Kalecki's Economics Today

Zdzislaw Sadowski, Adam Szeworski

• Publisher: Taylor & Francis
• Year: 2003
• eBook ISBN: 9781134422272
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

Michael Kalecki was a Polish economist who independently discovered many of the key concepts of what is now identified as Keynesian theory. His contribution to macroeconomics was late in being acknowledged, but his work can be seen to have resounding influence on some of today's economic problems. The analyses presented in this book serve to scruti

Part I

The overview

1 Kalecki and Keynes revisited

Two original approaches to demand-determined income – and much more besides

D. Mario Nuti

Introduction

In 1962–3 I had the privilege of attending Michal Kalecki's lectures at the Warsaw Higher School of Planning and Statistics (SGPiS), as it then was, on the dynamics of a capitalist economy. From Warsaw I moved directly to King's College, Cambridge, where I often heard Joan Robinson speak of Michal Kalecki as the man who had discovered the General Theory before Keynes, as she also fully acknowledged in print (1952, 1964, 1966a, 1976) and in correspondence with Kalecki. Such a generous recognition was put forward also by some few others, such as Oskar Lange (1939) and Lawrence Klein. Kalecki's pre-1936 writings ‘created a system that contains everything of importance in the Keynesian system’ (Klein 1951: 447); Klein (1975) makes the even stronger statement that ‘Kalecki's greatest achievement, among many, was undoubtedly his complete anticipation of Keynes' General Theory’ (emphasis added; see also Klein 1964, 1966). No recognition ever came from Keynes, or from any of his close associates such as Richard Kahn. Apparently Kalecki had sent to Keynes, before the General Theory was published, a German version of his 1933 paper on the business cycle, which Keynes returned to him with a note explaining that he did not know German¹ – others of Keynes' immediate circle certainly did and the resources of the College and of the University make this a curious response; it rankled then and it still rankles today. In 1937 Joan Robinson wrote to Kalecki: ‘It must be rather annoying for you to see all this fuss being made over Keynes when so little notice was taken of your own contribution’ (reproduced in Patinkin 1982).

In his 1936 review of the General Theory, Kalecki was the first to claim similarity of, and priority in, discovery for his 1933 essay: ‘The statement that investments determine the total size of output, I have proved in a manner similar to Keynes in An Essay on the Theory of the Business Cycle (Institute of Research on Business Cycles and Prices, Warsaw 1933), pp. 114–16’ (Kalecki 1936: 268). He also wrote: ‘I pointed out the independence of changes in output from shift in nominal wages also in the Essay on the Theory of the Business Cycle (1933)’ (1936: 260). But he did so in two footnotes, and in another extremely discreet and concise claim in his Introduction to Kalecki (1971): ‘The first part includes three papers published in 1933, 1934 and 1935 in Polish before Keynes' General Theory appeared, and containing, I believe, its essentials'. Otherwise he never pressed the point. I believe he was much too proud to feel the need to assert it and a claim not spontaneously and universally accepted could only diminish his greatness. After Kalecki's death, Don Patinkin (1982) denied that Kalecki could be credited with anticipating Keynes' General Theory: ‘Kalecki came significantly closer to the General Theory than did the Stockholm School…. At the same time, I cannot accept such claims [as those of Klein and Joan Robinson]’.

As a side note I will argue that while Kalecki and Keynes have in common a theory of national income determination based on effective demand and driven by investment, and the important policy implications that descend from it, each of them followed a distinctive intellectual route, used very different building blocks and covered distinctly different additional ground. It is not a question of establishing priority in discovery, but of crediting both of them with equally original, central contributions to modern macroeconomic theory.

Different departures

Kalecki's and Keynes' personal backgrounds were very different (on Kalecki's biography see Kowalik 1964). Both knew from direct and personal experience the cyclical nature of capitalist economies, but from different viewpoints. Kalecki was the son of a manufacturing entrepreneur who went bankrupt, and was therefore familiar with the world of production, the investment process and the risk of investing in production on borrowed money. Keynes came from an upper-middle-class family and had direct operational experience as a civil servant and as a financial investor who operated daily in the financial markets, on behalf of King's College and for himself (sometimes more successfully than at other times; he died rich, but he was close to ruin more than once).

Their intellectual formation was also very different. Kalecki was an engineer who lacked the financial means to complete his university degree, was versed in the mathematics of difference and differential equations, a self-taught economist who had not been influenced by the kind of conventional economic theory against which Keynes rebelled and campaigned. He made little use of choice theory and marginalist thinking. He was influenced by Marx's reproduction schemes, by the class categories of people and incomes (capitalists and workers, profits and wages) typical of the Marxian and English classical tradition, by Rosa Luxembourg and Tugan-Baranowsky. He had worked with Ludwik Landau on the construction of Polish national income statistics. Keynes was a mathematician who specialized in probability theory, which like Frank Knight he found useless in the assessment of business risk. He had an Eton and Cambridge education. He was taught economics by Pigou and Marshall against whom he reacted.

The very titles of their main works display the main differences in their approaches and concerns. Keynes had a theory of employment based on interest and money, Kalecki laid bare the dynamics of capitalist motion.

Common features in approach and propositions

Both Kalecki and Keynes disregarded the role of money wages in labour employment, regarding real wages as determined by producers' price setting; indeed they were both prepared to contemplate even a possible direct rather than inverse relationship between employment and wages. Both followed a bold, macroeconomic and aggregate approach to the theory of national income and employment determination, taking national income identities as their starting points. Both regarded investment demand as the driving force of the capitalist system and assigned a crucial role to government expenditure in macroeconomic policy to supplement investment and net exports when national income was in under-employment equilibrium, regarded as the normal state of the world. But similarities end here. Their investment and consumption functions were different; different too was the theory of interest and the role of monetary policy; the spillover effects of their theories led to important and original developments in entirely different areas of economic investigation.

Investment functions

Kalecki had a very complex view of the investment process, distinguishing between investment orders, investment output and actual deliveries of investment goods. Investment orders depend on the ratio of profits to the capital stock, and the long term interest rate. Thus for Kalecki, contrary to Keynes' approach, investment profitability is not a marginal concept derived from discounting prospective cash flows, but a current average ratio projected into the future. Such ratio is an increasing function of the degree of utilization of productive capacity – thus making Kalecki's investment function behave as a flexible accelerator or capital-stock adjustment equation. Short-term interest rate does not matter as much as in Keynes because for Kalecki the rate affecting investment is the long-term rate, which moves more sluggishly than short-term rates, and because increasing risk from the use of borrowed money, and the ensuing danger of bankruptcy, soon stops investment even at low interest rates. Current investment output is the result of lagged past decisions; investment deliveries raise (lower) the capital stock according to whether they exceed (fall short of) the equipment going out of use, feeding back onto current profitability and new investment orders. Expectations play no role, other than in current average profit rate being projected into the future.

For Keynes, on the contrary, current investment depends on both the marginal efficiency of investment – i.e. the internal rate of return on prospective investment projects, ordered in terms of decreasing efficiency – and current interest rate. The marginal efficiency of investment is something which exists solely in the minds of entrepreneurs, it embodies their ‘animal spirits’ and is subject to sudden changes according to ‘the state of the news’. Instead of the long-term interest rate being mildly affected by the current rate, as in Kalecki, for Keynes the current rate depends on expectations about the future normal rate of interest to which the current rate tends to revert (i.e. the interest rate ‘hangs from its bootstraps’).

Consumption functions

For Kalecki consumption behaviour differs among income categories: capitalists' consumption consists of a fairly stable amount which is constant over the cycle, as capitalists are constrained by their entire wealth and not by current income; they also consume a small – if any – share of current profits. Workers are presumed to consume all they earn. It follows that the marginal propensity to consume c can be approximated by the share of wages in national income, and indeed Kalecki's multiplier – which he seldom uses – is expressed as 1/(1 – wage share) instead of the conventional Kahn-Keynes 1/(1−c).

For Keynes, aggregate consumption depends primarily on aggregate income, regardless of its distribution, which comes into play in post-Keynesian (one should certainly say post-Kaleckian) income distribution theory (see below).

The basic models

For Kalecki:

Y=C+I	where Y=GDP; C=Consumption; I=Gross investment
Y=W+P	where W=Wages; P=Profits
C=Cc+Cw	where Cc=capitalists' consumption; Cw=workers' consumption
Cc=A	or Cc=A+b.P where A=constant and b is a small fraction;
Cw=W
A+W+I=W+P
P=A+I

Thus profits are determined by capitalists' (fairly constant) consumption and (variable, indeed cyclical) investment expenditure. A fall of money wages would leave demand unchanged if prices fell by the same proportion, and would result in a demand fall and therefore income fall if prices were rigid. Kalecki (1934) specifically considered an open economy in which exports played the same role as investment in driving demand and employment, while government expenditure was viewed as ‘domestic exports’, with imports as leakages and – ceteris paribus – a trade balance deterioration arising from an increase in government expenditure.

Investment decisions Id are a function of average profit ratio and longterm interest rate:

Id=Id(ltr, P/Y)	where ltr=long-term interest rate
P/Y=f(Y/K)	where K=capital stock

For Keynes:

I=I(r)	r=interest rate
M=L(r, Y)	M=money supply, L=money demand
C=B=c.Y	B=constant, c=marginal propensity to consume

‘For Keynes prices are determined by money wages, investment is determined by the interest rate and the marginal efficiency of capital, the interest rate is determined by liquidity preference’ (Joan Robinson). Lower money wages – as in Kalecki – do not necessarily promote employment unless they are accompanied by higher investment, which in Keynes might occur through their impact on the real quantity of money and therefore the interest rate.

For Keynes the central position is taken by the interest rate, as confirmed by the General Theory's full title. He is under the influence of Sraffa (General Theory, ch. 17, plus the convention of measuring income and money in wage units).

We are confronted with similar conclusions originally and independently drawn, arising from different starting points, different intellectual and technical backgrounds, different values and above all different building blocks, i.e. different theories of aggregate consumption, investment and the role of money. There is sustained originality in both; there is a very great deal that we can find in Kalecki that is not in Keynes, and vice versa. It is inappropriate to regard them as in competition for the same achievements.

Exclusive originalities

Kalecki has a theory of distribution, reviewed above. Indeed he has two distribution theories, the other depending on the aggregate degree of monopoly or aggregate mark-up although, as Nicholas Kaldor used to say, this is not satisfactory: for every product a mark-up theory of prices must specify price leadership criteria (in which enterprise's costs matter), the relevant degree of capacity utilization (costs varying with it) and the mark-up determination. Keynes neither has nor needs a theory of distribution. What is known as the neo- or post-Keynesian distribution theory is actually a neo-Kaleckian reformulation of Kalecki's first theory of distribution, with profit share instead of Kalecki and Keynes revisited absolute profits and a more flexible hypothesis about the magnitudes of propensities to save out of profits and out of wages.

Kalecki has a theory of cycles, indeed a number of theories of cycles that are increasingly refined over the years (including a theory of political business cycles) culminating with the approaches further developed by Nicholas Kaldor and by R.M. Goodwin. Keynes' model is compatible with business cycles and – with the addition of an accelerator or other ingredients – can be and has been turned (beginning with Paul Samuelson and Roy Harrod) into a theory of cycles. But Kalecki had a theory of cycles of his own, driven by investment demand, as early as 1933; he also had growth solutions as special cases of his cycle models.

Finally, Kalecki exercised his talent in diverse other areas of economic research, primarily development theory and economic planning, both in less-developed countries and in centrally planned socialist economies. In particular, his theory of the socialist economy was a strong denunciation of its excessive propensity to invest – excessive with respect to non-inflationary conditions, to population willingness to abstain from consumption for future gains, to the sustainability of income and consumption growth (see Nuti 1989). Had Soviet and central-east-European leaders heeded Kalecki's advice the history of the last 15–20 years in the socialist block would have been very different.

Keynes has a theory of expectations – sometimes self-fulfilling, sometimes self-falsifying (in the Preface to a reprint of the General Theory he wrote that if he ever were to re-write it he would distinguish carefully between the two cases). Expectations – he explains – are important because demand for future goods does not have to be expressed in current markets. Today we would say that markets are incomplete (most forward/future markets are missing) and in any case sequential (i.e. even if futures markets were complete, one would not have to transact in them today for markets reopen daily, indeed never close in the global economy). The volatility of expectations is a major ingredient of his approach, and a key to the understanding of his view of financial markets.

At the same time, fairly simple ‘reversionary’ expectations govern for Keynes the medium-long normal level of the interest rate, which is the foundation of liquidity preference. Right or wrong, relevant or irrelevant ...

Table of contents

• Cover
• Half Title
• Routledge Frontiers of Political Economy
• Full Title
• Copyright
• Contents
• List of contributors
• Preface
• Acknowledgements
• Introduction
• PART I The overview
• PART II The model
• PART III The policies
• PART IV The developing economies
• Epilogue
• Bibliography
• Index