Blog-Reference
Imagine that the American one-percenters sit around a table and play poker throwing in chips that are backed one-to-one by their financial and valued real wealth. In the course of the game, spectacular gains/profits are made. TV, press, youtube, and blogs are full of stories about how A outwitted B, how C had an improbable streak of luck, how D got away with cheating, how E committed suicide after losing all, and so on.
From the economist's objective perspective, in this story full of sound and fury, actually, nothing happens but a voluntary redistribution of wealth. Nothing is created, nothing is lost. The effect on the rest of the economy is zero. Only the names attached to different pieces of wealth change.
Of course, there are other games that may spill over to the rest of the economy and may have adverse effects on non-participants. What is important in the example above is that the gains/profits of the players are different from profits that are made in the sphere of production. The latter were the profits that Adam Smith and Karl Marx had before their eyes when they praised/condemned the capitalistic economy.
The first point for theoretical economics is that there are two different types of markets: the product and the asset market. Both markets run on entirely different principles, hence the standard supply-demand-equilibrium explanation does not apply. Treating all markets alike is the first analytical blunder of standard economics (2011b).
The commonplace Quantity Theory asserts a causality between the quantity of money and the prices in the product markets. The ignorance of asset markets, however, is only one of the numerous defects of the QT (2011c).
The third point is that there are two fundamentally different types of profit, monetary and nonmonetary profit. The latter stems from the change in the value of assets. The former emerges in the sphere of production (2011a). In this context, it is important to realize that conventional profit theories are provably false (Desai, 2008). What has to be kept in mind is that speculative financial attacks, as a rule, aim at realized profits from changes in the valuation of various assets. Their main effect is a redistribution of existing financial wealth among the players (2011b).
Keynes himself, just like Walras and the rest, had no correct profit theory and because of this Post Keynesianism never realized that Keynesian policies themselves are an important source of monetary profits.
The interrelationships are as follows (for details see 2015). The Employment Law is given at Wikimedia AXEC62:
The employment multiplier contains the expenditure ratio ρE. If ρE increases, employment L increases. An expenditure ratio ρE>1 means deficit spending. Thus, the equation contains the Keynesian assertion that deficit spending increases employment.
The Profit Law for the elementary case of the production-consumption economy is given at Wikimedia AXEC08:
Overall monetary profit Qm of the business sector, too, depends on the expenditure ratio ρE. Thus, this variable constitutes the link between changes in debt and profit, and in turn changes in financial wealth. All this is quite different from a zero-sum game.
With the correct structural-axiomatic profit theory we now arrive at the remarkable result that no other than Keynes, the most outspoken critic of the Laissez-Faire order, has in effect stabilized this order, such that the profits of the business sector increased exactly in step with the deficits of the private/public households. This, and not the redistribution games on the financial markets, led to the spectacular increase in the volume of financial wealth that Keynesians wonder about today. Overall monetary profit has nothing to do with performance or productivity but is the mirror image of the increase in debt.
In this global game, it is the American and Greek people who got the short end of the stick. But only the Greeks are actually aware of it.
Egmont Kakarot-Handtke
References
Desai, M. (2008). Profit and Profit Theory. In S. N. Durlauf, and L. E. Blume (Eds.), The New Palgrave Dictionary of Economics Online, 1–11. Palgrave Macmillan, 2nd edition. URL
Kakarot-Handtke, E. (2011a). The Emergence of Profit and Interest in the Monetary Circuit. SSRN Working Paper Series, 1973952: 1–22. URL
Kakarot-Handtke, E. (2011b). Primary and Secondary Markets. SSRN Working Paper Series, 1917012: 1–26. URL
Kakarot-Handtke, E. (2011c). Reconstructing the Quantity Theory (I). SSRN Working Paper Series, 1895268: 1–28. URL
Kakarot-Handtke, E. (2015). Essentials of Constructive Heterodoxy: Employment. SSRN Working Paper Series, 2576867: 1–11. URL
Related 'Who or what exactly did Keynes save?' and 'Full employment through the price mechanism' and 'Austerity and the idiocy of political economists'. For details of the big picture see cross-references Profit and cross-references Keynesianism.