Reisman's net consumption, net investment theory of aggregate profit: exposition and comparison to Mises and Rothbard

American Journal of Economics and Sociology, The, July, 2004 by Jerry Kirkpatrick

I

Introduction

BOHM-BAWERK (1959: 1) CONCISELY STATES THE PROBLEM OF PROFIT when he asks: "Whence and why does the capitalist receive [a seemingly] endless and effortless flow of wealth?" (1) The "effortless" part may be debated, but the "endless" part is true in the sense that at the aggregate level profits are almost always present--to the chagrin of Marx. "Whence and why," however, are the crucial questions. Nearly all economists hold, or at least have not challenged, the premise that wages are the original and primary form of income; thus profits, according to this "primacy-of-wages" doctrine, are a deduction from the wages of labor (cf. Smith 1976: ch. vi & viii). Many economists, both classical and contemporary, including the Austrian School economist Murray Rothbard (1962: 495-96), hold that the rate of profit (which includes the rate of interest) continually declines toward zero as the economy progresses. And many economists, including Ludwig von Mises (1966: 431, 469, 541-45), the leading Austrian School economist of the 20th century, hold that the anticipation of falling prices, even through increased production and supply, creates a negative component in the loan market rate of interest that could, by implication, render the loan market rate of interest negative.

George Reisman, in his work Capitalism: A Treatise on Economics (1996), disputes current and past theories of aggregate profit by turning them on their heads. He calls profits the original and primary form of income from which wages are deducted, thereby providing a powerful answer to the Marxian exploitation theory. He delimits time preference to the role of determining the rate of net consumption, which last, he argues, is the primary direct determinant of aggregate profit. He promotes net investment as a secondary determinant of aggregate profit because net investment tends to relate directly to an increasing quantity of money in the economic system. Through his "springs to profitability" he demonstrates how the elimination of profit due to a financial contraction must be temporary. And, by showing that under an invariable money, a one-time increase in the rate of saving is sufficient to stimulate an increase in the supply of capital goods indefinitely, he provides an answer to the argument for the declining rate of profit in a progressing economy.

This paper presents the essentials of Reisman's net consumption, net investment theory of aggregate profit, an Austro-classical theory, as Reisman describes it, (2) and relates his ideas to those of Mises and Rothbard.

II

The Primacy of Profits

THE PRIMACY-OF-WAGES DOCTRINE, as Reisman (1996: 477) labels it, is the notion that all income earned in an economy is originally, and rightfully, wages. The idea derives from the classical economists, particularly Adam Smith, who said that in precapitalistic times--when there are no capitalists--all productive activity is performed by laborers earning wages. States Smith ([1776] 1976: 72), "the whole produce of labour belongs to the labourer. He has neither landlord nor master to share with him." With the rise of capitalism and capitalists, says Smith, profit comes into existence as a deduction from the wages of labor, with the capitalist taking his or her share unjustly from the laborer. Marx completely accepts this idea and incorporates it into his exploitation theory. Indeed, Reisman argues that the primacy-of-wages doctrine is the fundamental conceptual framework of the exploitation theory (476-77). (3) Over the years, other economists have debated whether profit is a just or unjust deduction from wages--Bohm-Bawerk (1959: 263-71), notably, argues the former--but nearly all have accepted the basic premise.

Using concepts and principles from the classical economists, Reisman rejects the primacy-of-wages doctrine and holds that the primary form of income, even in the precapitalistic economy, is profit. As defined by the classical economists and accepted by Reisman, profit is essentially accounting profit, or sales revenues minus costs, and wages "are money paid in exchange for the performance of labor." The capitalist is "one who buys in order subsequently to sell for a profit" (478). Thus, a sole proprietor who has no employees earns a profit, not wages, after costs have been deducted.

Reisman goes on to defend the classical basis of the primacy-of-profits principle by quoting John Stuart Mill's (1987: 79) proposition that "demand for commodities is not demand for labour" and David Ricardo's (1973: 64) tenet that "profits rise as wages fall and fall as wages rise." (4) Concerning Mill's statement, Reisman explains: "In buying commodities, one does not pay wages, and in selling commodities, one does not receive wages. What one pays and receives in the purchase and sale of commodities is not wages but product sales revenue" (478; emphasis in original). Thus, in Adam Smith's "early and rude state" or in Marx's "simple circulation," all income is entirely profit--because the producers have no costs to deduct from their sales revenue; when producers buy capital goods and hire helpers and pay them wages, the producers become capitalists and their expenditures become costs to be deducted from their sales revenues, which were originally all profit.