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asked ago in General Economics Questions by (120 points)
I have written a paper on economics. I think I have proved that in an economy with fixed amount of money, no monetary profit is sustainable. The aggregate prices will always be above the public purchasing ability, therefore we have a mathematical problem.
The notion that banks create new money is incorrect, that's why the government has to create new money and periodically inject it into circulation. Circulation with fixed amount of money would be inefficient and won't allow effective consumption of all the products produced.
Here is my paper:
https://medium.com/@DoPromote/problem-of-the-origin-of-profit-37f94d33c67        ("Enter" key doesn't work?) Now wait... before you go to that article, let me make it easier for you.  Let me explaine what I'm talking about with a simple story.   ("Enter")          Let’s say we have a scenario of a single person living on an isolated island, let’s say his name is John. This person decides to open a firm that will plant coconut trees and collect the harvest. John is the owner of the firm, but he also registers himself as the only employee. He decides to pay himself a monthly salary of 120 dollars.
Now each month John manages to grow and collect 120 coconuts.
Now John’s firm has a monthly expenditure of 120 dollars.
So the firm must set the price at least 1 dollar per coconut in order to break even. With this price John will be able to purchase 120 coconuts. Now let’s say the firm decides to make a m-profit, and decides to sell coconuts for 2 dollars. Now John can only purchase 60 coconuts… So each month the firm pays John 120 dollars, produces 120 coconuts, sells 60 coconuts to John for same 120 dollars and it still has the remaining 60 coconuts.
So each cycle the firm makes profit in form of 60 coconuts, but it doesn’t make any monetary profit. In fact, no matter what price the firm sets, it can never make a profit in form of money, only in form of excessive coconuts that John wasn’t able to purchase.
And if John to make a monetary profit from his salary, by not spending all of it on coconuts, that will cause the firm to lose money each cycle. The firm won’t be able to earn back what it spent on labor, and each cycle it will have to reduce John’s salary.
Why? Because John’s only source of monetary income is the firm, and firm’s only source of monetary income is John. Therefore, the firm can never earn more money that it spends. No regular monetary profit is sustainable in an economy with a fixed amount of money. You have to have a constant external source of money, that will be periodically introduced into circulation.
That’s it. Here we proved that the “Money Circulation” that they teach in textbooks can’t be right. The image where money goes from firms to households, and from households back to firms, can’t be the full picture. Because we all know that firms and households make m-profit, but that’s not sustainable without a periodical external injection of new money. And in our reality the source of injection is the government of course.  ("Enter") Now you will claim that in real world we have banks and credit, that are supposed to somehow magically solve this problem... but I have analyzed it and I really don't see how. Here is another story:    So now the firm produces 120 coconuts a month, it can sell 60 coconuts for 120 dollars, and remain with 60 coconuts.
But let’s say we add a bank, and allow John to borrow money. So in first month John get paid 120 dollars, and he buys 60 coconuts, and the firm deposits the 120 dollars’ revenue in the bank. Now John decides to borrow these 120 dollars and purchase the remaining 60 coconuts, the firm sells aditional 120 coconuts and makes a monetary profit of 120 dollars. The firm sees 240 dollars deposited in the bank.
Let’s say John has to pay 10% on his loan each month, without interest rates, so he has to pay 12 dollars… so next month he is left with 108 from his salary, but he can borrow this 12 dollars again and purchase 60 coconuts… so once again there is 120 in the bank, John can borrow them too and purchase the remaining 60 coconuts, so the firm once again made m-profit and sees 360 dollars on its bank account. So you can go on like this forever, John borrowing the 120 dollars over and over again while his debt is constantly growing, and the firm making a m-profit of 120 dollars each month.
So after10 months the firm sees 1200 dollars on its bank account, and John owes 1200 dollars… but there is really only 120 dollars in the circulation, it never changed. What happened is that John was allowed to purchase 1200 worth of coconuts in exchange of a promise to pay for it later… but there is still only 120 dollars in circulation, no new money was created.

Now what happens if John want to pay back his loan? Let’s say he decides to spend only 60 dollars on coconuts, and use the remaining 60 dollars to pay out the loan… now we have a problem, the firm pays 120 dollars in salary, but now is only able to sell 60 dollars’ worth of coconuts, and it remains with 90 coconuts each month. Let’s say the firm decides to operate with monetary loss, so even though the firm loses money, it still remains with 90 coconuts each month.
So it will take John 20 month to repay his debt, and the firm will lose 1200 dollars, but gain 1800 coconuts. So the firm ends up with 120 dollars and 1800 coconuts… which is the same scenario if we hadn’t bank in the first place (30*60 coconuts).
No new money was created by bank at any point, it was always 120 dollars going back and forth. But what was created is a very unstable bubble, and if the firm was to try to withdraw some of the money, the bank would default.
commented ago by (120 points)
edited ago by
Now... I claim that in an economy with a fixed amount of money, the monetary profit is unsustainable... the government has to print new money and occasionally inject it into the circulation... otherwise the circulation won't be efficient.
People telling me that I'm wrong... but can't explain how I'm wrong. Also people tell me that this problem is old and well known... so I ask to provide links where was this previously discussed, no one can provide any link...
Tell me where I'm wrong... that's all I ask.
In my work in that link I discuss this problem of monetary profit in more details... I add more complexity, more firms, more employees, more whatever... the problem of monetary problem never goes away no matter what you do.
commented ago by (120 points)
edited ago by
wait, wait... I see that Karl Marx did talk about this problem, he called it "surplus value" problem... yes his approach to the subject is pretty similar to mine, but there are few differences:
1. I do not differentiate between any profit, be it "capitalist" profit or "proletariat" profit. Profit is profit, doesn't matter how it is made. If a worker doesn't spend all of his salary and is able to save some portion of it each month, then I call it "monetary profit". It's no different from firms making monetary profit when their revenue exceeds their expenditure.
2. I treat this problem not as an ideological issue, but as arithmetical problem. The money is a tool that is used for exchange, and it has limitations. The main limitation is that fixed amount of money doesn't allow an effective monetization of all the products.
In our isolated island example, maybe the firm didn't mind that it couldn't monetize the remaining coconuts. It paid John 120 dollars each cycle, and got 120 dollars back plus 60 coconuts (when the price is set 2 dollars for single coconut).
But in real world, firms want to monetize all their production... they don't want to make profit in form of remaining products.
3.Unlike Marx, I offer a simple solution... it might be very simple and has nothing special about it, but still a solution. The government simply has to calculate the amount of profit that is expected to be made during certain period of time, and cover it with newly made money...  simply purchase those remaining goods with new money (I call it "excessive goods" in my work). But keep in mind that also service producing firms have this m-profit problem, their "excessive services" may be harder to measure.

1 Answer

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answered ago by (1.8k points)
I'm Ryan Mcconnell. Please to meet you.

This is the same idea I uploaded here a couple of months ago in a work called The growth trap and sustainable capitalism. You should check it on my questions.

Kind regards.
commented ago by (120 points)
edited ago by
Hi Ryan. But it's not exactly the same...  you don't talk about the problem of the origin of profit.