Fixed link

Understanding Profit and the Markets: The Canonical Model

Egmont Kakarot-Handtke*

posted on 29 July 2013

linkdownload (2807 views, 407 download, 8 comments)

Neither Walrasians nor Keynesians have a clear idea of the fundamental economic concepts income and profit, nor of the interdependence of qualitatively different markets. Critique of these approaches is necessary but not overly productive. A real breakthrough requires a new set of premises because no way leads from the accustomed behavioral assumptions to the understanding of how the economy works. More precisely, the hitherto accepted behavioral axioms have to be replaced by structural axioms. Starting from new formal foundations, this paper gives a comprehensive and consistent account of the objective interrelations of the monetary economy’s elementary building blocks.


"Mention should be made that neither Walrasians nor Keynesians nor Marxians nor Institutionialists, not to speak of Austrians or Sraffaians, ever came to grips with profit (Desai, 2008), (Tómasson and Bezemer, 2010), (Kakarot-Handtke, 2013a). This is of no consequence for political economics where anything goes and substance only hampers a lively discussion. For theoretical economics, though, it has been a real disadvantage to operate over two hundred years without a correct conception of income and profit." Page 14.




You do realize that your supposed clarification of profit is merely a confused and overly qualified version of Marx's surplus value? Your procedure is valid only if you define 'household' as a particular group in society with a particular relation to 'the business sector'. Their definitions are quite ambigious, but it is clear that the two are mutually exclusive - one spends income, the other derives income from the spent income of the first group. Any overlap between them in this case will be ignored.


Your ultimate claim is that profit in the economy as a whole depends upon the extent to which 'business sector' - i.e., captialists - are able to appropriate from 'households' ( read labor) more value in the nominal form of money than what these very 'households' (read labor) recieved as income (wages). You merely push the problem of profit away from production  to distribution by imposing a central bank that finances the ability of labor to continously provide this surplus to capital as opposed to explaining how the economic system itself continually reproduces it. By claiming that central banks not merely finance profit but create profit for the economy as a whole, you think you are the one with 'substance'; I think instead of making claims about the history of economic thought you should instead start reading it..

Dear Tanthallas,

thank you for your good advice.

You do not seem to realize that I have dealt with Marx's failed approach already in the 2011 working paper: Exploitation and its Unintended Outcomes: An Axiomatic View of Marx's Surplus Value.

In case you intend to widen your intellectual scope here is the link:

Sometimes thinking helps to avoid premature counseling.

E. Kakarot-Handtke



Respectfully, I fail to see how you have dealt with Marx's approach in any way, shape, or form from the paper that you have linked above. 


First - You from the very outset do away with 'capital' to provide the gem of the insight that in an economy without 'capital' there is no 'profit' appropriated in production, but instead in such an economy the notion of 'profit' may only be understood in a distributional sense. This does not contradict Marx at all, nor does it contradict the labor theory of value. This is essentially Adam Smith's simple labor theory of value. Not only this, but you reproduce Smiths exact problem and fail to understand how Ricardo trancended it. In the Wealth of Nations, Smith ran into a distributional problem with the labor theory of value which made it seem contradictory at the very moment he attempted to put a return to capital into what was formely only a return to labor. You do exactly this, and I quote from page 5:


"So far, we have labor input as the sole
factor of production and wage income as the corresponding factor remuneration.
Since the factor capital is nonexistent in the pure consumption economy, profit
cannot be assigned to it in functional terms. And since profit cannot be counted
as factor income there is no place for it in the theory of income distribution."


I was not trying to be cruel when I recommended you read the history of economic thought before making claims about it. Your equations fit perfectly with the simple labor theory of value - which necessarily has different results from Marx's labor theory of value for the simple reason that you are not dealing with capital. 


Second - Why you believe that your results contradict Marx, or Ricardo for that matter, is beyond me. Marx makes it perfectly clear that what he calls profit on alienation is a standard feature of money / barter economies in general. Profit on alienation is exactly the type of 'profit' you call distributed profit.Marx devouts immensive amounts of time to what he calls the realm of distribution dealing with precisely what you are talking about, with the exception being that he deals with an economy that accumulates as opposed to an economy characterized by simple reproduction. I quote page 12:


"If the distributed profit ratio is greater than zero the expenditure ratio has to be
below unity to satisfy the zero profit condition (18). That is, saving can wipe out
overall profits in the pure consumption economy. The same holds for the investment
economy (for details see 2011b, pp. 18-19). Vice versa, if the household sector or,
for that matter, the public sector, runs a deficit, i.e. rE > 1, profits are up."


Why does 'savings' wipe out 'overall profits' in this case? Why must the household (?) or public sector run a deficit? Because the system you set up requires that for the economy as a whole the total mass of value that existed before exchange is same after exchange - regardless of how it is distributed amongst individual unts. This means that the economy is not growing; this means that there is no accumulation; this means that you are not talking about a capitalist economy, but instead a barter economy that simply reproduces itself ad infinitum. You are 100% in accordance with Adam Smiths simple labor theory of value, both in the conditions you presupose and the results you obtain. If this is not the case, please show me.  

Dear Tanthallas,


I accept that you want to defend Marx's profit theory. I hope you accept that my paper (2013) deals, as the title indicates, with the correct understanding of profit and the markets and not with Marx in particular. In this case you would admit that your opening sentence “I fail to see how you have dealt with Marx's approach in any way” misses the point.


It is not my intention to deal with Marx's approach at great length. Since his profit theory is logically deficient the rest of his theory falls flat. Marx knew quite well what science is all about and I think I have him on my side:


“I welcome every opinion based on scientific criticism.” (Marx, 1990, p. 93)


If you want to rescue Marx's profit theory you have to refute my profit formula. It is counterproductive to simply repeat an obsolete theory.


You correctly observed that I deal first with the pure consumption economy. This is the simplest possible case and therefore the correct point of departure.


“There can be no doubt whatsoever that a problem which has not yet been solved in all its aspects under its simplest conditions will be still more difficult to tackle if other, "more realistic" assumptions are being made.” (Morgenstern, 1941, p. 373)


By including capital from the outset Marx, and the Classics before him, made the decisive methodological mistake. They associated capital and profit tout court. This was quite commonsensical but unfortunately erroneous. It is a bit surprising that this could happen to Marx because he was well aware that common sense is antithetical to science and that his predecessors had not been up to the task.


“That in their appearances things are often presented in an inverted way is something fairly familiar in every science, apart from political economy.” (Marx, 1990, p. 677)


By starting with the pure consumption economy it becomes immediately clear that profit cannot be attributed to capital for the simple reason because there is no capital. This is the most important insight from the analysis of elementary conditions.


Your critique shows, first of all, a complete lack of understanding of the correct scientific procedure.


Second, your argument is misleading because it suggests that, quote: “... you are not dealing with capital.”


You should know better. In Section 8.2 you find the complete profit formula for the investment economy. In addition, I have dealt with the issue at length in my paper Squaring the Investment Cycle (2011). In this paper the relation between capital and profit is consistently established.


Your comment does not provide a serious argument to change the conclusion of p.14: “Mention should be made that neither Walrasians nor Keynesians nor Marxians nor Institutionialists, not to speak of Austrians or Sraffaians, ever came to grips with profit.”


More is not to say about Marxians.

Egmont Kakarot-Handtke



Kakarot-Handtke, E. (2011). Squaring the Investment Cycle. SSRN Working Paper
Series, 1911796: 1–25. URL


Kakarot-Handtke, E. (2013). Understanding Profit and the Markets: The Canonical

Model. SSRN Working Paper Series, 2298974: 1–55. URL


Marx, K. (1990). Capital, volume I. London: Penguin Classics. (1876).


Morgenstern, O. (1941). Professor Hicks on Value and Capital. Journal of Political Economy, 49(3): 361–393. URL




Papers on SSRN:



This has nothing to do with my desire to defend Marx, but instead my desire to defend false portrayls theorists within the history of economic thought. Had this been about Ricardo or Smith, I would still be here. 


Now - I have already stated that the particular way you choose to incorporate profit is precisely the what Marx calls 'profit on alienation', which he handled quite indepth and which has relevance for the particular profitability of individuals or firms through redistributing a particular mass of wealth from one person or firm to another. Marx never denied this. What Marx is concerned with is the particular moment, which appears in your analysis as the necessity of a 'bank' of some sort, wherein the mass of wealth growns - i.e., is not merely shuffled around any which way. 


If the simplest solution is indeed the best, which is questionable on many grounds in and of itself, your imposition of some external body to finance profitability as a whole is quite suspect. It is not vacuous claims of the philosophy of science, however, that I appeal to. I do not care how simple or complex what you are saying is - I care if it is internally consistent. It is indeed internally consistent, until you ask the question which we are arguing about - where does general profit, profit for the system as a whole as opposed to any individual unit within the system, emerge from. Because you have no link between the actual production of wealth and profitability, you see no need to deal with how wealth is produced and only care about the moment of its distribution. Hence you input a body that mediates the distribution between what are themselves inconsistent bodies (the household and business sector - a business sector which does not employ capital hence does not employ labor, quite fascinating indeed) such that it is possible for one side to run a deficit so the other runs a surplus. There is nothing inovative in doing this - I have tried to explain this to you by showing you that you could do precisely the same thing in Smith with his simple labor theory of value, or for ANY theoretical framework for that matter, to obtain a surplus on once side of the accounting ledger.


If you cannot see why imposing a bank that lets one side accrue debt so the other side can acrue a surplus is in NO WAY relevant to a discussion about the reproduction of profit - growth - for the system as a whole, but merely a mechanism by which one group within society is able to recieve wealth transfers from another, I do not believe this conversation is going anywhere. 


In closing, I will add that one more thing in regard to your 'understanding' of ' Marx and the Classics' . You say:


"By including capital from the outset Marx, and the Classics before him, made the decisive methodological mistake. They associated capital and profit tout court. This was quite commonsensical but unfortunately erroneous. It is a bit surprising that this could happen to Marx because he was well aware that common sense is antithetical to science and that his predecessors had not been up to the task."


Once again, as I have said above, profit and capital were not associated with one another immediately. Perhaps in Ricardo, as he was developing Smith, but not in Smith and Marx. I showed, as example. how Smith dealt with the precise issue you are dealing with for the precise reason you yourself are - he began his analysis with an economy wherein capital did not exist,  wherein there was only labor (call this labor household and business sector if you must, but know that these distinctions have no meaning unless the latter employs capital) and came to the exact conclusion you did - there is no way that profit in general is possible. Unlike you, however, Smith did not appeal to some mystical entity that is able to create money for some arbitrary group to bring themselves into debt so the other could net a profit, partly because this would completely annihilate the consistency between relative prices with profitability, which you seem to not care much about, and partly because this still does not explain the growth of wealth, which his book was concerned with, but merely an institutional structure that allows for wealth to change hands.



Dear Tanthallas,


you say that it is your desire to defend false portrayals of theorists within the history of economic thought.


My rather marginal portrayal of Marx, or Smith, or Ricardo, or others, consists in one single statement: their respective profit theory is demonstrably wrong (2013, Sec. 5). This, indeed, is a refutation not a portrayal. Therefore, what you are in fact doing is to defend obsolete theories. Exegesis is not my intent at all. It is time to refer these theories to the storage depot of obsolete ideas like astrology or geocentrism. As Joan Robinson aptly put it: Scrap the lot and start again. This is what Understanding Profit and the Markets is all about.


In my view it would be constructive if you tried to 'start again' and  take notice of some new arguments. Adam Smith commonsensically thought of profit as a part of total income and thus became the source of the muddle you are still in. My proof is rather straightforward and, best of all, the structural-axiomatic profit formula is testable. Your filibustering about the finer points of failed approaches is not the way forward.


The structural axiomatic profit formula reads Qm:=I-Sm+Yd (2013, eq. (24)) and you will not find it in Smith, Marx, or Ricardo. It has nothing to do at all with Marx's 'profit on alienation' or Smith labour theory of value. Your references are misplaced.


I would appreciate it very much if you could refrain from misleading assertions. It is  not the case that I do not care about the consistency between relative prices and profitability.  I strongly recommend that you study my working papers on SSRN, in particular: The Pure Logic of Value, Profit and Interest (2011).


This could help you to free yourself from the fixation on obsolete theories.



Kakarot-Handtke, E. (2011). The Pure Logic of Value, Profit, Interest. SSRN
Working Paper Series, 1838203: 1–26. URL


Kakarot-Handtke, E. (2013a). Confused Confusers: How to Stop Thinking Like
an Economist and Start Thinking Like a Scientist. SSRN Working Paper Series,
2207598: 1–16. URL


Kakarot-Handtke, E. (2013b). Understanding Profit and the Markets: The Canonical
Model. SSRN Working Paper Series, 2298974: 1–55. URL


Papers on SSRN:



Anyone can construct a logically consistent model and add an external effect to produce a desired result. Your structural axiomatic profit formula is a chimera. It does not explain profit, but instead merely the abscence of profit. To explain profit, you cannot merely impose an authority which is able to mediate the transfer of wealth from one party to another.


You are not 'starting again' in any sense. You are starting from the very beginning; however, instead of following the path which seeks to anser the question of how aggregate profit is reproduced due to the internal mechanisms of the economy you have chosen to follow the path that continues to mystify it.

Dear Tanthallas,


you say anyone can construct a logically consistent model.


In principle you are right. The question, then, is why has no one done it until now?* Or, more specific, why don't you have done it?


Waiting for Tanthallas's axioms and the logically consistent derivation of a testable profit formula.



*For the formal refutation of Keynes's approach see: Why Post Keynesianism is not Yet a Science.


Papers on SSRN: