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Monetary circulation, the paradox of profits, and the velocity of money

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  • Olivier Allain

    (UPD5 - Université Paris Descartes - Paris 5, CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique)

Abstract

Recent papers have reconsidered the paradox of profits, that is the difficulty to explain how monetary profits can be generated when firms borrow only the wage bill to finance their production. In this article, we use a stock-flow consistent approach give a solution to this paradox assuming that, when firms sell goods at prices which exceed their unit costs, the realised monetary profits are not used to pay back banks. These profits then remain in the circuit, allowing additional transactions. In a sense, profits result from their own expenditure. According to this interpretation, the velocity of money is higher than one because some monetary units are used in several transactions of goods.

Suggested Citation

  • Olivier Allain, 2007. "Monetary circulation, the paradox of profits, and the velocity of money," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00196485, HAL.
    • Handle: RePEc:hal:cesptp:halshs-00196485
    Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-00196485
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    References listed on IDEAS

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    1. Alberto ZAZZARO, 2002. "How Heterodox is the Heterodoxy of the Monetary Circuit Theory? The Nature of Money and the Microeconomy of the Circuit," Working Papers 163, Universita' Politecnica delle Marche (I), Dipartimento di Scienze Economiche e Sociali.
    2. Louis-Philippe Rochon & Sergio Rossi (ed.), 2003. "Modern Theories of Money," Books, Edward Elgar Publishing, number 2506.
    3. Edward J. Nell, 2004. "Monetising the Classical Equations: a theory of circulation," Cambridge Journal of Economics, Cambridge Political Economy Society, vol. 28(2), pages 173-203, March.
    4. Gennaro Zezza, 2004. "Some Simple, Consistent Models of the Monetary Circuit," Macroeconomics 0405006, University Library of Munich, Germany.
    5. Jean-Francois Renaud, 2000. "The Problem of the Monetary Realization of Profits in a Post Keynesian Sequential Financing Model: Two solutions of the Kaleckian option," Review of Political Economy, Taylor & Francis Journals, vol. 12(3), pages 285-303.
    6. Marcello Messori & Alberto Zazzaro, 2005. "Single-Period Analysis: Financial Markets, Firms’ Failures and Closure of the Monetary Circuit," Palgrave Macmillan Books, in: Giuseppe Fontana & Riccardo Realfonzo (ed.), The Monetary Theory of Production, chapter 7, pages 111-123, Palgrave Macmillan.
    7. Godley, Wynne, 1999. "Money and Credit in a Keynesian Model of Income Determination," Cambridge Journal of Economics, Cambridge Political Economy Society, vol. 23(4), pages 393-411, July.
    8. Edward Nell, 2002. "On Realizing Profits in Money," Review of Political Economy, Taylor & Francis Journals, vol. 14(4), pages 519-530.
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