Discussion Paper
No. 2010-2 | January 04, 2010
Steve Keen
Solving the Paradox of Monetary Profits
(Published in Managing Financial Instability in Capitalist Economies)


Bruun and Heyn-Johnsen (2009) state the paradox that economics has failed to provide a satisfactory explanation of how monetary profits are generated, even though the generation of a physical surplus is an established aspect of non-neoclassical economics. They emphasise that our ability to explain phenomena like the Global Financial Crisis (GFC) will be limited while ever we are still unable to explain this fundamental aspect of capitalism. In fact this paradox can be solved very simply, using insights from what is known as “Circuit Theory”. In this paper the author shows how monetary profits are generated, and introduces a multisectoral dynamic disequilibrium monetary model of production.Paper submitted to the special issue Managing Financial Instability in Capitalist Economies

Data Set

JEL Classification:

E12, E17, E20, E51


Cite As

[Please cite the corresponding journal article] Steve Keen (2010). Solving the Paradox of Monetary Profits. Economics Discussion Papers, No 2010-2, Kiel Institute for the World Economy. http://www.economics-ejournal.org/economics/discussionpapers/2010-2

Comments and Questions

Anonymous - Referee Report 1
January 08, 2010 - 12:09
See attached file

Steve Keen - Reply to Referee Report
January 11, 2010 - 12:55
See attached file

Anonymous - Referee Report 2
February 01, 2010 - 09:26
See attached file

Steve Keen - Reply to Referee Report 2-dp2010-2.pdf
February 02, 2010 - 06:12 | Author's Homepage
While I appreciate that the referee attempted to read the paper, the referee is not sufficiently informed on this literature to comment. For example, the referee's statement in response to my peripheral remark about the neoclassical theory of income distribution--that "However, my understanding is that the Cambridge controversies were about the use of an aggregate capital stock and do not touch the validity of marginal analysis at the micro, or general equilibrium level" should for example have been checked against the reference I provided in that footnote: Bhaduri, A. 1969, 'On the Significance of Recent Controversies on Capital Theory: A Marxian View', The Economic Journal, vol. 79, no. 315, pp 532-539. The query about "producers not consuming"--"I confess that I have not been able to understand the logic of even this simplest model. Specifically, why is it that bankers and workers consume, but producers do not?" is based on a misunderstanding of sectoral modelling. Producers do consume in this model, but since they are aggregated into one sector their consumption is not shown in intersectoral flows. I do appreciate the attempt to read a paper that is outside the reader's usual area of expertise, but I suggest starting with an overview of both critiques of neoclassical economics to see why alternative schools of thought have developed. My book Debunking Economics would be a good starting point, though far from the only suitable reference.

Anonymous - Referee Report
February 08, 2010 - 08:21
See attached file

Steve Keen - Reply to Anonymous - Referee Report
February 19, 2010 - 03:47 | Author's Homepage
As with the first referee's comments, it appears that I need to edit the paper to set out the logic and results more formally. The referee appears to have found the algebra confusing and has instead attempted to interpret the numerical examples given in the text. This has result in several errors of interpretation. In particular, the referee seems to believe that profit in the numerical model is (given the parameters used) equal to 99.819 minus the original debt of 100, given this comment by him/her: "Now the paper is suggesting that 99.819 is very close to the basic debt of the firms, the amount of credit money of 100, so just increasing the rate of turnover to 27, and we will have a monetary profit, not only as a flow but also as a stock magnitude, within a year. The accumulated accounts of the firm will show a difference of 3.7 between the debt of the firm = 100 and the accumulated deposits of the Firm of 103.7.So in this case the Bank owes the Firm 103.7 and the firm owes the bank 100, hence the ‘money’ profit of 3.7." In fact profit is the original 99.819 amount, and the referee's interpretation involves subtracting a stock (the value of outstanding loans) from a flow (profit per annum). In a revised version I will attempt to set out the paper in a manner which makes it less likely that misinterpretations of this nature can be made.

Marco Raberto - Editor's Report
October 06, 2010 - 13:26
See attached file