Pasinetti on profit(s)

Lorenzo Esposito (presented on February 12, 2025, at Università Cattolica)

Pasinetti has examined the topic of profits from multiple perspectives and in various contexts. Among his numerous and diverse analyses, I will focus on three aspects:

  1. Profit and vertically hyper-integrated sectors
  2. What is the relationship between the profitability of a single firm and macroeconomic efficiency? What happens if the neoclassical solution (the production function) is not applicable—for instance, due to the absence of perfect competition, the presence of fixed costs, or the lack of a uniform profit rate? A commodity is composed of several other commodities in fixed proportions. As a result, the cost of a commodity can be broken down into the costs of its inputs: labor, machinery, energy, and so on. In the neoclassical framework, if the profit rate of an input commodity increases, the demand for that commodity will decline. However, in the real world, where each commodity is composed of others in fixed proportions—at least in the short term and sometimes in the long run—an increase in a firm's profitability would merely lead to a rise in input costs.

    Ultimately, if a company becomes more profitable, this may reduce overall profitability. This dynamic may help explain the high profitability of "star firms" (such as those in the Dow Jones 30) despite the general downward trend in the profit rate.

  3. Profit as an Indicator of Efficiency in Centrally Planned Economies
  4. What is the role of profit in centrally planned economies? In Marx's theory, which refines the classical perspective on this issue, profit — arising as the residual from the exchange between capital and labor — is evidence of exploitation, meaning that labor power generates more value than what is embodied in wages. In a socialist society, exploitation should not exist; however, production still generates a surplus, which serves as the basis for future investments. Without delving into the nature of this surplus, its empirical presence is evident, leading both Western and Soviet economists to question what function it might serve in a centrally planned economy.

    This debate emerged after Nikita Khrushchev came to power in 1958, when the leadership of the Communist Party of the Soviet Union (CPSU) criticized the most extreme aspects of Stalinism — ranging from the cult of personality to strictly centralized planning. This shift sparked an intense discussion on the relationship between individual enterprises and central planning.

    Several Soviet economists who took part in this debate were also well known in the West, including Kalecki, Brus, Kantorovich, and Liberman, among others. Pasinetti engaged with this discussion by closely studying numerous articles by Soviet economists published in Pravda during the 1960s. His contribution was enriched by his technical expertise in the field of vertically (hyper-)integrated sectors, which allowed him to offer a distinctive analytical perspective.

    Even in this context, the fundamental issue is the nature of profit. In capitalism, profits result from individual decisions and can only be considered at the macro level through statistical aggregation in economic analysis. If a particular sector generates higher profits, firms will tend to shift toward it, as the profitability of an individual company strengthens its position against competitors, while sectoral profitability guides investment decisions in a market economy.

    Can the same function be attributed to the profits of a state-owned enterprise in a planned economy?

    In an economic system where prices are set centrally and quantities are also tightly controlled—since investments and wages are centrally determined—profits are effectively established ex ante.

    The challenge, however, was that while the Soviet Union of the 1920s and 1930s was focused on early industrialization, driven by coal and steel, by the 1960s, the Soviet economy had become vastly more complex. Entire economic sectors had emerged from nothing, with tens of thousands of factories producing hundreds of thousands of different products.

    At a time when electronic calculators were still in their infancy, simply computing the various iterations of a centrally planned economy, consisting of thousands of equations, required an army of operators. This was further complicated by issues related to the quality and timeliness of information, making centralized economic management increasingly difficult.

    This debate yields insights that are also relevant to market economies. We will highlight just one, which connects to our initial point: if a company generates higher profits and reinvests them — for instance, to expand production — this increased output must be anticipated and incorporated into the central plan. Otherwise, even if it represents an individual incentive, it will disrupt the overall plan.

    As a result, profits can only be managed centrally to ensure the harmonious growth of all components within the planned economy. However, this raises a critical question: what about incentives for individual enterprises, which were at the core of the reformers' discussion?

    While the debate seemed to focus on the profit rate at the firm or sectoral level, the deeper issue was the decentralization of decision-making—and, ultimately, the distribution of power within the production process.

  5. Profits and democracy
  6. From the points we have discussed, a third question arises: what is the relationship between profit and the political system? What is the nature of a democracy that is based on profit maximization?

    For liberal economists, the ideal democracy is one that allows businesses to operate freely. However, this view is built on rather questionable assumptions—Pasinetti refers to a "highly restrictive theoretical model” and a “simplification that borders on triviality."

    Pasinetti recalls the debate between Einaudi and Croce on whether economic or political structures should take precedence. Einaudi argued that laissez-faire should prevail over democracy — a position later embraced by Friedman and Hayek in their defense of Pinochet's dictatorship, which they saw as a vehicle for advancing liberal economic policies. Einaudi's idea was that economic liberalism naturally leads to political freedom. Pasinetti, however, disagreed, citing an aphorism by Anacharsis of Scythia (6th century BCE): "The market is a place deliberately designed for men to deceive one another."

    The homo oeconomicus paradigm is not only far removed from reality but is also not necessarily democratic. Pasinetti contrasts this with Keynes’s vision, not in its individual aspects but in its broader goal of reconciling an active role of the state in the economy with liberal democracy. This compromise is embedded in the Italian Constitution, a framework that Pasinetti regarded as "an incontrovertible fact."

    Pasinetti acknowledges that this approach is less conceptually defined than the general equilibrium model or the theoretically solid framework of Marxism. However, he emphasizes that it is the one most frequently adopted by governments. In light of the collapse of real socialism and the excesses of neoliberalism, this fact becomes particularly significant.