The principal problem of Political Economy
from David Ruccio
The discussion of capital and labor shares puts the issue of class at the top of the agenda. No wonder, then, that mainstream economists are expending so much effort these days attempting to define away the problem.
Let me explain.
If we look at changes in capital and labor shares (measured in terms of corporate profits before tax and compensation of employees as shares of gross domestic product, as in the chart on the left), we can clearly see that, in recent decades, the profit share has been rising and the labor share has been falling. In other words, labor has been losing out to capital—and we need to focus on solving that class problem.
But, of course, the share of income accruing to capital doesn’t just show up in corporate profits; some of that capital share is also distributed to a small portion of income-earners in the corporate (both financial and nonfinancial) sector. The share of income of the top one percent (as in the chart on the right) is a good approximation. If we therefore added the top-one-percent to corporate profits, and at the same time subtracted it from the compensation of employees, the divergence between the capital and labor shares would be even greater—and the class problem would be even more acute.
MIT’s Matthew Rognlie understands this perfectly. He notes that David Ricardo pronounced the issue of how aggregate income is split between labor and capital the “principal problem of Political Economy” and that the recent explosion of research on inequality has both called into question the postwar presumption of constant capital and labor shares and emphasized the increasing share of income accruing to the richest individuals. In other words, class has once again reared its ugly head.
Instead of trying to solve this class problem, Rognlie attempts to define away the problem—first, by focusing on net income shares and, then, by including housing in capital. He concludes that, once those adjustments are made,
concern about inequality should be shifted away from the split between capital and labor, and toward other aspects of distribution, such as the within-labor distribution of income.
The problem with focusing on net income shares—that is, in the case of capital, gross profits minus depreciation—is that it confuses flows of value (corporate profits before taxes, plus incomes to the top one percent, in the way I suggested above) with expenditures (e.g., by corporations to replace the value of plant, building, and machinery that has depreciated in value during the course of production).
The problem with including housing in the capital stock is that it doesn’t form part of the capital from which capitalists derive a flow of new value added or created. Housing industry profits are already accounted for in gross corporate profits. The fact that individuals may own housing doesn’t allow them to capture any of that new value; it just allows them to enjoy the benefits of have a home and to pay the costs (to banks and other financial institutions) of financing their homeownership.
While I agree with Rognlie that the “story of the postwar net capital share is not a simple one,” the fall and then recovery of the capital share (in the form of both corporate profits and one-percent incomes), which is mirrored by the rise and then fall of the wage share, can’t simply be defined away.
In other words, just as it was in the early-nineteenth century, class remains the “principal problem of Political Economy” in our own times
Principal problem solved
Comment on ‘The principal problem of Political Economy’
David Ruccio writes:
“If we look at changes in capital and labor shares … we can clearly see that, in recent decades, the profit share has been rising and the labor share has been falling. In other words, labor has been losing out to capital — and we need to focus on solving that class problem.” (See intro)
The principal problem of Political Economy is, of course, the scientific incompetence of Political Economists. The fact of the matter is that the profit theory is false since Adam Smith (Desai, 2008). The mistake/error consists — roughly speaking — in naively taking it for granted that profit is a share of total income and that it is attributable to capital. Nothing is further from reality.
The fatal analytical blunder means that (i) economists have no true conception of the most important phenomenon in their universe, (ii) they fail to capture the quintessence of capitalism, (iii) they lack any deeper understanding of how the actual economy works.
To be sure, with regard to profit not only Orthodoxy is groping in the dark but also heterodox economists, e.g. (2011; 2013; 2014a). David Ruccio can be added to the flat-earth crowd because he is obviously convinced that total income is the sum of wages and profits. Traditional Heterodoxy has to be criticized for its failure to get beyond debunking and class rhetoric.
The principal problem of economics, a.k.a. the profit conundrum (Tómasson and Bezemer, 2010), has been solved by Constructive Heterodoxy (2015). For the correct theory of income distribution see (2014b).
Egmont Kakarot-Handtke
References
Desai, M. (2008). Profit and Profit Theory. In S. N. Durlauf, and L. E. Blume (Eds.), The New Palgrave Dictionary of Economics Online, pages 1–11. Palgrave Macmillan, 2nd edition. URL http://www.dictionaryofeconomics.com/article?id=pde2008_P000213.
Kakarot-Handtke, E. (2011). What is WrongWith Heterodox Economics? Kalecki’s
Profit Theory as an Example. SSRN Working Paper Series, 1845803: 1–9. URL
http://ssrn.com/abstract=1845803.
Kakarot-Handtke, E. (2013). Debunking Squared. SSRN Working Paper Series,
2357902: 1–5. URL http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2357902.
Kakarot-Handtke, E. (2014a). Profit for Marxists. SSRN Working Paper Series,
2414301: 1–25. URL http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2414301.
Kakarot-Handtke, E. (2014b). The Profit Theory is False Since Adam Smith. What
About the True Distribution Theory? SSRN Working Paper Series, 2511741:
1–23. URL http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2511741.
Kakarot-Handtke, E. (2015). Essentials of Constructive Heterodoxy: Profit. SSRN
Working Paper Series, 2575110: 1–18. URL http://papers.ssrn.com/sol3/papers.
cfm?abstract_id=2575110.
Tómasson, G., and Bezemer, D. J. (2010). What is the Source of Profit and
Interest? A Classical Conundrum Reconsidered. MPRA Paper, 20557: 1–34.
URL http://mpra.ub.uni-muenchen.de/20557/.
For further cross-references see
http://axecorg.blogspot.de/2015/03/profit-cross-references.html