New Economics Theory – The Sisyphus Formula : Retained Profit = Fixed Assets + Debt

New Economics Theory – The Sisyphus Formula : Retained Profit = Fixed Assets + Debt.

The Sisyphus Formula – Simple Version :

Net Retained Profit = Fixed Assets + Consumer Debt

Let’s start with some a priori bookkeeping and then we’ll see later how well it holds up using numbers from the National Accounts : a) Business Borrows £100 from a bank : We have :

Dr Cash £100                                              Dr Loan £100

Cr Loan £100                                              Cr Current Account £100

And the Sisyphus Formula : “Net Retained Profit = Fixed Assets + Consumer Debt” holds true as all items in the equation are Zero at this point. The business then pays Workers the £100 to build a Fixed Asset so we then have :

Dr Fixed Assets £100            Dr Cash £100

Cr Loan £100                            Cr Wealth £100

Again the Sisyphus Formula : “Net Retained Profit = Fixed Assets + Consumer Debt” still holds true as we have : Retained Profit (£0) = Fixed Assets (£100) + Consumer Debt (- £100).

If we call our Fixed Asset “Stock” (I use the term ‘Fixed Asset’ as a shorthand for non-Financial Assets of all types including Stock) and we sell £20 of it to the consumers for no profit at all – for starters – we’ll have :

Dr Stock £80                  Dr Cash £80

Dr Cash £20                    Cr Wealth £80

Cr Loan £100

Again the Sisyphus Formula : “Net Retained Profit = Fixed Assets + Consumer Debt” still holds true as we have Retained Profit (£0) = Stock (£80) + Consumer Debt (- £80).

Dr Stock £80                      Dr Cash £70

DR Cash £30                       Cr Wealth £70

Cr Retained Profit £10   Cr Loan £100

Here we have Retained Profit (£10) = Stock (£80) + Consumer Debt (- £70) Once again the formula holds.

If now Business pays out £5 of this profit in dividends then we’ll have this : Business                                  Workers

Dr Stock £80                          Dr Cash £75

DR Cash £25                           Cr Wealth £75

Cr Retained Profit £5          Cr Loan £100

And now we have Retained Profit (£5) = Stock (£80) + Consumer Debt (- £75).

Starting again from scratch to test other transactions : If a business found a piece rock that had a funny shape and had it ‘valued’ or ‘re-valued’ from Zero (cost price) to £150 Market price then we’d have this :

Cr Re-Valuation reserve £150

In the National accounts Re-valuation Reserves are, to the best of my understanding ultimately included in Net Profit so we actually have this : Business Dr Stock £150

Cr Retained Profit £150

and once again the formula balances as we have :

Retained Profit (£150) = Stock (£150) + Consumer Debt (£0).

If some consumer with Zero wages wants to buy this Rock then they’ll have to go into debt to do so so then we’d have :

Dr Cash £150                                       Dr Goods £150

Cr Retained Profit £150                  Cr Debt £150

Again Retained Profit (£150) = Consumer Debt (£150) and the Formula holds.

If some of this retained profit is released in dividends – say £30, then the total net debt of the consumers, which equals the amount they owe to the Banks to Business less the amount of cash, company bonds and company shares they own will now be reduced by £30 so once again we’d have Business                                                 Consumer

Dr Cash £120                                       Dr Goods £150

Cr Retained Profit £120                 Dr Cash £30

Cr Debt £150

… Retained Profit (£120) = Consumer Debt (£120) and the equation still works. If this company then issued £20 of bonds which were bought by the consumers for £20, then we’d have this :

Dr Cash £140                                      Dr Goods £150

CR Bonds Issued £20                      Dr Company Bonds Held £20

Cr Retained Profit £120                Dr Cash £10

Cr Debt £150