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Essentials: An inquiry into the nature and causes of profit

The individual firm is blind to the structural relationships as defined with the 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 of 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 pure 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 as 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 pure 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.

  • In order that profit comes into existence for the first time in the pure 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 household sector's debt.

  • Wage income is the factor remuneration of labor input L . Profit is not a factor income, neither is loss. Since capital is nonexistent in the pure 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 does not depend on 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 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 total income ≡ wages + profits are flawed because profit and distributed profit is 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 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.

 

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Refers to Confused Confusers: How to Stop Thinking Like an Economist and Start Thinking Like a Scientist, Sec. 3  URL, see also  Objective Principles of Economics URL  and  Profit for Marxists  URL. For the graphical represenation see Debunking squared.

 

 

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