A popular myth propagated ad nauseam may begin to sound like the truth to some. It is no different for the “risk” theory of profit: the claim that capitalists “create” profits by assuming risk to capital. This theory was born out of the rise of the financial bourgeoisie as a dominant class; from the standpoint of this class, as Marx points out, “production is just an unavoidable middle”. For the financial bourgeoisie, it is a pure case of M to M”, the attempt to convert money into more money by buying and selling financial assets.
But the “modern portfolio theory” is an extension of the same ideas on risk theory that Frank Knight first posited in the 1920s. Its irrationality can be best understood by quoting the popular investor Charlie Munger, who famously remarked that “much of what is taught in corporate finance is, frankly, twaddle”.
In this episode, we explore the risk theory of profit with Prof. Wolff and ask: Is this theory a good representation of profits under capitalism?
