Relevance of Michal Kalecki Today

Author(s): Amit Bhaduri and Kazimierz Laski

Source: Economic and Political Weekly, Vol. 29, No. 7 (Feb. 12, 1994), pp. 356-357
Published by: Economic and Political Weekly
Stable URL: https://www.jstor.org/stable/4400787
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PERSIPtCTIVES
tual influence remain throughout Keynes'
Relevance of Michal Kalecki Today economic writings. It was only with great
effort that Keynes was able to liberate
Amit Bhaduri
himself gradually from the dogmas of
Kazimierz Laski
orthodox economics, and especially from
treating savings, in line with so-called
Both the 'paradox of thrift' and the wage cut controversy point to the Say's Law, as simply another form of
critically important role that aggregate demand plays in determining the spending.
level of economic activity, output and employment. And yet, before Kalecki
SAVINGS-A VIRTUE AND A VICE
and Keynes, economic theory was devoid of any theoretically precise
In both Kalecki' s and Keynes' theorising,
fortmulation of how this aggregate level of demand is generated in a a proposition known as the 'paradox of
market economY. thrift' plays a central role. Although sav-
ings is an individual virtue, valued highly
IT is difficult to appreciate the contempo- economy, as required by Kalecki and by both orthodox economics and Victo-
rary relevance of the extraordinary Polish Keynes. rian England, it can turn easily into a
economist Michal Kalecki (1899-1970) collective vice, if everyone spends less.
KALECKI AND KEYNES
without recognising the peculiar path of Because, this will result in lower demand,
progress in economic science. In the natural Both Kalecki and Keynes looked for an accumulation of unsold goods in factories
sciences, the important source of progress is explanation of mass unemployment during and shops'and finally lay-off and unem-
a healthy tension between theoretical specu- the Great Depression of 1929-1933. Not ployment. Therefore, what is good for the
lation and experimental evidence. Econo- only did they come to the same answer, butindividual is not necessarily good for the
mists like to believe that their subject even more important from the scientific society as a whole! This is, indeed, a most
progresses also along sirnilar lines. How- point of view, they reached their common difficult conclusion for any liberal econo-
ever, in economics a far greater tension conclusions by devising a similar method of mist to accept. And, precisely it was at this
exists between theory and ideology. Eco- analysis, namely, the application of the point of political philosophy that Kalecki
nomics, especially macro-economics which double entry format of national income ac- and Keynes directed their deepest criti-
deals with the working of the economy as a counting which shows all expenditure as cism of the working of the market economy.
whole and government policy formulation income and vice versa. Kalecki, like Keynes, By extending the same logic Kalecki ar-
in general, cannot avoid politics; just as was led by his analysis to dismiss the ortho- gued that money wage cuts by an isolated
politics cannot avoid economics. The result dox idea that a market economy is led auto- entrepreneur stimulates his profit by reduc-
is, economic science seldom progresses in a matically towards full employment. But the ing costs. But if all entrepreneurs cut money
cumulative manner. Newly fashionable theo- two great economists had started from very wages aggregate demand would be reduced.
ries are not formulated by systematically different positions in almost every respect. Kalecki concludes: "...one of the main fea-
retaining and improving upon the valuable Kalecki came from an impoverished Jewish tures of the capitalist system is the fact that
insights of past theories, but by pre-select- family. In 1923, just before completing his what is to the advantage of a single entrepre-
ing carefully mainly those aspects of older study of civil engineering at Warsaw and neur does not necessarily benefit all entre-
theories which fit current ideology. In some Gdansk Polytechnics, for financial reasons hepreneurs as a class. If one entrepreneur
respect, this becomes somewhat like a fash- had to give up. As an economist, he was almostreduces wages he is able ceteris paribus to
ion parade. Old intellectual fashions and entirely self taught and, thattoo, mostly through expand production; but once all entrepre-
policies are often resurrected with hi-tech observation of facts as an economic journalist neurs do the same-the result will be en-
mathematics and econometrics to suit the and researcher in economic statistics. Aca- tirely different. "
political mood of the time. As a result, the demic theories were never his main intellec- Both the 'paradox of thrift' as well the
dominant view of macro-economic policy tual diet, although he had come across fairly wage cut controversy point to the criti-
prescriptions swings like a pendulum every early some Marxist literature. But even here, cally important role that aggregate de-
few decades-from the view that the gov- he had the natural instinctof a great theorist: he mand plays in determining the level of
ernment is interfering too much with the made little use of the labour theory of value, but economic activity, output and employ-
economy to the view that it is not doing was deeply impressed by Marx's schemes of ment. And yet, before Kalecki and Keynes,
enough. Inflation and the slowing down of reproduction which intrduced the crucial dis-economic theory was devoid of any theo-
growth in the 1970s, although causedmainly, tinction between a capital goods sector (De- retically precise formulation of how this
by the oil crisis and some other special partment 1) and a consumers' goods sector aggregate level of demand is generated in
factors, were readily explained by lacking (Department 2) into macro-economic analy- a market economy. In 1933, three years
wage discipline and government tinkering sis. Given his personal and-intellectual back-before the publication of Keynes' highly
at the market. Thatcherism and ground, Kalecki remained mostly an 'extemal influential General Theory (1936), Kalecki
Reaganomics, professing 'the magic of the critic'-an outsider tothe academic establish- published in Polish his Essay on the Busi-
marketplace', became in the 1970s, highly ment in economics. ness Cycle Theory. It was a slim volume in
fashionable in governments and academia. Keynes, on the other hand, was its most which, with exemplary precision, he for-
H-owever, fashions lose relevance when successful 'internal critic', who revolu- mulated the theory of aggregate demand
harsh reality contradicts them persistently. tionised the system of thought from within.and identified investment as the central
Bill Clinton won the presidential cam- Keynes, a scion of an established upper element governing it. He then applied this
paign by pointing out that the government middle-class English academic family in scheme to explain business fluctuations
is not part of the economic problems fac- Cambridge, was almost born a part of the and put forward his theory of the capitalist
ing the US, but part of their solution. This ruling academic establishment. As an economy as a demand-driven system. In a
victory signals hopefully a retreat of the economist he was brought up in the tradi- way, the 'Keynesian Revolution' was born
market fundamentalism and a beginning tion of his great Cambridge professor, with it, althoughl the book was not trans-
of a more active role for the state in the Alfred Marshall, traces of whose intellec- lated into English until 1966!

356 E,onomic and Political Weekly February 12, 1994

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 OVERCOMING DEPRESSION profit for business in an economic recession. an extremely tight money policy, reduced
government expenditure in an attempt to re-
ECONOMIC ORTHODOXY VERSUS
In his early writings Kalecki developed also duce the budget deficit and restraint on wage-
the theory of profits. In his terse formulation KALECKI'S THEORY these economies has been landed in an eco-
investment plus capitalist consumption (as- The original vision shared by Kalecki and nomic depression which can be compared only
suming no savings outof wages) determine the Keynes that capitalism is essentially a de- with the Great Depression of the 1930s in the
level of profits earned by private business. If mand-driven system has not lost its policy capitalist world. Several democracies could
investment increases in a depression effective relevance today. The accepted orthodoxy, not survive that economic debacle. It will be
demand increases by more than the increase in however, has never shared this vision. Or- unwarranted optimism to believe that all the
investment. Indeed, workers producing in- thodox economic policies are rooted in the fragile democracies of eastern Europe can
vestment goods earn now more and spend view that the market economy is a supply- survive an economic depression of this magni-
more on consumer goods. In turn workers constrained system. This follows from the tude, if itlasts much longer. "Thosewhodonot
producing consumer goods earn more and assumption that the capitalist economy tends remember history are condemned to repeat it"
spend more on consumer goods, etc. The automatically to full-employment without
increasedeffectivedemand stimulates firms togovernment intervention. Ignoring the prob- NEED FOR AN UNDOGMATIC RETuRN TO
produce more output and, given the profit KALECKI' s THEORY
lems that deficiency in aggregate demand
margin perunitof output, the volumeof profits can cause, the ruling economic establish- And yet, thanks to the economic theories
increases through higher capacity utilisation. ments everywhere harps back to the tradi- of Kaleclki and Keynes, today we are not as
This process lasts till profit increase reaches tional virtues of more savings and austerity. helpless as we were in the 1930s. They
the level determined by the sum of increased The 'paradox of thrift' is simply forgotten. provided us with a clear theoretical basis for
investment and capitalist consumption. The Even today, multilateral institutions of the believing that, in the deep recessionary con-
formulation 'capitalists earn what they spend; Bretton Woods system recommend indis- ditions of today's east Europe, an active
workers spend what they earn' has since be- criminately austerity, especially in govern- demand expansion policy by the govern-
come a famous epigram. The theory thatprofit ment spending, both for developing coun- ment can raise output and employment with-
is detennined by capitalist spending through tries in balance of payment difficulties and out serious inflation. As a matter of fact, the
aggregate demand made a radical departure, for the former command economies trying persisting high inflation of eastern Europe
both from the Marxian 'surplus value' expla- to make a transition to the market system. may even decelerate, as higher capacity
nation as also from theorthodox explanation of Similarly, some central banks do not hesi- utilisation begins to bring down the unit
profit as the 'reward forwaiting' to thecapital- tate to follow in the time of a.depression a production costs in large public enterprises,
ists. 'tight money' policy of austerity to discour- where prices are set mostly on the basis of
Kalecki stressed that deficit spending of age spending and encourage savings. Its costs. Kalecki was again the first economist
the government (and an export surplus) essential logic lies in the pre-Keynesian andto integrate the theory of cost-determined
plays the same role as investment in deter- pre-Kaleckian supply-constrained vision ofprices with the vision of a demand-driven
mining the level ofXprofits. Hence, higher the economic system. The level of aggre- capitalist economy. Today that theory needs
deficit spending (e g, for public investment) gate output being assumed to be supply- to be applied to fightrecession and inflation,
during depression would not only reduce constrained, restrictive monetary policy orat the same time, in eastern Europe.
unemployment, but by rising the level of reduction in government budget deficit is not However, in one importantrespectMichal
total demand would lead to a higher output expected to reduce aggregate output through Kalecki'a s theory needs to be modified seri-
and profit level. With a higher level of reduction in aggregate demand. It is only ously to suit present conditions. Like Keynes,
economic activity and higher income, sav- expected to reduce inflation and improve theKalecki in the 1930s argued mostly in terms
ings of the corporate sector would expand balance of payments. The fear of inflationof an economy closed to foreign trade. De-
up to the level of the budget deficit. In this makes austerity a socially accepted policy. mand management in an advanced indus-
sense deficit spending (as investment) tends There is obvious merit to this orthodox trial economy no longer works smoothly
to finance itself! This conclusion was quite view, that the economy is supply-con- because part of the demand spills over easily
a blow to the orthodox idea that a balanced strained, only when we are nearing full- to the foreign market to create larger trade
budget is the very basis of 'sound' public employment and cannot bring easily into deficit. However, what is far worse is the
finance. Note again that the analogy betweenuse the underutilised capacity. Any large massive speculative flight from domestic
the individual and the society, which is takenexpansion of demand, say, by acombination currency that it might cause in today's highly
for granted in liberal political and economic of government budget deficit and cheap integrated and deregulated world capital
philosophy, was questioned by this Kaleckian money policy, would then undoubtedly lead market, as experiment with 'Keynesianism'
viewof deficit spending as a method of stimu-to inflation and payments problems. The by Mitterrand's socialist government in
lating the upswing in a recession. mistake of orthodox theory is to generalise France in the early 1980s showed. In their
In policy terms, Kalecki's theory of profitsthis special case of near-full employment different context, east Europe is bound to
also indicates why the government budget and ignore the equally obvious fact that face the same problem today, as expansion
deficit may stimulate and not 'crowd out' expansion of demand below full-employ- in demand could easily lead to larger import
private investment, especially in a deep reces-ment may cause output and employment to of better quality western goods and capital
sion. The common sense reason, which was expand without serious inflation. flight. Without massive inflow of foreign as-
established precisely by the convincing use of sistance and investment, the only way out of
national income accounting, is easy to see: CONSEQUENCES OF ORTHODOXY
this dilemma is tightcr temporary control of
higher budget deficit stimulates aggregate de- IN EAST EUROPE
import and capital outflow. On all account this
mand and, even with the same profit margin The economic disaster of pursuing the or- is very unpleasant. Butperhaps less unpleasant
per unit of sale, fimis increase their total thodox remedy of 'austerity only' is now far than the probable consequences of a long-
volume of sales to earn higher profit which too apparent in east Europe. In addition to lasting deep economic depression, compa-
encourages them toinvestmore. Hence, deficit inevitable losses caused by the collapse of the rable to that of th, 1930s, especially for their
spending may also 'crowd in' private invest- commandeconomies,Poland(fcrmer)Czecho- new-born, fragile democracies!
ment! And this is precisely what policy-mak- slovakia, Hungary, Bulgaria and other coun-
[A modified German version of this paper has
ing in a demand-driven system is all about: to tries suffer from consequences of a deliber-
been published in Die Zeit, Hamburg, and also in
step up demand in an intelligent way so that it ately restricted demand. By rgtricting de- Polish and Russian translation. The English ver-
stimulates both employment for workers and mand in almost every possible W#ay-through
sion has not appeared before.]

Economic and Political Weekly February 12, 1994 357

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