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August 30, 2018


Tony of CA

Can someone please define Animal Spirits? The way folks use it in economics it sounds rather ambiguous.


"One is that the main counterpart to the rising profit share has been a rise in consumption relative to wages. This hasn’t happened because people have borrowed more."

Actually the BEA throws too much garbage in there that shouldn't count as consumption. Government and employer payments for healthcare get added to consumption expenditure, for example.

I highly recommend this paper from the St. Louis Fed.

"In Sections 2 through 7, we have made the following claims:

• The great majority of household debt is incurred to finance asset positions, not current consumption.

• Historically, changes in household debt-income ratios have been driven more by variation in nominal income growth and interest on existing debt, than by new borrowing.

• Household debt is concentrated near the top of the income distribution; very little is owed by lower-income households.

• Consumption inequality appears to have increased in line with income inequality.

• The apparent rise in household consumption relative to income is entirely the result of third-party and imputed noncash expenditure; cash outlays for consumption by households are no higher as a share of income than they were in 1980."


B.L. Zebub


I've been puzzling about Kalecki's price equation for a while and I've stumbled on something I'm not sure you noticed, although I suspect you may be close to. Take this bit, from Kalecki's quote:

"If one entrepreneur reduces wages he is able ceteris paribus to expand production; but once all entrepreneurs do the same thing – the result will be entirely different".

So, in Kalecki's opinion, wage suppression leads to suppressed production, yes? That is so because, following Kalecki, less consumption translates into less aggregate demand and less sales, which leads to less production and investment (again, depressing aggregate demand).

This, however, is what you found:

"[T]he main counterpart to the rising profit share has been a rise in consumption relative to wages. This hasn’t happened because people have borrowed more; the savings ratio has risen slightly since 2000. More likely, I suspect, it is due to higher spending by business owners."

But that contradicts Kalecki's claim! I might be mistaken, but Kalecki seems to take for granted that workers' consumption and capitalists' investment are the only components of aggregate demand in a closed economy. But that ignores what you yourself found: higher [consumption] by business owners. A constant -or even falling- workers' consumption may be compensated by an increasing capitalists' consumption.

I don't claim originality in making that observation. A few years back Paul Krugman made a brief comment that seems to point in the same direction:

"So am I saying that you can have full employment based on purchases of yachts, luxury cars, and the services of personal trainers and celebrity chefs? Well, yes. You don’t have to like it, but economics is not a morality play, and I’ve yet to see a macroeconomic argument about why it isn’t possible."

If that objection is granted, Kalecki's omission is curious, because both Robert Malthus and Bernard Mandeville (the latter in his "The Fable of the Bees") influenced early Keynesian writers. Both Malthus and Mandeville emphasised the role of luxury consumption -non-productive, as they called it- by the upper classes.

Robert Mitchell

"If every £1 fall in wages causes workers to cut their spending by £1, profits would also fall."

This reasoning ignores Piketty's finding that r > g. Business owners can easily make more profit from purely financial investments than from selling goods or services in the real economy.

If you look at an insurance company's income statement, you see they make more from re-insurance and other returns on financial assets than from premiums. Same for public utilities; their investments pay out enough to cover operations and maintenance. Consumer electricity rates are explicitly decoupled from energy supply and go straight to retained earnings.

Ahmed Fares

@Robert Mitchell

"If you look at an insurance company's income statement, you see they make more from re-insurance and other returns on financial assets than from premiums."

Actually, they typically have higher losses than they earn on premiums. That's the business model. The losses on insurance are their cost of funds, in the same way that deposit interest is a cost of funds for a bank. Insurance companies earn money on the float between the time they receive premiums and the time they pay claims.

Insurance, like banking, is a spread business.

E-commerce Solutions

Well written article thanks for sharing.

Robert Mitchell

@Ahmed Then trying to calculate an insurance company's output using the System of National Accounts is misleading. SNA explicitly ignores capital gains; yet insurance companies' profit mostly comes from capital gains. If you use the SNA output for insurance companies, you ignore their realized profit in favor of imputed figures based on claims and premiums alone.

My point is that the figures used in this blog post don't reflect real profits. We should stop using BEA statistics in economic arguments because they ignore probably 90% of the money out there.

Kester Pembroke

Chris, get off your ass and do something to get George Soros as Secretary of State who supports ending the war on terror and the war on drugs. After all these years of wanting to end the war on terror Soros has never considered being the American foreign secretary.

Kester Pembroke

We need to support his EU Common Treasury idea. (Soros)

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