As in the previous article, the treatment here is aimed at the simplified economic model accounting, and not the full details of the national accounts. If one wanted to apply the accounting identity to real world national accounts, there are a great many smaller terms that would need to be added in in order to get the full accounting identity.
Model 4: Government Fiscal PolicyThe previous article started off with a simple two sector economic model, with the two sectors being the business sector and households. The last model considered was Model 3, and had an associated profit equation:
(Model 3 Profits) = (Net Investment) - (Household savings) + (Dividend payments).
We will now add a third sector: the general government sector. We will label this Model 4.
(Model 4 Profits) = (Net Investment) - (Household savings) + (Dividend payments) + (Government Fiscal Deficit).
The addition of the government sector added the final term to the equation -- the fiscal deficit. This is a fairly conventional phrasing, but it must be kept in mind that the fiscal deficit is the negative of the fiscal balance, so we need to flip signs if we want to use the fiscal balance as the variable. The usual condition for governments is to run deficits, so it is more familiar to express the equation using it.
The reason why a fiscal deficit creates profits is that the government is now injecting cash into the circular flows in the economy. If the government mails a senior a $100 transfer payment, and said senior immediately runs out and spends it, that represents $100 in business sector revenue that is not matched to any wage expenses.
(I am following the convention of economic models, and treating government spending as consumption. If governments capitalised some investment expenditures, those expenditures might not be considered part of the fiscal deficit, and they would need to be added into the profit equation.)
For profits, the full fiscal balance matters, not just the primary balance (the balance excluding interest payments). Mainstream economic analysis often likes to focus on the primary balance, but this glosses over the reality that interest payments by the government are an income source to the non-governmental sector.
The presence of the fiscal deficit in the profit equation is an important part of the counter-cyclical nature of fiscal policy. Mainstream economic models attempt to gloss over the the importance of profits on the basis that competition allegedly causes profits to wither away. However, in a recession, deficits naturally grow -- the tax take falls, while welfare state spending (such as unemployment insurance) automatically increases. Furthermore, even fiscal conservatives tend to panic in a downturn, adding active stimulus measures to the mix. The rising contribution of the fiscal deficit will counter-act the drop in investment, putting a floor under profits (and animal spirits) in the private sector.
During an expansion, fiscal deficits tend to contract (or least grow less than GDP in nominal terms). This acts as an increasing drag on profits, counter-acting the pro-cyclical impetus from investment.
In summary, a focus on the interaction between the fiscal deficit and profits gives a much greater weight on fiscal policy than an approach based on appealing to the so-called inter-temporal governmental budget constraint would suggest.
Model 5: The External SectorThe final addition to the profit equation is to bring in the external sector (imports and exports). If a country has net imports of goods, it implies that net cash flows are heading to foreign entities -- implying a loss in the circular flow of income.
The addition of the external sector adds a new wrinkle -- the profits that we are discussing here are domestic profits, which is not the same thing as national profits. A local firm may have profits in its foreign subsidiaries, but those will not show up in the domestic national accounts. A stock market investor is interested in the total profits of firms, and not just domestic profits, so the distinction needs to be kept in mind.
(Model 5 Profits) = (Net Investment) - (Household savings) + (Dividend payments) + (Government Fiscal Deficit) - (Net Imports).
The breakage in cash flows is straightforward. If a worker spends $100 on imported goods out of wage income, the source of the wages was an expense to the domestic business sector, while the domestic sector gains no revenue.
This raises a different perspective on the question of protectionism. From the perspective of optimising decisions of households, free trade is an obvious advantage, as it opens the opportunity set for consumption purposes. However, a trade deficit is a negative for domestic corporate profits.
If we assume that imports as a percentage of total domestic consumption is stable (the propensity to consume), import growth will equal the domestic growth rate. Meanwhile, exports would tend to grow at the growth rate of our export markets. The implication is that if our domestic growth rate is greater than elsewhere, the trade balance will tend to fall. For the "Anglo" countries (such as the United States) in recent decades, trade deficits will tend to rise during an expansion. As a result, the external sector will tend to act in a stabilising fashion for profits. This will be less true for countries following an export-led growth dynamic, as the persistent trade surplus will tend to move in tandem with the global business cycle.
Concluding RemarksWe have slowly built up the Kalecki Profit equation to a fairly general form. We would need to adapt it to take into accounts various technicalities in the national accounts if we wanted to apply it to real world data. I am unconvinced about the value of such an exercise, since it is unlikely that we could forecast each of the components of the full equation. Meanwhile, if we are not interested in forecasting, we can just read off profits from the national accounts, rather than calculating them with an accounting identity. Instead, the value of the accounting identity is for the analysis of models, and getting a high level understanding of the nature of the dynamics.
For example, one notes that the wage bill does not appear in the equation. That is, rising wages are not necessarily a negative for profits -- which is not obvious if we pursue a bottom up microeconomic perspective. Rising wages would presumably allow for greater household savings (which does appear in the equation), but that is a second order effect.
However, the most important take away is the importance of investment for the business cycle. Businesses invest on the expectation of greater future profits -- and investment is a source of aggregate profits. Central banks playing around with the money supply is at most a speed bump in the way of the self-reinforcing growth dynamics of industrial capitalism.
From a policy perspective, Minsky argued that this accounting logic implies the need for a relatively large central government to tame the business cycle. Small governments (5-10% of GDP, which was relatively normal peacetime share pre-World War II) will not generate a large enough cyclical swing in the fiscal deficit to cancel out the fixed investment cycle. The absence of the automatic stabilisers allows what would be recessions turn into depressions.
(c) Brian Romanchuk 2018
Sigh. You define profit incorrectly. Not really much else to say.ReplyDelete
You began this series using sectors households and business. There was a hidden assumption that money was available to trade. This hidden assumption may be the root of the misleading path the Kalecki equation takes (as you describe it).ReplyDelete
First, why differentiate between business and households? I think it is because business produces something to trade. Households only consume. That is an important distinction.
In the beginning, before business performed, there would have been nothing. Neither side would have anything to trade, nor would there have been money. How could money have been introduced?
1. Would business have first created something from nothing and then traded that to households for a promise of a future something in return? Possibly.
2. Would households have first requested business to create something from nothing, promising a future something in return? Possibly.
3. Would business first approach households offering something in the future if households would allow business to perform? Possibly.
These questions hint at the misdirection of the Kalecki equation as you present it. A 'future something in return' will become money. Based on these three questions, money could be either a promise to perform or an incentive to perform.
Workers (who would be part of the business sector) would be required if anything was to be produced or provided. They would need to be rewarded with realizable promises that come to fruition, not promises that only begat more promises of future performance that households, by definition, cannot fulfill.
The only promise that households can fulfill is option 3, allowing business to perform.
'Profits' created by government largess can become meaningless (as Venezuela demonstrates) but certainly are nice until largess becomes completely destructive. Such 'profits' are always enjoyed by some more than others.
We want to calculate aggregate profits of the *business sector*, and so we need to differentiate between the household sector and businesses. When we consider that in a capitalist society, firms are owned by capitalists, there is a natural distinction between firms and workers.Delete
There is not a whole lot of value added by worrying about “the beginning.” We live in capitalists societies that evolved out of earlier institutions (feudalism, or whatever came after feudalism). Even in ex-colonies like Canada and the United States, social structures were inherited from British institutions. There are no societies springing out of thin air.
I don't mean this out of disrespect, but as someone who has studied law and history from a money perspective (i.e. it's history and the legal institutions that enable it), and who has since plowed through a lot of economic material as a means to further my understanding of it, I have found that out of all the economic material it is only Egmonts profit law (and his definition of profit) which is correct and which reflects everything I have studied.
In order to try and understand why you disagree, is it possible for you to elaborate on how you define profit, or why you say Egmont in wrong?
I plowed through his tedious, bombastic prose once. He decided that only the transfer of “money” results in a profit. This does not fit the facts on the ground - firms extend credit to customers (accounts receivable).ReplyDelete
He is arguing that every single business person, accountant, and economist is wrong in how to define profits. That can only be described as delusional.
I have a real Ph.D. in applied mathematics. In mathematics, it is entirely reasonable to come up with new technical definitions; it is done all the time. (Egmont flies into a crazy rage whenever I point that out.) He’s entirely free to come up with a new technical definition of “profit.” The crux of the matter is: is it useful? The answer is straightforward: no.
If you look at real economic models, you will end up with the same accounting identities. The debate is about the behavioural relations. In this case, since businesses care about the standard definition of profits, the presumption is that their behaviour is in some sense set in a way to maximise those profits. Since they don’t care about Egmont’s definition, using it does not help set up models.
I have no idea what he’s going on about the MMT equation. If I am not mistaken, the MMT equation is a seectoral balances equation, and does not tell us about profit. People who care about accounting identities argue that the “senior MMTers” are pulling some technical legerdemain with the definition of saving used. However, I do not deeply care about accounting identitities, so I really never looked into this alleged controversy.
This was my earlier article: http://www.bondeconomics.com/2016/11/fun-with-accounting-identities.htmlReplyDelete
Thanks for the response, although I must confess I don't think it has elaborated much for me (and it certainly didn't change my views of Egmonts work). I "think" from what you are saying is that for some people the reality of money and profits, etc themselves are not as important as what people, businesses, countries etc perceive they are, and that how certain people, business, countries etc use those perceptions to make themselves more competitive is more important.ReplyDelete
MT: How mathematical incompetence helps the Kelton-FraudReplyDelete
Comment on Brian Romanchuk on ‘Primer: The Kalecki Profit Equation (Part I, II)’
Under the title “Kalecki Profit Equation”, Brian Romanchuk, presents 5 equations of increasing complexity referring to monetary economies of increasing complexity. This approach is obviously based on two of my posts.#1, #2 Insofar it is correct, however, Brian Romanchuk still gets some essentials wrong.#3, #4 As a result, with his mathematical incompetence, he in effect helps the Kelton-Fraud.#5 Needless to emphasize that a mathematician is supposed to detect and correct logical errors/contradictions and to secure formal consistency by strictly applying the axiomatic-deductive method.
To make matters short, a concise formal summary of the main points, which have been elaborated at length elsewhere, is given on Wikimedia.#6
• Macroeconomic profit has to be derived from consistent macrofoundations. All microfounded profit theories are a priori false.#7
• First of all, the distinction between monetary profit (coll. money-in-the-cashbox/bank balance) and nonmonetary profit (coll. paper profit) is essential. Eq. (i)
• To speak of the “Kalecki Profit Equation” is utterly misleading. Kalecki’s equation is formally defective and this has been demonstrated already in a 2011 working paper.#8 The correct “Kalecki” equation is given with Eq. (v).
• Eq. (iv) refutes all Keynesian and After-Keynesian I=S/IS-LM models from Hicks to Krugman and beyond.#9
• From the axiomatically correct Profit Law for the open economy with government and profit distribution, Eq. (vi), follows the AXEC balances equation, Eq. (vii), (I−S)+(G−T)+(X−M)−(Q−Yd)=0 which directly compares to the MMT balances equation (I−S)+(G−T)+(X−M)=0.
• The MMT balances equation features prominently in MMT presentations#10 for hiding the macroeconomic fact that Public Deficit = Private Profit.#11
Whether Brian Romanchuk does not realize that his Model 5 equation is inconsistent with the MMT balances equation or whether he intentionally obfuscates the issue is a matter of indifference. What counts at the end of the day is that he is in effect promoting the scientific and political fraud of MMT.#5
#1 DSGE and profit―forget it! MMT and profit―forget it!
#2 Rectification of MMT macro accounting
#3 Profit: after 200+ years, economists are still in the woods
#4 The first to leave the sinking MMT ship?
#5 The Kelton-Fraud
#6 Wikimedia, AXEC Profit Law and Balances Equation
#7 The Profit Theory is False Since Adam Smith
#8 What is Wrong with Heterodox Economics? Kalecki’s Profit Theory as an Example
#9 Keynes’s Missing Axioms
#10 Down with idiocy!
#11 MMT and the magical profit disappearance
William Hummel has an article summarizing a paper called Minsky's Analysis of Capitalism:ReplyDelete
Applying a national accounting model with specified "heroic" assumptions Minsky uses the Kalecki profit identity to conclude that profits = investment. Past investments are validated by profits that arrive only via cash flow generated by current investment activity.
Also according to Minsky every firm must markup its output price over its direct technical and overhead costs to obtain a profit. If there is a disruption of credit finance then there are no aggregate profits because firms in aggregate would be unable to markup the price of output over the input costs.
ANC, I am currently on the road, so I can’t spend much time on this. The definition of profits is a major point of discussion for accountants for decades. Having a physicist (?) walk in and exclaim that *everyone* defines profits wrong is an incredible stance. Meanwhile, he offers no reason to see why his definition offers any advantage. If his models had any advantage over standard definitions, he could just explain what they are, rather than pretend he is some demi-god here to correct centuries of misconceptions in economics.ReplyDelete
Ok, I see your point.ReplyDelete
I had a read of your other article too..thanks
I will admit that it did take me some time (years) to reach the following conclusion, but I only say this to explain that Egmont's work helped me to accept that what I had discovered is true...so here goes.
As for individual households or businesses, the standard definition of profit is fine.
From an individual household or business' perspective, it matters not what the actual 'profit' consists of, whether it is livestock, seashells, money, or legal claims of other sorts against others; all that matters is that at the end of some period, the stock of 'whatever' has increased; it is also irrelevant whether if by increasing such stock that someone else's stock has decreased, such as in the case where the stock is in the form of legal claims against others.
From the tax offices perspective, all this is also true. The tax office itself has no reason to concern itself with what profit means from a macro-perspective; all it cares about is 'has your stock of money or money equivalents increased, and if so by how much, so we can tell you how much of it to send to us'. Where that money comes from, how it is created, how it effects the nation as a whole including employment, poverty, etc etc are irrelevant to the tax office, and so too to individual households/businesses.
The micro-perspective deals with the fact that an individual has either made a profit or not - the macro-perspective deals with what conditions are necessary to ensure that everyone can generate a profit, or whether such a goal is even achievable.
The micro-perspective does not care if the profit comes at a cost to someone else. The macro-perspective must answer the question 'can we have full employment, or full profitability, or more to the point 100% solvency under our current system?'
When this question is asked, one cannot rely on the standard definition of profit to answer it without restricting the definition to only those forms which are not claims against others.
The reason? If profits are in the form of livestock or any other form which is self-reproducing (organic matter etc), then it is possible to keep growing it until we run out of earth. When profits are in the from of money or other legal claims against others it becomes obvious that to keep growing it then debt must also keep growing because debt is the source of the profits.
How then, can we achieve 100% solvency, if one entities solvency is the result of another's insolvency? We can't! There is a conflict between the micro-perspective of profit (in the form of individual or competitive financial gain) and the macro-perspective goal of 100% solvency or full employment. One prevents the other, and I think Egmont is trying to point this out (although this understanding is not exclusive to Egmont - see the following#1,2,&3) and also point out that so many hundreds of years wasted trying to model our way to full employment and 100% solvency based on a false understanding of profits from a macro-perspective.ReplyDelete
1. In a competitive world where one person’s economic gain is commonly another’s loss, a duty to take reasonable care to avoid causing mere economic loss to another, as distinct from physical injury to another’s personal property, may be inconsistent with community standards in relation to what is ordinarily legitimate in the pursuit of personal advantage:
# Paul Collingwood 'Economics as a Philosophical Science' 1933
The truth behind the idea of transferring wealth is that where a number of persons stand in determinate relations to one another the activity of one is so bound up with the activity of the rest that cases constantly arise in which one person can do what he wants only if someone else does not do what he wants.
# Bank of England 2014 'Introduction to Money'
Financial assets are simply claims on someone else in the economy — an IOU to a person, company, bank or government...most financial assets are actually claims on other financial assets. Because financial assets are claims on someone else in the economy, they are also financial liabilities — one person’s financial asset is always someone else’s debt. If everyone in the economy were to pool all of their assets and debts together as one, all of the financial assets and liabilities — including money — would cancel out.
Sorry for the long postReplyDelete
You say: “Applying a national accounting model with specified ‘heroic’ assumptions Minsky uses the Kalecki profit identity to conclude that profits = investment.”
Yes, Kalecki came up with his profit definition and Minsky with his and Keen with his and anybody else with theirs.#1
As the ancient Greeks already observed: “There are always many different opinions and conventions concerning any one problem or subject-matter…. This shows that they are not all true. For if they conflict, then at best only one of them can be true.” (Popper)
Fact is that NONE of them is true. To this day, economists do not get the foundational concept of their subject matter straight.
#1 Heterodoxy, too, is scientific junk
If I am reading your argument correctly, you believe that standard profit definitions must lead to unsustainable outcomes. That is an interesting question, but I take the other side. (We may end up with unsustainable outcomes, but that is due to deliberate choices.)ReplyDelete
However, even if true, that does not mean that the standard definition is “axiomatically incorrect”, which is Egmont’s position.
The majority of statements are neither true nor false:ReplyDelete
Some statements are considered to be true because they have never been proven false via a common sense or other commonly accepted procedure for testing validity:
Many arguments can't be resolved by scientific or other common modes of reasoning so people engage in non-scientific modes of argumentation:
I'm not sure it is scientific to assert that there is or must be one true meaning of the word "profit".
Solvency is not necessarily a zero-sum game. When liquidity is being provided by the financial system or government deficits then more units will be solvent then in a counter-factual economy where liquidity is becoming scarce.
You say “The majority of statements are neither true nor false.” True, indeed, 99.9 percent of statements is just brain-dead blather. The 0.1 percent is science.
Every layperson who is confronted with the statement: Mr. A has been murdered and you are the murderer, understands immediately the concept of scientific truth. Truth is (i) a binary concept, i.e. there is only true/false with NOTHING in between, and (ii), truth is objective, that is provable in principle, and (iii), that it is worth every effort to find out the truth even if we cannot be absolutely sure that we will be successful.
Scientific truth is well-defined since 2000+ years by formal and material consistency. However, there is the large swamp of cargo cult science (Feynman) where, as Keynes said, “nothing is clear and everything is possible.”
In the swamp, vagueness, indeterminacy, inconclusiveness, confusion dressed up as complexity, unresolved contradictions, storytelling, filibuster, gossip, finicky scholasticism (Popper), known/unknown unknowns, nonentities, vacuous doubt, silly beliefs, and the Humpty Dumpty Fallacy are the prevailing components of communication.
Economists are swampies.#1, #2 Economics is a failed science. To this day, economists have NOT gotten the foundational concepts of their subject matter, ― profit ― right. All microfounded (Walrasian) and macrofounded (Keynesian) models are provably false. Economist do not know how the economy works. Economics is a cargo cult science. The “Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel” is a fraud.
To claim that there is no truth is an immunizing stratagem (Popper) of failed/fake/stupid/corrupt proto-scientific blatherers.#3
You are on the wrong side of the demarcation line between science and non-science.
#1 Lousy scientists
#2 Economists ― medics or barber-surgeons?
#3 Failed economics: The losers’ long list of lame excuses
If evidence accumulates showing that human perception, language, and reason are inherently vague, complex, and uncertain (I can't state for certain that I agree with your 99.1% observed frequency) then it would be more scientific to accept the evidence then to make a normative argument that human perception, language, and reason should be clear, simple, and certain.ReplyDelete
Simple version of Kalecki profit model described on page 10 of this 49 page paper:
Y == Cw + Cc + I
Y == W + Pi
Assume workers use all income W to consume goods:
W = Cw
Then profits Pi:
Pi = I + Cc
where profits equal investment plus consumption of capitalist households that own the firms in society.
This formulation certainly pits owners against workers! Any wages earned by owners are included in the profit term!Delete
This blurring is evident in microeconomics when we examine the income of the working owner. It is hard to distinguish whether owner income comes from investment, hours worked, skill, or some other feature associated with ownership.
Kalecki’s profit equation is formally defective and this has been demonstrated already in a 2011 working paper.#1 The correct “Kalecki” equation is given with Eq. (v) in the Wikimedia compilation.#2
The compilation settles the profit issue.#3
#1 What is Wrong with Heterodox Economics? Kalecki’s Profit Theory as an Example
#2 Wikimedia, AXEC Profit Law and Balances Equation
#3 For details see cross-references Profit
"If I am reading your argument correctly, you believe that standard profit definitions must lead to unsustainable outcomes. "ReplyDelete
Yes, but only from a macro-perspective and history has proven this with constant economic booms and busts.
But as far as individual households/businesses are concerned, the standard definition is the correct one and the only definition that matters - the state of the economy, the level of household and public debt, the level of unemployment, homelessness, poverty etc should not and do not have any bearing on my business or household decisions except to the extent where I may wish to know how to stay ahead of the curve (i.e. predict the next bust so I can prepare and short the market or at least hedge).
I have a whole list of cases stemming back 100s of years where this very point is raised, because our common law has always maintained to 'defend' the right of individual autonomy on the knowledge that it is a competition where there must be losers. There would be no justification for such a large amount of time and energy spent on this very subject, and with judges after judges throughout the history of society (once it came out of feudalism) having to point out why the common law must defend the right of individual autonomy as opposed to defending a concept of economic equality if the reality of the situation from a macro-perspective was the other way around. It is no co-incidence that the most powerful and 'wealthy' economic empires throughout our recent history are those based on the common law system.
Of course, one needs to understand why this is the case before they will be willing to even entertain it, and from all the years of studying, the number one reason why I think people can't fathom the reality of this is because there is no recognition of the costs of property ownership let alone why those costs must be passed down (and hence why financial wealth can only ever trickle up), in order to maintain that ownership of property.
The best work I found on this was by Proudhon in his work on 'Property' where he demonstrated that 'no man can purchase what he produces with the wage he receives', because of the cost of property ownership.
But anyway, I guess what really matters is why one is in this field (economics, or study etc) to begin with. It might well be that for most people in the economics field there are many varied reasons. As an aside, I might add that I had come to my conclusions well before I picked up any text on economics - which I must also confess was an eye opener on account of the sheer level of disparity within it. There is more disagreement in economics than there is in religion, which is quite startling.
I am not the person to discuss those issues. From my perspective, the issue is straightforward: do we want to model the operation of the industrial capitalist system that we have? If so, we need to stick with the definition of profit that capitalists use, and not what some outside observers want them to use.ReplyDelete
I do appreciate the convo though, I always learn something new
You say: “From my perspective, the issue is straightforward: do we want to model the operation of the industrial capitalist system that we have? If so, we need to stick with the definition of profit that capitalists use, …”
False! Capitalists know as much about capitalism as fish know about water ― nothing. This is long known: “… these people who live and move among the facts often, or mostly, cannot of themselves put together any precise reasonings about them.” (Bagehot, 1885)#1
This is why scientists redefine everyday concepts rigorously: “The only way to arrive at coherent languages is to set up axiomatic systems implicitly defining the basic concepts.” (Schmiechen)#2
The elementary production-consumption economy is, for a start, defined by three macro axioms (Yw=WL, O=RL, C=PX), two conditions (X=O, C=Yw) and two definitions (monetary profit Qm≡C–Yw, monetary saving Sm≡Yw–C). From this follows Qm=–Sm, that is, macroeconomic profit comes in the most elementary case from the growth of household sector debt.#3
Capitalists don’t know this. Like goldfishes, they know only how to swim in their little pond but have no idea where the water comes from.
#1 Bagehot’s wisdom and the silliness of modern economists
#2 How to get out of the morass of ignorance
#3 Profit theory in less than 5 minutes
You say: “It is hard to distinguish whether owner income comes from investment, hours worked, skill, or some other feature associated with ownership.”
This is entirely beside the point. Obviously, you do not understand how macroeconomic profit and microeconomic profit are related.#1, #2
Profit for the economy as a WHOLE has NOTHING to do with productivity, the wage rate, the working hours, exploitation, competition, innovation, capital, power, monopoly, risk, greed, choice, etcetera. These factors affect only the DISTRIBUTION of profit between firms. Macroeconomic profit is in the most elementary case given with Qm=−Sm, that is, profit comes from the growth of household sector’s debt.
The crucial point is this: Brian Romanchuk’s Model 5 equation can immediately be transformed into this balances equation (I−S)+(G−T)+(X−M)−(Q−Yd)=0 which directly compares to the MMT balances equation (I−S)+(G−T)+(X−M)=0.
Brian Romanchuk argues: “Now I have no idea what he’s going on about the MMT equation. If I am not mistaken, the MMT equation is a sectoral balances equation, and does not tell us about profit. People who care about accounting identities argue that the ‘senior MMTers’ are pulling some technical legerdemain with the definition of saving used. However, I do not deeply care about accounting identitities, so I really never looked into this alleged controversy.”
So-called accounting identities are elementary algebra. If Brian Romanchuk does not see that his profit equation ⇒ balances equation directly contradicts the MMT balances equation he is an incompetent mathematician.
Worse, the MMT balances equation obscures the fact that Public Deficit = Private Profit and is used to politically deceive the ninety-nine percenters.#3 Either Brian Romanchuk is an incompetent mathematician or he is complicit in the MMT fraud.
Either way, his two posts about the “Kalecki Profit Equation” go down the scientific drain.
#1 Zero-sum capitalism
#2 Capitalism, poverty, exploitation, and cross-over exploitation
#3 Down with idiocy!
Egmont, the expression “I could care less” best summarises my views on this topic. If a “senior MMTer” wrote something that contradicts standard accounting identities, feel free to take it up with said “senior MMTer.” I cannot recall reading anything like that, so as far as I am concerned, you are beating up on a straw man. (The complaint I saw revolved around MMTers using “saving” to refer to sectoral balances, and not the standard national accounting version. Since “saving” and “investing” are commonly used to refer to things not matching the national accounting definition, I view that as grasping as straws.)ReplyDelete
Truth by definition? The Profit Theory is axiomatically false for 200+ yearsReplyDelete
Comment on Brian Romanchuk on ‘Primer: The Kalecki Profit Equation (Part I, II)’
(i) You said in the intro: “This article continues the discussion of the Kalecki Profit Equation. The Kalecki Profit Equation is an account identity (a statement that is true by definition) that determines the level of aggregate business sector profits in terms of other national accounts variables. The full equation is somewhat imposing, so the strategy employed here is to build up the equation by starting off with a simplified model economy that results in a brief equation, then adding new terms progressively.”
(ii) You say in your latest post: “Egmont, the expression ‘I could care less’ best summarises my views on this topic. If a ‘senior MMTer’ wrote something that contradicts standard accounting identities, feel free to take it up with said ‘senior MMTer.’ I cannot recall reading anything like that, so as far as I am concerned, you are beating up on a straw man. (The complaint I saw revolved around MMTers using ‘saving’ to refer to sectoral balances, and not the standard national accounting version. Since ‘saving’ and ‘investing’ are commonly used to refer to things not matching the national accounting definition, I view that as grasping as straws.)”
In (i) you say that you are dealing with “an account identity (a statement that is true by definition)”. In (ii) you say that there are standard accounting identities. Now, the standard identities are also known to be “true by definition”. In fact, this is a very common phrase in economics.
Simple logic tells everyone that wildly different accounting identities cannot all be “true by definition”. Economists have obviously a serious problem with understanding the elementary mathematical logic of accounting. This problem is unsolved since Keynes. After-Keynesians still claim that Keynes’ famous I=S is an accounting identity.#1
Kalecki came up with a quite different accounting identity: “The economy is closed (there is no international trade) and there is no public sector. With these assumptions Kalecki derives the following accounting identity: P+W=Cw+Cp+I where P is the volume of gross profits (profits plus depreciation), W is the volume of total wages, Cp is capitalists’ consumption, Cw is workers’ consumption and I is the gross investment that have been made in the economy. Since we have supposed workers who do not save (that is W=Cw in the preceding equation), we can simplify the two terms and arrive at: P=Cp+I. This is the famous profits equation, which says that profits are equal to the sum of investment and capitalists’ consumption.” (Wikipedia)#2
Kalecki’s profit equation is axiomatically false, that is, beyond repair.#3
In my post ‘The final implosion of MMT’ I came up with the axiomatically correct accounting equation for the most elementary economic configuration: Qm=−Sm.#4 which you commented on with ‘Fun With Accounting Identities’#5: “An article with the flamboyant title ‘The final implosion of MMT’ by Egmont Kakarot-Handtke caught my eye. As I observed at Mike Norman Economics, this was probably just an attempt to troll people. That said, I think it provides another useful example of national accounting works (or does not work...).”
See part 2
You did not get the point then and I commented: “Which part of Qm=−Sm do you not understand? The equation says: at the heart of national income accounting is an identity — the business sector’s deficit (surplus) equals the household sector’s surplus (deficit).” and summarized “The current state of economics is that national accounting is provably false and that economic theory is axiomatically defective and that the ‘throng of superfluous economists’ (including Brian Romanchuk) has no clue and cannot rise above brain-dead blathering.”
Now, your post ‘Primer: The Kalecki Profit Equation (Part I)’ starts with (Model 1 Profits) = − (Household savings), in symbols, Qm= −Sm.
In principle, it is a good thing that you corrected your false assertions about macroeconomic accounting and adopted the axiomatically correct Profit Law. However, you are deceiving the general reader by attributing it to Kalecki.
I hereby inform you publicly that false attribution not only constitutes a violation of the standards of scientific discussion/publication but also of Wikimedia’s ‘Creative Commons Attribution-Share Alike 4.0 International’ as well as the International Copyright © and Trademark ® Laws. The correct attribution of the Model 1 to Model 5 profit equations is to AXEC/Egmont Kakarot-Handtke.#6, #7, #8
#1 For details of the big picture see cross-references Refutation of I=S
#2 Wikipedia, Kalecki, The profit equation
#3 Refutation of Kalecki’s profit equation
What is Wrong with Heterodox Economics? Kalecki’s Profit Theory as an Example
The magic circuit and how economists got it wrong
Kalecki got it wrong, Allais got it right
Kalecki: the man who missed it by a hair's breadth
Kalecki’s wrong definition of profit and income
Loanable funds ― no hoax, just breathtaking stupidity
Macro for dummies (II)
Economists: scientists or political clowns?
Profit and stupidity
How the Intelligent Non-Economist Can Refute Every Economist Hands Down
#4 AXEC, Oct 31 2016 The final implosion of MMT
#5 BondEconomics, Nov 1 2016, Fun With Accounting Identities
#6 Rectification of MMT macro accounting
#7 DSGE and profit―forget it! MMT and profit―forget it!
#8 Keynes’s Missing Axioms
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You both have an even more fundamental error. You both divide the economy into business and households. Then you assume that only business can save.
If only business can save, any household member that had the audacity to save money would be disqualified from household membership and redefined as a business member.
By that standard, it would never be possible for households to ever accumulate money in the first place.
Therefore, to write Qm=–Sm where Qm represents business sector profits and Sm represents household profits makes no logical sense when examined in a broad swath of time.
Roger, you are missing the point that my explanation is based on a sequence of simple models that constrain behaviour. As we add more possible modes of behaviour, the profit equation adds more terms. The full accounting identity is very complex, as there are dozens of small factors added. However, those added terms are generally not significant analytically.Delete
However, I am certainly not assuming that only businesses save. There’s a household saving term in the equation.
I didn't see anywhere in the conversation any suggestions or implications that households can't save. In fact AXEC and others have also said elsewhere at the end of the day all businesses are owned by households. Considering that from a legal perspective, all businesses are essentially trustees and hence must have balance sheets that balance to zero (i.e. the equity is a liability to shareholders), whereas householders balance sheets have no such obligation, this implies that in reality, it is only households who can ultimately save. This then suggests that instead of seeing the economy as a division between business and households, the economy is really a division between households who own net financial assets (solvent) and households who own net financial liabilities (insolvent), and the business sector is the means by which the solvents extract their income from the insolvents.Delete
Brian, ANC Driver,Delete
After reviewing your comments and researching what I wrote (July 11, 2018 at 1:23), I can't defend my words. I therefore withdraw the comment (but leave it visible for continuity).
According to this 20 page paper solvency refers to positive net worth and insolvency refers to negative net worth of the firm, government, or household unit under consideration:Delete
if we could divide the household sector into a net creditor and a net debtor household, in terms of financial assets and liabilities, then it is not necessarily true that the debtor household have negative net worth, because it may own non-financial assets with valuation exceeding the debt.
Net Worth = Non-financial Assets + Financial Assets - Liabilities
That's true from an accounting perspective and also whilst times are good, but as the GFC demonstrated, your wealth is only ever as good as what you can liquidate it for. As someone who experienced this first hand, I no longer subscribe to what economists, politicians, wealth advisors, or any other so-called experts say, or what national statistics say, or what the current buying market is willing to pay for anything - all wealth is based on an illusion. The reality of it is simple for me - in a world where everything is treated as a commodity which can be exploited for profit, it is either eat or be eaten.Delete
Incidentally, in Australia (bearing in mind this country hasn't had a supposed recession in something like 23 years - oh whoopy for Australia - it still has 0.5% of its population homeless), the total wealth, as per national statistics, including housing is over 8 trillion, over half of which is in housing. The total of Australia's Superannuation is 2.7 trillion and yet total household debt is 2.5 trillion. So, in 30 years since the Super scheme was introduced and made mandatory, it has only slightly done better than household debt. For those in the housing market, especially those in the middle to older age brackets, they are going to want to hope there isn't some larger than normal wave of retirement any time soon which may trigger a sell-off in housing, nor are they going to want to see the Australian government reach its aim of a federal surplus by 2020, nor are they going to want to see China's economy derail by any significant margin. On the flip-side, for all the younger generation who have had the so-called dream of owning a home intravenously pumped into their psyche, but haven't been able to enter on account of the ridiculous prices of housing in this country, although a serious economic correction of some sort may put their jobs at risk, it will make housing much more affordable for them, but in saying this, they will have to take more care of the elderly who will far less wealth then they were banking on.
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Maybe I am missunderstanding your proposed equation (I−S)+(G−T)+(X−M)−(Q−Yd) but won´t ( Q = Yd ) because of the way it is meassured? I understand that due to ( Q = I −S+ Yd ) starting from a certain (Yd) will not lead to a (Q) that is equal to it, but as this meassures are generally made at the end of the accounting period won´t they become equal? How would you differenciate between the two?ReplyDelete
These comments are years old, so the only person that notices responses is myself.ReplyDelete
Wow, got an email this morning; it's been over 3 years since this conversation! So it's not just you Brian lol.ReplyDelete
Interesting to note last year or so I started to look for correlations between the stock markets (as a proxy for Qm) and the increase/decrease in the other sectors, in particular net G spending, net I, increase/decrease in credit creation etc. Before each recession there is always a slowdown in some or all of these factors, or in aggregate; likewise, there is also an increase in aggregate behind each new bull phase.
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