There are many important laws that determine the behavior of various systems within the Universe but as far as economics is concerned, none is more important than the concept of a closed system.
From Wikipedia:
”In non-relativistic classical mechanics, a closed system is a physical system which doesn’t exchange any matter with its surroundings, and isn’t subject to any force whose source is external to the system. A closed system in the classical mechanics sense would be considered an isolated system in thermodynamics.”
What does this mean in the context of a monetary economy? What could properties of a physical system have in common with a system based largely on the relationships between stocks and the flows between them? It turns out that some math systems behave according to the same rules that constrain elemental physical particles, i.e. the concept of the conservation of matter holds mathematically for the “conservation” of currency units within the system.
If we define the closed system as the universe of state-backed US dollar assets and liabilities, including state-issued bonds held by the public, it means that the net dollar assets existing in the economic system cannot change over some period of time t without an add or subtract from a source external to the system.New Economic Perspectives
Sectoral Balances within the Domestic Non-Government
Paul Meli
47 comments:
C'mon!
It is really important to get the accounting right.
Really. Really. Really. Really.
I do not know why profits is defined as the difference between sales and investment!
"p = net profit over the period as the difference between Sales and Investment."
Second it is ridiculous to claim that businesses do not make a profit if the government is not in deficit. Please check the flow of funds data for the case of the United States when the government was running surpluses around the year 2000.
Third,
Not only do businesses earn revenues from investment expenditure of other businesses but also by consumption expenditure of households. If the government has expenditures, businesses also earn via government's expenditures.
Fourth,
Unless you think households consume all income, businesses earn from household consumption and pay wages to households - the latter appearing as costs. This somehow doesn't even appear.
It is perfectly possible theoretically to have growth without government expenditure and taxes and without household debt increasing forever relative to its income - meaning all stocks/flow ratios behaving well.
But the first point is essential. Profits is not the difference between sales and investment.
In fact, investment adds to profits of firms as a whole.
Ramanan, you doth protest too much.
It's really important to get the math right, regardless of the accounting, which I haven't appealed to in the example so you can't accuse me of getting it wrong. I can't help it if the terms I've used sound just like accounting terms.
This is a simple math problem, not an accounting problem. It is you that is trying to make it an accounting problem. Do us favor, and go apply some accounting to F=ma or e-mc^2 and get back to us on what you find out. That should keep you busy for a while. Anyway…
"Investment" is how much the company has spent into the economy over some period (my definition, not intended to be conflated with your accounting version).
"Sales" is how much revenue the company receives over the same period. (I've invented that term also but everyone should know what it means).
"Gross Profit" is the difference between the two.
Translate those terms as you wish and then comment on the math problem, as that is the problem at hand. (x+p)-x=p no matter how many times you try it.
It is mathematically impossible for a firm to receive more in revenue than it has invested in a closed system if it is the only company. This is also true for all businesses in the aggregate for p>0 . If you are claiming otherwise you are wrong according to the laws of arithmetic, accounting can't help you here.
If we take two containers, one empty and one with a gallon of water in it, and introduce a quart into the empty container from the other, it is impossible to get more than a quart out of the second container without some sort of external add.
If the 1st container has a quart of water in it prior to the "transaction", then it is possible, but the prior water could only come from an external source, a kind of "deficit spending".
This has nothing to do with accounting. Accounting can tell us a lot, but it can't create perpetual motion, something from nothing, etc.. Nothing can. It is, always has been and probably always will be impossible (perpetual motion that is).
This mathematical reality is so simple It is hard to understand how anyone could deny it.
"It is impossible for an effect to be greater than it's cause" - Aquinas 1274
This concept was known 700+ years ago, how did you miss it?
"Second it is ridiculous to claim that businesses do not make a profit if the government is not in deficit. Please check the flow of funds data for the case of the United States when the government was running surpluses around the year 2000. "
Sorry Ramanan, but the FoF is not stock-flow consistent year-to-year, and maybe not ever. Even the mighty FoF cannot overcome the law of the closed systems, however.
"In fact, investment adds to profits of firms as a whole"
This is mathematically impossible in a closed system, regardless of what you think FoF tells you. You are welcome to tell us where the add came from. FoF can't help you here, you have to use algebra.
Paul,
couple thoughts wrt Ramanan's concerns wrt accounting, etc...
Your 'investment' could just be called 'expenses' take the cue from the IRS who has by fiat recategorized what used to be 'investment' as "section 179 EXPENSES" which means from a tax accounting perspective, you can write off certain "investments" as "expenses" so this should not be a problem with the accountants... just treat all "investment" as "section 179 expenses" in effect....
Also, think in terms of "cash basis" accounting (I think you basically already are) but here is some info on "cash basis" vs "accrual basis".... I believe in "cash basis" personally...
http://en.wikipedia.org/wiki/Cash-basis_versus_accrual-basis_accounting
I believe "cash basis" is closer to a real-time snapshot of what has happened...
Resp,
Paul,
FoF is stock-flow consistent. If you think it isn't you aren't being.
Which is what it looks like because you claim mathematical impossibility for something that is mathematically possible.
And FoF is mathematically consistent as well.
Now, let us take an example.
Firms in the aggregate pay interest to banks and wages and dividends and make investment expenditures.
Firms receive receipts from sales of consumption goods and also receive receipts from investment expenditure of other firms.
Firms also purchase raw materials from other firms and these cancel out. Firms also have intermediate consumption purchased from other firms which also cancel out.
Households receive wages and dividends.
Banks give loans, get interest on loans and pay interest to depositors and also pay dividends.
I think you confuse profits for surplus (i.e., positive net lending).
It is perfectly possible for firms to have receipts less than total expenditure. The difference is financed by borrowing from banks and issuing equities to households.
In this situation firms are still making profits.
Firms' liabilities may be rising forever but liabilities/income may not necessarily rise forever.
But doesn't mean firms' net worth is going negative. It is positive because investment has added to the stock of fixed capital which are assets for firms.
One real life example. Australian private business sector is a net debtor. In fact the whole of Australian private sector is a net debtor.
Alternatively, if you want it in a model form check out the paper by Wynne Godley and Marc Lavoie:
Kaleckian Models Of Growth In A Coherent Stock Flow Monetary Framework - A Kaldorian View
http://www.jstor.org/stable/4538777
Or alternative link:
http://www.levyinstitute.org/pubs/Lavoie%20Godley_2001-02.pdf
Matt,
The relationships remain the same under cash or accrual accounting. The only thing that changes is the timing, i.e. what accounting "reports" has already happened.
Profits will merely be realized in a different time frame wrt the accounting, but in the virtual balance sheet everything is instantaneous. That is where some of the misunderstanding comes from.
As you often say, accounting only gives us an "ex-post" picture of what has already happened.
The bottom line is this…the economy can not create or change one way or another the quantity of dollars within it. Dollars are not like an amoeba that can split into two entities. Only the government can change the quantity. Value, etc. has no bearing on the quantity of dollars, they can only come from one source and that source is outside (not a part of) the system.
From the beginning of my participation in this discussion my main arguments have been that there is nothing that can happen in the conomy that will be in violation of closed-system principles and that by appealing to accounting to "prove" something is over-thinking the problem in a big way. Plus it can't "prove" what it sets out to prove.
The only real truth in the accounting model is the sectoral balances identity. It is a relationship untethered from the data and it must be true, not only because it;s an identity but because it is a representation of a closed system that is, for lack of a better term, "law".
In this particular case, if the data says otherwise, the data must be wrong, because there is only one solution. This is the "tyranny of the arithmetic".
Using accounting to solve the problem I have presented is analagous to an action whereby If I want to go across the street to my neighbors house, I choose to go in the opposite direction around the world to do so. I am wasting a lot of of time and effort, and my journey is not guaranteed.
Not only that, but we're dealing with millions if not billions of transactions. Closed system "law" tells us that we can't create something from nothing, so we don't have to try to prove it with anecdotal evidence. That's what accounting amounts to.
We "take a picture" of what has happened by measuring some dataset, but that dataset is only an approximation and I'm not even sure we are measuring the right things.
At any rate, the data doesn't matter unless it is stock/flow consistent.
Ramanan,
"It is perfectly possible for firms to have receipts less than total expenditure. The difference is financed by borrowing from banks and issuing equities to households.
In this situation firms are still making profits. "
Can they be making profits if the firm chooses to use Cash Basis Accounting?
rsp
and also I dont think such a firm is making a profit for tax accounting purposes... rsp.
under a cash basis. ie they cant show loan proceeds as "sales" or "revenues", or sale of stock as "revenues" or "sales"... rsp,
or are you talking about "system wide"...
but just for grins, in your hypo, if "all Firms" filed a consolidated tax return cash basis, ie "USA Inc." , how could that consolidated entity show profits? rsp,
Ramanan,
"FoF is stock-flow consistent."
I don't think so, for one thing many of the entries are estimates and any virtual mathematical analysis based on the S/B identity will be exact to the penny.
Be that as it may, it doesn't really matter because if the FoF tells you something that is not in perfect harmony with the sectoral balances then the data is wrong, or being mis-interpreted. The "system" is inflexible.
It's a closed system, one-in one-added. One-removed one-subtracted. Otherwise everything stays the same but the distribution changes. There is no wiggle room. TINA.
I know you hate hearing this because you are so secure in your argument and you love the FoF. I figured out pretty quickly those reports are useless for this kind of analysis. A snapshot is never as good as the real thing. The closed system gives you the real thing, it tells you up front what is possible and what isn't.
From there the problem becomes trivial.
Forget the FoF, it's irrelevant wrt solving this particular problem,but it is quite useful in other ways, like for quantifying certain subsets of the data.
Secondly, in the end accounting is only an "ex post" picture of what has already happened. With the S/B identity and my extension of it, we can make a real-time analysis of how the system will behave given certain inputs. It is a rigid model. And, it is just as rigid as the S/B identity, because it is a subset of it.
That is not to say we know what will happen, because when, how often and what participants spend their funds on can be unpredictable. But, given an input (or lack of one) it is easy to see what is likely to happen.
It's getting late I'll get back to this tomorrow.
Matt,
I didn't assume proceeds of loans are counted as revenue of firms!
Yes I meant system wide.
About taxes: whichever way firms are taxed, they still have after-tax profits if they have pre-tax profits.
Investment expenditure for one firm is a receipt for another. For firms as a whole investment adds to receipts but in calculation of profits, the expenditure is not shown as a negative. It is as simple.
Paul,
"Ramanan,
"FoF is stock-flow consistent."
I don't think so,"
It is SFC :-)
Ramanan,
"It is perfectly possible for firms to have receipts less than total expenditure. The difference is financed by borrowing from banks and issuing equities to households.
In this situation firms are still making profits."
But you are granting that this would be impossible for a single firm on cash basis right? (ie revenues < expenses and impossible that firm could still be 'profitable')
rsp,
rsp,
Matt,
Possible for all firms to make profits.
What I said isn't a scenario in which a few firms are making losses and others profitable - although that could happen but not necessarily.
One needs to be careful in distinguishing operating expenses and capital expenditure.
Ramanan at 10/31/2012 6:42 PM
"Not only do businesses earn revenues from investment expenditure of other businesses but also by consumption expenditure of households…
The system is closed. It is axiomatic that without net adds by the government, profits are not possible without consuming the host (households). All that can happen is a shift of funds from households to business.
"…If the government has expenditures, businesses also earn via government's expenditures."
With (G-T)=0, government expenditure amounts to taxing and spending (redistribution, taxes don't fund anything). Companies in the aggregate still make a net profit. The funds have to come from somewhere.
As an aside, I will take this opportunity to point out an economic reality. It is impossible for businesses in the aggregate to succeed on sales to their own employees. Their success is dependent upon two things the government provides…direct hiring of part of the workforce and direct purchase of goods and services from private businesses.
So much for the idea of a "libertarian paradise".
"It is perfectly possible theoretically to have growth without government expenditure and taxes and without household debt increasing forever relative to its income - meaning all stocks/flow ratios behaving well."
Nope. Impossible. Closed system. How would you account for the net growth in dollar financial assets if the government isn't adding them?
"In fact, investment adds to profits of firms as a whole."
"It is impossible for an effect to be greater than it's cause" - Aquinas 1274
Ramanan at 11/01/2012 5:48 AM
"It is SFC :-)"
Whether it is or is not is a side argument. You can't use accounting to solve a math problem. What I have presented is a math problem. The FoF can't be appealed to as a means to prove your case. It is a painting of a photo of the real thing. Estimates.
Your arguments continue to defy mathematical reality, so I can only conclude that you are incorrectly interpreting data from the FoF (if you are correct that it is SFC).
My argument is simply this…
It is impossible for net nominal growth to occur in the economy without net adds by the fiscal authority. This is axiomatic.
This rules out the possibility of profits in the aggregate and sales by businesses exceeding investment (costs of production) over time, ie "profits".
Matt,
Moving between accounting on a cash basis and an accrual basis can only change the "picture" created by the accounting snapshot.
The closed system is inflexible, there can be no net adds or subtracts at the macro level without government actions or leakages.
Every transaction below this on the hierarchy is subject to the same restriction.
Accounting can only create a "picture" of what the closed system allows.
You've said it yourself many times, that's where I got the idea. Accounting is an ex-post picture of events that have already occurred. Those events are limited by closed system arithmetic. The Arrow of Time is at play here.
Right I guess I'm trying to point out that Accrual sort of "moves the clock forward" more than Cash... and since we are analyzing the monetary system, it would seem to me that it is best to always use a Cash basis...
ie under Accrual, a firm can have "sales" and "revenues" BUT not have received the actual USD balances in it's account yet, they put it on the A/R and "book it" as "sales" even though they have not been paid actual USD balances yet...
Seems to me you would want to eradicate this type of accounting if you are trying to analyze what is going on in a strictly monetary sense... A/R is effectively "lending money" that doesn't really exist in the system... rsp,
ps I guess I/m also saying that we should perhaps make sure that if we are talking about Cash basis, we would want to make sure others were not interpreting as Accrual basis... rsp,
"perhaps make sure that if we are talking about Cash basis, we would want to make sure others were not interpreting as Accrual basis... rsp,"
Matt, It would probably be best to think in terms of accrual accounting. Much of investment is forward-looking and gains are delayed as the up-front costs are monetized over time.
There are so many transactions taking place with different timing and structure that it would be impossible to appeal to accounting as proof of anything in macro other than at the top-level, ie the sectoral balances identity.
Imagine trying to determine thermodynamic behavior or the flow of current through an electrical circuit by examining the collisions and movements of the individual particles. Impossible.
Instead, scientists resort to statistical methods and the observation and establishment of mathematical patterns.
We "know" about the concept of entropy, but can't prove it. The proof is in the fact that exceptions have never been observed in the wild.
If we put an ice cube on a surface at room temperature (RT>32 degrees F), the ice cube will always melt. Statistically it is possible for individual molecules of H2O to move to a state of lower entropy, but in the aggregate…
Ramanan at 10/31/2012 8:46 PM
"Alternatively, if you want it in a model form check out the paper by Wynne Godley and Marc Lavoie: Kaleckian Models Of Growth In A Coherent Stock Flow Monetary Framework - A Kaldorian View http://www.jstor.org/stable/4538777"
"The financial instability hypothesis incorporates the Kalecki (1965)-Levy (1983) view of profits, in which the structure of aggregate demand determines profits. In the skeletal model, with highly simplified consumption behavior by receivers of profit incomes and wages, in each period aggregate profits equal aggregate investment. In a more complex (though still highly abstract) structure, aggregate profits equal aggregate investment plus the government deficit." - Hyman P. Minsky, Working Paper #74 pp 5-6 May 1992
Paul @November 1, 2012 9:39 AM,
What is you quote is fine.
However you are still wrong but do not see what Minsky says about profits is totally different from what you have and how you define it.
It's a bit painful if you start bringing in icecubes and water melting and all that. It has nothing to do with what we are discussing.
What you write is beyond ridiculous. Things would have been interesting if we were discussing some nuances. But you completely screw up the definitions of profits and then keep asserting that there are no profits.
"Things would have been interesting if we were discussing some nuances. But you completely screw up the definitions of profits and then keep asserting that there are no profits."
Minsky defines profits in the quote I provided, and it is in harmony with my presentation. If you think otherwise we are speaking different English.
The discussion is about closed system math. I am relating it to economic transactions that are constrained by that same math. Very simple argument.
So far you have failed to address the problem I have defined. You've done everything but.
If you don't understand or acknowledge the implications of closed system analysis then you aren't capable of addressing the problem. I can't force you to understand it, only you have the power to do so.
The entropy comment is between Matt and myself, I didn't invite you into that conversation. Matt is a man of science, he knows what I am alluding to. Your comment about it is a cheap shot. No worries, I have thick skin.
Minsky's definition of profits is not the same as yours.
You will keep making the same mistake again and again.
Minsky has profits even in the absence of government deficits but in your case, firms' profits in the absence of government deficits is zero.
"If (G-T)=0, p>0 is a closed system violation (which is impossible)"
Happy muddling!
"Minsky has profits even in the absence of government deficits but in your case, firms' profits in the absence of government deficits is zero."
Profits are possible, just not net profits in the aggregate. I have not said otherwise.
"In a more complex (though still highly abstract) structure, aggregate profits equal aggregate investment plus the government deficit."
Pretty clear.
"Profits are possible, just not net profits in the aggregate. I have not said otherwise."
Now adding terminologies.
You are still wrong. Profits are possible in the aggregate if netted.
""In a more complex (though still highly abstract) structure, aggregate profits equal aggregate investment plus the government deficit."
Pretty clear."
Yes pretty clear that if government deficit is zero, profits NOT EQUAL to zero.
You confuse matters.
For firms as a whole, investment expenditure by one is a sales receipt for another and hence investment contributes to profits in the aggregate.
HOWEVER, investment expenditure is not subtracted to arrive at profits.
Unlike you Minsky knows this.
Paul,
Are they including "profits" that are created only by Accrual accounting?
ie They are including "sales" or "revenues" that havent really settled on a Cash basis in the banking system?
rsp,
"Yes pretty clear that if government deficit is zero, profits NOT EQUAL to zero. "
NET profits, in the aggregate, ie for the economy as a whole…
…as a consequence of the closed system, it is impossible for any NET nominal gain in financial assets to occur with (G-T)=0 and (X-M)=0.
Net aggregate profits require an increase in NET nominal financial assets.
It's a simple statement, one which you continue to sidestep with obtuse responses.
All you have to do is prove the counterfactual. Unfortunately for you, it will require arithmetic.
"Net aggregate profits require an increase in NET nominal financial assets."
That is *totally* wrong.
Totally, totally wrong.
Second, that is not Minsky's definition of profits. His definition is the standard one. So please stop hiding behind Minsky.
"it will require arithmetic"
It is you who require arithmetic Paul.
"Are they including "profits" that are created only by Accrual accounting?"
Matt, I don't know, the paper is general in nature, there are no equations or numbers.
Here's a link to the paper (which I got from Tom H.):
https://dl.dropbox.com/u/33741/wp74.pdf
The way I look at it, what is the point of "profit" if it doesn't increase your net cash position?
At any rate, corporate profits are reported in nominal dollars. The S/B is a nominal relationship, a direct function of the quantity of NFA in the non-government.
(G-T) and (X-M) are nominal expressions, thus (I-S) is expressed in nominal terms.
My analysis is wrt nominal flows. I am referring to nominal profits and nothing more.
In a closed system if businesses extract nominal profits from an investment, those profits must come at the expense of households.
Any stock of funds that households hold from prior periods have to have come from net government spending or they would have to have borrowed them.
The debt circuit goes south pretty quickly if the government doesn't monetize gains. The economy fails by any definition. Flow decays.
Where did businesses get the $2 Trillion in cash they are sitting on? Not part of my argument it's a rhetorical question.
That is my argument in a nutshell and it takes nothing beyond simple arithmetic (and a little logic) to make it.
Accounting/economic definitions do not handicap the ability to do simple arithmetic.
There are no unknown unknowns in there to undermine the argument.
Any attempts by others to inject non-nominal elements into the discussion are side-stepping the argument, which they are free to do but what's the point?.
""Net aggregate profits require an increase in NET nominal financial assets."
That is *totally* wrong.
Totally, totally wrong. "
You've had the opportunity over the course of this thread to make your case, which you have failed to do.
"Totally, totally wrong." is not an argument and doesn't cut it. You're wasting my time.
"You're wasting my time"
Well yeah. Tried hard to get you straight. And since long.
Please get the definition of profits right. Net profit is not equal the net accumulation of financial assets.
What you do by that post is to mislead people into thinking that profits in the aggregate come only as a result of government deficits by changing the definition of profits to your own convenience.
This was covered months ago when JKH explained it correctly. The MMT people still don't understand it because they think all money comes from the government and that the private sector is helpless to survive without government spending.
Paul didn't understand the nuances then and he doesn't want to understand them now because then he'd have to admit that MMT is wrong on many other points as well.
"Please get the definition of profits right. Net profit is not equal the net accumulation of financial assets. " - Ramanan
Umm…I didn't make that claim, not even close.
You are free to state the definition of "gross profit" for the record, although I'm discussing the net flow of funds between housholds and business entities, and I'm calling the difference "gross profit".
Give it a name for me, I don't mind. The resulting arithmetic is the same in any case as presented, the net flow of funds is towards business, this isn't possible without a net add from an external source of funds.
So far you have just been mailing in your criticisms…you're not even trying.
@ Lars
Your comment is content-free. Please make a specific technical criticism based on the relationships I've laid out in my post, ie net flows wrt arithmetic.
Then be prepared to defend your logic, or lack of.
Paul,
Ramanan has been very thorough in explaining why your post is "totally wrong". You refuse to understand why. Or you just can't understand why. Many of us tried to explain the same points to you earlier this year when JKH wrote his S=I posts. You didn't understand those either. You didn't even come close.
You're a classic case of a non-economist who believes the MMT nonsense about how money only comes from the government and government spending. MMT completely distorts Godley's sector financial balances and the UMKC economists get it completely wrong by changing definitions and creating a government based view of the world. The only people who fall for it are non-economists. That's why MMT has not caught at at all with any reputable economists. They see the accounting errors and basic flaws in the understandings.
But this was all explained to you in the past and you didn't get it then so you won't get it now. Plus, I've seen your debate style and it's among the nastiest MMT has to offer. Good day.
Paul,
"The way I look at it, what is the point of "profit" if it doesn't increase your net cash position?"
I'm copacetic but that sort of flies in the face of "Accrual Accounting" under which a firm can be "profitable" without actually getting paid....
it's sort of a scam imo whereby accountants can book "profits" and everybody takes out commissions and bonuses and then when the deals look like they are unraveling because the customers can't actually pay (perhaps due to a lack of actual system balances that you point out), everybody leaves for new companies and no one can clawback the bonuses and commissions as the recipients have left the firms...
rsp,
"I'm copacetic but that sort of flies in the face of "Accrual Accounting" under which a firm can be "profitable" without actually getting paid…."
Matt, they get paid in the next period, it all comes out in the wash. If a net gain doesn't show up in one period, it will show up in the next.
This is the beauty (and simplicity) of closed-system analysis. All of those funky transactions and their timing become unimportant. We focus on net changes.
When a business files it's first tax return, it gets to choose which way it wants it, cash or accrual. After that it's set in stone, no going back.
Whichever way you keep your books, net profit over history will converge on the same number, but the date profits are recorded (the snapshot) will be different. It always adds up, of that you can be sure.
There's no real advantage either way. The dead give-away is the IRS doesn't care which way you choose.
They don't let you switch back-and forth because it gives you the opportunity to "finagle" the books to show losses so you can take tax breaks you normally wouldn't be able to take.
"Ramanan has been very thorough in explaining why your post is "totally wrong""
He's been thorough in checking my grammar, that's for sure. Meanwhile, you're over here arguing for him by proxy and it's still content free.
In every other respect Ramanan has been non-responsive so it isn't possible to tell whether he's wrong or right, although he has left some clues.
Why do you care what I think anyway?
"That's why MMT has not caught on at all with any reputable economists. They see the accounting errors.... "
Oh c'mon Lars, most Economists ignore the accounting in general.... rsp,
paul, I think it would probably be less confusing and more helpful to your cause of arriving at a closed system diagram if you drop customary terminology that has technically defined meaning. Just define your own technical terms and don't use terms already in use.
I would also be guided by the two chief accounting identities.
Stock: Assets equals (identity) liabilities plus net worth
Flow: Income equals (identity) expenditure plus profit (loss).
Other accounting relationships that break this out are consistent with these and with each other. But I would not be too concerned with this at this point. Accounting gets pretty involved pretty fast, and there is probably no reason to get into the nuances to construct a simple closed system model.
ou could start thinking of a very simple closed economy with one firm and one household and elaborate from there. E.g. one firm and many households as the next step.
Just stipulate your own terms and definitions, but I would suggest staying away from technical terms in other use.
The idea is to construct a model that anyone can understand without needing to know the technical details of either economics or finance. Right now, neither the economists nor the finance people have been able to explain this clearly enough for non-experts to get their heads around. I think that a systems approach could advance the ball down the field.
Then maybe we can match the model with the accounting satisfactorily.
"Income equals (identity) expenditure plus profit (loss)."
Tom,
That is not what profit is!
Tom,
We 're on the same page. I could use some input from time to time, but I would prefer to discuss these kinds of things on a back channel.
Tom, See what I mean?
@ Ramanan
Right.
Definition of 'Gross Profit'
A company's revenue minus its cost of goods sold. Gross profit is a company's residual profit after selling a product or service and deducting the cost associated with its production and sale.
To calculate gross profit: examine the income statement, take the revenue and subtract the cost of goods sold. Also called "gross margin" and "gross income".
Read more: http://www.investopedia.com/terms/g/grossprofit.asp#ixzz2B0ojo500
That's why I am suggesting to paul to star with the balance sheet and income statement as a general accounting paradigm, but putting the system in his own definitions.
If one goes with the standard accounting definitions, I doubt it will be possible to come up with a simple explanation that non-experts can understand. At least no one has been successful yet as far judging by the results.
Lars Svensen: MMT says State Money comes from the State. And Bank Money comes from the Banks. And Monopoly Money comes from Parker Brothers.
Do you disagree?
But these days the Banks come running to Mommy, the State, when they poop themselves, not vice versa. Maybe a few hundred years ago it could be vice versa during an unusual period in human history.
You really think Lerner was wrong when he said "Money is a creature of the State"?
"Reputable economists"? An oxymoron.
*****
Think Ramanan is right here, might have said something slipshod recently here myself.
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