MINSKY, KALECKI, AND

THE PROFITS EQUATION

BY
TRACY MOTT
JUNE 12, 2016
MINSKY SUMMER SEMINAR,
LEVY ECONOMICS INSTITUTE
OF BARD COLLEGE
The profits equation used by Michał Kalecki
and Hyman Minsky was also discovered by
Jerome Levy in the 1910s.

We start with national income = profits +

wages + taxes = consumption + investment +
government spending, or

Y = Π + W + T = C Π + I + CW + G

Π = C Π + I + CW + G − T − W

Π = C Π + I + G − T − SW
Minsky emphasizes the interactions among profits,
investment, output, and debt (D):

               𝑰=𝒇[𝚷(+),𝒀(+),𝑫(−)]

An increase in investment increases profits, output,

and debt, which first spurs more investment and
eventually depresses investment.
   
Kalecki emphasizes the interactions among
investment, profits, output, and capacity (Z) and
talks about “increasing risk.”

               𝑰=𝒇[𝚷(+),𝒀(+),𝒁(−)]

An increase in investment increases profits, output,

and capacity, which first spurs more investment and
eventually depresses investment.
   
We could also write the investment function as
​𝑰/𝒁 =𝐟(​𝑹/𝒁 ,​𝒀/𝒁 ,​𝑪𝑪/𝚷/𝒁 ), where R = retained earnings
and CC = debt, or cash flow, commitments.
This combines Minsky’s and Kalecki’s
concerns.

Some say that ​𝑰/𝒁  should be a function of the

profit share because the profit rate, ​𝚷/𝒁 =​𝚷/𝒀 ⋅​𝒀/𝒁   .
But why should firms care about the profit
share or even the profit rate? They care about
the rate of return per dollar of finance, but…
The importance of profits to Kalecki comes from
their role as the aim of production and from their
role as finance, as in his “principle of increasing
risk” and the relation of retained earnings to
investment spending.  

The importance of profits to Minsky is the same,

except that Minsky adds their importance to
covering financial commitments, both equity and
debt.
If the profit share is higher, this could be as a
share of a lower level of Y because if the wage
share were lower, this would mean lower
consumption spending and so lower capacity
utilization (​𝒀/𝒁 ), which should depress Y and
investment spending.

Wages are both a cost to business and a source

of demand for goods and services. In an
export-dependent economy, the cost effect may
be more important. In the world economy
overall, however, lower real wages mean lower
demand and employment.
The relation of investment to saving:

As Kalecki notes in the reading selection by him

that was made available to you all, investment
creates saving, as in J.M. Keynes’s work. We
don’t need prior saving to have investment, but we
do need finance.

The finance can come from retained profits and/or

from new debt issuance, and what Kalecki and
Minsky say is that we need profits for this to
happen, both as the finance that comes from
retained earnings and as the means to cover debt
commitments.
 
The cyclical process that both Kalecki and Minsky
describe is one in which downturns are caused by
an insufficiency in both profits and expected
profitability.

This in turn can be caused by excess capacity or

excess debt or restrictive monetary or fiscal policy.
   
Minsky talks about how the actions of the
monetary authority as a lender of last resort
and of the fiscal authority in increasing G-T
can prevent a deep depression.

This, however, supports inflation arising from

business desires to maintain profits and
increases economic inefficiency.

It also means that there will be a tendency for

the aggregate level of debt to build up over
time in an economy.
The “Minsky Knife-Edge” (Mott 2002, 2010)

Assume desired capacity to output ratio (Z/Y) to

be unchanging within business cycles.

Desired Z will depend upon expected Y. As ​𝒀 /𝒀  > ​

𝒁 /𝒁  in cycle upswings, we need an increase in ​𝒁 /𝒁 
= ​𝑰/𝒁 .

If mark-ups are unchanged, the profit share will

be unchanged, and the need for investment
finance will grow faster than the availability of
profits to provide such finance, so recourse must
be had to borrowing (Duesenberry 1958).
 
Periods when ​𝒀 /𝒀  < ​𝒁 /𝒁  (downturns) will be
shortened by means of counter-cyclical policy
actions.

Minsky’s proposition that the use of counter-

cyclical policy to shorten slumps will raise the
business debt-income ratio over time is thus quite
plausible.

Low interest rates in downturns also means that,

rather than paying down debt, households will
once more begin to increase their borrowing.

Evidence from the US economy, 1948-2007:

 %  change  in   %  change  in  non-­‐farm   %  change  in  the  mark-­‐up   household  debt/
produc0vity  (output  per   business  real  hourly   (price  [CPI-­‐U-­‐RS]  per  unit   personal  disposable   corporate  debt/na0onal  
year   hour)   compensa0on   labor  cost)   income   income   unemployment  rate  
1948   2.8   0.5   2.4   0.287   0.411   3.8  
1949   3.3   4.2   -­‐0.8   0.331   0.416   5.9  
1950   6.7   4.6   2.0   0.363   0.459   5.3  
1951   2.7   0.7   2.1   0.369   0.441   3.3  
1952   1.8   3.5   -­‐1.8   0.401   0.438   3.0  
1953   2.3   4.8   -­‐2.4   0.427   0.430   2.9  
1954   1.9   2.4   -­‐0.6   0.464   0.439   5.5  
1955   4.2   4.1   0.1   0.508   0.459   4.4  
1956   -­‐0.8   4.6   -­‐5.5   0.525   0.463   4.1  
1957   2.6   2.4   0.1   0.536   0.465   4.3  
1958   2.2   1.1   1.0   0.556   0.486   6.8  
1959   3.8   3.2   0.6   0.588   0.481   5.5  
1960   1.2   2.5   -­‐1.4   0.613   0.483   5.5  
1961   3.1   2.3   0.8   0.634   0.493   6.7  
1962   4.5   3.0   1.5   0.652   0.486   5.5  
1963   3.5   2.1   1.4   0.689   0.496   5.7  
1964   3.0   1.8   1.1   0.696   0.498   5.2  
1965   3.1   1.7   1.4   0.706   0.513   4.5  
1966   3.6   3.0   0.6   0.697   0.519   3.8  
1967   1.7   2.7   -­‐0.9   0.691   0.528   3.8  
1968   3.4   3.5   -­‐0.1   0.694   0.542   3.6  
1969   0.2   1.3   -­‐1.2   0.685   0.562   3.5  
1970   1.5   1.4   0.1   0.646   0.580   4.9  
1971   4.0   1.9   2.1   0.651   0.581   5.9  
1972   3.3   3.2   0.1   0.670   0.585   5.6  
1973   3.1   1.8   1.3   0.663   0.610   4.9  
1974   -­‐1.5   -­‐1.2   -­‐0.4   0.658   0.570   5.6  
1975   2.7   0.9   1.9   0.641   0.752   8.5  
1976   3.3   2.5   0.8   0.653   0.738   7.7  
1977   1.6   1.5   0.1   0.684   0.742   7.1  
1978   1.3   1.7   -­‐0.4   0.712   0.756   6.1  
1979   -­‐0.3   0.0   -­‐0.4   0.735   0.796   5.8  
 %  change  in  the  
%  change  in   %  change  in  non-­‐farm   mark-­‐up  (price   household  debt/

year  
1980  
produc0vity  
(output  per  hour)  
-­‐0.2  
business  real  hourly  
compensa0on  
-­‐0.3  
[CPI-­‐U-­‐RS]  per  
unit  labor  cost)  
0.1  
\  
personal  disposable  
income  
0.721  
corporate  debt/
na0onal  income  
0.825  
unemployment  rate  
7.1  
1981   1.4   0.2   1.2   0.694   0.836   7.6  
1982   -­‐1.1   1.0   -­‐2.2   0.675   0.857   9.7  
1983   4.5   0.0   4.6   0.690   0.846   9.6  
1984   2.0   0.1   1.9   0.691   0.841   7.5  
1985   1.6   1.1   0.4   0.761   0.888   7.2  
1986   3.1   3.3   -­‐0.2   0.802   0.896   7.0  
1987   0.5   0.3   0.2   0.822   0.904   6.2  
1988   1.7   1.2   0.5   0.838   0.921   5.5  
1989   0.7   -­‐1.7   2.5   0.858   0.939   5.3  
1990   1.9   1.0   0.9   0.867   0.929   5.6  
1991   1.6   1.4   0.2   0.881   0.924   6.8  
1992   4.1   2.7   1.4   0.870   0.927   7.5  
1993   0.4   -­‐0.5   0.9   0.896   0.933   6.9  
1994   1.1   -­‐0.5   1.6   0.917   0.919   6.1  
1995   0.5   -­‐0.3   0.8   0.936   0.931   5.6  
1996   2.7   0.7   2.0   0.951   0.933   5.4  
1997   1.6   0.9   0.8   0.962   0.909   4.9  
1998   2.8   4.5   -­‐1.7   0.972   0.962   4.5  
1999   2.9   2.6   0.3   1.015   1.021   4.2  
2000   2.8   3.7   -­‐0.8   1.028   1.093   4.0  
2001   2.5   1.1   1.4   1.072   1.092   4.7  
2002   4.1   2.0   2.1   1.128   1.075   5.8  
2003   3.7   1.8   1.9   1.208   1.024   6.0  
2004   2.8   0.9   1.8   1.271   1.004   5.5  
2005   1.9   0.6   1.3   1.341   1.024   5.1  
2006   1.0   0.6   0.4   1.397   0.955   4.6  
2007   1.8   2.1   -­‐0.3   1.413   0.928   4.6  
As anti-recessionary policy also leads to an
upward drift in costs and prices in any one
country, support rises for austerity policy to fight
the price inflation and currency depreciation.
This raises the trade deficit, which lowers profits.

It also aggravates the debt problem, since wage

stagnation will likely encourage the use of
borrowing by households to maintain living
standards and the facilitation of such borrowing
on the part of business to maintain business
revenues.

 
Severe downturns are limited, but expansions,
if they appear to threaten price stability, will
be held back, as Kalecki predicted in 1943.

As the debt-income ratio rises over time with

policy limits on slumps, attempts to use policy
to fight inflation come into danger of setting
off more serious slumps, as we saw beginning
in 2007.
In conclusion, do we see why
Jerome Levy, Michał Kalecki,
and Hyman Minsky thought that
the sources of profits were so
important?