Kalecki and the new Gilded Age

According to the Polish economist Michal Kalecki, capitalists “earn what they spend.” The more money they throw into circulation, the more they get back as aggregate profits. This seems counter-intuitive, but it can be proved using a simple accounting model.

First, from a macroeconomic view, total income and expenditure must balance. The individual parties to a market transaction may view the money transferred as either a sale or an purchase, but at an aggregate level these terms refer to the same thing. Thus in a simplified economy (no government sector,  closed to international trade) we can write:

Profits + wages = consumption + investment

Consumption may then be decomposed according to class:

Total consumption = capitalists’ consumption + workers’ consumption

Assuming that workers don’t save (i.e. wages = workers’ consumption), we can cancel a term from each side of the original equation, leaving us with:

Profits = capitalists’ consumption + investment

Even at this high level of abstraction, the model is useful. We can see from Australia’s national accounts that investment is the largest component of aggregate profits.

This can be extended to a more realistic economy (with external trade, a government that taxes and spends, and worker savings) where after re-arranging income and expenditure terms it can be shown that:

Profits = capitalists’ consumption + investment + net exports + government deficit – workers’ saving

From this accounting identity Kalecki (writing in 1942) drew clear conclusions:

It is from this point of view that the fight for foreign markets may be viewed. The capitalist of a country which manages to capture foreign markets from other countries are able to increase their profits at the expense of the capitalists of the other countries…In a sense the budget deficit can be considered as an artificial export surplus…The above shows clearly the significance of ‘external’ markets (including those created by budget deficits) for a capitalist economy. Without such markets profits are conditioned by the ability of capitalists to consume or to undertake capital investment…The connection between ‘external’ profits and imperialism is obvious. The fight for the division of existing foreign markets and the expansion of colonial empires, which provide new opportunities for export of capital associated with export of goods, can be viewed as a drive for export surplus, the classical source of ‘external’ profits. Armaments and wars, usually financed by budget deficits, are also a source of this kind of profits.

Thus the trade surplus of present-day China constitutes a huge boost to the profits of Chinese firms. But what of those countries – like the US, UK and Australia - where investment is relatively low due to inadequate rates of return, and which import much more than they export? Here Kalecki’s equation has a further implication. Profit may be maintained by unproductive expenditure, luxury consumption and state deficits. Splurging on yachts and private jets, rather than being a deduction from profit, contributes to it.

This is made clear when, turning to the Australian national accounts, we observe how the components of profits have changed over time. First we need to find numerical values for the terms in our profit equation.

Profits = capitalists’ consumption + investment + net exports + government deficit – workers’ saving

But in national accounts, consumption and savings aren’t decomposed according to class. The term for capitalists’ consumption and workers’ saving will thus be a residual, calculated by subtracting the other components of profit (investment, government deficit, net exports, etc.). We can see below how the relative contributions of investment and the residual term (capitalists’ consumption minus workers’ savings) have changed in recent decades.

Investment still makes by far the largest contribution to profits, but the importance to aggregate demand of capitalists’ consumption and working-class indebtedness has steadily risen. The popular depiction of the wealthy elite - acquiring their riches through deferred consumption, thanks to discipline, frugality, and genetically-endowed low time-preference rates - has changed accordingly. The notorious Citigroup equity-strategy reports of 2005 (part one and part two) may stand as ideological bellwethers. There a curious, adventuresome ”new wave of entrepreneurs and managers” with elevated dopamine levels is exhorted to “commandeer a vast chunk” of social wealth by “paying itself a lot.” The “Anglo-Saxon plutonomies” (US, UK, Canada and Australia) are lauded for uncovering new “dominant drivers” of aggregate demand. Thanks to the luxury expenditure of a ”new Managerial Aristocracy”, “toys for the rich” account for a disproportionate slice of consumption. Like it or not, the “earth is being held up by the muscular arms of its entrepreneur-plutocrats”, not “the multitudinous many”.  As the authors explain, “if the rich keep getting richer, as we suggest, this bodes extremely well for businesses selling to or servicing the rich.”

Open support for this spendthrift upper stratum is the declared outlook of the Australian state elite, as is smug complacency about its Titan’s long-term creditworthiness. Treasury and Reserve Bank personnel have lately begun referring to a merely ”North-Atlantic Financial Crisis“, and the central aim of the new Australian government is, in the words of the Prime Minister, to secure the “stability and continuity” of the pre-2007 growth model. Mass unenthusiasm for this bipartisan project (and its agents) has been spun igeniously by media and state leadership. They claim to have “heard a message”: ”the Australian people, given the closeness of this vote, want us to find common ground”.

Tags: Australia, Australian Federal Election 2010, Keynesian economics, Marxism, national accounts, wealth effect