Journal Article
No. 2010-31 | October 28, 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 uses a monetary circuit of production model to derive policy conclusions about how to overcome a “credit crunch” that reverse the guidance given by the standard but empirically falsified “money multiplier” model of credit money creation.

Data Set

JEL Classification:

E12, E17, E20, E51


Cite As

Steve Keen (2010). Solving the Paradox of Monetary Profits. Economics: The Open-Access, Open-Assessment E-Journal, 4 (2010-31): 1–32.

Comments and Questions

BPHanley - I think this captures the essence well.
January 03, 2011 - 22:46
I think this article captures the essence well. The article fits banking multiplier behavior relative to time.

David Chester - Modelling the System
May 25, 2012 - 11:18
In common with J.M.Keynes and his macroeconomics theories, this paper uses a model which is incomplete. It contains only 3 sectors: the worker, the firm and the bank. Missing are the important and individual effects of the government, the capitalist and the landlord, each of which plays a distinctive and individual role in the functioning of the whole macroeconomics system (see attached diagram). The reason for including these 3 additional sectors or entities is so as to cover the reprentation of the process of production as originally outlined by Adam Smith (1766), where Land, Labour and Capital yield Ground-Rent, Wages and Interest (or dividends on investments). It is a wonder to me how, in these circumstances, the writer expects the results to provide an answer which is believable for the representation of the way our system works! The idea of modelling the money flows in the system is good and so is the clear explanation of it, but I really cannot see how it can represent what goes on in the social system of a country unless the additional 3 effects are included. These 6 entities produce no more than 19 money flows with their reciprocal flows of goods, services, valuable documents etc. My other critism of the analysis in this paper is that an equilibrium condition should be the starting-point of the simulation. Instead the system here appears to start with a money injection and a long period for the equilibrium to be reached. Had this been the starting point, then the response of the system to small money-shocks could be better used to illustrate how our social system is affected by fiscal or monetary manipulations of governmental order of scale.

Steve Keen - Reply to David Chester - Modelling the System
May 26, 2012 - 07:17 | Author's Homepage
You misunderstand the purpose of the paper. It was not attempting to provide a complete economic model, but to debunk a belief that has developed in Post Keynesian economics that a pure credit economy must necessarily fail because of the charging of interest by banks. With banks lending $100 and then expecting $105 back (including interest), it was alleged that debt must rise to maintain constant economic activity, that firms would be unable to service and pay debts unless workers consumed all their wages, etc. This simple model established that these claims were all due to stock/flow confusions. It is also a framework from which much more complete models--like the one you are suggesting--can be built. I have built multiple sector models with input-output dynamics using it, and a new software package to make this approach more accessible is being developed. No you do not have to start a model in equilibrium and then shock it to see what happens; this is an economics fetish that we would be much better without. It can be done of course--that is just a case of changing the initial conditions for a simulation. But with that perspective often goes the belief that a system tends to its equilibrium, which physical sciences have known to be false ever since the days of Lorenz.

Anonymous - Modelling The Complete System
May 28, 2012 - 18:01
Thanks for your response. You have however missed my point. The reason why J.M.Keynes theory is so poor is because he failed to model the whole system. Whatever the intent, if the system is not complete then the results will not necessarily be correct, because of the several effects that have been missed out. In the case of the 2 or 3 sector model of Keynes he has (deliberately) used it to show what he wants and not what actually takes place. He even had the cheek to state this on one occasion! So it is with regret that I find that the model used in this paper or rather the implied model here, has only 4 sectors and some of them are incomplete. The full model which I previously attached has 6 sectors and 19 mutual monry-flowing functions. This model is the result of trying to provide the absolute minimal representation, but which includes all the macroeconomic functions (according to Ockham's Razor or A. Einstein's later criterion for simplicity). It is my claim that unless they are all included, then something about the results will not be right and more significantly cannot be proved to be correct. In your case the flow of money to the capitalist is as if he/she does nothing more with this "profit" (a word to which I object incidently), which is actually an income for use in further investment. Such investment will create more demand for capital goods etc. This is one aspect of the model which is lacking, amongst many. I am particularly aware of the important effect of growing land values and their increasing ground-rents over the years and so I find that your incomplete model is unable to represent what you claim it does. Is there any way that you might have in order to use the model that I supplied, for simulating the functioning of the WHOLE system?

Steve Keen - More complete models
May 29, 2012 - 12:38
Yes there is. Follow the development of the "Minsky" project on my blog, and I am working on a joint paper with a more complete model. If you wish, you could implement your model in my framework by adding the other sectors you wish to include as additional bank accounts, along with production of course.

Steve Keen - More complete models
May 29, 2012 - 12:38
Yes there is. Follow the development of the "Minsky" project on my blog, and I am working on a joint paper with a more complete model. If you wish, you could implement your model in my framework by adding the other sectors you wish to include as additional bank accounts, along with production of course.

David Chester - Adding to the Model
May 31, 2012 - 16:23
The complete model as I envisage would have more than the income and expenditure flows of the bank, for its various kinds of customers. It would also require these input and output flows for the other 5 idealized aggregate and functioning entities, each having its own balancing table and of course this representation should include the flows between them. Such a model is so very different to what your suggestion could provide that I cannot see how to "improve" your programme to incorporate it. Did you examine my model? Had you done so I think this difficulty would have been immediately clear. I find myself repeating the point I made about the difficulty in representing the dynamics when only a part of the complete system is being modelled. The model I showed covers it all, and I was wondering if and when your modelling will reach this level of representation?