What is the Source of Profit and Interest? A Classical Conundrum Reconsidered

Tomasson, Gunnar and Bezemer, Dirk J (2010): What is the Source of Profit and Interest? A Classical Conundrum Reconsidered.

Abstract

Classical political economy was underpinned by a shared view of the economy as a circular flow. This begged the question of how the value of produce can exceed the value of factor inputs: the ‘Profit Puzzle’. In this paper we advocate an understanding of the Profit Puzzle as a monetary paradox arising from Say’s Law. We trace how Classical, Keynesian and Neoclassical economists addressed the Puzzle. We suggest a solution based on the work of Bentham.

• Item Type: MPRA Paper
• Language: English
• Keywords: Circular Flow, Say's Law, Profit, Credit, Marx, Schumpeter, Keynes
• Subjects: B - History of Economic Thought, Methodology, and Heterodox Approaches > B1 - History of Economic Thought through 1925 > B12 - Classical (includes Adam Smith); E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy

References

Baumol, W (1977) ‘Says (at Least) Eight Laws, or What Say and James Mill May Really Have Meant’, Economica, 44(174): pp. 145-161

Bentham (1952) Volume I of Jeremy Bentham's Economic Writings, Critical Edition Based on His Printed Works and Unprinted Manuscripts, in thee volumes. Edited by W. Stark for The Royal Economic Society. London: George Allen and Unwin Ltd.

Borio C and P Lowe (2004)“Securing sustainable price stability: should credit come back from the wilderness?” BIS Working Paper No 157

Andresen, T (2009) A block diagram approach to macroeconomics, and why IS/LM is fatally flawed. Working Paper, The Norwegian University of Science and Technology

Board (2009) Guide to the Flow of Funds Accounts. Washington DC: Board of Governors of the Federal Reserve System

Caporale, G. and P. Howells (2001) Money, Credit and Spending: Drawing Causal Inferences Scottish Journal of Economics, Vol. 48, No. 5, pp. 547-57.

Chapman, B and S Keen (2006) Hic Rhodus, Hic Salta! Profit in a dynamic model of the Monetary Circuit. Storia del Pensiero Economico

Fontana, G and B Gerrard (2002) The Significance of the Monetary Context of Economic Behavior. Review of Social Economy 60(2): 243-262

FRBC (1992) Modern Money Mechanics. Chicago: the Federal Reserve Bank of Chicago.

FRBD (2009) Federal Reserve Bank of Dallas website education section, at http://www.dallasfed.org/educate/everyday/ev9.html. Accessed February 25, 2009 Dallas: the Federal Reserve Bank of Dallas.

Geanakoplos, J (2009) End The Obsession With Interest. Nature 457(19): 963

Godley, W and A. Shaikh (2002) An Important Inconsistency at the Heart of the Standard Macroeconomic Model. Journal of Post Keynesian Economics 24(3).

Heyn-Johnsen, C (2009) Paper presented at ‘Workshop on Managing Financial Instability’, Reykjavik, 3-5 September 2009

Hudson (2007) Trade, Development and Foreign Debt (2nd edition). New York: Islet.

Hicks, J (1973) Personal letter from JM Keynes to JR Hicks, March 31, 1931, reprinted in 'Recollections and Documents', Economica, February 1973, p. 9.

Kates, S (ed.) (2003) Two Hundred Years of Say's Law: Essays on Economic Theory's Most Controversial Principle . Cheltenham UK: Edward Elgar

Keynes, JM (1979). The General Theory and After: A Supplement. In” D. Moggridge (ed.) The Collected Writings of John Maynard Keynes, vol. XXIX. London: MacMillan

King, R & R Levine (1993) Finance and Growth: Schumpeter Might Be Right. The Quarterly Journal of Economics 108(3): 717-37.

Leathers, C and P. Raines (2004) The Schumpeterian role of financial innovations in the New Economy's business cycle. Cambridge Journal of Economics 28(5):667-681

Lown D and C Morgan (2006) The Credit Cycle and the Business Cycle: New Findings Using the Loan Officer Opinion Survey Journal of Money, Credit and Banking 38(6): 1575-1597

Malynes, G de (1601) The Canker of Englands Common Wealth. London

Marcuzzo, M (2007) From the ‘Fundamental Equation’ to Effective Demand: ‘Natural Evolution’ of ‘Change of View’? In: Alberto Giacomin and Maria Cristina Marcuzzo, eds., Money and Markets: A Doctrinal Approach, Routledge Studies in the History of Economics London: Routledge, 2007

Murphy, R (2007) “Interest and the Marginal Product of Capital: A Critique of Samuelson.” Journal of the History of Economic Thought 29(4): 454-464

Nicoll, I (2009) The University College London Bentham Project: Aims. At http://www.ucl.ac.uk/Bentham-Project/info/aims.htm

Reisman, D. (2004). Schumpeter's market: enterprise and evolution. Cheltenham: Edward Elgar

Rhymes, T (1989) Keynes’ Lectures 1932-1935. Ann Arbor, University of Michigan Press.

Ricardo, D (1952) The Works and Correspondence of David Ricardo, ed. by Piero Sraffa, the Royal Economic Society. Volume VI, Letters 1810-1815. Cambridge University Press.

Rochon, L-P (2008) ‘Profits’. International Encyclopedia of the Social Sciences. Gale, Cengage Learning

Samuelson, P (1971). Paradoxes of Schumpeter’s Zero Interest Rate." Review of Economics and Statistics, 53, No. 4, 391-392

Samuelson, P (1988) Schumpeter as an Economic Theorist. In: Frisch, H (ed.) Schumpeterian Economics. New York: Praeger.

Schumpeter, J (1934). The Theory of Economic Development. New York, Harvard University Press.

Schumpeter, J. (1939) Business Cycles. New York, McGraw-Hill

Shionoya, Y (1997) Schumpeter And The Idea Of Social Science: A Metatheoretical Study. Cambridge University Press.

Sowell, T (1973) Say's Law: An Historical Analysis. Princeton University Press.

Thomas Sowell (1973) Say's Law: An Historical Analysis. Princeton University Press).

Toporowksi, J (2008) Theories of Financial Disturbance. Chelthenham: Edward Elgar

Uhlig, H (2004) What moves GNP? Econometric Society 2004 North American Winter Meetings 636

Werner, R (1997). Towards a New Monetary Paradigm: A Quantity Theorem of Disaggregated Credit, with Evidence from Japan. Kredit und Kapital, 30,2: 276-309