by James Smith
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
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.
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.
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 additional 60 coconuts and makes a monetary profit of 120 dollars. The firm sees 240 dollars deposited in the bank… but there is no actual 240 dollars in the bank, it’s still only 120 dollars. The bank only writes in its books/computers “240 dollars”, without actually having it.
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 after 10 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).
And what if the firm refuses to operate at monetary losses, and once it was able to earn only 60 dollars, it decides to cut John’s employment by half ?
Well, let’s say that John is getting paid by hours, so now he will work half of the time that he used to. Let’s also say that now he will be able only to grow 60 coconuts… so he can only purchase 30 each month.
So John back to a state where he spends what he earns, and he is stuck with 1140 dollars of debt, that he will never be able to repay.
So no new money was ever 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 more than 120 dollars at any point, the bank would default.
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.
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.
Let’s have another example.
Let’s go back to John and coconut firm. Let’s also add Jack. John will be the firm owner, and Jack will be the employee.
Let’s assume Jack receives an hourly wage, a dollar each hour, and he works 180 hours a month. Let’s say he produces 1 coconut each hour.
Let’s say the firm manages to produce 180 coconuts each month, and it sets the price at 2 dollars for a single coconut. Let’s also add that the firm starts with only 180 dollars.
So in the end of the month, the total production will be 180 coconuts, 90 of which will be consumed by Jack after he will purchase it with 180 dollars, and the remaining 90 will be consumed by John (he won’t need any money to purchase the remaining 90 coconuts, since it is his property).
Now it is clear if Jack’s goal is to consume coconuts, then we should have no problem. After receiving the salary, Jack will spend it all on coconuts. In this scenario we have no problem, the firm earns exactly what it spends, and each cycle is identical.
But once Jack decides that his goal is not only consume coconuts, but also to accumulate money and save some portion of his salary, then we have a problem. Let’s say Jack decides to save 30 dollars for 3 months, so he only spends 150 dollars. For some reason he plans to reduce his consumption for 3 months by 3o dollars (150), and then for 3 month increase it by 60 dollars (210). Well his goal is still to consume coconuts, but not at a steady rate.
Now the next month the firm is no longer capable to pay for 180 hours of work, but only for 150 hours. So the total production is reduced to 150 coconuts. Now let’s say once again Jack saves 30 dollars, next month his salary will be 120 dollars and the firms output will be 120 coconuts. He saves 30 dollars again, the next moth (4th month) his salary will be 90 dollars, and coconut production will be 90 units. Now Jack bring out his saved 30 dollars, and he wants to purchase 60 coconuts. Of course what will happen depends on John’s actions. If he decides to sell 60 coconuts for the usual 2 dollars, then we have no problem. But if John decides to consume some of them, then Jack may experience a shortage or an inflation (if John decides to raise the price). But let’s say John reacts to Jack’s actions, so he has no problem to consume whatever is left after Jack performs his purchase.
So now for 3 months John will earn 30 dollars more than he spends on labor, Jack working hours will increase by 30 hours each month, so after 6 months we restore the initial situation.
Here is the table:
firm out = firm output ;
purch, cons, sav = purchases, consumption, savings;
tot cons = total consumption ;
firm m.e., m.i. = firms monetary expenditure, monetary income
m supply= money supply ; in circul = money in circulation;
(all values in the table are in dollars)
Now as you see, all Jack wanted to do is to decrease his consumption by 30 dollars for 3 months, and later increase it by 60 dollars for 3 months, and then return to his regular 180 dollars. But his temporary accumulation of profit has caused a damage to the circulation and total production output.
The total loss equals to 540 dollars, this is the total drop in production between months 8 and 12.
Now if our annual GDP is 4320 dollars (360*12), then 540 dollars is 12,5%. So we have lost 12.5% of our annual GDP, just because Jack decided to save 16,66% from his salary for 3 months. Jack losses are 270 dollars, and John’s losses are also 270 dollars.
I mean overall Jack planned to consume same amount of products, but by trying to temporarily decrease and later increase consumption, he damaged the GDP by 12,5%. That’s pretty dramatic.
This is the perfect example how fragile economy is with fixed amount money, and how disrupting the problem of monetary profit can be.
