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Profit Theory: a New Macroeconomic Analysis Andrea Carrera

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Profit Theory: a New Macroeconomic Analysis Andrea Carrera Profit theory: a new macroeconomic analysis Andrea Carrera Faculty of Economics Università della Svizzera italiana Lugano, Switzerland A thesis submitted for the degree of Doctor of Philosophy in Economics Lugano, September 2016 Doctoral Committee: Prof. Alvaro Cencini (Università della Svizzera italiana) Prof. Patrick Gagliardini (Università della Svizzera italiana) Prof. Louis-Philippe Rochon (Laurentian University, Canada) Prof. Sergio Rossi (University of Fribourg, Switzerland) Abstract Profit and its investment in productive activities lie at the heart of modern monetary economies. Indeed, it is thanks to profit investment that fixed capital is produced and used by companies to increase the number of consumption goods and, ultimately, to increase the wealth of households. Yet, despite economists’ full understanding of corporate gains from a microeconomic standpoint, economists are far from sharing a common theory of macroeconomic profit. In this book, an assessment is made of profit theories since 1874, the year that marked the advent of so-called mainstream economics. Following an analysis of bank money, a discrete-time theory of profit formation and economic growth is then proposed. Possibly the main conclusion of this inquiry, mone- tary authorities should distinguish distributive payments from those transactions that define the creation of new income. Thus, a reform of the system of national payments is advocated, aiming to keep record of all production-based wealth. Keywords: production; consumption; investment; monetary systems; monetary policy JEL codes: E21; E22; E23; E42; E52 Contents Figures vi Tables vii Foreword and acknowledgments viii Introduction 1 1 The nature of money 7 Classical perspectives 9 Bank money 23 The exchange law of equivalents 28 2 The analysis of profit since 1874 34 The Neoclassical theory 40 A Treatise and The General Theory 75 Keynesian traditions since 1936 88 3 The analysis of profit: a new approach 102 Production and consumption 105 National profit 117 Investment 129 v Economic growth 161 4 Bank policy 166 A stock-flow consistent approach 168 Monetary disorders: early explanations 174 A reform of the system of national payments 185 Conclusion 204 Appendix 209 References 220 Figures 1.1 Profit: an issue (I) 28 1.2 Profit: an issue (II) 29 2.1 The neoclassical wage-profit frontier 69 2.2 Switches of techniques and the production function 70 2.3 Switches of techniques and the non-production function 72 3.1 Production as an instantaneous event 107 3.2 Consumption as an instantaneous event 110 3.3 Bank deposits 112 3.4 Instant-like dynamics 113 3.5 Total output value over two-time periods 136 3.6 The ‘Keynesian cross’ diagram 144 3.7 The IS-LM diagram 146 3.8 The identity between macroeconomic saving and investment 147 3.9 The identity between money demand and money supply 150 3.10 Deposits growth: an upward bound 164 4.1 Profit distribution: flows and stocks 171 4.2 Profit investment: flows and stocks 172 vii Tables 1.1 The stylized balance sheet of commercial banks 25 1.2 The payment of wages: bookkeeping 25 1.3 The stylized balance sheet of central banks 26 3.1 The payment of wages, and consumption: bookkeeping 105 3.2 Wages and profit 119 3.3 Profit creation: bookkeeping 119 3.4 Wages in a multi-company economy 125 3.5 Wages, prices, and profit in a multi-company economy 127 3.6 Investment: bookkeeping 130 3.7 Wages payments over infinite time-periods 162 3.8 Deposits growth: an upward bound 163 4.1 Transactions flows matrix (I) 169 4.2 Transactions flows matrix (II) 170 4.3 Income creation and total expenditure: bookkeeping 187 4.4 Income creation and partial expenditure: bookkeeping 189 4.5 Profit and dividends: bookkeeping 196 4.6 Investment: bookkeeping 201 4.7 The periods’ balances: bookkeeping 202 Foreword and acknowledgments Adventures do occur, but not punctually. E.M. Forster (1924) A Passage to India This work is a personal retake of Bernard Schmitt’s monetary theory. A student of Joan Robinson and Piero Sraffa at the University of Cambridge, UK, at the end of the 1950s, Schmitt became a highly respected economic figure, although also often ignored by the academic world during the last 60 years. Since time made it impossible for me to meet Bernard Schmitt personally, my research is based exclusively on his writings and on explanations provided by some of his closest students and colleagues. To be true, I guess Schmitt would have likely rejected my use of mathematical symbols. Above all, seeing as how no explanation of amortization is given in this book, despite the high attention paid by him to capital replacement, he would have probably labelled my research as incomplete. My choice was not made arbitrarily, though. Fol- lowing a stock-flow consistent study of monetary and real payments, rather than study- ing amortization, I decided to stress the importance of distinguishing between distribu- tive payments and those payments that, on the contrary, are at the origin of new income. This is my way, at least in this book, to uphold the reform of the system of national payments advocated by Schmitt. Some parts of this work have been published in Carrera 2015 and Carrera 2016. I also delivered lectures about this work during the annual meetings of the Canadian Economic Association in 2014 and 2016 and the Eastern Economic Association in 2015 and 2016. My research was undertaken between 2012 and 2016 in Canada, France, Italy, the United Kingdom, Spain, Switzerland, and the United States. ix This work has benefited from encounters with numerous economists I met with along the way. I feel indebted to all of them. I would like to extend particular thanks to Alvaro Cencini, for his being a patient and rigorous Master and – may I dare – a pater- nal figure who, so far, has taught me all I know of monetary circuit theory. My gratitude goes to him and the following people, for their useful comments – at times concise, at times prolific, but always up to date – during my lectures, over private lengthy conver- sations, or following the reading of a draft of this book: Fletcher Baragar (University of Manitoba), Robert Dimand (Brock University), Patrick Gagliardini (University of Lugano), Jonathan Harris (Tufts University), Edouard Maciejewski (International Monetary Fund), James Marshall (Muhlenberg College), Kari Levitt Polanyi (McGill University), Pierluigi Porta (University of Milan-Bicocca), Omar Ramirez (First Bank of Puerto Rico and Complutense University of Madrid), Louis-Philippe Rochon (Lau- rentian University), Sergio Rossi (University of Fribourg), Julian Sanchez (Autonomous University of Madrid), Mario Seccareccia (University of Ottawa), Estrella Trincado (Complutense University of Madrid), and an anonymous reader. I would also like to thank Luigi Pasinetti (Catholic University of Milan and Lincean Academy, Rome) for suggesting useful literature during my first steps into academic research, as well as Mauro Baranzini (University of Lugano and Lincean Academy, Rome), Ginevra Cenci- ni, and Amalia Mirante (University of Lugano and SUPSI, Lugano), for having been discreet, but ever-present, during my academic journey. I would further like to express my gratitude to Michael Paysden for having helped me in the translation of the text that follows, to Simona Cain and Carol Theal for having helped with its redaction. I also thank everyone who has encouraged my research over the years, even when unfamiliar with the technical details. I apologize to the reader for any errors present in the text, which are purely my responsibility. I shall take care to remove them in future editions of Profit theory: a new macroeconomic approach. Introduction Man, as well as other animal species, makes use of raw materials in order to manufac- ture a certain number of utensils and machine tools that are functional to daily activities. Interestingly, it must be observed that the human kind is the only, or among the very few, species that produce tools to produce other tools (Georgescu-Roegen 1986: 247- 248). Since the second half of the XVIIIth century, productive techniques have much improved, and, quite often, at a hectic pace. History is full of examples of this. One may think, for instance, of the relative short time that passed by between 1903, when the Wright brothers piloted the first powered aircraft, and 1969, the first time of Man landing on the Moon. The improvement of techniques – technological progress – has likely been cause and consequence of mass production. Automobile and pharmaceutical productions are clear examples of such a phenomenon. Large-scale production would not be possible without the aid of instrumental capital (or fixed capital): ‘machines to make machines to make machines…’, as Schumpeter put it (ibid.). Several studies have been carried out on mass industrial production and on technological progress. In fact, experts (economists, philosophers, engineers, historians, etc.) paid notable attention to the way in which instrumental goods have been created and accumulated by human societies over History. In particular, physical capital has generally been researchers’ object of study. Differently to consumption goods – goods traditionally conceived of as goods of daily use –, instrumental capital is generally identified with the whole of those tools (small utensils as well as big machines) employed in the production of consump- tion goods and other instrumental goods. Both categories – consumption goods and capital goods – are almost always univocally conceived of as physical objects. Small is, instead, the number of scientific works in which both categories are studied from both the physical and the monetary standpoints. In our research, we seek to study productive activity of consumption goods – hereafter called also wage goods – and fixed capital – 2 INTRODUCTION or capital goods. We will propose a positive (and normative) analysis of productive activities from both a real (physical) and monetary (numerical) perspectives.
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