Tuesday, July 4, 2017

Barkley Rosser — Comments on Profit and Capital


Summary of the meanings and uses of the terms "capital" and "profit." Barkley Rosser covers a lot of background in a few short paragraphs.

From the logical perspective, the problematic is that "capital" and "profit" are ordinary language terms that are also technically defined differently in various economic and financial accounts. The quest for the "real" meaning as the "essence" denoted by "capital" and "profit" is therefore doomed to failure.  There is no there there.

This is a problem generally in economics and social science. It is very difficult to establish key terms technically in a way that compels general agreement. Therefore, a plethora of competing theories, none of which are able to rule the day since none qualifies as a best explanation in terms of the commonly accepted criteria of 1) consistency/comprehensiveness, 2) correspondence/evidence, 3) usefulness/practicality, and 5) economy/elegance. So it becomes take your pick, or come up with something that purports to be "better."

Angry Bear
Comments on Profit and Capital
J. Barkley Rosser | Professor of Economics and Business Administration James Madison University

31 comments:

AXEC / E.K-H said...

The profit theory is false since Adam Smith. This is one of the greatest embarrassments in the history of the sciences. For the proof see:

Profit and stupidity
http://axecorg.blogspot.de/2017/06/profit-and-stupidity.html

Economists: scientists or political clowns?
http://axecorg.blogspot.de/2017/06/economists-scientists-or-political.html

and cross-references Profit
http://axecorg.blogspot.de/2015/03/profit-cross-references.html

Egmont Kakarot-Handtke

Bob said...

They could never agree on a theory of profit. But the show must go on...

Magpie said...

Bob said...

They could never agree on a theory of profit. But the show must go on...

The problem is not that "they" (who are "they" anyway?) cannot agree on a theory of profit. The problem is that there are many people who find a theory of profit inconvenient. Is not that they can't, is that they won't.

We've just witnessed in this blog a capitalist defending capitalism against the most basic and elemental logic, against fact, against decency. Why? Is that because the guy is blind? The fact people like him are making money like crazy has nothing to do with that?

Advances in philosophy and science always, invariably affect lots of people. Those whose interests are negatively affected have an incentive to oppose those advances. Not only that, they usually have the means to do so.

Take the Catholic Church as an example. It opposed tooth and nail rationalism, science, and the Enlightenment. God, they even opposed the Bible being translated to modern languages. Why?

Popes and cardinals, bishops, and theologians were the intermediaries between God and the rabble. God spoke to them and they communicated what he said to us: they had the monopoly in biblical interpretation. They decided what was legitimate or not. They crowned emperors, for Christ's sake!

Is it difficult to understand that in a world where faith is no longer the guide to human behaviour the Princes of the Church lose?

Let's go back to our present. It's no secret that coal mining corporations fund climate change denialism, just like, in its day, Big Tobacco funded opposition to anti-smoking campaigns. Wall Street funds the Democrats, industrialists fund the Republicans. It doesn't take a genius to understand why.

----------

And, ultimately, when all else fails, let's seed doubt by hook or by crook.

In Spanish they have a saying, which roughly translates as "when the water is murky, the fishermen win": the fish can't see what they are biting.

That's what's behind the postmodern "everything goes": if one cannot disprove what one dislikes, let's make the water murky.

MRW said...

MAGPIE: We've just witnessed in this blog a capitalist defending capitalism against the most basic and elemental logic, against fact, against decency. Why? Is that because the guy is blind?

Who are you talking about?

Magpie said...

MRW said...

Who are you talking about?

A few days back there was a rather caustic exchange. One side defends the view that capitalism, social hierarchy, wage labour, profits are natural things: they reflect human nature. You can't stop cats from hunting mice: it's in their nature. Well, something like that only with humans. Presumably, those things are in our DNA.

If those things are human nature, then capitalism is the pre-ordained result of 150-200 thousand years of human development and "has always been with us". In a way, from our nomadic ancestors to the classical slavery and medieval serfdom in Europe, Africa, Asia, Oceania and the Americas, everything that has transpired were unsuccessful attempts, child's staggering steps, towards organising society on a capitalist blue print: capitalism was there, even if only in embryo.

By shedding atavistic features, gradually but inexorably human society evolved towards that end: capitalism and, I imagine, liberal democracy.

And this is, too, where human evolution must stop. We reached The End of History. TINA.

It is a happy ending, too. Capitalist social hierarchy is not only natural but inherently good, nay, it is the best possible one. We are led by the best, wisest, most skilled ones: the capitalists. And the beauty of this arrangement is that the vast majority, those less gifted ones, have nothing to complain: they, the workers, were finally emancipated, freed ... by their bosses. That's, after all, what the word boss means: liberator, isn't it? A bossy person is someone who sets you free.

At any event, that word, bosses, doesn't do justice to the bosses. It doesn't sound good. Job creators sounds much better: human instances of that other Creator. Humanity, or at least the best part of it, finally transcended its animal origins and evolved into something greater.

That's why we all are so happy and satisfied. Any deviation from that heaven on earth leads inevitably to totalitarianism: that's the only conceivable way to stop people from clamoring desperately for capitalism, social hierarchy, wage labour and profits. We are so fucking happy.

Or, at any event, that's how our selfless, disinterested capitalist champion of capitalism sees humanity, history, and the future.


Or read for yourself

http://mikenormaneconomics.blogspot.com/2017/06/chris-dillow-why-libertarians-should.html?showComment=1498663117227#c6667067905250254550

And

http://mikenormaneconomics.blogspot.com/2017/06/chris-dillow-why-libertarians-should.html?showComment=1498663731376#c1260961634500122685

Magpie said...

Incidentally, MRW, if you thought that that person was a libertarian or an anarcho-capitalist, well, think again.

He may have lifted every single point of the "How to defend capitalism" talking points. That passionate defence of capitalism may check every single argument the people from Mises Institute advance.

But he ain't a libertarian, no siree. At least, he denies that.

AXEC / E.K-H said...

Magpie

You say: “The problem is not that ‘they’ (who are ‘they’ anyway?) cannot agree on a theory of profit.”

‘They’ are Walrasians, Keynesians, Marxians, Austrians, and Pluralists. And this means that ‘they’ “fail to capture the essence of a capitalist market economy.” (Obrinsky) This, obviously, includes you.

Egmont Kakarot-Handtke

Bob said...

The problem is that there are many people who find a theory of profit inconvenient. Is not that they can't, is that they won't.

Magpie,

Have you read AXEC's theory of profit?

It may be ideologically inconvenient.

Magpie said...

Bob said...

Have you read AXEC's theory of profit?

It may be ideologically inconvenient.


No, Bob, I haven't read any of that.

There are plenty things I have never read. I haven't read any books on astrology, necromancy, spiritism, esotericism, either. I haven't read anything from Scientology.

For that matter, I have never read any book on quantum mechanics or string theory, either.

After finding Egmont's comments even in the soup, I lost what little curiosity I once felt for it. So, I'm sorry to say, I fear I never will.

Have you? You can give me the gist of it, if you like.

Bob said...

I read some of it, but I don't understand it.

It is a macroeconomic definition of profit, quite different to that understood by business owners. It's not a definition where you can say that "profit" is related to the exploitation of labour. Or where "profit" is related to the "brilliance" of management.

AXEC / E.K-H said...

Profit theory in less than 5 minutes
Comment on Bob on ‘Comments on Profit and Capital’

For the determination of monetary profit of the economy as a whole one has to start with the most elementary case of a pure consumption economy without investment, government, and foreign trade.* In this elementary economy three configurations are logically possible: (i) consumption expenditures are equal to wage income C=Yw, (ii) C is less than Yw, (iii) C is greater than Yw.

In case (i) the monetary saving of the household sector Sm≡Yw-C is zero and the monetary profit of the business sector Qm≡C-Yw, too, is zero.
In case (ii) monetary saving Sm is positive and the business sector makes a loss, i.e. Qm is negative.
In case (iii) monetary saving Sm is negative, i.e. the household sector dissaves, and the business sector makes a profit, i.e. Qm is positive.

It always holds Qm+Sm=0 or Qm=-Sm, in other words, loss is the counterpart of saving and profit is the counterpart of dissaving. This is the most elementary form of the Profit Law. Total profit is scattered among the firms that comprise the business sector.

Profit for the economy as a WHOLE has NOTHING to do with productivity, the wage rate, the working hours, exploitation, competition, innovation, capital, power, monopoly, waiting, risk, greed, the smartness of capitalists, or any other subjective factors. Total profit/loss is objectively determined in the most elementary case by the change of the household sector’s debt.

Economists who observe a single firm and generalize what they see do not understand that what is true for a molehill (= micro) is NOT true for the universe (= macro). Micro profit theory is simply a Fallacy of Composition.

The profit theory is false since Adam Smith/Karl Marx.

Egmont Kakarot-Handtke

* (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 it holds X=O. Note that ALL variables are measurable.

Bob said...

What happens when you add investment, government and foreign trade?
Can we add one element at a time?

AXEC / E.K-H said...

Bob

The balances of the business sector, the household sector, the government sector and the rest of the world are interrelated as follows: Qm≡-Sm+Yd+I+(G-T)+(X-M). This is the Proft Law for an open economy (X-M) with a government sector (G-T) and with business investment I and distributed profit Yd.

Egmont Kakarot-Handtke

Bob said...

Elementary case: an economy consisting of a business sector (employer) and a household sector (employee).

Qm ≡ -Sm
Profit ≡ -Savings
Profit ≡ -(Wages - Consumption)

My first conclusion is that Qm is a measure of production and Sm is a measure of consumption. In a 'perfect' economy, everything that is produced is consumed. The cost of production is Wages. The cost of consumption is Wages. Wages are monetary or $. When $ is exchanged, production or consumption occurs. The period of time between production and consumption entails a loss for the business sector and a gain for the household sector. The period of time between consumption and production entails a loss for the household and a gain for business. The effect over time is that the two cancel each other out and net to zero. This is a macro effect. As you state, it has nothing to do with individual firms and households. Their perception of profit and savings remains as is.

It seems to me that the term Profit is actually Profit/Loss or Gain/Loss or Cost/Reward. Since businesses produce goods and services, perhaps the term can be Production Cost/Reward?

Bob said...

I suppose an equivalent term for Consumption is Sales. Hence Qm = Sales - Wages

AXEC / E.K-H said...

Bob

You say: “My first conclusion is that Qm is a measure of production and Sm is a measure of consumption. In a ‘perfect’ economy, everything that is produced is consumed.”

Not quite, monetary profit Qm and monetary saving Sm are nominal variables, the real variables are output O and quantity bought/sold X. All variables are related to a period of defined length, usually the calendar year. Because ALL variables are measurable all conclusions are testable. There is no ambiguity of any sort.

For a detailed verbal and graphics supported description of the elementary consumption economy see ‘How the intelligent non-economist can refute every economist hands down’.

http://axecorg.blogspot.de/2015/12/how-intelligent-non-economist-can.html

Egmont Kakarot-Handtke

AXEC / E.K-H said...

Bob

For the summary of the discussion see
http://econospeak.blogspot.de/2017/06/comments-on-profit-and-capital.html?showComment=1499518826458#c7906826356427584858

or here
https://axecorg.blogspot.de/2017/06/economists-scientists-or-political.html

Egmont Kakarot-Handtke

Bob said...

I do not understand that type of diagram. A relationship between two variables can be plotted on a two dimensional graph with vertical and horizontal axis. The result of vectors can be plotted similarly. Beyond that, it's confusing.

For now, I need to confirm the real variables being used.

(i) Yw=WL wage income Yw is equal to wage rate W times working hours L
e.g. 10$/hr x 40 hours = 400$ income

(iii) C=PX consumption expenditure C is equal to price P times quantity bought/sold X.
e.g. 5$/unit x 20 units bought/sold = 100$ exchange

(ii) O=RL output O is equal to productivity R times working hours L
e.g ??? x 40 hours = ???

I'm assuming that Productivity is a monetary unit and that Output will also be monetary. R is thus the wage rate paid and O is the production expenditure. Alternatively, R could be abstracted as the value of commodities produced and O the total value, which would equal the market clearing price when sold.

Assuming this is the case, these variables remain as measures of the production and consumption of commodities over time.

Bob said...

To my knowledge, the Marxian definition of Profit was based on the firm, not on the economy as a whole.

Tom Hickey said...

To my knowledge, the Marxian definition of Profit was based on the firm, not on the economy as a whole.

Marx's view is based on macro analysis as I understand it. It's the macro surplus that is labor value plus capitalists' profit (rent). This is similar to the feudal structure of workers providing the production and landlord pocketing the difference between labor bill and revenue from sales. The surplus over cost as not earned, so it was considered rent.

AXEC / E.K-H said...

Bob

(i) You say: “I do not understand that type of diagram.”

Think of a Cartesian coordinate system#1. Take the first quadrant = north east and throw the other three quadrants away. The first quadrant has only positive values on the axes. Make this four times. Now, put the four first quadrants together, then you get a new coordinate system with ALL axes positive. Thus you can easily walk from one quadrant to the next because the axes have the same dimension, e.g. L = hours per year, or C = dollar per year, or O, X quantity per year. Negative axes are not needed in economics because output O or working hours L are always greater or at least equal zero.

(ii) Productivity is a real magnitude with the dimension quantity per hour.

(iii) The Marxian definition of profit is ultimately based on the labour theory of value which does not relate to the economy as a whole. But Marx applied also macro reasoning, for example: “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.” This question is answered by the Profit Law Qm=-Sm (see above).#2

Egmont Kakarot-Handtke

#1 Wikipedia Cartesian coordinate system
https://en.wikipedia.org/wiki/Cartesian_coordinate_system

#2 For more details see ‘Marx, the moron’
https://axecorg.blogspot.de/2017/06/marx-moron.html
and ‘Profit for Marxists’
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2414301

Bob said...

But surplus is not synonymous with profit. The serf produced a surplus that was appropriated by the lord. Gnerally speaking, the labour force does not consume all that it produces - a portion has to be set aside to support everyone who is not in the labour force.

At the level of the firm, surplus is synonymous with profits.

Bob said...

Okay, more to digest. Until later.

AXEC / E.K-H said...

Bob

You say: “But surplus is not synonymous with profit.”

No, surplus is a real magnitude and profit is a nominal magnitude. For the relationship between the two see Section 4 ‘Profit, surplus, real shares’ in ‘Profit for Marxists’
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2414301.

Egmont Kakarot-Handtke

Tom Hickey said...

But surplus is not synonymous with profit.

It is a matter of definitions, and definitions are not necessarily as positive as they may appear to be. There is also a normative (ideological) aspect to them too.

Surplus as profit implies profit is rent.

Marginalism implies that profit is the marginal product of capital, therefore, just deserts.

There is no "natural" state of either society or an economy. Calling one version "natural" doesn't make it so, and usually the use of "natural" is a tip off that ideology is being introduced in by the back door.

Bob said...

AXEC provided a quote that may indicate how far Marx went in developing a macro version of profit. In other words, not far enough.

According to Marx, labour surplus is what allows human beings to survive. We might say the same is true for bumblebees. It's not specific to capitalism or feudalism, it's a necessity.

The 1930s Technocracy movement described it as the process of obtaining extraneous energy from the environment. At first, this was limited to human brawn. Over time, tools were developed, animals were employed to do work, and then more concentrated forms of energy were harnessed. Our standard of living and our very lives depend on this process.

Bob said...

Ok, so the diagram is one where the origin (0,0) is at the center and the 4 axis represent equal periods of time. Each axis is labeled according to the variable to be plotted, in relation to another variable.

(ii) Productivity is a real magnitude with the dimension quantity per hour.

Then e.g. 10 units/hr produced x 40 hours = 400 units of output.

Thus Qm expressed as O is expressed as a quantity. Sm expressed as X is a quantity.

Bob said...

100 bicycles are produced. Shipment of 100 bicycles is stolen and cannot be recovered. Nominal profit representing the market value of the bicycles is lost, while the surplus (the bicycles) remain.

Tom Hickey said...

"Surplus" doesn't have a single meaning that denotes the "essence" of surplus. Generically, it means "more."

For Marx, there was no "economics" as such in subsistence societies. There were no goods produced for exchange (commodities), no wages, and no unemployment. Everything was used up by producers that produced "on time." Or they didn't and died. There was no inventory either.

Goods produced for exchange are commodities. They are surplus over subsistence, what a worker can produce in addition to meeting subsistence needs. Then the question becomes one of mode of production, which is institutional. Historically it was imposed through class structure and class power according to Marx and based more on evidence than the competing just-so stories.

There really was no surplus before agriculture during the hunter-gathers stage of development in which subsistence living was the rule.

Agriculture was divided into farming and pastoralism. "Capital" comes from the Latin word of head, meaning head of livestock. In pastoral communities wealth was based on head of livestock. In farming communities wealth was based on stocks of produce, mostly grain, that were stored up for future use.

In a monetary economy, there is a monetary surplus also, which accrues from exchange of commodities (surplus over subsistence) for money. In urban environments arts, crafts and trades were also practiced but initially their contribution was less than farming and pastoralism and most of the population was engaged in agriculture. This remained largely true until modern times and the development of technology.

Workers create more goods than needed for their subsistence using skill and technology. This is the real surplus (over subsistence). The monetary surplus is the difference between monetary cost of production (wage bill) and sales revenue. Monetary surplus accrues from exchange of real surplus for money.

Workers earn money as wages from work. Capitalists extract rent based on ownership, without work.

In a socialist monetary economy, the monetary surplus is divided among workers and they are able to mutually purchase the real surplus (commodities produce for sale) in excess of provisioning for subsistence fairly equally based on income from their work.

In a capitalism monetary economy, the monetary surplus goes to owners of "capital" (land, technology, accumulated financial resources) and they are able to command more of the real surplus with it as well as invest to increase their real capital and thereby also their financial capital. This is expropriation according to Marx and it was initiated by primitive accumulation through class power and developed through class structure and class power.

Admittedly this is a somewhat crude summary of Marx's thinking, but I think it captures the line of argument.

AXEC / E.K-H said...

Bob, Tom Hickey

Everybody who has ever used knife and fork or a wheelbarrow or a cooking spoon somehow understands the concept of lever and can apply it successfully in everyday situations. Science, though, goes beyond the endless multitude of concrete instantiations of the lever and tries to figure out the common denominator of ALL variants of levers past, present, and future. Science abstracts from the superficial reality of the Here and Now and tries to figure out the underlying fundamental reality, which has been found to be Fb/Fa=a/b: “This is the law of the lever, which was proven by Archimedes using geometric reasoning.” (Wikipedia)

The failure of economics is mainly due to the Fallacy of Insufficient Abstraction.#1 In other words, economists cannot rise above the level of storytelling. One story line is that of supply-demand-equilibrium and the wonderful feats of the Invisible Hand, the other story line is that of the struggle between the good guys=workers and the bad guys=capitalists. Storytelling is scientific rubbish but people like it.

Economics, understood as science, must go beyond common sense, plain description, and storytelling: “The highest ambition an economist can entertain who believes in the scientific character of economics would be fulfilled as soon as he succeeded in constructing a simple model displaying all the essential features of the economic process by means of a reasonably small number of equations connecting a reasonably small number of variables. Work on this line is laying the foundations of the economics of the future . . . (Schumpeter)

So the first thing to do is to formulate ‘a simple model’ of the abstract entity economy, more precisely, the simplest possible model. 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.

The most elementary economy is given with three equations Yw=WL, O=RL, C=PX, two conditions X=O, C=Yw and the definition of total monetary profit Qm≡C-Yw.#2 This yields P=W/R (1), i.e. the market clearing price P is equal to unit wage costs W/R. This is equivalent to W/P=R (2), i.e. the real wage W/P is equal to the productivity R. This holds, no matter how the wage rate W is set. A wage reduction leads to a proportional fall of the market clearing price P. Profit Qm does NOT change because the budget is balanced, i.e. C=Yw, and from this follows Qm=0, i.e. profit is zero.

In the elementary monetary economy, workers always get the whole output O, the real wage W/P is equal to the productivity R. If productivity increases over time the real wage rises, if productivity falls over time then at some point the real wage hits the subsistence level. This, though, has NOTHING to do with exploitation or surplus or profit. So, as a matter of principle, the elementary consumption economy can reproduce itself at any level of employment L for an indefinite time as long as there are no external limits. It is impossible for the business sector as a whole to make a profit.

See part 2

AXEC / E.K-H said...

Part 2

So, where does profit come from? Not from a longer labor time L, not from higher productivity R, not from a lower wage rate W, not from more greed, not from monopoly power, not from risk taking, not from wishful thinking or any other subjective factor.

It was Marx who 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.”

Trivially true. As long as the budget is balanced, i.e. C=Yw, total monetary profit/loss Qm is zero. Because we know already that the Profit Law states Qm=-Sm it is quite obvious that the business sector as a whole can only draw more out of the circulation, i.e. C greater Yw, if the household sector throws more into the circulation, in other words if the household sector dissaves, i.e. if Sm≡Yw-C is negative, i.e. if C is greater than Yw.

From nothing comes nothing, even economists understand this.#3

Egmont Kakarot-Handtke

#1 For details see ‘Economics and the Fallacy of Insufficient Abstraction’
https://axecorg.blogspot.de/2017/06/economics-and-fallacy-of-insufficient.html

#2 For the detailed verbal description see ‘How the intelligent non-economist can refute every economist hands down’
http://axecorg.blogspot.de/2015/12/how-intelligent-non-economist-can.html

#3 For more details see ‘The Emergence of Profit and Interest in the Monetary Circuit’
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1973952