Couldn’t find it in Wikipedia. Or any textbooks I’ve seen. Or media articles. You sure won’t read about it in the Financial Times or the Wall Street Journal. Or hear about it at the hairdressers. Doubt it’s on Facebook. It’s not even a subject for graffiti.
Very few people, mostly economists, seem to be aware of it, but even they can’t agree whether it’s true.[1] Marx knew about it. And Keynes. And both thought they’d resolved it. Others aren’t convinced they did. Some accept it, some think it can’t be true and have worked out justifications for their disbelief, but I think they’ve missed the obvious: it is true, but its ramifications are too shocking and too demanding of change to make it easy to accept.
It’s called the profit paradox: money distributed during production of goods – the payments made to do the producing – sums to less than the money required to buy those goods, because prices include a profit margin, an amount over and above the costof producing the goods.[2]
So how then do producers profit?
Marx thought profits followed because of what he called surplus product. Keynes thought an even less obvious concept he called user cost did it. Explanations by both have been criticised as inadequate.
Other economists,[3] particularly ‘Circuitists’, conclude differently: they claim that the profits of all companies taken together will be balanced by the losses of others, meaning zero net aggregate profits. A zero-sum game.[4] Some Circuitists aren’t sure about this though. It’s what their equations tell them, but some can’t believe it and therefore think their equations must be wrong.
Steve Keen, the Australian economist who warned about a credit-driven financial collapse years before the Great Recession, thinks Circuitists misunderstand stocks and flows, and that his model, full of differential equations representing monetary flows, shows how net profits can be positive. But I think he defines profit in an invalid way – as a proportion of net costs rather than of sales – which makes his model unrealistic and conclusions drawn from it unreliable.
On the other hand, Charlotte Bruun, a Danish economist, believes a zero-sum game can’t be avoided if only monetary flows are considered. However, because she thinks producers wouldn’t be motivated to pursue profits in a zero-sum game, she concludes that rising stock valuations must create positive net profits.
For me, though, it seems obvious that the profit paradox is no paradox at all. The Circuitists have it right – Keen’s invalid equations don’t prove them wrong, nor do Bruun’s speculations. It really is a zero-sum game – in total. But producers are still motivated even so. They aren’t academics fussing over arcane equations – most wouldn’t have the foggiest idea about zero-sum games. They simply see some companies making profits, and compete to be one of them.
So we have a zero–sum game in total, but full of individual profits and individual losses balancing to zero overall. Winners and losers.[5]
You can’t borrow your way out of this zero-sum game either, because loans have their own in-built profit margin – interest – which only augments the role played by profit. As economists Gunnar Tomasson and Dirk J. Bezemer put it: “profit earned by one capitalist must be at the expense of someone else—be it worker, other capitalist, or banker.”[6] Rising consumer debt can postpone some losses and the inevitable day of reckoning – until it inevitably stops rising – but even so it does not change the zero-sum game.[7]
Yet if it’s always winners and losers, then it isn’t efficient. Every player could be equally efficient but, as long as profits are included in prices, some would have to lose the zero-sum game.
As I said, you’ve been duped. The ideal that anyone with an idea and perseverance can prosper sounds enticing, but does not accord with economic reality, which more resembles a lottery. You can do everything right but someone else might do it with more luck and you will fail simply because not all can win.
Furthermore, if some have to lose, then there can be no stability. Profit-driven growth incorporates loser-driven unemployment, bankruptcy and reduced spending – anti-growth. Hence, the business cycle: growth and anti-growth combined, inherently unstable, a constantly tweaked tightrope-walk teetering between crest and trough, roiling along, out of control.
We can do better than this. We can devise a system capable of stability, without guaranteed loss for some. Such a system can have no interest or profit. Turns out it can have a one-day working week. The affording of anything deemed appropriate. No more financial hardship, unemployment, job insecurity, mortgages, rent, corporate tyranny. Saving of work without fear of losing income. Competition subservient to cooperation. Local stewardship, environmental care, international security, unfettered aid, truly sustainable development, political self-determination, change… You know you want it.