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Brian Romanchuk — Primer: The Kalecki Profit Equation (Part I)

*The Kalecki profit equation -- named after the economist Michal Kalecki -- describes how aggregated profits are determined by national accounting identities. (Note that Jerome Levy came up with a similar approach earlier; the equation is sometimes referred to as the Kalecki-Levy profit equation.) The results are perhaps not obvious if we look at profits from a bottom up perspective. From the perspective of business cycle analysis, the key point to note is that net investment is a source of profits. Meanwhile, since firms invest in order to grow profits, we get a self-reinforcing feedback loop. From a policy perspective, we see that governmental deficits also add to profits, which implies that increasing deficits add to profits in a recession, helping put a floor under activity....*

Bond Economics

Primer: The Kalecki Profit Equation (Part I)
Brian Romanchuk

## 4 comments:

Profit: after 200+ years, economists are still in the woods

Comment on Brian Romanchuk on ‘Primer: The Kalecki Profit Equation (Part I)’

“A satisfactory theory of profits is still elusive.” (Desai, Palgrave Dictionary)#1 Isn’t this a bit strange? Economists never get tired of producing microeconomic and macroeconomic models and of giving policy advice and do not know what profit is? Strange but true, fact is that Walrasians, Keynesians, Marxians, Austrians, and Pluralists are groping in the dark. Because of this, the whole of economics is scientifically worthless.

The ultimate blunder of economics is that both microfoundations and macrofoundations are provably false. As a result, one has multiple profit theories but not the materially and formally correct one.

Brian Romanchuk discuses the Kalecki profit equation and the Levy profit equation. This is a rather pointless exercise because all these equations are provably false.#2, #3, #4, #5, #6

Because economists messed up macroeconomics, more specifically, the axiomatic foundations of economics,#7, #8 economics still stands at square one.

To make the argument short, the macroeconomic Profit Law for the open economy with a government is given as Q=Qm+Qn with Qm=Yd+(I−Sm)+(G−T)+(X−M). Legend: Q total profit, Qm monetary profit, Qn nonmonetary profit,#9 Yd distributed profit, Sm monetary saving, I investment expenditures,#10 G government spending, T taxes, X export, M import. Because all variables are measurable, the Profit Law is testable.

From the axiomatically correct Profit Law follows immediately that Keynes’ I=S and MMT’s balances equation (X−M)+(G−T)+(I−S)=0 are provably false.#11

The Profit Law is the essential relationship for the monetary economy. For 200+ years now, the Profit Theory is false because economics has not been correctly macro-axiomatized.#12 As Mirowski put it “... one of the most convoluted and muddled areas in economic theory: the theory of profit.”

Egmont Kakarot-Handtke

#1 Profit: after 200+ years still elusive

https://axecorg.blogspot.com/2018/04/profit-after-200-years-still-elusive.html

#2 What is Wrong with Heterodox Economics? Kalecki’s Profit Theory as an Example

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1845803

#3 Rethinking deficit spending

https://axecorg.blogspot.com/2016/12/rethinking-deficit-spending.html

#4 Kalecki got it wrong, Allais got it right

https://axecorg.blogspot.com/2015/01/kalecki-got-it-wrong-allais-got-it-right.html

#5 Heterodoxy, too, is scientific junk

https://axecorg.blogspot.com/2015/09/heterodoxy-too-is-scientific-junk_85.html

#6 For details of the big picture see cross-references Profit

http://axecorg.blogspot.com/2015/03/profit-cross-references.html

#7 From false micro to true macro: the new economic paradigm

http://axecorg.blogspot.com/2016/11/from-false-micro-to-true-macro-new.html

#8 Essentials of Constructive Heterodoxy: Profit

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2575110

#9 Primary and Secondary Markets

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1917012

#10 Squaring the Investment Cycle

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1911796

#11 Rectification of MMT macro accounting

http://axecorg.blogspot.com/2017/09/rectification-of-mmt-macro-accounting.html

#12 The Profit Theory is False Since Adam Smith. What About the True Distribution Theory?

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2511741

I've been looking for something that gives a treatment/overview on Kalecki's equation. Thanks for posting.

djrichard

You say: ”I’ve been looking for something that gives a treatment/overview on Kalecki’s equation.”

The real question is why economists in general and you, in particular, don’t know what profit is. The short answer is because economists are scientifically incompetent. In fact, Walrasians, Keynesians, MMTers, Marxians, Austrians, and Pluralists have NO idea of profit ― the pivotal concept of their subject matter. From the viewpoint of science, economics is a failure, from the viewpoint of the general public, economics is a fraud.#1

In order to establish material consistency, one needs measurement and one of the most important measurement tools of economics is National Accounting. The importance of National Accounting for testing of economic models is comparable to CERN for testing in physics. Economists neither understand the significance nor the elementary mathematics of National Accounting.

Economic theory and accounting are like hand and glove. Therefore, it is of utmost importance that the foundational concepts are consistently defined and the SAME in theory and accounting. It is the worst mistake to play accounting against theory/model. At a deeper level, they have a common conceptual/formal core, i.e. the axioms of economics.

Because the nominal magnitudes of accounting are a subset of a comprehensive theory which is composed of nominal and real variables, the concepts have to be consistently defined in theory and then applied one-to-one in National Accounting. Theory has to take the lead.

It holds: “The only way to arrive at coherent languages is to set up axiomatic systems implicitly defining the basic concepts.” (Schmiechen) Fact is that Walrasian microfoundations and Keynesian macrofoundations are axiomatically false.#2 This is why economics is a failed science and why Michal Kalecki’s and Brian Romanchuk’s profit theory is false.#3

Egmont Kakarot-Handtke

#1 DSGE and profit―forget it! MMT and profit―forget it!

http://axecorg.blogspot.com/2018/03/dsge-and-profit-forget-it-mmt-and.html

#2 The miracle cure of economists’ micro-macro schizo

https://axecorg.blogspot.com/2018/07/the-miracle-cure-of-economists-micro.html

#3 For details see cross-references Kalecki

https://axecorg.blogspot.com/2015/02/kalecki-cross-references.html

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