NDZ/STAR MAX/IPx
The study of profits remains a shockingly neglected subset of the economic discipline.
On June 23, 1869, the first bureau of labor statistics in the world was reluctantly established by the Massachusetts state legislature. Clearly an attempt by state elites to quell rising working-class unrest, local labor leaders were given control of the bureau. Inspired by the long-standing American “free labor” ideology, which focused on the power dynamics between producers and capitalists, the bureau heads concluded that to truly measure the health of an economy, one needed to collect not only wage and price data but also profit rates.
This would prove difficult. When the bureau sent out a prepared questionnaire on profits, not a single one was returned by business owners. Furious, the bureau heads turned to the legislature to demand the legal power to collect this profit data. Their request was denied, yet they did not give up.
Ingeniously, they sought out profit estimates by publishing a report on the amount of money deposited by wealthy Bostonians in local savings banks. “Astonished at the audacity” of this “unspeakably mischievous” report, Boston elites had seen enough. The bureau chiefs were fired in 1873 and replaced by Carroll Wright, who would go on to spend 20 years as the first head of the federal agency then called the Bureau of Labor. Wright would eventually be seen as the father of modern labor statistics.
Unlike his predecessors, Wright took on a strictly consumerist approach. All but ignoring questions of power, he devoted his life to comparing wage rates to cost-of-living indices as a way to measure such novel concepts as “price levels” and “standards of living.” He never looked into profit rates, nor did the Bureau of Labor Statistics.
Ignoring profits is not just an intellectual problem, but a political and social one.
It’s been almost 150 years since the founders of the Massachusetts bureau were fired, but when it comes to American economic discourse, it may as well have been yesterday. While mainstream economists, think tanks, and journalists obsess over every tenth of a percentage point of inflation and unemployment, profit analyses remain something you find only in shareholder reports, IRS filings, or Bloomberg consoles. In fact, what companies tell the IRS about their profits bears little resemblance to what they tell shareholders, making expert analysis even more essential.
We live in a capitalist economy driven by the profit motive. Yet, ironically, the study of profits remains a shockingly neglected subset of the economic discipline. No Nobel Prize in Economics has ever been given to the study of profits. Economists classify their publications into countless categories (the Journal of Economic Literature’s J3 code stands for “wages, compensation and labor costs”), yet there is no category for profits. The American Economic Review last published an article with the word profits in the title in 2014. It was about the Japanese textile industry at the turn of the 20th century. As for metrics, while Carroll Wright’s Bureau of Labor Statistics is still going strong, there is no Bureau of Capital Statistics.
Ignoring profits is not just an intellectual problem, but a political and social one. Never has it been more glaring. As anyone not living in a cave has heard, consumer prices have risen in the past year. (We know this thanks to the consumer price index, or CPI, invented by Wright.) Yet far less known to most Americans is that around the same time as this consumer price increase, there was a staggering jump in corporate profits.
Despite this leap, economists have turned their focus not to the giant corporations that raised prices but to everyday Americans who consumed them. Very broadly, mainstream economists see the problem as the government’s expansionist fiscal and monetary policies, which made workers too powerful, raised wages too high, and led to higher consumer prices, as demand outran supply. In their view, the economy is “overheating” and there is no choice but to cool it down by weakening workers’ purchasing power by cutting spending, raising interest rates, or lowering wages.
If economics were a more diverse discipline, Americans would be hearing a very different story, one in which the starting baseline for modeling the economy is not the assumption of perfectly competitive markets but rather corporate concentration and asymmetrical market power. According to this approach, large corporations are often not “price takers” but “price makers,” and increasing profits by raising prices is not a theoretical impossibility but an empirical fact familiar to most anyone who has ever run a large business.
Unfortunately, such theories have—much like the founders of the Massachusetts Bureau of Labor Statistics—been all but forced out of the economic discipline and discourse. Be they right-leaning Austrian economists like Joseph Schumpeter, who based his entire theory of capitalist innovation on monopoly profits; left-leaning post-Keynesians like Joan Robinson, who built models of the economy that assumed large corporations had significant market power; or Brandeisian thinkers who believe competition is not a natural given but a policy goal, such voices have almost no place in nearly any of the top U.S. economic departments, let alone in Washington. Before we once again hurt workers in the name of curtailing inflation, it is high time we heard these voices again.
