Trouble in Paradise: Incomes

This chart, based on yearly income tax data available at The World Top Incomes Database (WTID), speaks quite eloquently by itself: this is a clear graphical representation of growing income inequality in Australia.

However, I will add a few comments.

Over the first 20 or so years represented in the chart, the top 1% average income (blue line) oscillated over a relatively constant $100K-$150K $150K-$200K band (all money figures in 2010 dollars).

Meanwhile, after an initial period of relatively constant growth from the early 1960s to the early 1970s, the bottom 90% income average (green line) tended to stabilize during the rest of the 1970s and early 1980s. Considering that the top 1% income average remained relatively stable over the same period, the behaviour of the adult average income (red line) can safely be considered a result of the behaviour of the bottom 90% income average. In the chart this shows as the red line paralleling the green line.

1983: Bob Hawke (Labor) occupied the prime ministership (see chart: from A to B). In 1991 Paul Keating (Labor) replaced Hawke as prime minister (from B to C). In 1996 John Howard (Coalition) assumed the prime ministership, which he kept until 2007 (from C to D): the last year for which the TWID has data.

The Hawke/Keating government has the dubious honour of starting Australia's "economic rationalization", principle guiding economic policy in Australia ever since.

Another common feature of this period is that the top 1% income average shot up in quite a regular manner: 197.4% over the entire period; but at an increasing pace: averaging 4.0% p.a. during the Hawke period, 4.7% p.a. during the Keating period and 7.5% p.a. during the Howard period. [1]

That result does not account for the 2 periods of unusually high growth for the top 1% income average: the 1986-1990 years (first spike in the blue line, within the Hawke period), and the 1998-2001 years (second and smaller spike in the blue line, within the Howard period).

As a comparison, during the period 1983-2007 the bottom 90% income average (green) at times remained almost unchanged, sometimes increasing, sometimes decreasing. As a result, over the whole period, the bottom 90% income average grew 29.8% (1.2% p.a.).

It can be seen in the chart above that the adult average income (red line) starts to separate from the bottom 90% income average (green line): the growth in adult average income is driven in large part by the growth in the top %1 average income; thus adult average income increasingly overestimates the real income situation of most Australians.

The following chart zooms in to provide a clearer picture (see chart legend: colour code changes!):

We must consider the current campaign to revive WorkChoices in the previous context, taking into account that the world seems on the verge of a renewed recession, with the consequent increase in unemployment and lower wages.

The opposition knows its leader Tony Abbott has a very good opportunity of giving the Coalition a historical electoral victory against the weak minority Labor Government.

If I had to guess what's behind this campaign, I'd say that big business (acting with characteristic opportunism) and former PM John Howard and Peter Reith consider this a chance to further lower wages and reduce working conditions, at very little political cost. And given that any cost of an unlikely defeat would fall upon Abbott, it's possible that Reith would not regret that event that much.

In any case, the adoption of a technocratic rationalization (productivity and "flexibility" at its forefront) is simply for PR reasons.

At the other hand, Tony Abbott is understandably reluctant to risk a defeat or even a pyrrhic victory, after all the personal effort he's put into his relentless opposition.

So a first question is who'll prevail within the Coalition, Abbott or the hardliners? More importantly, would Abbott choose to fly under the radar on this subject, before the election, just to announce his intentions to resurrect WorkChoices after becoming PM?

But, foremost, would the combined votes of the Labor remnants and the Greens be enough to stop him?

See also accompanying piece Trouble in Paradise: the Bogeyman Strikes Back.

Note:
[1] Calculated for the Hawke period, as an example, in the following manner:
100*($205,914-$156,042)/$156,042 = 32.0%; 32.0%/(1991-1983) = 4.0%

"It's not Personal, Sonny. It's Strictly Business"

"It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own self-interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages." Adam Smith (The Wealth of Nations).

[1]

The title of this piece comes from a line spoken by Michael Corleone in the 1972 Francis Ford Coppola blockbuster The Godfather, based on Mario Puzo's book.

Michael and Sonny Corleone, sons of a Mafia don, were discussing Michael's plan. Sonny opposed it, believing that Michael (his little brother, whom he patronizingly calls Mikey) was being driven by considerations outside commercial interests (i.e. "personal").

Michael argues in a quite unemotional, reasoned manner and uttered the line above.

At the end of this piece, I trust the thread linking the two preceding quotes and the cartoon will become apparent.

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One of the commonest misconceptions about Marxism concerns its relationship with morality/ethics.

To me, it's difficult to make heads or tails of the following passage, which illustrates that misconception:

"Marx, like Ricardo before him, believed that all value came from labour; that is, the blood, sweat and tears of workers. We might find this a convincing argument from a moral perspective - after all, doesn't the worker do all the work? Or we may not find it a convincing moral argument at all - is that to say that the capitalist literally does nothing? But whether this is morally convincing or not it is, in essence, irrelevant to understanding the processes of a capitalist economy." (See here).

.
In my mind, moral/ethical arguments boil down to this: "A is wrong (right, ethical/unethical, etc.), because of B; therefore C" (where A, B and C are statements, C being also the conclusion, which somehow negates A if it is wrong, or reinforces it, if it is right). It is the terms "wrong", "right", "ethical", "unethical" that characterize this as a moral judgement.

Example: "It is wrong for wealthy butchers to sell meat to the poor, because the poor are hungry, have no money and cannot pay the price asked; therefore wealthy butchers must give away free meat to the poor".

Translation key:

A: "wealthy butchers sell meat to the poor";
B: "the poor are hungry, have no money and cannot pay the price asked";
C: "wealthy butchers must give away free meat to the poor".

That is a moral argument. Let's consider it, under Smith's terms: it addresses the wealthy butcher's humanity, and talks of the poor's necessities. There is also an explicit moral valuation: "it is wrong".

My purpose with the example is to provide a comparison with the statement "all value comes from labour". Unlike the example, the statement "all value comes from labour" does not fit the scheme "A is wrong, because of B; therefore C". It contains no moral valuation. It does not address anyone's humanity and does not speak of anyone's necessities.

Thus, the statement "all value comes from labour" is neither a moral judgement, nor a moral judgement's conclusion.

So, if the statement "all value comes from labour" is not a moral judgement, what is it?

It is the conclusion of a standard logical analysis. To represent that analysis symbolically, in terms similar to those used before: "If we assume premises X, Y, ... and Z, then it must be the case that all value comes from labour" (X, Y, ... and Z are statements). Note that there is no explicit moral valuation.

Although I do support the statement "all value comes from labour" (i.e. I believe its premises are true and the conclusion follows logically from them), it is not my purpose here to convince you of it. In principle, all analysis may be disproved (i.e. the conclusion shown not to follow from the premises); the premises shown to be false. The same applies to this particular analysis.

Thus, readers are free to make their own minds. If the reader is prepared to defend his or her position, by all means, state your case in a pertinent, logical, clear, brief fashion in the comments.

My purpose is to clarify that, as in Smith's quote above, Marx's and Ricardo's statement "all value comes from labour" is about "what is", not about "what should be".

So, Marxism has no moral/ethical implications?

Far from that. It means that these considerations are not required to support Marxist socialism. In this, Marxist socialism differs fundamentally from other forms of socialism and reformism, some of which predated or were contemporaries to Marx (see here). Some of these movements did base themselves on moral judgements, not unlike the "wealthy butchers" example (see here).

To illustrate Marx's point:

Imagine you are in a mission from God to convince wolves that it's wrong to kill and eat other animals, because all animals are God's creatures; wolves, therefore, should become vegetarians (that is, following my example above, a moral argument).

So, armed with zeal, good-will and faith, you head into the forest and start preaching to the wolves.

Soon you find that your message isn't making converts. Even if wolves could understand your language, the message itself makes no sense: wolves kill and eat other animals because that's what wolves do. It's a part of the definition of what a wolf is: a predator.

Further, if a wolf were foolish enough to heed that preaching, it would soon cease being a wolf and turn into a corpse: its metabolism and digestive system are not adjusted to a vegetarian diet, its teeth and jaws are not efficient grass-foraging tools.

The same reasoning applies to the economic human predator: the capitalist. Capitalists exploit workers because that's what capitalists do: "It's not personal, Sonny. It's strictly business".

In the course of events workers make a living from employers, just like buyers get bread, meat and beer from bakers, butchers and brewers. But that's not what motivates employers, bakers, butchers or brewers. What motivates them is profit. That's the thread linking the quotes and the cartoon.

No wonder socialism isn't popular among capitalists or businesspeople in general: if a wealthy butcher gave away meat he would lose money and would not remain a wealthy butcher much longer; further, if he stubbornly persisted, he would go broke and become a pauper. (That's precisely what happened with Capitalist, an employer, in the example studied here).

Let's not fool ourselves: my little wolf story may be original (at least, I haven't heard it before), but it does not express anything new. Its central message is obvious to anyone.

But progressives often assume that what is obvious to any thinking reader (or any butcher) in our days, would be a complete revelation to Marx or Ricardo or to a host of other economists (including Petty and Smith).

When progressives assume that the statement "all value comes from labour" depends on moral judgements, they are projecting on Marx and Ricardo their own naivety/ignorance. And, in Ricardo's case, this is particularly funny: Ricardo was a wolf among wolves, an extremely successful financial speculator, a landlord and an MP from a rotten borough! You've got to love the irony.

But that does not reflect the full magnitude of this "progressive" mistake: "progressives" (and the quotation marks were deliberately inserted here) are, unwittingly or not, misrepresenting superstition as if it was Marx's thought.

Contrast this "progressive" view of Marx, with Marx's own vision of the human predator:

"I paint the capitalist and the landlord in no sense coleur de rose. (...) My standing point, from which the evolution of the economic formation of society is viewed as a process of natural history, can less than any other make the individual responsible for relations whose creature he socially remains, however much he may subjectively raise himself above them". Karl Marx. (Das Kapital, vol. 1, preface to the 1867 edition).

In this passage there is no appeal to humanity and no talk of anyone's needs: it's all about business. No moral valuation: no "this is wrong", or "that is right".

Marx isn't preaching to the wolves: he's addressing the animals wolves kill and eat. If you work for someone else for a living, he is talking to you.

To answer the question posed in the passage motivating this post: "is that to say that the capitalist literally does nothing?" Yes, while wearing the capitalist hat, they literally do nothing. The workers do.

Or, paraphrasing Smith: It is not from the benevolence of the capitalists that we expect our wages, but from their regard to their own self-interest.

The myth these "progressives" unconsciously perpetuate is that this is not true: workers are a collective Blanche Dubois, always depending on the kindness of strangers.

Image Credits:
[1] Cartoon of the big bad wolf reading a bedtime story, by Gaspirtz. Wikipedia. My usage of this cartoon does not imply Gaspirtz's agreement or disagreement on the subject of this post.

Update:
26-09-2011. Having said all that, does it mean that each and every capitalist, without exception, is a predator? In a word, yes.

But there are vegetarian wolves, too. Or more precisely: wolves that try to be vegetarian (like perhaps Warren Buffett). They are few and far in between, but deserve recognition nonetheless (see here, h/t David Ruccio's Occasional Links and Commentary).

24-02-2012. I've just found this excellent series of articles by Robert Vienneau:  "Marx and Commentators on Marx on the Justice of Capitalism". See here for parts 1, 2 and 3.

In it Vienneau documents a reading of Marx's exploitation as an empirical fact, similar to what I described above. And I say empirical fact in opposition to the view of exploitation as a moral/ethical ("metaphysical") thing promoted by "hard-nosed" "progressives" and right-wingers (significantly, both sides often coincide in this); and Vienneau does this in a very erudite manner, with abundant quotes, from Marxist and non-Marxist authors alike (btw, I believe he is an Sraffian).

I am not sure I concur with some of Vienneau's ancillary points, but if he in any way misses the mark, from a Marxist perspective, it is not by much. I highly recommend these posts, especially for the more academically-minded readers.

Is it Alive?

"He's just resting - waiting for a new life to come." Dr. Frankenstein (Frankenstein, 1931).

Dracula vs. Frankenstein [1]

Recently the discussion over economic matters revolved around two ABS releases:  National Accounts, June 2011 (ABS cat. Number 5206.0) and Labour Force, August 2011 (cat. Number 6202.0).

It turns out that Australia avoided a technical recession (two consecutive quarters of negative GDP growth: see here), but unemployment rate is increasing (see here).

That discussion, interesting as it is, totally eclipsed the release by ABS, on 30/08/2011, of Household Income and Income Distribution, 2009-10 (cat. Number 6523.0).

This is weird for at least two reasons:

1. Income fell for the first time in 14 years (see here); and
2. One would have expected journos to be anxiously waiting for news about income; after all, ABS reports on GDP every quarter and labour force every month, but reports on income and wealth at most only every second year!

Yet, extensive Googling returned just three press items (a couple of opinion pieces, see here, here; a small story, here) and a few bloggers. Who ever said Aussies are materialists?

Meanwhile, the local lunatic Right, like a modern-day Victor Frankenstein, attempts to inject artificial life into the decaying WorkChoices corpse (see here), while the big business chorus wails about "high" wages (here), seconded by "our" taxpayers-funded ABC (here).

So, to avoid disappointing the good folks at ABS, I'll try my hand at this topic.

This is how real average gross household income evolved in Australia since 1994:

Real average household income (ABS 6523.0 Table 1.2)

A few observations: the gaps are years where the data was not collected (See? Aussies don't care about money!); the black dots are years where ABS decided to consider as income things that had not been considered income before (So, it's not just that the series is patchy, it isn't fully comparable: things keep getting better); income as defined by ABS includes lots of things (i.e. wages/salaries, government transfers, interests and profits), but it does not include capital gains and often does not even include the lowest income quintile decile, either ("Many of the households included in the lowest income decile are unlikely to be suffering extremely low levels of economic wellbeing", perhaps due to underreporting (?!). See Explanatory Notes, paragraphs 29, 30 and 31).

In any case, although the data is rather crappy, it's clear that average gross household incomes have fallen since at least 2007: -2.9%.

But why? Data disaggregated by quintile may suggest an answer:

Average household income by quintile.

The lowest quintile excepted (where mid-quintile average household weekly income rose $10 a week, I kid you not! and where "government pensions and allowances were the main income source for more than 60% of households". See Key Results), incomes have fallen since at least 2007 across the board (where "wages and salaries were the main source of income for more than 80% of households"). The most affected group, the highest quintile, fell -4.7%.

Is that data proof conclusive that wages and salaries have fallen? Perhaps not.

Note as well that this fall occurred even though the Fair Work Act (the current industrial relations legislation, accused by our esteemed Right-wingers of strangling poor suffering businesses) was in place since July, 2009: half the two-year period covered. So much for the Fair Work Act causing wages to "soar".

Let's now examine the ACTU report "The Fair Work Act: Two Years On":

In the four-year period immediately preceding the approval of the Fair Work Act, every award classification (from C14, the least qualified, to C1b, the most qualified) increased less than inflation (estimated over the period as 12.53%). By July 2009, for example, a worker classified as C1b lost 7.79% of acquisitive power.

Incidentally, those wages are characteristic of low- to mid-income workers. For instance, a full-time C1b worker (top category of the FWA scale), would earn $1,080 per week ($28.4 per hour or $56,160 a year). If this worker has a dependent spouse, and no children, her equivalised household income of $720 (= $1080/1.5, 1 for the income earner plus 0.5 for the dependent spouse) would put her within the third quintile ($515-$727): roughly median household income (less than average household income).

This worker's wages fell in the 2005-2009 period and, judging by the ABS data, probably ever since. And the way workers can compensate for this loss is through paid overtime or shift penalties.

So, where the hell are those fucking high wages we keep hearing about?

And now our businesspeople and raging Right politicians want to eliminate working entitlements (aka Industrial Relations reform) plus increased "flexibility" to lower wages.

But then, again, we really don't care that much about money...

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Finally, for those progressives who "don't believe value exist": when our C1b worker lost 7.79% of her acquisitive power, her employer saved in real wages. In other words, had her June 2005 weekly wage ($1,031.10) risen with inflation (12.53% over the period) it would have reached $1,160.30 in July 2009.

But it didn't. In July 2009 her wage was in fact $1,080.00. The difference ($80.30 or about 3 hours per week) is work effort performed ("labour power sold") but unpaid: she worked about 3 hours for free every week.

Now, you may call it whatever you like (say, "metaphysical substance", while a bit of an oxymoron, as you may or may not know, sounds good). Marx called it "surplus value" (or, more precisely, an addition to it: a drop of your very own metaphysical substance).

Let me close with this quote by Engels:

"And for this change, I must render an explanation (...) to the bourgeois, in order that they may convince themselves how greatly the uneducated workers, who can be easily made to grasp the most difficult economic analyses, excel our supercilious 'cultured' folk, for whom such ticklish problems remain insoluble their whole life long". ("Wage, Labour and Capital", Introduction)

My advice to progressives "proving" Marx wrong without reading him: observe real life, read, and think. It's not that hard and after a while you'll find your head doesn't hurt anymore.

Image credit:
[1] Dracula vs. Frankenstein. Wikimedia

Pilkington's Island

"The engine that drives enterprise is not thrift, but profit" - John Maynard Keynes

Last month Naked Capitalism included an interesting article by Philip Pilkington [1] on the origin of profits. Mr. Pilkington's "key point here [was] that investment creates profit", as opposed to the Marxian view that, in a capitalist mode of production, labour creates profits in the guise of surplus value.

To make his point Mr. Pilkington described and used a simple but clever model.

These are the key "ingredients" of his model:

• One island (i.e. a national economy with no exports or imports, with a government but without taxes or government expenditure: GDP = C + I , see below about depreciation and other inputs/intermediate consumption)
• One capitalist (who owns fixed capital: everything but labour power and money)
• One bank ($10 in $1 coins)
• Ten workers (5 builders, 5 bakers)

And these are the basic assumptions:

1. Only workers consume (they don't save anything);
2. There is a minimum wage ($1 a day);
3. The Capitalist and the Bank do not consume;
4. "No input costs apart from the cost of labour" and "capital goods (machines etc.) do not depreciate" (labour is the only production input: no intermediate consumption).
5. The income tax rate is nil.

For the full motivation, read its description, under the heading "A Capitalist, A Bank, Ten Workers, Two Presidents and a Giant Loaf of Bread" (Mr. Pilkington is a writer, and, it seems, a good one, too!).

The model, as I intend to show, does not achieve its goal and tends to obscure things unnecessarily. However, unexpectedly, this has a positive effect.

Readers familiar with the article under scrutiny, may skip the following and jump directly to Discussion.

Otherwise, let's follow Mr. Pilkington's own exposition:

Day 1

"(...) The capitalist hires 5 workers (the builders) to build a bread factory - spending $5. He then hires the other 5 workers (bakers) to make bread in the factory - spending an additional $5. All of this money is raised from the local bank which charges him a rate of $1 interest a day. The capitalist ends up with a giant loaf of bread which he sells to the workers for all their wages - the bread thus sells for $10 and each worker gets a 10% share.
"(...) At the end of the working day, the builders once more join the bakers at the factory door and, since everyone has received their wages, the bread sells at its previous rate - the capitalist gets $10 (after interest payments he has $9), the workers all get a 10% share of the giant loaf and there is no deflation."

Let's pause here and think about what just happened.

Before the first day, these were the balance sheets of Capitalist and Bank:

Capitalist:
Assets: machines (valued $M); Liabilities: $0. Equity: $M (where $M is an arbitrary dollar amount).

Bank:
Assets: $10 (cash); Liabilities: $10 (presumably). No equity.


Bank's and Capitalist's combined equities: $M

During the first day:
Capitalist invested $5 to build a bakery and used the $5 remaining to pay wages.
A loaf of bread, costing $5 in wages, was sold for $10 (10 workers' combined wages), for a profit of $5. The price of bread was $10/loaf.

GDP: $B (brand new bakery's market value; more on this on Discussion) plus $10 (big loaf of bread). GDP = $B + $10.

At the end of the first day, these are the balance sheets of Capitalist and Bank:

Capitalist:
Assets: $M (machines), $B (bakery), $9 (cash); Liabilities: $10 (loan from Bank). Equity:  $M + $B - $1 (= $9 cash - $10).

Bank:
Assets: $10 (loan to Capitalist), $1 (cash); Liabilities: $10. Equity: $1.

Combined equity: $M + $B

Day 2

Capitalist already has a bakery. Turning to the builders, he says: "Smell you later".

A depression resulted: unemployment appears (5 builders), GDP falls in both real and nominal terms; prices fall. In real terms, only one loaf of bread was produced: real GDP = $10 (Day 1 prices). The price of bread plummeted (from $10/loaf to $5): nominal GDP = $5 (Day 2 prices). CPI = -50%.

Observe that Capitalist is a peculiar beast indeed: bread demand and prices have fallen, but he refuses to adjust output (still produces one loaf of bread); by assumption 2, he is not a wage-setter, either (even though unemployment increases labour supply); and doesn't even think about asking Government to cut the minimum wage. Further: he can't really sack any baker or increase productivity (more on this below in Discussion). A magical island indeed! As a consequence, although nominal wages remain unchanged ($1/day), real wages doubled.

Faced with falling bread prices and higher real wages, it's no wonder that Capitalist barely managed to match costs and receipts: $5 wage bill, $5 receipts.

But Capitalist is not much weirder than Bank, who remains mute and does nothing at all.

At the end of the Day 2, these are the balance sheets of Capitalist and Bank:

Capitalist:
Assets: $M (machines), $B (bakery), $8 (cash); Liabilities: $10 (loan from Bank). Equity:  $M + $B - $2. Capitalist, all panicky, barely manages to mutter: "I'm in deep shit".

Bank:
Assets: $10 (loan to Capitalist), $1 (cash); Liabilities: $10. Equity: $2. Bank exclaims: "Ye-haw! Crisis? What crisis?"

Combined Bank and Capitalist equity: $M + $B (unchanged since Day 1).

The other big surprise is that the 5 bakers are also winners: those guys are lucky that Capitalist is their boss. A really magical island!

From Day 2 on, little changes: GDP and prices fall no further, unemployment does not increase. A sort of equilibrium is reached where Capitalist loses $1 a day. Eventually (Day 5), before running out of money to pay wages and interests, Capitalist leaves the key to the bakery with Bank. Bank may or may not continue producing bread. If it decides to produce bread, the one loaf of bread GDP does not change.

Discussion

To argue his point, Mr. Pilkington set a one-off investment pulse, which, given assumptions 4 and 5, translated entirely into workers' income. This affects effective demand.

Prof. Bill Mitchell, a top exponent of MMT, has treated recently the topic of effective demand, saving me the effort of explaining it here. [2]

To put things simply: construction (private investment) provided jobs to 5 builders, baking, to 5. The demand by 10 cashed-up workers drove the price of the only loaf of bread up, to $10, well beyond the point where its price exceeded its cost ($5). This translated into profits.

Note as well, that every day, the physical product of the physical input of labour was enough to adequately sustain the workers and create a surplus.

For example, on Day 1: a 10 worker-day input (current market price: $10) originated an output consisting of a loaf of bread (current market price: $10) plus a bakery (current market price: $B). The 10 workers ate the loaf (1/10 each); Capitalist kept the bakery. In monetary terms: the workers were paid $10 and Capitalist kept the $5 profit (logically $B = $5, although it was not the product of a sale, as required by the GDP calculation!), from which he paid $1 to Bank later.

Day 2: a 5 worker-day input (current market price: $5) originated an output consisting of a loaf of bread (current market price: $5). The 5 workers ate the whole loaf, which the previous day was enough for them and the builders (each baker is getting 2/10 of the loaf), but no additional profit was left for Capitalist. Because real wages increased, it is the bakers who are getting the surplus now! That's another reason why I keep insisting that this is a magical island: the assumptions on price formation and the assumptions on he behaviour of Capitalist are producing strange effects.

Anyway, the conclusion, to me, seems inescapable: value was added to the product in excess of its inputs. Given that only labour was used as input, in this case I can't imagine how it can be argued that labour isn't solely responsible for the value added. When Capitalist appropriated the excess, this excess was called profit. But if labour is solely responsible for the value added, what role played Capitalist to justify his getting a profit? I'll leave the reader to ponder that question.

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In any case, all this was overlooked and seemed to have reasoned: there was an investment then and there is a profit, now; investment stops, profit stops. Gotcha Karl Marx! (More on this when discussing Kalecki's profit equation).

Not so quick. As hinted above, here assumptions 1 and 2 play a crucial role. Let Nc be the number of builders and Nb that of bakers. Once the investment stream ceased, effective demand declined (from Nb + Nc to Nb). Production cost equals w.Nb (w is the daily wage in dollars), while sale revenue is (1-t).w.N (N = Nb + Nc if date = Day 1, Nb otherwise; t is the income tax rate). As by assumption 5, t = 0, profits ((1-t).w.N - w.Nb) had to cease with the investment stream (N fell to Nb).

Incidentally, this means that in the island it doesn't help sacking bakers: other things remaining the same, saving 1 dollar in the wage bill means a loss of 1 dollar in profits sales receipt! For the same reason, a wage fall does not affect the end result, ceteris paribus. No productivity gains in this magical island.

If length of journey had been included, perhaps a different result would obtain. Alas, it wasn't included.

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What about Kalecki's profit equation, presented thus:

Pn = I + (G - T) + NX + Cp - Sw?

("Pn = total profits after tax. I = gross investment. G = government spending. T = total taxes. (So, G - T = the total government budget deficit). NX = net exports (total exports minus total imports). Cp = capitalists' consumption. And Sw = total workers' saving.")

By design, all terms in the RHS of the equation are nil, except investment (Day 1, only!). Therefore, the equation becomes:

Pn = I.

Mr. Pilkington's conclusion still holds partially: investment, in this case, did create a profit, as expected using the equation (i.e. it was a sufficient condition for profit in the magical island). I have already argued why it did not, however, invalidate Marx's conclusion, as apparently intended.

Moreover, other variables (a fiscal deficit, for instance) would have created a profit, as well, as the non-trivial version of the equation shows. Thus investment is one among other possible "causes" of profit (i.e. investment is not a necessary condition for profit).

Further, let's consider now an income tax rate of 50% and see what happens with Capitalist's profit even in Day 1! ((1-t).5.w.N - w.Nb, with t = 0.5, N = 10, Nb = 5). Investment in this case does not "cause" a profit!

So, is the Kalecki equation wrong? On the basis of what little I know about it, I have no elements to say that. What I would say is that Mr. Pilkington's interpretation of the equation is incorrect: Marx is speaking of profits at an individual enterprise level; Kalecki's equation speaks of profits at the macroeconomic level.

Further, with the already expressed reservation that I don't really know much about it and pending further tinkering with the model, I would say that the Kalecki profit equation and the LTV seem fully compatible.

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Moving to another subject. Note that the way the agents were named in this model (Capitalist and Bank) obscures a fact: in reality, both are capitalists! A Bank/Capitalist separation might have been essential for Mr. Pilkington's purposes (to argue that investment causes profit), but it obscured his analyses and might have contributed to his confusion; but for my purposes here, it is useful, nonetheless.

Capitalist is certainly losing money, and this is correctly noted, but his loss is caused by the need to share his money with Bank. That's why the combined Bank and Capitalist equity remains constant: $M + $B.

This may or may not surprise Mr. Pilkington, but it certainly does not surprise a Marxist: banking does not produce surplus value, but it still makes a profit. Where does this profit come from? It comes from someone else's surplus value!

Capitalist is contractually obliged to share with Bank the surplus value obtained during Day 1 in the form of interests payments, at the rate of $1 a day. In other words: Capitalist, in reality, is exploited by Bank.

Prof. Michael Hudson has written extensively about this. [3]

This shows that there's a value added in Marxian economics which is not provided by the model under scrutiny or even by Kalecki's profit equation.

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Finally, there is at least one other issue that remains to be treated. But that issue requires a separate treatment, because Kalecki's equation would seem to offer a macroeconomic way to understand how an economy, where workers are paid less than the value they create, can operate, when the so-called Say's Law supposedly proves it impossible.

And, quite significantly, the equation purports to explain capitalists' profits, which since at least Sismonde di Sismondi and especially Karl Marx is seen as the source of accumulation and recurrent crisis. 

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A last word: I have criticized Mr. Pilkington's article heavily. This doesn't mean that his effort was without merit. Quite to the contrary. I'd encourage him to persevere in his endeavour. Maybe one way would be to relax the constrains on the Capitalist/Bank's behaviours. Perhaps another way would be changing how prices are formed: the way chosen ensures that markets clear, which is rather ironic for someone who often attacks Say's Law.

And I thank the readers for their patience.

Articles referenced:

[1] Philip Pilkington. 17-08-2011. Profits in a Capitalist Economy - Where Do They Come From, Where Do They Go?
[2] Bill Mitchell. 30-08-2011. We Need to Read Marx.
[3] Michael Hudson. 30-07-2010. From Marx to Goldman Sachs: The Fictions of Fictitious Capital.