Michael Roberts — Back to Front

Marx's economic theory is based on his theory of the commodity and how profit is extracted as surplus value based on commodification. Thus, profit (along with profit rate) is the economic driver, which Marx expresses in the expression, M - C - M', meaning that financial investment of money–M–is used to produce commodities for consumption–C– that leads to return on investment as profit extracted as surplus value from the process–M'. Since this is not earned through productive work it is "economic rent" in the sense of classical economics, in which economic rent figured prominently. Marx did not come up with the idea. Rather, he sought to produce a more rigorous account of it.

Conventional monetary policy is based on keeping the interest rate lower than the profit rate, so as not create liquidity preference that overly encourages saving and stifles productive investment. While this may be a factor, it is not the factor, or even the most important factor, which is a reason that monetary policy doesn't work very well if relied on as a policy tool.

Michael Roberts argues that Keynesian fiscal policy that takes demand as the driver as is not necessarily successful either, since the driver isn't money rather than the interest rate. Rather, according to Marxian analysis, the issue is the inherent contradictions in the structure of capitalism as a modification of feudalism. Ownership of capital was substituted for, or melded with ownership of land as a source of rent extraction.

In this view, what is required is a entirely fresh approach based on removing the bias introduced by flawed institutional arrangements, especially bourgeois property ownership, that found the current system on expropriating surplus value as economic rent. 

Such a system is not only unfair to workers, but it is also dysfunctional as an economic system. This dysfunctionality leads to political problems, which Marx believed could only be addressed through revolution, since the ownership class as he knew it then would never acquiesce to reform through the political process. But not much has changed in this regard, other than the appearances. The system still depends on rent extraction. What's new is financialization, digitization, and some of the forms that monopolization takes.

While may have conditions have changed drastically since Marx wrote, his analysis of capitalism and its discontents still holds the day, since it is a work in political economy rather than economic theory.  Macroeconomics deals with socio-economic systems that involves much more than abstract economic relations since they are historical and dynamic. 

Marx and other classical economists like Smith understood this. But the other classical economists were products of their class and remains essentially true to it. Marx, however, broke the mold in claiming that class was the problem. He concluded that an inherently dysfunctional system would either change or be changed. He did not think that the owners of the system would be up for change it themselves, based on noblesse oblige, for example.

Interestingly, Marx lived shortly after the American and French revolutions, which were still lively in memory and certainly shaped his thinking, especially since he was historically inclined having been trained in Hegel. 

Now we see the uprising in France where La Marseillaise is again being sung in the streets, this time not against feudal rule but neoliberal.

Michael Roberts Blog
Back to Front
Michael Roberts

David F. Ruccio — Utopia and value theory

Mainstream economists refer to it as price theory, everyone else value theory. But whatever it’s called, it’s at the center of economists’ differing explanations of what happens in (and alongside) markets.

As I see it, price/value theory serves as the framework to explain a wide range of phenomena, from how and for how much commodities are exchanged in markets through the determinants of the distribution of incomes to the outcomes—for the economy and society as a whole—of the allocation of resources and commodities through markets.

And each price/value theory has a utopian dimension. It’s not just an accounting for and an explanation of the conditions and consequences of commodity exchange; it’s also a way of thinking about the fairness and justice of markets. It therefore informs (and is informed by) a utopian horizon within and beyond markets.

Let me explain.…

Excellent short explanation of a key economic idea that functions as a political weapon in the class war.

The differences between neoclassical price theory and Marxian value theory couldn’t be more stark. The differences are even more dramatic when we compare their utopian horizons. Whereas neoclassical price theory leads to a utopian celebration of capitalist markets, Marxian value theory both informs and is informed by a utopian critique of capitalist exploitation—and therefore a movement beyond capitalism.

The question is how surplus value is created. Surplus value becomes profit (owners' share by fact of ownership), which is income that is not earned since it is the difference between proceeds and wages.

In both cases—neoclassical price and Marxian value theory—the story about commodity exchange, and therefore the analysis of the form that wealth takes under capitalism, has a utopian dimension. The two theories have that in common. Where they differ is the form that utopian dimension takes....

Occasional Links & Commentary
Utopia and value theory
David F. Ruccio | Professor of Economics, University of Notre Dame

See also

Michael Roberts Blog
Inequality and exploitation
Michael Roberts

See also

Monthly Review
The Multiple Meanings of Marx’s Value Theory

Riccardo Bellofiore

Nick Rowe — "Profits = Investment - Saving"

"Profits = Investment - Saving"

Or, "Profits = Expenditure - Income". Those are just alternative ways of saying the same thing, for a closed economy, if investment and saving include government investment and saving.

Most economists will say that's wrong. And it is wrong by standard definitions, where aggregate expenditure and income are the same thing, and investment and saving are also the same thing (for a closed economy, including government investment and saving).

But let me tell you a story:

Worthwhile Canadian Initiative
"Profits = Investment - Saving"
Nick Rowe | Associate Professor of Economics at Carleton University, Ottawa, Canada

David F. Ruccio — It’s the profits, stupid!

I would phrase it somewhat differently: "It's the distribution, stupid."

The social and political problems arise from grossly asymmetrical distribution and the ensuing distributional effects economically through highly asymmetrical income and wealth.

Occasional Links & Commentary
It’s the profits, stupid!
David F. Ruccio | Professor of Economics, University of Notre Dame

ProMarket — The Rise of Market Power and the Decline of Labor’s Share

The two standard explanations for why labor’s share of output has fallen by 10 percent over the past 30 years are globalization (American workers are losing out to their counterparts in places like China and India) and automation (American workers are losing out to robots). Last year, however, a highly-cited Stigler Center paper by Simcha Barkai offered another explanation: an increase in markups. The capital share of GDP, which includes what companies spend on equipment like robots, is also declining, he found. What has gone up, significantly, is the profit share, with profits rising more than sixfold: from 2.2 percent of GDP in 1984 to 15.7 percent in 2014. This, Barkai argued, is the result of higher markups, with the trend being more pronounced in industries that experienced large increases in concentration.

A new paper by Jan De Loecker (of KU Leuven and Princeton University) and Jan Eeckhout (of the Barcelona Graduate School of Economics UPF and University College London) echoes these results, arguing that the decline of both the labor and capital shares, as well as the decline in low-skilled wages and other economic trends, have been aided by a significant increase in markups and market power....

ProMarket — The blog of the Stigler Center at the University of Chicago Booth School of Business
The Rise of Market Power and the Decline of Labor’s Share
Asher Schechter

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

Egmont Kakarot-Handtke — Rethinking deficit spending

We've discussed this previously here at MNE in terms of the Kalecki profit equation.

AXEC: New Foundations of Economics
Rethinking deficit spending

Rethinking the Profit LawEgmont Kakarot-Handtke | University of Stuttgart - Institute of Economics and Law

Warren Buffett's got the minimum wage thing wrong like so many other people

Warren Buffet was chiming in on the minimum wage or should I say, the idea of hiking the minimum wage. This was in response to a question as to whether or not that would be an effective means of fighting income inequality, which he says is "extraordinary" as in, really, really, bad.

Here's what Buffet said:

“I don’t have anything against raising the minimum wage but I don’t think you can do it in a significant enough way without creating a lot of distortions,” Buffett, 84, Berkshire Hathaway Inc.’s chief executive officer, said Saturday at the company’s annual shareholders meeting in Omaha, Nebraska. Those distortions “would cost a whole lot of jobs,” Buffett said.

It's funny. Buffett talks about distortions? Like massive, unprecedented income and wealth inequality is not a distortion? Come on.

Anyway, I'm assuming that when Buffett claims "a whole lot of jobs" would be lost he is inferring that higher wages paid by firms would lead to lower profits and then workers would have to be laid off.

This is fallacy of composition and it's the common error that most minimum wage hike detractors like to invoke.

The problem with that arguement is it simply doesn't hold up in the macro sense. First of all profit is composed of two variables. One is cost (C) and the other is revenues (R).

If wages are hiked then yes, costs (C) will increase, but at the same time people's incomes will rise (all else being equal) and that will translate into higher sales (revenues). Buffett of all people should know this. Revenues are not a constant; they're a VARIABLE. Why is it that all the minimum wage hike detractors can't understand this and focus on costs alone? There isn't an economist in the world who will tell you that higher income will necessarily lead to static or falling sales.

So, in the "macro" environment higher costs (wages) would be offset by higher sales and that would equate to the same or greater profits, which means that no one has to be laid off.

Maybe it's true in the micro sense, that is, if ONE FIRM  is forced to raise its minimum wage then that firm might struggle and be forced to lay people off. However, if it's an across the board hike and everybody's income goes up, sales will not collapse. On the contrary, they would  probably soar and so would profits.

WTF, Buffett??

Dietz Vollrath — Scale, Profits, and Inequality

But if we take seriously the incentives behind innovation, then it isn’t simply the genius of the individual that matters for growth. The scale of the economy is equally relevant.

I would say that scale is much more relevant than innovation. Innovation is not new. What is new is population size and mass markets that serve either the entire market or major segments. There is still significant innovation in niche markets, but the innovators are not rewarded anywhere near like those who can capture market share in a mass market. It's the existence of mass markets (scale) that results in the level of inequality that prevails and promises to be become the norm as more an more niches are absorbed into conglomerates and smaller less efficient firms merged and consolidated. You know, "the economies of scale." Do we need unlimited inequality to incentive innovation in this environment? Why? Most of the gains are simply rents that are extracted because they can be.

The Growth Economics Blog
Scale, Profits, and Inequality
Dietz Vollrath | Associate Professor of Economics at the University of Houston

h/t Mark Thoma at Economist's View

Seth Ackerman — The Red and the Black

This is an astute examination of the issues involves in moving from capitalism in liberal democracy to socialism in social democracy (not to be confused with statism). It's also a good lesson in the history of economics.

Jacobin
The Red and the Black
Seth Ackerman | editor at Jacobin and a doctoral candidate in history at Cornell
(h/t Brad DeLong)

Peter Cooper — Unearned Income and its Distribution

In any society, there will be real output (real income) and real wealth that is not produced solely by humans. Some real income is due to the contribution of nature – land, natural resources, beneficial weather patterns, animals and so on. Some real income is produced by machines, robots and other means of production that were created by prior applications of labor in combination with nature. In any given accounting period, this real income is 'unearned' in the sense that it is not due to human effort exerted within the period. Much of it currently flows to industrial capitalists and rentiers on the basis of property ownership rather than productive contribution. Over time, the real productive contribution of means of production can be expected to rise, due to technical progress. In this post, a framework is tentatively suggested for thinking about the distribution of unearned income, both at a point in time and as it grows over time.

Heteconomist
Unearned Income and its Distribution
Peter Cooper

"Can't See The Wisdom For The Cleverage."

Commentary by Roger Erickson

This is so laughably clever (of savant insiders) that it's obviously dumb (to outsiders).

"Can't see the wisdom for the cleverage." That's my new mantra. I'm referring to group-wisdom vs individual-cleverness of course. Those two concepts work on entirely different levels. The first may not be either detectable or decipherable to the latter, no matter how heroic the intellect or work ethic combined in any given individual. No more so than one human neuron can perceive what a human CNS collectively can.

Multinationals beach tax bills in Spanish shells

"A rented office overlooking a dusty rail track near Madrid’s airport was until recently the workplace of what would appear to be the most productive worker in all of Spain.

From here a single employee presided over a company that from 2009 to 2011 made €9.9bn of net profits, all while earning an annual salary of only €55,000.

The person was working for ExxonMobil Spain SL, a holding company for the world’s largest oil group by value, which for several years used a relatively unknown part of Spanish tax law to transfer billions of euros from foreign subsidiaries to the US, helping to significantly reduce its tax bill."


Read more at the links please, or I'll be exiled or in jail as long as Ed Snowden and Bradley Manning, simply for sharing with all what some of us already know.


ps: Didn't Lew Platt of HP once say that “If HP knew what HP knows, we would be three times as profitable.” So why can't the human species know what the human species knows? Wouldn't WE be far more than just 3x better off for it? What part of social doesn't our supposedly advanced species yet understand?

If none of us are as smart as all of us, then it's surely also true that mistrusting any of us is never as dangerous as mistrusting all of us? To paraphrase, trusting only some of us is never as adaptive as trusting all of us simultaneously? There's safety in group transparency and group knowledge? Will I go to jail - or disappear - just for saying so?  If you really think so, then please copy this little text and distribute it, somewhere in posterity. :)

NSA staff don't yet look where the sun don't shine ... do they? :(

Daniel Little — Marx's thinking about technology

One interesting factoid: Capital's falling rate of profit was Engels editing rather than Marx. There's more.

Understanding Society
Marx's thinking about technology

Daniel Little | Chancellor, University of Michigan at Dearborn

Peter F. Drucker — Profit is not the purpose of business and the concept of profit maximization is not only meaningless, but dangerous

I heard Peter say a lot of strange things when I was his student, but this has got to be one of the most unusual that I’d heard up to that time. I think most of my Drucker classmates agreed. Indeed, until Drucker came along most everyone believed the basic “fact” that the purpose of a business was to make money. That is, to make a profit. This belief leads to a corollary, another myth, believed by all—that is, that the goal of any business is profit maximization. Another words, whatever your business, your goal should be to make as much profit as possible. If you accept making a profit as a business’s purpose, the second part just follows naturally. This might even seem worthy to many. To quote Michael Douglas’s famous (or infamous) statement in his role as Gordon Gekko in the 1987 movieWall Street: “Greed is good.” Even today many “know” greed, or profit maximization to be the correct prescription for business success, even if it is amoral or shouldn’t be “good” from a moral perspective. Not so fast, Gordon. As Drucker so often said, whatever everyone knows is usually wrong, Hollywood films not excepted. Drucker told us first that profit is not the purpose of business and that the concept of profit maximization is not only meaningless, but dangerous.

Lessons from Peter F. Drucker
The Purpose of Business Is Not To Make A Profit
William Cohen, Ph.D. | Peter Drucker’s first executive Ph.D. graduate at what is now the Peter F. Drucker and Masatoshi Ito Graduate School of Management. His latest books are Drucker on Leadership (Jossey-Bass, 2010) and Heroic Leadership: Leading with Integrity and Honor (Jossey-Bass, 2010). Cohen is the president of The Institute of Leader Arts and a vice president of the 26 Peter F. Drucker Academies of China and Hong Kong. He is also a retired Air Force general.

Neoclassical economics is a term variously used for approaches to economics focusing on the determination of prices, outputs, and income distributions in markets through supply and demand, often mediated through a hypothesized maximization of utility by income-constrained individuals and of profits by cost-constrained firms employing available information and factors of production, in accordance with rational choice theory. — Wikipedia

Neoclassical economics is at odds with the foremost figure in business management has to say, and which most business people know from experience. "The business of business is business." that is, attracting and retaining customers in a marketplace that is ever-changing. Profit is a by-product of business success, which is the result of efficient and effective management. "Efficiency is doing things right, and effectiveness is doing the right things," is the message of Peter F. Drucker's The Effective Executive.

Steve Randy Waldman — Hidden profits, hidden rents

Evan Soltas attracts the attention of SRW with his analysis of profits and rents.

Evan Soltas has a very good post on the explosive growth of the financial industry since the end of World War II. As a share of GDP, in terms of profits, and in terms of payroll, postwar America has been truly been a golden age for bankers, brokers, and fund managers.
In fact, it’s even better than it looks!

Interfluidity
Hidden profits, hidden rents
Steve Randy Waldman

Evan Soltas — 5 More Graphs on Finance

Profits and rent in the financial sector.

Evan Soltas | economics & thought

5 More Graphs on Finance

Robert Vienneau — Nell's Diagram Of A Capitalist Economy by Robert Vienneau

I like the clarity with which monetary flows and commodity flows are distinguished in this approach. It is not the case that capitalists own blast furnaces sitting in their backyard, which they then loan to firms. Mainstream economists are deliberately and consistently obfuscating on this issue, from introductory teaching to beyond. Perhaps there's a reason for this widespread confusion:

"From the point of view of Political Economy, however, the most important fact is that while wages are paid for work, and one can (and in some circumstances should) think of the wage bill, equal here to Worker Consumption, as reproducing the power to work, profits are not paid for anything at all. The flow of profit income is not an exchange in any sense. The Samuelson [circular flow] diagram...is fundamentally misleading; there is no 'flow' from 'household supply' to the factor market for capital. The only flow is the flow of profit income in the other direction. And this, of course, leads straight to that hoary but substantial claim that the payment of wages is not an exchange either, or at any rate, not a fair one. For Wages plus Profits adds up to the Net Income Product; yet profits are not paid for anything, while wages are paid for work. Hence the work of labor (using the tools, equipment, etc., replacement and depreciation of which is already counted in) has produced the entire product. Is labor not therefore exploited? Does it not deserve the whole product?" -- Edward Nell

Read the whole post at Thought Offerings (short)
Nell's Diagram Of A Capitalist Economy
by Robert Vienneau