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
Here’s an interesting little debate from earlier this year that I came across yesterday evening. It is between a number of market analysts over whether the current stock market is overvalued. Why is that interesting? Because the argument is focused on one of the best known foundational stones of heterodox economics: the Levy-Kalecki profit equation.
Weird? Not really. James Montier, a well-known investment analyst at GMO, has been using the profit equation as central to his forecasting work for a number of years. You can see his latest offering here (page 5). Montier’s argument is that profits in the US at the moment are heavily reliant on the still rather large budget deficits that are being run there. I made a similar argument on the Financial Times Alphaville blog over a year ago.
This is actually a non-controversial point. Private sector savings are equal, to the penny, to the budget deficit minus net imports. This is intuitively obvious: when the government spends money that money either accrues to a private sector institution within the country or to a foreigner abroad. We then divide the private sector into households and firms and we quickly see that budget deficits are equal, again to the penny, to net imports, household savings and… you got it: profits.
All of this is just basic accounting. The above cannot be in any sense ‘untrue’ because this is how the accounting apparatus works. So, why is David Bianco from Deutsche Bank disputing this? Basically he confuses an accounting identity with a behavioral equation.…
Fixing the Economists
Confusing Accounting Identities With Behavioral Equations
Philip Pilkington
See also
Taxation, Government Spending, the National Debt and MMT if you missed it.
