Some Intuition on the Profit Equation, Courtesy of Kalecki

Kalecki’s profit equation famously shows realized gross profit, prior to its distribution into various parts (retained earnings, interest, rent, etc.), as a function of aggregate demand. In a simplified model of a closed economy with only capitalists and workers, in which workers in aggregate do not save, it shows that profit is the sum of capitalist consumption and private investment. On first encounter, this is an intriguing relationship. One explanation, discussed previously here, is that wages, being spent entirely on consumption items, return to capitalists, whereas capitalist expenditures remain with the capitalist class as a whole. This has been summarized as “workers spend what they get and capitalists get what they spend”. This aphorism is eye-opening and fascinating, yet, in its own way, also somewhat mysterious if pondered for long. Kalecki provided an alternative way of viewing the situation, which may further aid understanding.

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