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By looking at a single firm it seems that profit depends on (List A):

  • exploitation of the workforce

  • innovation

  • risk-taking

  • capital accumulation

  • monopolistic practices

  • market imperfections

  • the combination of the factors of production

  • wage rate and employment

  • the talent of managers and the motivation of the workforce

  • aggressive expansion at home and abroad

  • bamboozling the consumer

  • speculation, financial manipulation, fraud, cheating

  • corruption, cronyism, gaming the system

  • the loss of other firms.

These factors play a role when it comes to the distribution of profits between firms. But these factors cannot explain the profit of the business sector as a whole. The conventional view is that total profit must be zero in equilibrium under the condition of perfect competition. This is an analytical conclusion because one cannot directly observe this limiting case in the real world. The conclusion depends, as with every theory, logically upon the premises. Hence, it all depends on whether the axioms are true or false.

By looking at the economy as a whole, which can be done with the help of an objective formal starting-point that radically reduces the complexity of the real thing, it follows that total profit of the business sector is determined in the elementary case of a production-consumption economy by two factors (List B):

  • by the relation of consumption expenditures to total income,

  • by distributed profits in the period under consideration.

This theoretical conclusion can be verified with the accuracy of two decimal places by proper application of national accounting. It does not depend on fantastic assumptions about human behavior, equilibrium, perfect competition, or other figments of the imagination. The explanations given in List A are obviously different from those in List B. In more general terms, List A is subjective-behavioral while List B is objective-systemic and contains the elementary version of the AXEC profit theory. The profit formula Qm≡C−Y+DN is a logical implication of the structural axiom set. The elementary formula becomes more sophisticated as soon as investment, government, and foreign trade is added.

The first important conclusion of the macro-axiomatic analysis is that 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. The second conclusion is that there is a close relation between profit/loss and the expansion/contraction of credit for the economy as a whole. Therefore it is an elementary mistake to identify profit with a physical surplus. The third conclusion is that there is no antagonism between total  wages and total  profits and that the distribution of output has nothing at all to do with the behavioral concept of marginal productivity. The fourth conclusion is that 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. This applies to many other microeconomic observations.

The crucial point is that profit for the economy as a whole cannot be derived from the behavior of the individual firm. That is, the standard microeconomic approach cannot, as a matter of principle, deliver the correct profit theory. And when the profit theory is false the other parts of a comprehensive approach are open to doubt. What is immediately obvious is that, as collateral damage, the familiar theories of income distribution and wealth distribution are wrong by logical implication.

A correct theory is the precondition of economic policy. This, of course, is not new: “We have long known that the conduct of economic policy requires the policy-maker to have a theory of how the economy works.” (D. Laidler). The conventional economist's combination of a sense of mission, flawed theory, and self-delusion is not of great help if any.



Economists: Cast of characters 


PTOs = 'Ptolemeans' = behavior-centric = obsolete paradigm

Focus on (i) behavior of humans in the economic realm,

(ii) simultaneous equilibrium

RatioPTOs  constrained optimization, homo oeconomicus

RatExPTOs  constrained optimization+rational expectations

PsySocPTOs  homo emotionalis, socialis, Keynesiansis, etc.

Formal foundations: behavioral axioms or ad hoc


COPs = ' Copernicans' = structure-centric = new paradigm

Focus on (i) behavior of the monetary economy (structural laws), (ii) behavior of humans in the economy (history),  URL

Formal foundations: structural-systemic axioms  

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