January 19, 2015

Income, profit, distributed profit: a radical simplification

Comment on 'The first of the great powers to reduce private debt will be the world's next hegemon'


OK, let us take your numbers. Imagine one giant firm, Art Inc, which is identical with the business sector as a whole.

In the first period you pay a total wage income Yw of 100 and receive 180 which is identical to total consumption expenditures C of the household sector. Note that the households sector's budget is not balanced (C>Yw). Art Inc posts a monetary profit Qm=80 at the end of the first period. This profit is equal to the dissaving (Sm=Yw-C) of the household sector, that is, Qm=-Sm.

Imagine further that the banking system consists only of the central bank. Then both sides of the central bank's balance sheet increase by the same amount. The household sector's overdrafts at the end of period 1 are equal to the business sector's current deposits, i.e. 80 (2011, Sec. 2).

In the second period there is wage income and distributed profit, i.e. total income Y consists of wage income Yw=100 and distributed profit Yd=30, so Y = 130. Now all depends on whether distributed profit is spent on consumption goods or saved. Let us keep consumption expenditures unchanged, i.e. C=180. At the end of period 2 profit is again Qm=80, i.e. 180-100. Because of profit distribution Yd=30, retained profit Qre is 50=80-30. This amount is equal to the household sector's dissaving Sm=130-180=-50.

The balance sheet of the central bank at the end of period 2 is 80+50=130 i.e. the households sector's debt (= cumulated overdrafts) is equal to business sector's current deposits.

The whole process reverses as soon as the households pay off their debt as they are supposed to do at some future date.

Egmont Kakarot-Handtke

Kakarot-Handtke, E. (2011). The Emergence of Profit and Interest in the Monetary
Circuit. SSRN Working Paper Series, 1973952: 1–23. URL