This article continues the discussion of the Kalecki Profit Equation (link to Part I). 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. The previous article noted that investment creates a pro-cyclical self-reinforcing loop between it and profits. This article discusses two factors that normally act to moderate the business cycle: the fiscal deficit, and the external sector.
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....
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
