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 on aggregate 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 conclude, ‘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 ingeniously by media and state leadership. Following the recent federal election, members of the ruling elite claim to have ‘heard a message’: ‘the Australian people, given the closeness of this vote, want us to find common ground’.


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9 Responses to “Kalecki and the new Gilded Age”

  1. Trust me « Churls Gone Wild Says:

    […] Superannuation payments are a compulsory deduction from wages, over which the employee surrenders decision-making power, while retaining the risk that the accumulated amount will not prove sufficient to fund her retirement. As Minsky showed, money-manager capitalism does not fund employment-generating investment – quite the opposite. Prompted by the single-minded focus of fund managers on “shareholder value”, large firms engage mostly in balance-sheet restructuring (buying and selling financial assets, issuing liabilities then buying them back) and payment of dividends. The level of retained profits, and thus investment in plant and equipment, is reduced. The record of recent decades shows that economies with the largest batch of pension funds (US, UK, Netherlands, Switzerland, Australia) display a comparatively low rate of capital-stock accumulation. Growth in jobs, wages and living standards has lagged accordingly. The inflow of funds to financial markets serves only to bid up asset prices, before being absorbed as household debt, banker bonuses and luxury consumption. […]

  2. Capital-market inflation (and financial instability) in pictures « Churls Gone Wild Says:

    […] banks, sluggish real investment, slow employment growth, and household indebtedness, was the luxury consumption of the financial elite. Like this:LikeBe the first to like this […]

  3. The southern anchor: APEC and Canberra’s so-called Asian engagement since the 1980s « Churls Gone Wild Says:

    […] was embodied in capital goods: buildings, machinery, etc. Instead it increasingly took the form of luxury consumption goods and services (e.g. the grand harbourside house of Hawke himself) and unproductive expenditure on […]

  4. A sticky end « Churls Gone Wild Says:

    […] Reduced accumulation of productive capital goods (buildings, machinery, tools and other durable fixed assets) thanks to the absorption of a greater share of the surplus product by finance and other unproductive sectors; […]

  5. The ‘green’ economy: a fantasy fuelled by financialization « Churls Gone Wild Says:

    […] the surplus product is absorbed in such a manner, or embodied in luxury consumption goods and other types of unproductive expenditure […]

  6. Keynes and interwar diplomacy: anti-communism, arms spending and the rentier interest « Churls Gone Wild Says:

    […] I’ve explained previously how the state’s appropriation of labour and resources through unproductive spending on armaments accomplishes much the same trick as luxury compensation. […]

  7. Japan’s liquidity trap and its cousins | Churls Gone Wild Says:

    […] by e.g. reducing retained earnings through higher dividend payouts, interest payments, and unproductive luxury spending) prevents demand for labour and other inputs from increasing to levels that will threaten profit […]

  8. Taking candy from a baby? | Churls Gone Wild Says:

    […] investment, involving the diversion of the surplus into residential expenditure, asset markets and luxury consumption, has been the decisive feature of Australian society in the last three […]

  9. The right man for the job | Churls Gone Wild Says:

    […] the purchasing power for true luxury consumption (yachts, antiques, jewellery, fine art), private consumption choices and leisure activities can, as […]

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