June 6, 2017

Profit and distribution: a primer

Comment on Cecchetti & Schoenholtz on ‘Labor’s Declining Share: A Primer’#1


The Palgrave Dictionary summarizes: “A satisfactory theory of profits is still elusive” (Desai, 2008) and this is the most damning verdict about economics. After 200+ years economists cannot tell the difference between profit and income. This is the current state of economics: the four main approaches ― Walrasianism, Keynesianism, Marxianism, Austrianism ― are mutually contradictory, axiomatically false, materially/formally inconsistent and all got the pivotal economic concept profit wrong.#2

Quite naturally, because profit theory is false distribution theory, too, is false.

Cecchetti & Schoenholtz’s post starts with the observation: “For at least the past 15 years, and possibly for several decades, labor’s share of national income has been declining and capital’s share has been rising in most advanced and many emerging economies.” And they conclude: “But the race for a better understanding of what drives the income distribution is just getting started, so we still have a great deal to learn about what determines labor’s share.”

In order to get a better understanding, the very first thing to do is to get the profit theory right.#3. The axiomatically correct Profit Law is given with Qm≡Yd+(I-Sm)+(G-T)+(X-M) and reduces to Qm≡(I-Sm)+(G-T) for Yd, X, M=0; Legend: Qm total monetary profit, Yd distributed profit, Sm monetary saving, G government expenditures, T taxes, X exports, M imports.

Nominal labor share l is in the elementary version of Cecchetti & Schoenholtz given as quotient of wage income Yw and the sum of wage income and monetary profit Qm, that is, l=Yw/(Yw+Qm)=1/(1+Qm/Yw).

This gives us the drivers of the falling labor share l which simply translates into Qm rises faster than Yw. Now monetary profit Qm for the world economy as a whole is in turn determined by growth expressed as investment expenditures I, monetary saving/dissaving Sm, and government deficit G-T. This is a testable proposition because all variables are measurable. Roughly speaking, growth of the capital stock (predominantly in Asia) and growth of overall household and government sector debt explains the decline in the worldwide labor share l over the past decades.#4

Egmont Kakarot-Handtke

#1 Money and Banking blog
#2 See ‘The Profit Theory is False Since Adam Smith. What About the True Distribution Theory?
#3 See also ‘First Lecture in New Economic Thinking
#4 To determine the real shares is another matter that has been dealt with elsewhere.

Related 'Where MMT got macro wrong' and 'Austerity and the idiocy of political economists' and 'Rethinking the Distribution' and 'Keynesianism as ultimate profit machine'