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)

Profit and the collective failure of economists

Comment on David Ruccio on ‘Accumulate, accumulate! Or not’

Blog-Reference

Economists do not understand how the economy works. The deeper reason is that neither the Walrasian, nor the Keynesian, nor the Marxian, nor the Austrian sect understands what profit is. What the general public can see and touch and smell and feel is that the representative economist does not understand the pivotal phenomenon of his subject matter. Economists are like astronomers before gravity was properly understood.

Marx was, like the Classicals, a political economist and mainly concerned with society and the underlying laws/trends of societal evolution. As a matter of fact, he was rather good at descriptive sociology but completely failed as an economist. Like Smith, Ricardo, and other classical economists, he got the profit theory wrong (2014a). And this fate Marxianism shares with the other sects until this very day: “A satisfactory theory of profits is still elusive.” (Desai, 2008, p. 10)

Because of this, the formula that David Ruccio presents as Marx’s theory of accumulation is simply false, while his observations about declining capital investment in the USA are spot on. As with most heterodox economists, the sociology is better than economics proper.

The axiomatically correct macroeconomic Profit Law for the 2-sector economy reads Q_m ≡Y_d+I−S_m (2014b, p. 8, eq. (18)) #1 Legend: Q_m monetary profit, Y_d distributed profit, Sm monetary saving, I investment expenditure, dimension €, $, etc. per period

The Profit Law gets a bit more complex when foreign trade and government are included. By summing up investment expenditures over time and taking depreciation into account, the equation ultimately yields the profit rate (2011, Sec. 6.2). These details are not needed at the moment. Nonmonetary profit Q_n and nonmonetary saving S_n, which relate to re-valuations are also left out of the picture.

The macroeconomic Profit Law says (for the world economy as a whole):
(i) strong growth = high investment I = accumulation is good for the overall monetary profit Q_m of the business sector as a whole,
(ii) strong consumption expenditures = low monetary saving S_m or even dissaving −S_m = growing consumer debt is good for profit,
(iii) by implication high government deficit spending = growing public debt is good for profit, #2
(iv) substantial profit distribution Y_d is good for profit.

Profit and profit distribution constitute a self-reinforcing feedback loop. The same holds for profit and investment. These built-in positive feedback loops explode the notion of equilibrium once and for all. The market economy is not a self-optimizing equilibrium system.

Note that overall profit has nothing to do with high productivity or low wages or the capital stock. These and other factors affect only the distribution of overall profit between firms or countries.

Note also that the Profit Law holds for the USA, Russia, China, the EU, and all other countries or associations; that is, it does not matter at all whether one has a pure/mixed market economy or private property or free enterprise or any other of the alleged characteristics of capitalism. The Profit Law holds for every national monetary economy and for the world economy as a whole.

In the last decades, overall (= world) profit has been driven by the growth in Asia (= high I), by dissaving, i.e., the growth of private debt mainly in the USA, by the growth of public debt worldwide, and by substantial profit distribution mainly in the USA. Overall profit has been redistributed between nations/regions via export surpluses/deficits.

Roughly speaking, as accumulation (= I) slows down in China/Asia and the developing regions, world-profit goes down, then overall profit distribution goes down, then again profit goes down, then investment goes down, and so on. Rising unemployment and falling wages accelerate the downward spiral (2015). This spiral is deflationary no matter what the Fed or other central banks do.

So Marx got the life formula — accumulate, accumulate! — of the monetary economy almost right. He had, in any case, a better grasp of economic dynamics than standard equilibrium theory. Independent of all these differences between the major sects of economics, the greatest collective scientific embarrassment of all time is: the profit theory is false since Adam Smith.

Egmont Kakarot-Handtke


References
Desai, M. (2008). Profit and Profit Theory. In S. N. Durlauf, and L. E. Blume (Eds.), The New Palgrave Dictionary of Economics Online, 1–11. Palgrave Macmillan, 2nd edition. URL
Kakarot-Handtke, E. (2011). Squaring the Investment Cycle. SSRN Working Paper Series, 1911796: 1–25. URL
Kakarot-Handtke, E. (2014a). Profit for Marxists. SSRN Working Paper Series, 2414301: 1–25. URL
Kakarot-Handtke, E. (2014b). The Three Fatal Mistakes of Yesterday Economics: Profit, I=S, Employment. SSRN Working Paper Series, 2489792: 1–13. URL
Kakarot-Handtke, E. (2015). Major Defects of the Market Economy. SSRN Working Paper Series, 2624350: 1–40. URL

#1 For the rising complexity of the Profit Law, see Graphic AXEC143d.
#2 Keynesianism as ultimate profit machine

Related 'Rethinking the Profit Law' and 'The perennial conundrum: profit and distribution' and 'Ricardo, too, got profit theory wrong!' and 'The Common Error of Common Sense: An Essential Rectification of the Accounting Approach' and 'Profit'. For details of the big picture, see cross-references Profit.

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Graphic AXEC109i

Stock prices, profit, and other self-fulfilling idiocies

Comment on David Glasner on ‘Stock Prices, the Economy and Self-Fulfilling Prophecies’

Blog-Reference and Blog-Reference and Blog-Reference adapted to context

You quote Paul Krugman saying:#1 “The truth ... is that there are three big points of slippage between stock prices and the success of the economy in general. First, stock prices reflect profits, not overall incomes. “

And, elaborating on this point: “This may seem, however, to present a paradox. If the private sector doesn’t see itself as having a lot of good investment opportunities, how can profits be so high? The answer, I’d suggest, is that these days profits often seem to bear little relationship to investment in new capacity. Instead, profits come from some kind of market power — brand position, the advantages of an established network, or good old-fashioned monopoly.”

Obviously, economists do not really understand what profit is and where it ultimately comes from. As the Palgrave Dictionary summarizes: “A satisfactory theory of profits is still elusive.” (Desai, 2008, p. 10). Or, as Mirowski put it, “... one of the most convoluted and muddled areas in economic theory: the theory of profit.” (1986, p. 234)

So, in effect, Krugman, Glasner, and the blogging rest try to explain stock market valuation as a reflection of profit expectations without having any idea of what profit is. What the general public cannot see is that this abysmal scientific blunder is all-pervasive and that the representative economist does not understand the pivotal phenomenon of his subject matter.

For this reason alone, the whole discussion about stock market valuation and efficient markets is vacuous. The root cause of why the profit theory is false lies in the Fallacy of Composition, that is, economists take propositions that are true for a single firm and generalize them for the economy as a whole (2013).

The correct profit theory follows from the analysis of the pure production-consumption economy, which is the most elementary case (2011). From this analysis follows:

― 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. Overall monetary profit is NOT explainable by subjective factors but is OBJECTIVELY given by the Profit Law, which can be tested in principle by summing up what is in the cash boxes or on the bank accounts.

― For profit to come into existence for the first time in the elementary production-consumption economy, the household sector must run a deficit for at least one period. This presupposes the existence of a credit-creating entity.

― 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.

― Profit has no real counterpart in the form of a piece of the output cake. Profit has a monetary counterpart. In a real exchange economy, profit does not exist.

― The existence and magnitude of overall profit do not depend on the ownership of the firms that comprise the business sector. The Profit Law holds for capitalist and communist economies alike.

― 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 goods output has nothing at all to do with profit.

― Innovation and efficiency are IRRELEVANT to the profit of the business sector as a WHOLE. It is a logical mistake to trivially generalize what can be observed in an individual firm. The same holds for monopoly power. These factors affect the DISTRIBUTION of profit among firms but NOT the overall volume.

All this follows from the elementary case of the pure production-consumption economy. The Profit Law for the investment economy reads Qm≡Yd+I−Sm (2014, p. 8, eq. (18)). Legend: Qm monetary profit, Yd distributed profit, Sm monetary saving, I investment expenditure. The Profit Law gets a bit more complex when foreign trade and government are included.

In the last decades, overall (= world) profit has been driven by the growth in Asia (= high I), by dissaving, i.e., the growth of private debt mainly in the USA, by the growth of public debt worldwide, and by substantial profit distribution mainly in the USA. Overall profit has been distributed between the countries via export surpluses/deficits.

Roughly speaking, as accumulation (= I) slows down in China/Asia and the developing regions, overall world profit goes down, then overall profit distribution goes down, then profit goes down, then investment goes down again, and so on. Rising unemployment and falling wages ACCELERATE the downward spiral (2015). The market economy is NOT self-adjusting.

Does this matter for stock valuation? Not much, as long as the central banks stand ready to stabilize the stock markets. This is what the market participants have observed in the past and expect for the future, independent of the performance of the real economy. This is where the disconnect between overall profit and overall stock market valuation comes from.

Egmont Kakarot-Handtke


References
Desai, M. (2008). Profit and Profit Theory. In S. N. Durlauf, and L. E. Blume (Eds.), The New Palgrave Dictionary of Economics Online, 1–11. Palgrave Macmillan, 2nd edition. URL
Kakarot-Handtke, E. (2011). The Emergence of Profit and Interest in the Monetary Circuit. SSRN Working Paper Series, 1973952: 1–22. URL
Kakarot-Handtke, E. (2013). Confused Confusers: How to Stop Thinking Like an Economist and Start Thinking Like a Scientist. SSRN Working Paper Series, 2207598: 1–16. URL
Kakarot-Handtke, E. (2014). The Three Fatal Mistakes of Yesterday Economics: Profit, I=S, Employment. SSRN Working Paper Series, 2489792: 1–13. URL
Kakarot-Handtke, E. (2015). Major Defects of the Market Economy. SSRN Working Paper Series, 2624350: 1–40. URL
Mirowski, P. (1986). Mathematical Formalism and Economic Explanation. In P. Mirowski (Ed.), The Reconstruction of Economic Theory, 179–240. Boston, Dordrecht, Lancaster: Kluwer-Nijhoff.

#1 Bull Market Blues

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

Key Issues: Nature and causes of profit

The individual firm is blind to the structural relationships as defined by the macroeconomic axiom set. On the firm’s level, profit is therefore subjectively interpreted as a reward for innovation or superior management skills or higher efficiency or toughness on wages or for risk taking or capitalizing on market imperfections or as the result of monopolistic practices or whatever else. These factors can play a role when it comes to the distribution of profits between firms, and these phenomena become visible when similar firms in an industry are compared. Firms do not create profit; they redistribute it.

The enterprise which has better management, better luck, superior resources, a better product, no competitors, and so on, is likely to make more profit than the enterprise without these advantages. Not much more can be said about the sources of particular profit without elaborating the obvious. (Murad, 1953, pp. 6-7)

All this is true of particular profit but irrelevant for overall profit. The explanation of particular profit is indeed utterly trivial, hence its popularity.

 

The case is perfectly clear when there is only one firm in the elementary production-consumption economy. It is a matter of indifference whether the firm’s management thinks that it needs profit to cover risks or to finance growth, or whether it realizes the profit maximum or not. If consumption expenditures are, in the most elementary case, equal to wage income, monetary profit Qm≡C−WL will invariably be zero, no matter what agents want or plan or optimize or expect. Hence, there is no need to second-guess much about it. Profit for the business sector as a whole is a systemic property. Psychologism, as ever, explains nothing. Whether profit-making is considered good or bad does not matter either. Moralizing, as ever, explains nothing. Profit is not determined by folk psychology but by the structural axiomatic Profit Law.

 

From the analysis of the elementary production-consumption economy follows:

• 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.
• So that profit comes into existence for the first time in the elementary 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.
• Wage income is the factor remuneration of labor input L. Profit is not a factor income, nor is loss. Since capital is nonexistent in the elementary production-consumption economy, profit is not functionally attributable to capital.
• 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 profit-maximizing behavior of the business sector but solely on the relation of consumption expenditure to wage income.
• 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.

The fundamental error of value theory is to start from the premise that the value of the output of goods and services is always equal to the sum of factor incomes. This error can be traced back to Adam Smith (2008, pp. 50, 155).

Under the condition C=Y, profit Qm≡C−Y+DN is numerically equal to the distributed profit DN. The fundamental difference between the two variables does not catch the eye in this limiting case. The equality of profit and distributed profit is an implicit feature of equilibrium models. These have no counterpart in reality. In the real world holds C ≠ Y, hence profit and distributed profit are never equal.

All models that are based on the common-sense definition of total income ≡ wages+profits, are flawed because profit and distributed profit are not the same thing.

None of the foregoing conclusions could ever be derived from the behavioral assumptions of utility or profit maximization. These assumptions are the wrong starting point of economic analysis, even if they were true.

Objective/structural/systemic axiomatization is palpably superior. The Profit Law is testable with an accuracy of two decimal places and is evidently of immediate practical relevance. Serious alternatives are not available. Conventional economics fails already at the first axiom. This is an immutable logical fact.


References

Murad, A. (1953). Questions for Profit Theory. American Journal of Economics and Sociology, 13(1): 1–14. URL
Smith, A. (2008). An Inquiry into the Nature and Causes of the Wealth of Nations. Oxford: Oxford University Press.

 

Related 'Confused Confusers: How to Stop Thinking Like an Economist and Start Thinking Like a Scientist, Sec. 3 URL' and 'Profit for Marxists URL'. For the graphical representation, see Debunking squared.


© 2013 EKH, except original quotes, original notation adapted to HTML code here

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Graphic AXEC186b

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 genuine science physics, for example, and 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≡Q_m+Q_n with Q_m≡Y_d+(I−S_m)+(G−T)+(X−M). Legend: Q_m monetary profit/loss of the business sector, Y_d distributed profit, I investment expenditure, S_m 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 has been 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 a confused blather.

However, this does not hinder Michael Roberts from pushing 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 prophecy: “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.

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REPLY to jlowrie on Jul 17

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

The 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

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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

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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

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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 together are only employable as clowns and useful idiots in the political Circus Maximus.

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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, or 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 for at least 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 goods output has nothing at all to do with profit.

• Innovation and efficiency are irrelevant to 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

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

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#PointOfProof

Jul 21

before

after

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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.

See also Capitalism, poverty, exploitation, and cross-over exploitation

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#PointOfProof

Jul 23

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.

The thing with profit and exploitation

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

Blog-Reference and Blog-Reference on Nov 28

The Palgrave Dictionary summarizes: “A satisfactory theory of profits is still elusive.” (Desai, 2008)

This perhaps surprises the general public: economists do not know to this day what profit is. As a consequence, they have NO idea about how the monetary economy works. More specifically, economics consists of four main approaches, Walrasianism, Keynesianism, Marxianism, and Austrianism, and NONE of them gets profit right. #1

As a consequence, economic policy guidance has never had sound scientific foundations. Because economists never captured the essence of the market economy, whatever they have said for or against capitalism, communism, or socialism has been based upon provably false theories about how the monetary economy works.

Since Ricardo and Marx, both orthodox and heterodox economists believe that there is a fundamental antagonism between the firm’s owners (= capitalists) and the employees/workers.

The idea that antagonism between classes is built into the economic system, though, rests on an optical illusion. And this optical illusion ultimately derives from the theory of the firm. It is obviously true that an individual firm can increase profit by lowering the wage rate. But this is NOT true for the economy as a whole. To generalize what is true for an isolated part of a system is known in methodology as the Fallacy of Composition.

In the most elementary case, the interdependencies of the economic system have the unintended effect that if firm A makes a profit by lowering the wage rate, firm B (= the rest of the economy) makes a loss under the initial macroeconomic condition that total consumption expenditure is equal to total wage income. #2 And, by the same token, the real wage of the workers of firm A decreases and that of the workers of firm B increases. So, what happens is that a redistribution of profit between firms and a redistribution of output between households takes place.

In political terms, this means that there are NO CLASSES with a common interest. Put differently, what appears as an exploitation of the workers of firm A is only part of the complete picture of a REDISTRIBUTION of profits WITHIN the business sector and a REDISTRIBUTION of output WITHIN the household sector. In other words, the exploitation of workers in firm A benefits the workers in firm B. And the profit increase of firm A’s capitalists comes from firm B’s capitalists. Taking all capitalists together, their profit does not change. Taking all workers together, their real share of output does not change.

Conclusion: the naive concept of exploitation has to be replaced by the concept of crossover exploitation.

Economists are supposed to be experts on the economy. So it is quite natural to think that they know how the profit mechanism works; after all, this is the foundational phenomenon of their subject matter. Yet, this is definitely not the case. Economists are incompetent scientists, and after 200+ years, they are still stuck in the Fallacy of Composition. So, economists have NOTHING to contribute to the discussion about how the economy, markets, and firms should be organized.

Economists have discussed the role of exploitation and profit without ever coming to the core of the matter. It is Red Friday, and time for them to retire now for good.

Egmont Kakarot-Handtke

#1 How the Intelligent Non-Economist Can Refute Every Economist Hands Down and
The Profit Theory is False Since Adam Smith. What About the True Distribution Theory? and Profit for Marxists.
#2 Essentials of Constructive Heterodoxy: Profit

Related 'How to end the Punch and Judy show about profit'

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REPLY to Tom Hickey on Nov 27

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 are inverse to productivities. #1 This Law replaces the Labour Theory of Value.

The Profit Law for the pure consumption economy says that OVERALL profit depends on the expenditure ratio and the distributed profit ratio. #2

It holds in particular:
• Overall 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 for 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 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 overall profit do not depend on the ownership of the firms that comprise the business sector.
• 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. #3
• There is no antagonism between total wages and total profits, and the distribution of consumption goods 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.

In sum, the classical/neoclassical and Keynesian/Post-Keynesian Theories of Value/Profit are provably false.

#1 The Pure Logic of Value, Profit, Interest
#2 Essentials of Constructive Heterodoxy: Profit
#3 When Ricardo Saw Profit, He Called It Rent: On the Vice of Parochial Realism

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COMMENT on Andrew Anderson on Nov 28

You say: “A very interesting thing to me is that in the Bible profit is good but profit taking ISN’T(!) good ...”

It is common knowledge that the Bible belongs to the sphere of religion/belief/storytelling and that economics belongs to the sphere of science/knowledge/proof.

Both spheres do not mix, never have, and never will. Your post is out of place.

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REPLY to jrbarch on Nov 29

It is common knowledge that the content and level of economic discussion are far below zero. There is NO need for you or anybody else to deliver more examples.

For details, see FakeNews, FakeScience: economics in the information age.

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REPLY to jrbarch on Nov 30

You say: “I do have an issue with ‘trust me, I’m a scientist’.”

There is NO issue at all; there is only your abysmal ignorance and confusion. Science is NOT about trust or credibility or belief or authority, but only about proof, more specifically, about the logical and empirical consistency of a theory. A theory, in turn, is the best humanly possible mental representation of reality.

Since the ancient Greeks introduced the distinction between opinion (= doxa) and knowledge (= episteme), NO scientist has ever said Believe me. As Popper put it: “... a critical discussion is well-conducted if it is entirely devoted to one aim: to find a flaw in the claim that a certain theory presents a solution to a certain problem.”

So, there is NO issue at all. I have given you the Profit Law, and if you have qualms about it, you are invited to refute it. Of course, you cannot. But you can endlessly waffle about Love, the Divine, your Australian aboriginal brothers, and all the other good vibration stuff.

Here is the ultimate test to practically find out the difference between doxa and episteme for yourself: You have the choice to board an aircraft that has been designed/constructed by your good vibration folks and one that has been designed/constructed by scientists/ engineers. Who do you REALLY trust?

OK, and now get out of economics.