai, 2008) #1 In other words, economists have NO idea what the pivot of their subject matter is.

Because profit is ill-defined, income is ill-defined, and by consequence, saving is ill-defined. Monetary profit, to begin with, is NOT a flow of income like wage income, but the difference of flows. Distributed profit is income, but profit is NOT income. Distributed profit and profit are NOT the same things.

By consequence, total income is NOT the sum of wages and profits, #2, which in turn means that there is NO “profit share of income” and by consequence no “wage share of income”. This means that the content of this thread, comments included, is vacuous blather because all are based on false premises.  #3, #4, #5, #6

Without true profit theory, there is no true distribution theory. The axiomatically correct Profit Law is given as Q_m≡Y_d+(I−S_m)+(G−T)+(X−M) (i) and this reduces to Q_m≡(I−S_m)+(G−T) (ii) for Y_d, X, M=0; Legend: Q_m monetary profit/loss, Y_d distributed profit, I investment expenditure, S_m monetary saving/dissaving, G government expenditures, T taxes, X exports, M imports. Total profit Q is the sum of monetary and nonmonetary profit, i.e., Q≡Q_m+Q_n (iii).

Accordingly, the so-called “labor share” λ ― which is NOT a “share” but a quotient ― is defined as the relation of wage income Y_w to the sum of wage income and total profit Q, that is, λ≡Y_w/(Y_w+Q) with Q given by (iii) above.

The fact is that neither market power nor declining unionization nor automation can account for a falling “labor share” λ. The main drivers of increasing overall profit have been, in the past decades, the increased deficit spending of the household sector and the government sector, which translates into an ever-growing private/public debt.

Traditional distribution theory and the concept of a wage/profit “share” is abysmal proto-scientific garbage since the founding fathers. #7, #8

Egmont Kakarot-Handtke


#1 The Profit Theory is False Since Adam Smith. What About the True Distribution Theory?
#2 How the Intelligent Non-Economist Can Refute Every Economist Hands Down
#3 Profit and distribution: a primer
#4 Profit and the decline of labor’s nominal share (I)
#5 Profit, income, and the Humpty Dumpty Fallacy
#6 For details of the big picture, see cross-references Profit
#7 Ricardo, too, got profit theory wrong
#8 Economists simply don’t get it

Related 'Truth by definition? The Profit Theory has been axiomatically false for 200+ years' and Links on McKinsey’s ‘A new look at the declining labor share of income in the United States’ and 'There is NO such thing as a “labor share of income”’ and 'Profit and the decline of workers’ nominal share (II)’ and 'Profit and the decline of labor’s nominal share (I)’ and 'Income Distribution, Profit, and Real Shares

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Source FRED taken from WTF Happened In 1971?

Twitter/X Feb 10, 2026 Because profit is not income, there is no profit share of income

Occasional X: Profit and workers’ share (I)

 

#LearnRealEcon

The macroeconomic #ProfitLaw ⇓ implies #PublicDeficitIsPrivateProfit. So, #DeficitSpendingMoneyCreation is a #FreeLunch for the #Oligarchy i.e. exploding #PublicDebt is the ultimate cause of a rising #ProfitShare/falling #WageShare. ⇒

Profit and the decline of… pic.twitter.com/K7GqE2FxQN

— E.K-H (@AXECorg) April 6, 2024

Occasional X: Profit and workers’ share (II)

The “Kalecki–Young Sectoral Inflation Decomposition (KYSID)” is provably false for one simple reason: the definitions below ⇓ of profit share of income θ and wage share (1−θ) are false because the definition of profit is false and therefore the definition of income is false.… pic.twitter.com/F70tyV5T3V

— AXEC (@EgmontHandtke) April 27, 2026

For more about the use/misuse of share, see AXECquery, 

The discussion continues here.

Links on McKinsey’s A new look at the declining labor share of income in the United States

Blog-Reference

Distribution Theory is false because Profit Theory is false. After 200+ years, economists still have NO idea about the foundational magnitude of their subject matter. This holds for Walrasianism, Keynesianism, Marxianism, Austrianism, and MMT.

McKinsey* identifies as main drivers of the capital share by sector 1998-2002: Supercycles and boom-bust, Rising and faster depreciation, Superstar effects and consolidation, Capital substitution and automation, Globalization, and labor bargaining power.

The factors that explain the development of sectoral profits, though, do NOT explain the drivers of overall macroeconomic profit. They explain only the distribution of overall macroeconomic profit between the sectors.

The axiomatically correct macroeconomic Profit Law is given by Q≡Q_m+Q_n with Q_m≡Y_d+(I−S_m)+(G−T)+(X−M). This reduces to Q_m≡−S_m+(G−T), which says that the main drivers of increasing macroeconomic Profit Q_m have been in the past decades the increased deficit spending of the household sector (-S_m) and the government sector (G−T), which translates into an ever-growing private/public debt.

Distribution Theory and the concept of a wage/profit “share” is abysmal proto-scientific garbage since the founding fathers. See:

► There is NO such thing as a “labor share of income”
► Profit and the decline of workers’ nominal share (II)
► Profit and the decline of labor’s nominal share (I)
► Profit and distribution: a primer
► Profit and macrofoundations
► Rethinking the Profit Law
► Rethinking the Distribution
► Profit, income, and the Humpty Dumpty Fallacy
► Keynes, Lerner, MMT, Trump, etc. and exploding profit

►The GDP-death-blow for the economics profession
► For details of the big picture, see cross-references Profit

Egmont Kakarot-Handtke


* McKinsey Global Institute

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Graphic AXEC143d Macroeconomic Profit Law (with increasing complexity) and sectoral balances equation

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.

Income Distribution, Profit, and Real Shares {27}

Working paper at SSRN

Working paper at ARCHIVE

This paper clarifies first the nature and significance of monetary profit by applying the structural axiom set as a consistent point of departure. As a crucial result, the fundamental theorem of income distribution emerges. It states: profit is no factor income. Since the individual firm is blind to this structural fact it subjectively interprets profit as some kind of reward. As a matter of fact, firms do not ‘make’ profit, they only redistribute it among themselves. With profit consistently defined it is possible to determine the nominal and real shares of the elementary income categories wage income and distributed profit.