The Kalecki Profit Equation
08 August 2017 | Pago Pago, American Samoa
Kalecki was an economic and mathematical genius, who was too poor and had no opportunity to get a college degree in anything. He was all self taught in economics and he anticipated Keynes' General Theory on most of its analysis by a few years before Keynes wrote and published that treatise. As the famous economist, Joan Robinson at Cambridge, wrote --
"Michal Kalecki's claim to priority of publication over Keynes is indisputable. With proper scholarly dignity. . . he never mentioned this fact. . . The interesting thing is that two thinkers, from completely different political and intellectual starting points, [Lord Keynes and Michal Kalecki] should come to the same conclusions [on how the economy and business cycle operated]. For us in Cambridge, it was a great comfort [because it was all so new and revolutionary]."
For example, Kalecki came up with the famous Profit Equation as follows:
The assumptions are: divide the whole economy into two groups: workers, who earn only wages, and capitalists, who earn only profits.
Workers do not save.
The economy is closed (there is no international trade) and there is no government sector.
With these assumptions Kalecki derives the following accounting identity:
P+W=Cw+Cp+I which looks like Y = C + I
where P is the volume of gross profits (profits plus depreciation), W is the total of all wages, Cp is capitalists' consumption, Cw is workers' consumption and I is the gross investment. That is, the total of all profits and wages or income is equal to everyone's consumption and total investment.
Since we have supposed workers who do not save, then W = Cw in the preceding equation), we can substitute and simplify to get
P=Cp+I, the famous Kalecki Profit Equation
that is, profits are equal to capitalist's consumption plus their investment (remember workers don't save, so they can't invest). That is not a bad first order approximation to reality at all.
Good economist that he was, he also figured out which way causation ran. Workers couldn't decide squat. Also, profits did not determine Cp or I, but capitalist could decide how much to consume and invest so that is how causation ran. Capitalists control the economy.
Kalecki's profit equation. Anyone can understand it.