Jim:  +ProfSteveKeen Thank you for sharing this lecture. I really appreciate your goal of ensuring proper accounting in economic models, and my favorite feature in Minsky is the Godley tables. Unfortunately, I believe you have introduced an accounting inconsistency in this lecture’s model in your calculations of GDP which also causes inconsistencies in the gross profits (\pi_G) and net profits (\pi_N). I see several accounting contradictions in the model that result from these calculations. First, since we are not dealing with foreign exchange nor government consumption, GDP should equal the total consumption within the model. There are just two sources of consumption in the model, Cons_W (239.209) and Cons_B (5), which add up to just 244.209 annually, yet the calculated GDP value in the model is 341.727. The model doesn’t provide a source for this additional consumption. (In modeling quarterly turnovers, the quarterly revenue isn’t actually the full balance of Firms, as your GDP calculation assumes.) Second, gross profit should equal the total revenue minus the cost of goods sold. In the model, as defined in the Godley table, there are only two sources of revenue for the Firms, Cons_W and Cons_B, so the total annual revenue is just 244.209 (as calculated above), and if you use the Wages as your cost of goods sold, 239.209 annually, that means gross profit is merely 5, not 102.518 (as calculated from the overstated GDP amount in the current model). Third, Net Profit = total annual revenue – total annual expenses. In the model, therefore, Net Profit should equal (Cons_W+Cons_B) – (Wages+Interest), which is 244.209 – 244.209 or 0 — not 97.518. Likewise, since Net Profit = Gross Profit – Interest, if we start with the correctly calculated annual Gross Profit of 5 and subtract the annual interest payment of 5, this also shows Net Profit is 0. Even the Bank profits are 0 in this model, since their total annual revenue is just 5 and their total annual expenses (Cons_B) is also 5. (Interestingly, it is only because the Banks consume their total annual income that the Firms have the additional 5 units of revenue to be able to pay the interest without an annual loss.) The root cause of these inconsistencies in your model, I believe, is that it assumes the quarterly revenue equals the Firms total bank account (85.4317) and that wages are just 70% of these revenues. In fact, the quarterly revenue is just 61.05225 (i.e. 244.204/4) and ~98% is spent on wages. The current annual net profit amount of 97.518 is a calculation fiction that is not supported by the accounting in the Godley table. There is no source of spending to provide this additional 97.518 income, nor has your model defined how this profit is transferred out of the Firms accounts (e.g. dividends, owner draws, etc.) to explain why their net worth (Assets-Liabilities) doesn’t increase despite these profits. I believe I know how this problem can be fixed to properly account for and explain positive net profits in such a model (even without adding government spending or foreign exchange), but I wanted to bring these accounting inconsistencies to your attention to learn your thoughts about them. Perhaps you address these flaws in later lectures, or perhaps they are resolved in your more advanced models.

Me:  +Jim Nelson Thank you for this post. It makes more concrete the costing/pricing system that is an integral part of commerce/the economy and that economists are generally unaware of. Of course some would say these are merely static numbers, but considering that these realities are ongoing flows of money, costs and prices they are dynamic factors. If you also factor in the costs of depreciation which is an additional cost for virtually all businesses you begin to realize that the deepest systemic problem of the economy is that the rate of flow of total costs and hence total prices is greater than the rate of flow of individual incomes simultaneously produced and actually available to spend….which of course is the Social Credit insight.