Michał Kalecki (1899 – 1970) was a Polish economist who arrived in London in 1936, claimed to have published the essential ideas of John Maynard Keynes’s General Theory of Employment Interest and Money in an earlier Essay on the Business Cycle Theory published in Polish in 1933, and went on to develop those ideas in a series of papers and commentaries criticising capitalism, development economics and the economics of socialism. That he got to Keynes’s theory before Keynes we have the words of Keynes’s friend Joan Robinson and the Economics Nobel Laureate Lawrence Klein, who also recognised Kalecki’s more radical genius.
Kalecki was born in the Polish city of Łódź, where his father was a minor industrialist. Unfortunately, business conditions around the turn of the nineteenth century were not good and deteriorated rapidly with the outbreak of the Russo-Japanese War. Łódź became a centre of the 1905 Revolution that prepared the ground for the later October Revolution in Russia. His father’s business collapsed, and the young Kalecki’s education was further disrupted by the hostilities between Russia and Germany in the First World War. After the war, Kalecki managed to complete just a couple of years of engineering studies, before returning to Łódź to scrape together a living to support himself and his father.
It was at this time, that Kalecki started writing articles on markets, business conditions and the companies operating in them. These eventually got him a first job, in 1929, as a consultant on business cartels in a new Institute for the Study of Business Cycles and Prices in Warsaw. From this work came the macroeconomic ideas for his Essay on the Business Cycle Theory. He presented the theory in Leyden at a meeting of the Econometric Society at the end of September 1933, where it was noted by, among others, Nicholas Kaldor, Ragnar Frisch and Jan Tinbergen. In 1935 Kalecki was awarded a Rockefeller Travelling Fellowship that bought him to London (via Stockholm).
Kalecki arrived in London to an excited academic tumult over the meaning of Keynes’s new book. His claim to have worked through the essential ideas of the book before Keynes was, of course, widely discounted. But he met Joan Robinson, who was bowled over by Kalecki’s deeper understanding of those ideas, and she introduced him to Keynes. Keynes was sufficiently impressed to publish Kalecki’s papers in the Economic Journal that Keynes edited. More than this. Keynes helped Kalecki find employment as a researcher in Cambridge.
Despite Joan Robinson’s support, Kalecki did not get on with the academics in Cambridge, brought up on the neo-classical theory of Alfred Marshall the founder of Economics at the university. When the Second World War broke out, Kalecki moved with his wife to Oxford, where he spent the war years at the Oxford Institute of Statistics researching articles and commentaries on the war economy and war finance. From this period come his writings on full employment and fiscal and monetary policy. And while Keynes was arguing with the US government at Bretton Woods over the future of the international monetary system, Kalecki also wrote on this, and the limitations of the plans presented at Bretton Woods.
In 1945 Kalecki left Oxford to join the International Labour Organization in Montreal, in the following year moving to New York, where he joined the Department of Economic Affairs at the UN Secretariat. He stayed there until 1954, writing reports on inflationary and deflationary conditions in various countries. Politically this was a difficult time. With the spread of anti-Communism, he was denounced as a Marxist and a Communist sympathiser. When he was instructed to submit his work for editorial correction by a board which would have control over that work, he resigned his position and returned to Poland.
He arrived in Poland just as discussions were opening over the reform of the socialist system of economic administration. He opposed the socialist market model famously advocated by Oskar Lange because Kalecki thought that it would reproduce the deflationary pressures that created unemployment in the capitalist economies. For a while his was an important voice in economic planning discussion. But in the 1960s when he became critical of the Communist government’s industrialisation ambitions, he was quietly dropped from his official positions. He still had a thriving and lively programme of academic teaching and research, on capitalist and developing countries.
However, in 1968, barbarism resurfaced in Polish society, with a purge of Jews and ‘revisionists’ from Polish society and institutions. Such was Kalecki’s international standing that his own position was secure. But his associates at the universities where he worked lost their jobs and were driven abroad. In 1969, already a sick man, Kalecki made one last visit to Cambridge, before returning to Warsaw. He died on the 17 April 1970.
In an article like this it is impossible to summarise the full range of Kalecki’s ideas. These range from papers in pure mathematics that he wrote, to consultancy and policy notes. Given the economic dilemmas of the present British government, perhaps the most relevant Kaleckian ideas may be grouped under three headings: the economics and politics of full employment; collective consumption; and techniques of debt management.
The economics and politics of full employment
Kalecki and Keynes shared a common policy goal in wanting to achieve full employment. This was natural after the years of mass unemployment in the inter-war period and a was a goal shared with most economists of the time. For both Keynes and Kalecki full employment was not just a means of overcoming the obvious inefficiency of mass unemployment amid obvious human need. Full employment was also a way of remedying the two most egregious moral and material failures of the capitalism in which they lived: poverty, arising from the absence of employment that would allow workers to support themselves and their families; and the inequalities of income that had no basis in productivity or just deserts.
Kalecki argued that full employment could be obtained by expanding government expenditure, in particular through a fiscal deficit. The expenditure part of the deficit adds to demand in the economy, over and above existing production. In this way, it adds to the profits of business by creating what Kalecki called a ‘synthetic’ boom along the lines of an investment boom. In this regard, Kalecki agreed with Keynes that fiscal policy is the key measure for expanding economic activity in particular since the traditional alternative of monetary policy (lowering interest rates to encourage investment and economic activity) had not worked in the 1930s, and has shown meagre results in terms of economic growth since then.
However, in perhaps his most famous article ‘Political Aspects of Full Employment’, published in 1943, Kalecki argued that the enhanced bargaining power that full employment gives to workers is precisely why employers will not want to have full employment, despite the obvious benefits to business of more consumer demand and higher profits. To defend their ‘power in the place of work’, capitalists would use their ‘power in society’ to oppose full employment. In Kalecki’s view, big business and its friends in the higher reaches of finance would find more than one economist to declare that the situation of full employment is ‘manifestly unsound’. After all, a state of unemployment seems, historically, a ‘natural’ condition of capitalism, especially since full employment is only ever reached, if at all, at the peak of an economic boom
Of course, enlightened modern business desires full employment almost as much as any of the critics of capitalism. Business only differs from those critics in how that goal is to be achieved. Business would prefer that this should be done through private investment, which historically has powered business up-swings. But private investment in turn depends on entrepreneurs’ confidence in future business conditions. As Kalecki pointed out this creates a dependence on a fragile business opinion that gives big business a veto over government economic policy: The government must do nothing that might imperil the existing or potential investments that may in the future generate full employment and cause a financial crisis. ‘Budget deficits necessary to carry out government intervention must be regarded as perilous. The social function of the doctrine of “sound finance” is to make the level of employment dependent on the state of confidence.’
These circumstances create what Kalecki called a ‘political business cycle’ in democracies, where full employment becomes a priority as elections approach, but is abandoned under pressure from business and finance for ‘sound finance’. However, the residue that is left of poverty and unemployment brings with it its own dangers principally in the radicalisation of those ‘left behind’ by the temporary or uneven growth of prosperity. This is not the radicalisation dreamed of by naïve sections of the left, in which the working class comes together to overthrow capitalism, but the rejection of democracy, the embrace of militarism and authoritarianism, and attacks on minorities. Full employment was, for Kalecki, a way of preventing fascism and essential for the preservation of democracy.
Kalecki had no illusions about the pressure that full employment, by strengthening the position of workers and trades unions, would place on labour market bargaining. New institutions would be needed to socialise the process of negotiations over wages and workers’ rights. They would abolish some of the worst features of free market capitalism and prevent fascism from undermining democracy.
Collective consumption
Despite his reservations about the possibility of achieving full employment solely by means of private sector investment, this did not mean that Kalecki thought that such investment could be left to individual businesses to decide. Overall, the economy needs to have the capacity to satisfy the demand of a fully employed population. This meant avoiding the business cycles of the past, when market forces caused extreme fluctuations in investment, and hence also in profits, output and employment. The stabilisation of investment was unlikely to be achieved by subsidies to business, or reductions in interest rates. Subsidies may have to be cumulative, in order to maintain a given level of investment, and the eventual subsidy may end up as a fiscal burden. As for interest rates, these have a weak and unreliable effect on investment and, cumulatively, may quickly run up against zero interest boundary. Providing inducements to invest corrupts business and fiscal policy.
A more reliable way of encouraging private sector investment is the use of public investment, in particular where there is an industrial sector that is under-invested. Kalecki gave the example of slum clearance. But he might have had in mind coal-mining, railways and the steel industries in Britain. All of them were conspicuously under-invested while in the private sector and were nationalised by the post-war Labour Government precisely to modernise their capital equipment and working practices.
The overall aim was to expand the capacity of equipment in line with the increase in the working population and the productivity of labour. In other words private investment should rise proportionately to full employment output. Some of this will be done spontaneously by private enterprise to take advantage of technological innovations. But the rest may be brought on by public investment.
Kalecki did not believe that the government expenditure necessary for full employment should be devoted to public investment alone. In particular he was critical of public investment as mere job-creation. Public investment should be determined in accordance with social priorities to avoid unnecessary expenditure on redundant projects. In response to the argument that government expenditure should be restricted to public investment, he argued that ‘it would be absurd to restrict the government spending programme to public investment when a higher standard of living can be achieved by devoting a part of this spending to increasing consumption.’ ‘Subsidies to consumption’ would include not only welfare payments, such as pensions and child allowances, but also public services of health, education and housing.
Kalecki recognised that full employment would raise the possibility that wages would rise faster than labour productivity, and employers would seek to recoup the increase in labour costs by raising their prices. Kalecki thought that this could be avoided by subsidizing employers affected by above-productivity wage increases, financing this through income tax on higher incomes. If necessary, price controls could be introduced. These measures would raise consumption while, at the same time, reducing after tax inequalities of income.
Where does the money come from?
Kalecki devoted considerable attention to the question of the financing of the government expenditure required to achieve and maintain full employment. This should be done not by profligate printing of money, but by recognising that money spent by the government ends up in private markets of households and firms, to be absorbed by money markets in the economy. Indeed, the fiscal deficit resulting from expenditure in excess of taxation and other charges on the public, is an element of expenditure in the economy over and above what firms in the private sector spend on their business costs. In this way the deficit adds to profits in the economy.
This means that fiscal deficits can be self-financed by borrowing short-term from the money markets. Then, as the government expenditure makes the money markets more liquid, the government can ‘fund’ its deficit by issuing long-term bonds. Short term borrowing has the disadvantage that it requires refinancing on maturity and hence is a drain on the government’s cash flow. Long-term borrowing is preferable because the only immediate payment requirements are the interest payments on the bonds. Deficit financing by borrowing transforms ‘idle money’ in the financial markets into ‘active money’ in the economy at large.
Currently doing the rounds of economic policy discussions, a common objection to deficit financing is that sooner or later the selling of government bonds reaches the limit of what the financial markets can absorb, or ‘confidence’ fails in the government’s ability to repay its debts, so that bond prices fall and the rate of interest required to find purchasers of the bonds increases. This Kalecki thought could be easily overcome by buying and selling bonds and Treasury bills so that the government can maintain its control over bond prices.
For example, suppose that bond prices start to fall, raising the effective rate of interest on new bond issues. The government can then issue Treasury bills and use the proceeds from their issue to buy in the government bonds whose prices are falling. The rate of interest on Treasury bills is more or less determined by the Bank of England’s policy rate of interest. Government bonds are mostly held by central banks and investment institutions such as pension funds and insurance companies which hold them in their portfolios against their long-term liabilities. So government buying in of its bonds is less likely to elicit selling by most holders of those bonds and may rapidly increase bond prices. When government buying has restored its preferred bond prices, a new bond may be issued at the government’s preferred rate of interest to repay the short-term Treasury bills. Since, in this operation, bills and bonds are issued to buy bonds and bills, the total amount of government debt outstanding remains the same through the procedure.
This manipulation of the financial markets is known among central bankers as ‘operation twist’. It was used in the US in the 1930s and as recently as 2011. The ‘trading along the yield curve’ was recommended as a means of controlling long-term interest rates in the UK, in the Radcliffe Report on the Working of the Monetary System, published in 1959.
However, Kalecki recognised that government debt management would also need measures of taxation to maintain stability in the economy. The ideal measure would be impose a ‘capital levy’, a charge on total wealth, in each year equal to the total debt servicing requirements in that year. Since the ability of the wealthy to pay the charge depends not on their income but on the liquidity of their wealth, which is restored by the government in payment of its debt servicing, the charge would not affect their expenditure in the economy at large. And because the charge would be levied as a proportion of total wealth, whether invested productively or not, it need not affect business decisions on investment.
The idea of a capital levy was not a new one. It had been recommended by Keynes in his Tract on Monetary Reform (1923) and later as a means of dealing with Second World War debt. John A. Hobson and Josef Schumpeter too favoured this kind of taxation. And among the classical political economists, David Ricardo urged its use to pay off the national debt.
But the capital levy is always going to be controversial among the wealthy who would have to pay it, but who also receive the payments on government debt. As an alternative, Kalecki recommended a tax on profits, calibrated in such a way as to leave the returns from investment unaffected by the tax. One way or another it was important that cost of debt service should not squeeze lower incomes or business investment, leading to lower expenditure on consumption and taxation, or that public expenditure, public services and social welfare be made to pay for government debt. That way lies economic deflation and financial crisis. In the end, the wealthy can have as much financial stability as they are prepared to pay for.
Kalecki lived for almost a quarter of a century after the death of John Maynard Keynes, after whom their revolution in economic thinking was named. But he lived and worked in relative obscurity at this time, first at the United Nations and then in Poland, from where he observed the consequences of that revolution.
Kalecki’s genius lay not only in the clarity and logic with which he laid out the principles of Keynesian economics, a clarity that sometimes eluded the author after whom those principles are named. Kalecki’s distinction, alongside his exposition, was also to explain why the promise of Keynesian economics was unfulfilled.
