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E aestimatio, the ieb international journal of finance , 2013. 7: 28-47 L the ieb international journal of finance C © 2013 aestimatio , I T R A H C Profits and extraordinary profits in the R A E S Spanish economy during the 2000’s E R López Martínez, Félix Dávila Cano, Lorenzo López Bernardo, Javier ̈ RECEIVED : 4 OCTOBER 2012 ̈ ACCEPTED : 6 APRIL 2013 Abstract This paper intends to explain the sources of profits in the Spanish economy during the last decade, a period of time that comprises several years of sustained growth (2000 - 2007) and the years since the global financial crisis, which started at the end of 2007. First, we will examine briefly the theory of profits in the history of economic thought, seeing that despite the importance of profits for a capitalist system, economists have tended to ignore them, not offering any explanation about their determination and generation. Then, we will look at the evolution of profits in the Spanish economy in the period 2000-2011. Doing this, we will take advantage of the method first devised by Jerome Levy and Michal Kalecki in the 1910’s and 1930’s, respectively. We will see that, contrary to the general belief among economists and businessmen, profits LK have soared since the beginning of the crisis in 2007, due mainly to the huge govern - ment deficits and the improvement in the foreign sector. Finally, we will compare our measure of profits against other common measures, such as the Madrid Stock Ex - change volume of profits or the Bank of Spain’s Central Balance Sheet Data Office, fo - cusing on the impact of capital gains on the business sector and concluding that the prospects for profits in the following years are quite gloomy. Keywords: National accounts, Business profits, Sources of profits, Levy-Kalecki’s profit equation, capital gains. JEL classification: E00, E12, E20, O50. López Martínez, F. Escuela de Organización Industrial (EOI), Madrid. (0034) 629 70 43 47. E-mail: [email protected] Dávila Cano, L. Instituto de Estudios Bursátiles (IEB), Madrid. (0034) 679 19 27 19. E-mail: [email protected] López Bernardo, J. Kingston University, London. (0034) 629 27 72 63. E-mail: [email protected] 28 AESTI MA TIO aestimatio, the ieb international journal of finance , 2013. 7: 28-47 © 2013 aestimatio , the ieb international journal of finance beneficios y beneficios extraordinarios en la economía española durante la década del 2000 López Martínez, Félix Dávila Cano, Lorenzo López Bernardo, Javier Resumen El presente artículo intenta explicar los determinantes de los beneficios en la economía española durante la última década, período de tiempo que comprende varios años de crecimiento continuo (2000-2007) y los años desde el comienzo de la crisis financiera global, que comenzó a finales de 2007. En primer lugar, examinaremos brevemente la te - oría de los beneficios en la historia del pensamiento económico, subrayando que, a pesar de la importancia de los beneficios para un sistema capitalista, los economistas han ten - dido a ignorarlos, ofreciendo pocas explicaciones sobre su determinación y generación. En segundo lugar, mostraremos la evolución de los beneficios en la economía española en el período 2000-2011. Para tal fin, usaremos el método desarrollado por primera vez por Jerome Levy y Michal Kalecki en la década de 1910 y 1930, respectivamente. Veremos que, en contra de la creencia generalizada entre economistas y empresarios, los beneficios LK han aumentado desde el inicio de la crisis en 2007, debido principalmente a los enor - mes déficits gubernamentales y a la mejora del sector exterior. Por último, compararemos nuestra medida de los beneficios contra otras medidas habituales, tales como el volumen de beneficios de las empresas de la Bolsa de Madrid o los datos de la Central de Balances del Banco de España, centrándonos en el impacto de las ganancias de capital sobre el sector empresarial y concluyendo que las perspectivas de los beneficios para los próximos años son bastante negativas. Palabras clave: Contabilidad nacional, beneficios empresariales, determinantes de los beneficios, ecuación de beneficios Levy-Kalecki, ganancias de capital. AESTI MA TIO 29 n 1. Historical introduction It is surprising to detect the scarce interest paid by economists to the theoretical aspects of the determination of profits in a capitalist economy. In principle, it is an atypical situation, given the importance everybody concedes to profits as the driver of capitalist economies and their important role in the accumulation of capital and economic growth. In fact, the entire history of the theory of profits has been advanced besides the development of capitalism, with very little relevance to the practical affairs of capitalists and investors. The first effort to develop a comprehensive theory of profits was made by Classical economists, especially by Adam Smith, David Ricardo and Karl Marx. According to them, profits were central for the accumulation of capital and economic growth. David Ricardo was the first to develop a model where profits could be calculated once land rent and wages were deducted from income. Profits were a residual, . because land rent (determined by the rent of marginal land) had priority in J , o d r distribution over the rest of incomes, and wages were fixed at the subsistence level. a n r e B In this way, Ricardo was able to integrate profits into his framework and even offer a z e p ó profit theory for the long-run. Several decades later, and along Ricardo’s lines, Marx L d n a put profits front and centre, pointed to them as the main engine of the capitalist . L , o n economy and eventually its main contradiction, due to their falling trend provoked a C a l i by the fundamental laws of capitalism. It is worthwhile to note that all these theories v á D , . were conceived under a very general framework of how an economic systems works, F , z e n being the scope more macro than micro. í t r a M z e p ó This tradition was not followed by neoclassical economists, who were more focused L . s ’ 0 on the theory of prices and markets at the microeconomic level. Profits for the 0 0 2 e neoclassicals are always equal to the marginal product of capital, so there is no need h 7 t 4 - g 8 n 2 to find any further explanation. This is also true of the macro distribution models i : r 7 u . d 3 started by Robert Solow in the 1950s. y 1 0 m 2 o , e n c o n c a e n i h On the other hand, in the orthodox theory of the firm, built on the concepts of perfect f s i f n o a l p competition and perfect capital markets, the relationship between realized profits - a s n e r h u t or cash-flow, the exogenous variable mostly considered - and investment is not clear. o j n i l s a t n i Investment depends on investment opportunities (expected profits), without any f o i o t r a p n limits in their financing. Every investment is carried out once the cost of capital is covered . y r r e a t n n i i If one leaves the world of perfect markets and ventures into the field of asymmetric d b r e i o e a r information (Myers and Majluf, 1984) and managerial discretion (Jensen, 1986), we h t t , x e o i d find a bunch of models that shed light on the positive relation between cash-flow t n a a m s i t and investment; ideas very common among business managers that have received i t f s o e r P a empirical support in Fazzari et al. (1988). Thus, the importance of cash-flow is greater 30 AESTI MA TIO in smaller businesses than in bigger ones (Carpenter and Guariglia, 2003), investment (or unproductive overinvestment) is greater in businesses with a larger degree of managerial discretion (Jensen, 1986) and the influence of cash-flow is greater in financial systems where capital markets prevail than in systems with predominance of banking finance - i.e. United Kingdom vs. Germany (Bond et al., 2003). In any case, this plethora of studies focused on the relationship between cash-flow and investment has not exerted any influence on economic modeling nor in the theory of the determination of profits itself. If the theoretical aspects of the generation of profits have been so overlooked as to justify the lack of contributions in the field - this is the impression given; for instance, in most introductory or intermediate economics textbooks (Carlin and Soskice, 2006; Froyen, 2009; Romer, 2011; Blanchard, 2012), no references to profits are made, it is more surprising to see that its empirical analysis has suffered the same fate. In the various books on the structure of the Spanish economy (Banco de España, 2005; Tamames and Rueda, 2008; Chacón, 2009; García Delgado and Myro, 2011), there P r o f i t is no chapter or section that gives us an indication or an idea of the business profits s a n d generated in the economy; in fact, in most of them they do not even appear as a topic. e x t r a o r d i Out of the materials cited above, the situation is something better, but still deficient. n a r y There are a limited number of empirical studies about the volume of profits and the p r o f i t rate of profit in different countries (Bowles et al.

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