Socially constructed profits

By Bill Kaye-Blake 21/06/2013

Paul Krugman made a point on his blog yesterday that really struck me:

profits are no longer anything remotely resembling a “natural” aspect of the economy; they’re very much an artifact of antitrust policy or the lack thereof, intellectual property policy, etc.

This is something I’ve seen suggested or hinted at or mentioned in a round-about way, but Krugman made a bold, succinct statement of the issue. Profits — returns to capital — are whatever we decide they are through the legislative choices we make. Profits are socially and politically determined.

Some background: I still think the Cambridge capital controversy is an unsolved conundrum. It isn’t the simplification that bothers me — the aggregation of unlike things into the single lump of Capital. It’s a model of the economy; models simplify. No, I worry about the circularity, that the value of capital is determined by its rate of return, which is a function of the value of capital. Try programming that in Excel.

Also, JK Galbraith described an interesting dynamic in, um, The New Industrial State? Managerial capitalism was administered by managers in large corporations who were managing demand for end products and managing returns to factors of production — labour, management, and shareholders. The point was that the industrial state at the time was a partially-managed economy. Returns to the factors of production were not ‘natural’, but decided in C-suites and boardrooms.

I guess I’m putting Krugman’s observation in an historical context: some economists have been arguing for a while that profit is (at least somewhat) socially determined, rather than a function of scarcity and markets. It’s become really obvious in a case like Disney or Apple, which then explains some amount of rent-seeking in the form of political activity, rather than producing stuff consumers want.

Minor point: If I search the New Palgrave Dictionary of Economics for ‘cambridge capital controversy’, I get:

Your search for ““cambridge capital controversy”” over the entire article content within the 2008, 2009, 2010, 2011, 2012 and 2013 editions returned no results.

And yet, Wikipedia knows exactly what I’m talking about.