1899-1970
The Polish economist Michal Kalecki was born in 1899 in Lodz and died in Warsaw in April 1970. His academic training was in engineering, and he was self-taught in economics, influenced by writers such as Karl Marx (1818-1883) and Rosa Luxemburg (1870-1919). He obtained his first quasi-academic employment in 1929 at the Research Institute of Business Cycles and Prices in Warsaw. A Rockefeller Foundation fellowship allowed him in 1936 to study abroad in Sweden and then
England, where he remained for the next ten years, including employment during World War II (1939-1945) at the Oxford University Institute of Statistics. After working for the International Labour Office in Montreal in 1945 and 1946, Kalecki was appointed deputy director of a section of the economics department of the United Nations Secretariat in New York at the end of 1946. He resigned from the United Nations in 1954 in response to the appointment of a board of directors to exercise control over the World Economic Report, which was seen as resulting from American involvement in the work of the United Nations. Kalecki returned to Poland in 1955, where he was heavily involved in the debates over the role of decentralization and workers’ councils, the speed of industrialization, and the relative size of consumption and investment. In the last decade of his life, Kalecki was heavily involved with problems of economic development.
Kalecki discovered a range of ideas on the importance of effective demand and the role of investment similar to those discovered by John Maynard Keynes (1883-1946), and Kalecki can claim priority of publication (1933 for Kalecki versus 1936 for Keynes). While there are similarities between Kalecki and Keynes, there are also differ-ences—for example, over the determinants of investment and the perception of the economy as competitive or oligopolistic (on the relationship between Kalecki and Keynes, see Sawyer 1985, chap. 9). The school of thought known as post-Keynesianism has been strongly influenced by the work of Kalecki, and many of the ideas current there can be traced back to Kalecki (King 1996 and 2002, chap. 2). Kalecki was influenced by Marx and Marxist writers but would not have described himself as a Marxist (Sawyer 1985, chap. 8).
A key element in Kalecki’s work was the idea that the level of economic activity would be determined by the level of aggregate demand, and that investment decisions were a particularly significant element in the determination of the level of demand. Any decision to increase investment expenditure can only come to fruition if finance is available and provided through the banking system. Actual investment expenditure generates a corresponding amount of savings. Kalecki argued that savings were undertaken predominantly out of profits, and he often assumed as a first approximation that workers did not save, and hence investment expenditure in aggregate determined the volume of profits. As Kalecki wrote, "capitalists as a class gain exactly as much as they invest or consume, and if—in a closed system—they ceased to construct and consume they could not make any money at all" (Kalecki 1990, p. 79). The assumption that wages are spent and the view that capitalists’ expenditure determines their income was reflected in an aphorism that was ascribed by Joan Robinson to Kalecki—"the workers spend what they get, and capitalists get what they spend" (Robinson 1966, p. 341)—though it cannot be found in the writings of Kalecki. There is also a reverse direction of causation at the level of the enterprise, whereby the profitability of the enterprise will influence its investment decisions. Profits provide internal finance for investment, and the present level of profits influences expectation on future profits.
Kalecki saw capitalism as oligopolistic and monopolistic, and he dismissed the notion of perfect competition as a "dangerous myth." His approach to pricing put forward the idea of the "degree of monopoly," which expresses the notion that the market power that an enterprise possesses will strongly influence the markup of its price over its (production) costs. The extent of market power depends on such factors as the dominance of the enterprise in its market, the barriers to entry into the industry, and so on. The degree of monopoly leads to a theory of the distribution of income and of the determination of real wages. At the level of the enterprise, the degree of monopoly sets the price-cost ratio; from this, the ratio of profits to sales can be derived. Further derivation and then aggregation indicates that the share of profits in national income depends on the average degree of monopoly and on the cost of imports. Since wages are a major component of costs, the degree of monopoly has a major impact on the real product wage. Kalecki thus advanced a distinctive theory of the distribution of income between wages and profits, and the view that a firm’s pricing behavior, rather than events in the labor market, set the real wage.
The phenomenon of the business cycle was central to Kalecki’s economic analysis of capitalism, and his discovery of the importance of aggregate demand for the level of economic activity was undertaken in the context of cyclical fluctuations. Kalecki viewed "the determination of investment decisions by, broadly speaking, the level and the rate of change of economic activity" as the piece de resistance of economics (Kalecki 1968, p. 263). The central feature of Kalecki’s explanation of the business cycle is the influence of investment on economic activity and hence the determinants of investment. Kalecki distinguished between the decision to invest and the placing of orders for investment, with a significant lag between investment orders and actual investment. Investment orders depend on profits, and profits are generated by actual investment.
Kalecki also postulated that investment is negatively influenced by the size of the capital stock. Combining these elements, Kalecki arrived at a mixed differential-difference equation (Kalecki 1990, pp. 82-83), for which there may be many solutions. Kalecki sought to establish that there is one solution for which the amplitude remains constant. "This case is especially important because it corresponds roughly to the real course of the business cycle" (Kalecki 1990, p. 87). He then argued that, with that condition satisfied, the other parameters of the model are such that a regular cycle of around ten years would be generated, which conforms with the general pattern of the time of a cycle of the order of eight to twelve years in length. The mixed differential-difference equation was the basis of Kalecki’s attempt to generate a self-perpetuating cycle, which was later to be resolved through the notion of limit cycles.
Another important ingredient of his approach is summarized in the oft-quoted statement that "the long-run trend is but a slowly changing component of a chain of short-period situations; it has no independent entity" (Kalecki 1968, p. 263). This can be interpreted as undermining the predominant equilibrium approach to economic analysis whereby there is a long-period equilibrium around which the economy fluctuates or toward which the economy tends and which is unaffected by the short-period movements of the economy.
The discoveries of Keynes and Kalecki in the 1930s on the principle of effective demand and the associated idea that governments could (and should) manipulate their budget stance to generate high levels of employment (rather than aim for a balanced budget) seemed to open the way for the achievement of permanent full employment in capitalist economies. Kalecki raised many doubts about the possibilities of achieving prolonged full employment in a laissez-faire capitalist economy, most notably the resistance by business to prolonged full employment arising from a loss of "discipline in the factories."
