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Was Kalecki right: A Theory of Profits | Patreon

Of late, I seem to be often inspired to write a blog based on one of the many historical economist quotes I post on Twitter X. Michal Kalecki is one of my favorites; a lot can be said about how he was ahead of Keynes's time, but that's another story. I posted this quote on Twitter.

 The responses to this post have definitely questioned the validity of Kalecki's claims. However, I did not interpret his argument as a straightforward assertion that capitalists can only achieve profits through a budget deficit or export surplus, although there is certainly some validity to this idea. So, what is profit in its most basic form?

In a static sense, within a closed economy with only capitalists and workers, profit can be defined as output minus costs. However, this static definition is limited because, in reality, there is no stock of profits—only a flow that changes over time. This definition aligns with the value creation theory, where the flow of output is generated by some form of fixed capital stock. Assuming a fixed money supply, if there is $100 in output and a $70 wage bill (which covers the raw materials of production), then the profit flow would be $30. Suppose each widget of real goods and services is valued at $1, and 100 widgets are produced.

In a constant price model, let's define the fixed capital stock as 300 widgets worth $300, with a capital-output ratio of 3 (meaning $3 of capital generates $1 in output). With $30 in profits for capitalists, we'll simplify by assuming all profits are reinvested. If we consider a discrete time frame, say a year (though I do not advocate for a discrete time model, this will help illustrate the concept), investing $30 would increase the fixed capital stock to $330, and the cycle continues. In a dynamic continuous-time model, time lags would be relevant, but for this discussion, that detail is not crucial.

The outline above presents a basic view of profits. What I think Kalecki was really suggesting is that for firms to invest beyond their profits, two key factors come into play. For example, if the sale of goods and services abroad generates $10 more than the $30 profit left after costs, capitalists would end up with $40 in profit. However, this additional profit would typically be used to invest in fixed capital stock, with the resource sent aboard this would reduce the availability of widgets for investment. While capitalists could import resources from abroad, assuming these widgets have the same constant dollar value, this would offset the additional profits from exporting. Alternatively, banks could create $10 in credit to help capitalists import the necessary resources to maintain the $30 investment level. Although this new debt would need to be serviced and repaid in the future, as long as credit grows over time and interest rates do not accelerate rapidly, servicing and repayments should not become problematic.

A government budget deficit functions similarly to an export surplus. It's important to recognize that governments do not borrow directly from the private sector through Treasury bonds. Instead, primary dealers (banks) purchase this debt using reserve accounts and reserves created by the central bank, meaning no money is extracted from the private sector. For instance, if the government spends $10 on direct household spending, this would eventually translate into increased consumption and profits for capitalists. As with exports, capitalists now have $40 in profit and can take out credit from banks to import capital goods from abroad, offsetting the additional raw resources used for consumption.

Kalecki's quote is accurate in the sense that budget deficits or export surpluses can increase profits above those already achieved after costs. This perspective is consistent with an aggregate view of the economy and aligns with reality.