<p>You largely answered this question yourself: you provided this reference to a Gennero Zezza paper: <a href="http://www.levyinstitute.org/pubs/wp405.pdf" rel="nofollow noreferrer">(link to paper)</a></p>

<p>Zezza states in the second paragraph that most of the thinking about the Paradox of Profits was mistaken, as the authors used models which were not stock-flow consistent (flows disappeared). If people are arguing that there is a paradox, but do the accounting wrong, it is difficult to explain the error - since their arguments are internally inconsistent. </p>

<p>I am not familiar with Marx’s arguments, but based on the question, he is making an argument about a fixed money supply. This adds an extra constraint, that is probably not addressed in the Zezza papper.</p>

<p>For a single time period, there is no difficulty in generating profits. The business sector starts with \$100, pays \$90 in wages, \$10 in dividends, and then the household spends all money received to buy goods - generating \$10 in profits, which is enough to cover the dividend. Profits can be achieved also by the business sector investing in fixed capital or inventories. In any event, this can be achieved with a fixed money supply.</p>

<p>The only challenge is generating a steady state. Can a fixed money supply co-exist with a growing economy in steady state? This is perhaps a challenge, but the reality is that even non-financial entities can issue instruments that are used as money if the money supply is constrained. (For example, the pre-Confederation Canadian colonies had a perpetual shortage of coinage, and a wide variety of entities issued tokens that circulated as money). Since it is hard for a society to survive without government, government-issued money is normally issued in a way to grow in line with the economy.</p>

<p>Marx was writing in an era before fiat currencies had shown much ability to survive. My understanding is that his thinking did not take into account the flexibility of fiat systems.</p>

<p>In summary, since the argument that profits are paradoxical is based on faulty logic, it’s difficult to explain where the problems lie. One would need to delve into the details of each argument, and determine where they made the error - and it’s not necessarily always the same error.</p>

CC BY-SA 4.0
2019-05-01T11:10:47.613Z
2019-05-01T11:10:47.613Z
Brian Romanchuk
<p>here are 3 papers that discuss it.
it seems to me that the paradox is that, supposing a closed economy has money M raised through bank loans, then, while that economy can create goods and services and thus can grow in real terms, (ie there are aggregate real profits) it seems that there cannot be any aggregate monetary (nominal) profits since the amount (stock) of money in the economy does not change.</p>

<p>Marx says that under a closed economy under the gold standard , money supply can grow only via finding new gold in gold-mines , and it is ridiculous to think that profits will be equal to the gold found.</p>

<p>It relates to the income/expenditure/output identity of National Income Accounts / NIPA which says that income = expenditure , therefore profits = 0</p>

<p><a href="https://keenomics.s3.amazonaws.com/debtdeflation_media/papers/9780230_203372_10_cha09.pdf" rel="nofollow noreferrer">https://keenomics.s3.amazonaws.com/debtdeflation_media/papers/9780230_203372_10_cha09.pdf</a></p>

<p><a href="http://www.economics-ejournal.org/economics/journalarticles/2010-31/version_1/at_download/file?fbclid=IwAR0Le51-" rel="nofollow noreferrer">http://www.economics-ejournal.org/economics/journalarticles/2010-31/version_1/at_download/file?fbclid=IwAR0Le51-</a></p>

<p><a href="http://www.economics-ejournal.org/economics/discussionpapers/2009-52/file" rel="nofollow noreferrer">http://www.economics-ejournal.org/economics/discussionpapers/2009-52/file</a></p>

CC BY-SA 4.0
2019-04-26T11:22:12.227Z
I don’t have a good reference, but you could search the web for the Kalecki Profit equation. Investment is not an expense, so the assertion that all expenditures by businesses are expenses is false.
Brian Romanchuk
CC BY-SA 4.0
2019-04-26T18:31:08.433Z
yes i have studied the kalecki profit equation in this regard and its very interesting , but could u help me with my specific questions?
Randor
CC BY-SA 4.0
2019-04-26T18:34:15.917Z
how in a closed economy with no government and no banking (and therefore money supply completely fixed) can there be any monetary profits?
Randor
CC BY-SA 4.0
2019-04-26T18:36:56.177Z
and why does responding to this paradox require such long papers- why is there no simple response for it? ( to me the simple response is that indeed monetary profits are in fact equal exactly to the change in the money supply)
Randor
CC BY-SA 4.0
2019-04-27T15:15:05.210Z
This is the best reference I can find. https://www.concertedaction.com/2014/03/22/paradox-of-profits-question-mark/
Brian Romanchuk
CC BY-SA 4.0
2019-04-30T14:22:18.843Z
yes i have seen that, its as i said, very interesting, but its taking a different tack - it doesnt help me here ... :'(
Randor
CC BY-SA 4.0
2019-04-30T21:35:10.207Z
But there can be profits, since investment - including inventory growth -  is not an expense. As the reference I offered argues, there is no paradox, since it was based on faulty logic about the national accounts. Since the premise that there is a paradox is wrong, it’s hard to find any good references on the topic.
Brian Romanchuk
CC BY-SA 4.0
2019-05-01T09:05:05.950Z
look how Marx described it, that seems to me to be 1 good way to describe the matter.  How can one find a solution to the problem as he described it?
Randor
CC BY-SA 4.0
2019-05-01T09:36:18.093Z
from the paper you referenced - can u explain what is the definition of Operating Surplus, and the other one he mentions?   "There is an alternative way of stating the “paradox” which says: if firms inject money at the start of the production process, how do they recover more money at the end of the process? This seems to confuse what is known as operating surplus in the system of national accounts (such as in the 2008 SNA or earlier versions) with the surplus on the financial account."
Randor
CC BY-SA 4.0
2019-05-01T10:38:54.233Z
I’m not an expert on Marx, and his writings are famous for being confusing. If you want to isolate his arguments, you should re-write the question (or ask a new one) about wht he wrote. This section ofthe website is not heavily populated, and it’s not clear whether there’s other post-Keynesins besides myself here. I’ve never heard of the paradox, and it seems obviously incorrect to me.
Brian Romanchuk
CC BY-SA 4.0
2019-05-01T10:46:36.293Z
can you help me understand the website you referenced? - see my q above about operating surplus.   PS, here is another paper that references the paradox that i just found:  http://www.levyinstitute.org/pubs/wp405.pdf
Randor
<national-accounts><profits><national-income>
please help describe a) what exactly is the Paradox of Profits , b) what is the argument of these papers exactly
Randor
# please help describe a) what exactly is the Paradox of Profits , b) what is the argument of these papers exactly

(Asked by: username_0 on 2019-04-25)

here are 3 papers that discuss it.
it seems to me that the paradox is that, supposing a closed economy has money M raised through bank loans, then, while that economy can create goods and services and thus can grow in real terms, (ie there are aggregate real profits) it seems that there cannot be any aggregate monetary (nominal) profits since the amount (stock) of money in the economy does not change.

Marx says that under a closed economy under the gold standard , money supply can grow only via finding new gold in gold-mines , and it is ridiculous to think that profits will be equal to the gold found.

It relates to the income/expenditure/output identity of National Income Accounts / NIPA which says that income = expenditure , therefore profits = 0

<https://keenomics.s3.amazonaws.com/debtdeflation_media/papers/9780230_203372_10_cha09.pdf>

<http://www.economics-ejournal.org/economics/journalarticles/2010-31/version_1/at_download/file?fbclid=IwAR0Le51->

<http://www.economics-ejournal.org/economics/discussionpapers/2009-52/file>

**Tags:** national-accounts, profits, national-income
> **Comments:**
> **username_1**: I don’t have a good reference, but you could search the web for the Kalecki Profit equation. Investment is not an expense, so the assertion that all expenditures by businesses are expenses is false.  
> **username_0**: yes i have studied the kalecki profit equation in this regard and its very interesting , but could u help me with my specific questions?  
> **username_0**: how in a closed economy with no government and no banking (and therefore money supply completely fixed) can there be any monetary profits?  
> **username_0**: and why does responding to this paradox require such long papers- why is there no simple response for it? ( to me the simple response is that indeed monetary profits are in fact equal exactly to the change in the money supply)  
> **username_1**: This is the best reference I can find. https://www.concertedaction.com/2014/03/22/paradox-of-profits-question-mark/  
> **username_0**: yes i have seen that, its as i said, very interesting, but its taking a different tack - it doesnt help me here ... :'(  
> **username_1**: But there can be profits, since investment - including inventory growth -  is not an expense. As the reference I offered argues, there is no paradox, since it was based on faulty logic about the national accounts. Since the premise that there is a paradox is wrong, it’s hard to find any good references on the topic.  
> **username_0**: look how Marx described it, that seems to me to be 1 good way to describe the matter.  How can one find a solution to the problem as he described it?  
> **username_0**: from the paper you referenced - can u explain what is the definition of Operating Surplus, and the other one he mentions?   "There is an alternative way of stating the “paradox” which says: if firms inject money at the start of the production process, how do they recover more money at the end of the process? This seems to confuse what is known as operating surplus in the system of national accounts (such as in the 2008 SNA or earlier versions) with the surplus on the financial account."  
> **username_1**: I’m not an expert on Marx, and his writings are famous for being confusing. If you want to isolate his arguments, you should re-write the question (or ask a new one) about wht he wrote. This section ofthe website is not heavily populated, and it’s not clear whether there’s other post-Keynesins besides myself here. I’ve never heard of the paradox, and it seems obviously incorrect to me.  
> **username_0**: can you help me understand the website you referenced? - see my q above about operating surplus.   PS, here is another paper that references the paradox that i just found:  http://www.levyinstitute.org/pubs/wp405.pdf  

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## 1 answers

### Answer by username_1 on 2019-05-01. Score: 2

You largely answered this question yourself: you provided this reference to a Gennero Zezza paper: [(link to paper)](http://www.levyinstitute.org/pubs/wp405.pdf)

Zezza states in the second paragraph that most of the thinking about the Paradox of Profits was mistaken, as the authors used models which were not stock-flow consistent (flows disappeared). If people are arguing that there is a paradox, but do the accounting wrong, it is difficult to explain the error - since their arguments are internally inconsistent.

I am not familiar with Marx’s arguments, but based on the question, he is making an argument about a fixed money supply. This adds an extra constraint, that is probably not addressed in the Zezza papper.

For a single time period, there is no difficulty in generating profits. The business sector starts with \$100, pays \$90 in wages, \$10 in dividends, and then the household spends all money received to buy goods - generating \$10 in profits, which is enough to cover the dividend. Profits can be achieved also by the business sector investing in fixed capital or inventories. In any event, this can be achieved with a fixed money supply.

The only challenge is generating a steady state. Can a fixed money supply co-exist with a growing economy in steady state? This is perhaps a challenge, but the reality is that even non-financial entities can issue instruments that are used as money if the money supply is constrained. (For example, the pre-Confederation Canadian colonies had a perpetual shortage of coinage, and a wide variety of entities issued tokens that circulated as money). Since it is hard for a society to survive without government, government-issued money is normally issued in a way to grow in line with the economy.

Marx was writing in an era before fiat currencies had shown much ability to survive. My understanding is that his thinking did not take into account the flexibility of fiat systems.

In summary, since the argument that profits are paradoxical is based on faulty logic, it’s difficult to explain where the problems lie. One would need to delve into the details of each argument, and determine where they made the error - and it’s not necessarily always the same error.


---

