An Approach to Understanding Profit In Capitalism

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This article is about profit in a capitalist society. It may take several readings to grasp the main ideas but it is worthwhile. Some of the conclusions may be surprising. One of the oldest problems in economics is the problem of a general glut. That is, the chance that demand will be insufficient to consume all of the goods and services that are produced. Classical theory assumes that this cannot happen over the long term. Prices will adjust over time to assure that everything that is produced will be sold.
One of conclusions, in this analysis of profits, is that without government deficits and household debt, general gluts would be more common, and profits would be lower than they are in a mixed economy in which government and debt play essential roles.

This analysis also shows that household saving or thrift is not necessarily a virtue. Unless savings are absorbed by investment, all of the potential output will not be consumed. Unemployment, deflation and falling profits would be the result. Business investment is dependent upon the hope of future profits. Since the hope for future profits is variable, business investment is unstable, and will not always absorb household savings. Government investment and government spending compensates for some of the variability in business investment. Household debt also plays a role in maintaining adequate demand when business investment does not produce the level of employment and income that is needed to absorb potential output.

Marx's critique of capitalism, and predictions of its ultimate demise, was essentially a critique of classical Ricardian economics, whose assumptions ruled out the problems of a general glut. Marx did not perceive the roles of government and the use of debt to moderate some of the inherent instabilities in capitalism. Ironically, Utopians who advocate pure forms of capitalism, without recognizing the essential roles played by government and debt in modern capitalism, risk validating Marx's predictions about its ultimate demise.