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Diversion-Profit Identity Demonstrated via Kalecki’s Profit Equation

May 22, 2017

This is an adjunct to my preceding post on diversion. In it, I argued that oligarchy is a structure by which goods and services fulfilling the core motives of the oligarchic class — luxury consumption and wealth defense — are costlessly obtained from population workers. I call this diversion and it’s rendered costless in our era by the return flow of monetary profit.

That diversion and profit are intimately linked in a diversion-profit loop is easy to see once we accept that the system is one of minority power over the majority. I seek to show in the table below that the identity between diversion and profit flows directly from the logic by which Kalecki derived his profit equation (profit = capitalist consumption + investment).

Key conclusions are: 1) profit is the monetary return of diversion; 2) only investment in goods or services produced for oligarchic consumption are profitable; and 3) investment in goods or services ultimately to be consumed by the population is never profitable over its relevant life. (I assume a closed economy with no state spending in which workers cannot save.)


Kalecki Equation

Profit = Capitalist Consumption + Investment

Diversion Equation

Profit = Diversion

Applicable time period for an investment: Specific accounting period, commonly a year. Applicable time period for an investment: Its applicable life.
Purpose: To understand how profit is generated in an accounting period. Purpose: To highlight the essential class nature of the modern system and to show that the population sector isn’t profitable.
1. GNP can be thought of as the sum of consumption and gross investment:

GNP = Consumption + Investment

1. GNP can be thought of as the sum of consumption and gross investment:

GNP = Consumption + Investment

2. We can expand consumption into 2 components: Capitalist Consumption and Worker Consumption. 2. We can expand consumption into 2 components: Oligarchic Consumption and Population Consumption.
3. We then rewrite equation 1 as:

GNP = Capitalist Consumption + Worker Consumption + Investment

3. We then rewrite equation 1 as:

GNP = Oligarchic Consumption + Population Consumption + Investment

  3a. We can expand investment into 2 components depending on the ultimate beneficiary: Oligarchic Investment + Population Investment
  3b. We rewrite equation 3 as:

GNP = Oligarchic Consumption + Oligarchic Investment + Population Consumption + Population Investment

4. GNP can also be considered the sum of capitalist gross profit plus the worker wage so that:

GNP = Profit + Wage

4. GNP can also be considered the sum of oligarchic gross profit plus the population wage so that:

GNP = Profit + Wage

 

 

 

5. We link 4 and 3 and get:

Profit + Wage = Capitalist Consumption + Worker Consumption + Investment

5. We link 4 and 3b and get:

Profit + Wage = Oligarchic Consumption + Oligarchic Investment + Population Consumption + Population Investment

  5a. Since population investment, by definition, will eventually be consumed by the population, we merge it with population consumption. We restate equation 5 as:

Profit + Wage = Oligarchic Consumption + Oligarchic Investment + Population Consumption

  5b Since diversion is the sum of oligarchic consumption plus oligarchic investment, we restate equation 5a as:

Profit + Wage = Diversion + Population Consumption

6. Since the wage is assumed identical to worker consumption, we eliminate it on both sides and get the Kalecki Profit Equation:

 

Profit = Capitalist Consumption + Investment

6. Since the wage is assumed identical to population consumption, we eliminate it on both sides and end up with:

 

Profit = Diversion

 

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4 Comments
  1. I just finished reading Capitalism as Oligarchy and thought it was a brilliant dissection of the reality that lies unseen in plain sight. Just look at Trump’s visit to the MidEast, where he announced a $100 billion arms deal and the Saudi’s $100 million donation to a World Bank/Ivanka Trump-related “charity.” (It was interesting to see Melania brush away her husband’s outreached hand on the tarmac. First lady, and still not satisfied!)
    Social Darwinists, a group that includes all sales people, believe that the world is the way it is because if it were going to be another way it would be. In any case, it’s not their job to change it, only to survive as best they can in it… and relax into a self-serving fantasy among like-minded people.
    Note: The word “diversion” frustrates me. It has so many different meanings and associations. A diversion can be entertainment. Diversity has demographic and political overtones. Diversion also means to “change the course or direction of something.” None of the definitions of diversion in the book was 100% satisfying. Concrete examples would help.

    • Thanks Kerry for the positive feedback on the book. You make an excellent point about the very wide meanings and associations of the word diversion. The dictionary tells us it comes from the Latin divertere meaning to turn in opposite directions. I use it to mean, as you say, “to change the course or direction of something” — i.e. the structural power to change (divert) the purpose of human labor away from serving the interests of the worker and toward the interests of the empowered minority. I can see that some dissonance is created by the fact the word also refers to such things as trivial entertainment or, as in diversity, to the state of demographics. Can you think of a better word? While I didn’t mention it in the book, I thought while writing it that it was interesting that diversion and diversification come from the same root. Portfolio diversification in modern oligarchy being one of the prime means by which diversion is obtained by the class.

  2. David Chester permalink

    Line 4 is simply not correct. GNP is the sum of the 3 returns (ground-rent wages and interest) that come from use of Adam Smiths 3 factors of production: land, labor and durable capital goods, respectively. The term profit is vague but sometimes it can be replaced by “interest” on the use of the durables.

    • We’re coming from differing paradigms David. While you may see it as wrong in yours, I see no problem with it in mine. No matter what word one uses (profit, interest, etc), my essential point is that whatever the propertied minority spends in service to its key motives is monetarily costless.

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