But where does @RichardJMurphy get these idiot ideas from?

Let’s deal with profit first of all. This is a surplus paid as a the result of entrepreneurial skill. It is not a return to capital: that’s interest. Profit, then, is the reward in excess of the normal rate of return to capital that results from the successful undertaking of a risky venture. The corollary is loss.

No. Schumpeterian profit is the return to entrepreneurs. Profit is the return to equity, interest the return to debt. This is something that he would have learned if he had paid attention in his economics lectures back at Southampton those decades ago.

reward in excess of the normal rate of return to capital that results from the successful undertaking of a risky venture

No, really, that’s Schumpeterian profit.

And this distinction is extremely important. For as my favourite economics paper ever shows, the portion of the value created by entrepreneurs that is actually captured by the entrepreneurs is only 3%. The rest of it goes to the rest of us in the form of consumer surplus. And please do note, consumer surplus does not show up in GDP.

This point is at the very heart of why this capitalism/free markets mix actually works, why it has made us all so damn stinking rich in the couple of centuries that it’s been in operation. If you’re not going to get this point then you’re not going to grasp why the system works.

As people who didn’t pay attention in their uni economics lectures aren’t of course.

17 comments on “But where does @RichardJMurphy get these idiot ideas from?

  1. Did you ever consider, the sperm that contributed to make the Richard Murphy we know, was the winner of a race that had a hundred thousand losers? Be thankful it wasn’t one of the other ones, didn’t make the grade. Things could be a whole lot worse.

  2. Profit is just a wage paid to enterpreneurs and capitalists. Or, a rent. Wages are rents on individuals.

    Categories are largely artificial. I draw $1000 of cartoons, they cost $800 to produce, my profit is $200. Or my wage. Or my rent- if people pay to look at a cartoon, are they buying it or renting it? All the same thing really. You can’t really do all these sums with them. Or, you can, but they mean far less than you think they mean.

  3. I mean basically, Ricardo has a lot to answer for with his rentiers, capitalists and labour thing. Has spawned an awful lof ot aerie-faerie nonsense over the years.

  4. It’s quite something that Murphy should pontificate so much from a level of understanding both limited and impaired.

  5. You can work out rent. Whether profits or wages, everything earned above the amount at which the entrepreneur or labourer would prefer to give up and go home is rent. Ergo most profit and most wages are rent.

    I’m less sure of Schumpeterian profit than Ricardo (and not desperately convinced by Ricardo). There’s plenty of fields you can make profits in excess of the normal return to capital without being either innovative or risky, being rare is good enough, while if your portfolio only has risky investments you will make good on a few but lose most, thus have an average return on capital anyway.

  6. So Murphy claims that SSE, the object of Miliband’s attack is making a loss because its return on capital (measured correctly) is less than the normal rate of return?

  7. “…you can make profits in excess of the normal return to capital …”
    To me that’s a most peculiar phrase. What’s “normal”? Is it some arbitrary amount that’s regarded as fair & in which case who sets it? Or is it some form of mean or average & a reflection of a market? Taken from a range of numbers including the big minus ones of a catastrophic failure to the stratospheric positive ones of a runaway success. Seems one could call almost any number in that range “normal” for some purpose.

  8. without being either innovative or risky, being rare is good enough

    Surely being rare is being risky? You haven’t got the example of everyone else in the field showing that there’s a market, so you’re striking out into unknown territory.

  9. To me that’s a most peculiar phrase. What’s “normal”? Is it some arbitrary amount that’s regarded as fair & in which case who sets it? Or is it some form of mean or average & a reflection of a market?

    Ah, the joys of the arithmetical economist and his aggregates. He takes an average and declares that “normal”, and if your return is below it you feel hard done by and if your return is above it, it is “excess”.

  10. @ bis
    A “normal” rate of return can be deduced from adding a risk premium to the after-tax return on risk-free assets with the holding period and liquidity characteristics of the investment at the date of the investment. In most cases that would be a long-term government-guaranteed bond that was not tradable (as most entrepreneurial businesses cannot be sold at whim). The risk premium would obviously depend on the riskiness of the business.
    The rate of return earned on established businesses should not be measured against the current artificially low returns on gilt-edged but against the returns available on alternative uses for the cash at the date of investment.
    The implication in Murphy’s wording that if four businesses in a particular high-risk sector make a return of 20% for each one that goes bust losing 100% those four are making an excess return despite the five in aggregate losing money is either a sneaky piece of suggestio falsi or a demonstration of his ignorance.

  11. His Chartered Accountants’ exams are a long way behind him.

    You learn it as one of the first principles of business finance.

    He’d look pretty silly discussing with a venture capitalist the interest payments on his investment…

    Mind you, he’d look pretty silly doing, well, anything, really.

  12. John77

    That is a very thorough explanation my friend; somehow I don’t think that was what Ritchie meant,

  13. Only Richard Murphy could go through life as a Chartered Accountant, a self styled “tax expert” and “re-inventor of economics” without understanding the concept of interest.

    As Lenny Bruce would say if he wasn’t dead: “Return to capital? My ass!”

  14. Just read this comment from RM on his blog:

    “I began writing at 8 when my twin and I got our first typewriter”

    He has a twin !!!! …. god help us…. although perhaps his twin got all the brain cells and RM didn’t

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