1. Profit: The Main Cause of Crisis
Sašo Tomažič
University of Ljubljana
Faculty of Electrical Engineering
Laboratory of Information Technologies

2. Economic crises Crises in capitalism reoccur regularly. Some examples:
Depression in USA
1929 Wall Street break down and the Great depression
1987 Black Monday (Hong Kong)
2000 dot-com collapse
2008 the last global crisis
What do economists have to say?
They believe that crisis are an integral part of the business cycle (economic fluctuation)
They classify business cycles by periods
They create macro-economic models
They try to find economic equilibrium
The conclusion: crises are natural phenomena

3. Macro-economic models
Simple mathematical models
IS-LM (Investment Saving – Liquidity preference Money supply)
IS-MP (Investment Saving – Monetary policy)
AD-IA (Aggregate Demand – Inflation Adjustment)
Large scale macro-econometric models (empirical forecasting)
They relay on large quantities of past statistical macro/economic data
They model economy with stochastic processes
Agent based models
They break down macro-economic relations to decisions of micro-economic agents.
Dynamic stochastic models
Agent based models that include dynamic of processes
Database of different models in MatLab

4. Methodology (our approach)
Big picture
Avoiding being lost in the details (not seeing the forest from the trees)
Avoiding different assumptions
Deductive instead of inductive reasoning
Example of marble collectors
Economy as a system
Theory of systems
Feedback loop
Stability and equilibrium

5. Economic equilibrium
Macro-economic models are used to find the state of equilibrium
Equilibrium can be stable or unstable
Unstable equilibrium needs regulation
Regulation is not always feasible
stable
stable
unstable
unstable

6. Feedback loop Systems with positive feedback can be unstable.
If 𝛽 𝑓 𝐴 𝑓 >0 then feedback is positive.
If 𝛽 𝑓 𝐴 𝑓 >1 then system is unstable.
Unstable system can have unstable point of equilibrium.
The systems with delayed negative feedback are also unstable. They oscillate.
𝑌(𝑓)= 𝐴(𝑓) 1−𝛽𝐴(𝑓)

7. Earnings, Surplus, and Profit
Earnings are what we have created through our physical or intellectual work.
Surplus is the amount of assets or resources created in excess of what we need or utilize. It is a part of earnings.
Profit is what remains after deducing all business expenses:
costs of material,
physical and intellectual work, and
depreciation of production means.
One man’s profit always inevitably entails another man’s loss.

8. Profit from capital Profit from capital can be made from capital by
investing and/or
lending money for interest.
Profit from capital introduces positive feedback into the system
𝑜𝑢𝑡𝑝𝑢𝑡 =𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 1+𝑝 𝑛
𝑝 … annual growth
n … number of years
The exponential grow of capital also requires an exponential growth of the real economy. At least 2% per year is expected.
At 2% growth per annum (p=0,02) 1 liter of wine per annum in year 0 yields 31 milijon liters per annum for each oy 7 billion habitants of Earth in 2016

9. Interests 𝑑𝑒𝑏𝑡 =𝑝𝑟𝑖𝑛𝑐𝑖𝑝𝑎𝑙 1+𝑝 𝑛
The most critical mechanism for profit of capital.
Debt grows exponentially, in accordance with:
At 5% interests debt doubles in 14 years.
All newly created money is lent for interest.
Most of new money is created as a loan of commercial banks.
After 14 years, banks expect to have twice as much money than they created, therefore, the debt cannot be repaid, even not in theory.
At 5% real interests rate
debt 1€ in year 0 yields
5, 21 ∙ € in (the mas of € banknotes would exceed mass of billion suns)
IMF: Debt of nonfinancial sector to financial sector in 2015 was $ billion (205 % of the world GDP).
Interests necessarily lead to debt crisis.
𝑑𝑒𝑏𝑡 =𝑝𝑟𝑖𝑛𝑐𝑖𝑝𝑎𝑙 1+𝑝 𝑛

10. Labor Market
Due to advances in production technology, work efficiency has greatly increased.
To maximize profit employers reduce the number of employees (instead of reducing the work hours).
Purchasing power declines.
Demand declines.
More workers lose their jobs
This is positive feedback. It leads to great unemployment in times of crisis.
Governments try to solve this problem by regulation, which is delayed, so it produces oscillations.

11. What can (should) be done?
Positive feedback must be disabled
We should renounce profits from capital.
It requires changes in collective consciousness (education)
Better understanding
Changed attitude to work (work will become privilege).
Moral values (greed should be replaced with other walues(
Monetary reform:
Newly created money should not be loaned (producing debt(.
Commercial banks should not create new money.
Money should lose the function of capital (interests).
Taxation reform
Progressive taxation of profits with upper limit.
Limited inheritance
Social security
Basic income
Reform of the pension system
Free basic commodities (food, transport, inhabitancy, …)

12. Discussion?