CHAPTER VIII KALECKI THE SOCIALIST ECONOMIST First draft

CHAPTER VIII

KALECKI THE SOCIALIST ECONOMIST First draft

As is well known Kalecki came from a Marxian cultural background. We must keep in mind, though, that during Kalecki’s formative years, Marxism was a very vital intellectual current. Out of the Soviet Union and the communist parties –of which Kalecki was never a member-- there was not an “official” Marxist school of thought, with enough power to impose its own theoretical version above the rest. But in spite of his background, Kalecki’s approach did not leave an imprint in Marxian economic ideas. His theories were, and still are, received with suspicion by most Marxist economists.

In this chapter we will link Kalecki and Marx’s theories. It is not our purpose to suggest that the former was a “Marxist”. Rather, what we would like is to show how in some general principles formulated by Marx, one finds in embryo the theory of effective demand, as well as some points later developed by Kalecki (and by modern heterodox economics). Had Marxists followed the path opened by Kalecki (and by others), they would have been able to develop a much more interesting economic theory.

Realization and the levels of economic activity

Let us first of all link Kalecki’s theory of effective demand with the so- called “problem of realization” of Marxist economic thought. We begin with a purely national accounts perspective. Consider a private, closed economy in

conditions of “expanded reproduction”¹. To simplify, we will suppose that all of the sectors of this economy are vertically integrated. We will also assume that workers are paid at the end of the production period.

Using Marx’s categories, we can state the problem as follows. At the beginning of any productive period, the capitalists possess a certain endowment of means of production and hire a labor force. At the end of a productive period, part of the means of production has been used up. In their place, the capitalist now have commodities, which must be sold. The entirety of these commodities is equivalent to the global (gross) output; which, in terms of value, can be separated into constant capital, variable capital and surplus value (or, simplifying, net profits).

The realization of these commodities takes place in the course of the process of circulation. This has as its starting point the money which the capitalist throw into the market. A part of this money they use to replace the machinery and equipment worn out during this period. This expenditure (and demand) serves to realize the constant capital included in the global product.

Another part of this money is used to pay the labor force hired. The workers spend all of their wages to buy the necessities of life which they themselves have produced during the period of production. Through this expenditure (and demand) the variable capital is realized. In the third place, the capitalist throw money into the market for their personal consumption and to expand their endowment of the means of production. Through the latter two types of expenditures, as much for their personal consumption as for their (net)

1 “Expanded reproduction” denotes a situation in which capital accumulation is taking place; or, to state it differently, net investment is positive.

accumulation, the capitalists realize the surplus value (or net profit) contained in the global product. Therefore, the surplus value is realized through the consumption of capitalists and their accumulation or net investment².

As we can see, there is almost a one-to-one correspondence between Kalecki’s and Marx’s conceptions of how output and profits are realized. And in fact, Kalecki used Marx’s schemes of reproduction to illustrate his theory whereby profits equal capitalist consumption plus their investment (Kalecki 1939 [1990], and 1968 [1991]). However, the Marxian foundations of Kalecki’s approach go beyond the purely accounting principle.

Indeed, even though Marx did not formulate a theory of effective demand, he established certain fundamental, very general principles which could serve as a basis for such a formulation. These principles are embedded in what Sweezy (1942) called the qualitative aspect of the theory of value, and they were taken up in Kalecki’s theoretical construct. Synthetically, the idea is the following. In capitalism, which is a developed mode of commodity production, the

2 The equivalence between accumulation and net investment may seem strange, since Marxian economic theory also includes in accumulation the increment of variable capital from one period to the following. We, however, exclude this last element from our definition of accumulation, because we assume that the workers advance their labor to the capitalists, and that they are paid for their work at the end of the productive period. As a consequence, for each period, the surplus value not consumed by the capitalist, and which is used for the expansion of the production in the following period —that is, that which accumulates— exclusively encompasses the increment of constant capital. This increment is nothing other than net investment.

products of labor appear as “commodities”, i.e. as goods which are produced for others. Thus, the search for a profit, which is contained in the prince of production of the commodities but which can only be obtained from its sale, will be the incentive of production.

The topic of effective demand, with which Kalecki begins, is directly related to Marx’s proposition of capitalism as a fully developed mode of commodity production. The labor contained in the sum of commodities produced —the total product— only reveals itself as socially necessary if commodities are realized; that is, sold at their prices of production. But this is far from granted.

Moreover, both authors identify demand, and more specifically investment demand, and not production, as the moving force of the capitalist economy. We showed in the previous chapter that Kalecki argued that in a capitalist economy nothing guarantees that output is produced at a level compatible with the full employment of the productive forces. Marx was well aware of this possibility³. As Kalecki (1968 [1991]: 465) put it “That Marx was

3 Marx’s clear perception of the “realization problem” made natural for his followers to understand that a capitalist economy cannot ensure full utilization of its productive resources, manpower in the first place. Coming from that culture, Kalecki, when he formulated his version of the principle of effective demand, would not, as Keynes put it, “believe [himself] to be writing a book on economic theory which will largely revolutionize…the way the world thinks about economic problems”. Rephrasing Galbraith’s (: 133) words, we may say that it was not in the Marxian, but “in the classical (or non-socialist) tradition [that it was]

assumed that the economy, if left to itself, would find its equilibrium at full

deeply conscious of the impact of effective demand upon the dynamics of the capitalist system follows clearly from this passage of the third volume of Capital

‘The conditions of direct exploitation and those of the realization of surplus value are not the same. They are separated not only by time and space, but also logically. The first ones are merely limited by the productive capacity of society, the second ones by the proportion of the various branches of production and by the consumer power of the society’. However, he did not systematically scrutinize the process described by his reproductions schemes form the point of view of the contradiction inherent in capitalism as a result of the problem of effective demand”.

Indeed, in many parts of Capital Marx’s reasons as if full employment of resources prevailed. Anyway, he always insisted on the difficulty of realizing the surplus vale contained in the sum total of commodities. This led at least one of his followers, Rosa Luxemburg, to strongly deny that expanded reproduction could take place in capitalism. Her denial followed from her notion that capitalists had no reason to accumulate, because they knew beforehand that the surplus value could not be realized. Therefore, realization of profits could only take place through foreign trade, through exchange with non-capitalist sectors of any given country, or thanks to government purchases of goods and services (for example in arms).

Kalecki was a great admirer of Luxemburg’s work. He recognized that on her quest for the motives of expanded reproduction, she emphasized the essential role of capital accumulation, which led naturally toward a theory of employment”. Milo Keynes; "ESSAYS ON JOHN MAYNARD KEYNES";Cambridge University Press, 1975

investment decisions. He also thought highly of her intuition on the role of foreign markets and government expenditure in the realization of profits. But he rejected her overall conclusion about the impossibility of expanded reproduction in capitalism. He also proved that, as shown in a previous chapter, it is not total exports, or total government expenditure, which contribute to raise profits, but only a trade surplus, and a budget deficit. Anyway, he concluded: “Rosa Luxemburg… stressed the point that, if capitalists are saving, their profits will be

‘realized’ only if a corresponding amount is spent by them on investment…the necessity of covering the ‘savings gap’ by home investment or exports was outlined by her perhaps more clearly than anywhere else before the publication of Mr. Keynes’s General Theory” (Kalecki, 1939 [1990]: 255).

Theories of value and of distribution

We will contrast now Kalecki’s and Marx's theories of distribution. As an antecedent, let us first of all recall that, according to Marx’s “law of value”⁴, prices are only a transfigured form of values, which are determined by the total amount of labour socially necessary to produce a commodity. Prices in particular sectors will deviate upwards (downwards) from values, whenever the

“organic composition of capital”⁵ in the sector is above (below) the average.

However, in the aggregate, the surplus value, as well as variable capital and constant capital, will have the same magnitude if they are expressed in values

4In fact, Marx never explicitly defined the “Law of value”. But from his work we take it that our inference regarding its meaning is correct.

5 In modern parlance, the organic composition of capital could be made equivalent to the ratio between cost of materials plus depreciation allowances, over total wages.

or in prices. Also it would follow that capitalist profit is quantitatively equivalent to the unpaid work. Capitalists can exploit workers because they can pay then a wage which although is the equivalent of the "value" of their labour power, it is below the "value" of what they produce.

Further, in Marx’s approach, income distribution is determined, ultimately, by the struggle and the strength of capitalists and workers. The rate of surplus value, equivalent, grosso modo, to the relation between net profits and the wage bill, is determined by the productivity and the real wage per worker. The first is considered as a given for purposes of analysis; the second, however, converges towards the value of labour power which depends on “historical and moral” factors, which can change over the medium or long term.

Changes in the real wage and in the rate of surplus value appear to be determined exclusively in the labor force market. Let us state this in another way: in Marx’s theory of distribution, prices seem to play a passive role, in the sense that, he works with the (implicit) assumption that businesses are “price- takers”, and that they cannot influence on the latter.

It is well known, particularly after Sraffa’s (1960) work, that l o g i c a l reasons do not exist to state that prices are derived from "values"; nor that p r o f i t i s (quantitatively) equivalent to unpaid labour⁶; nor, l a s t l y , that the

6I t i s clear that Marx never pretended to explain c a p i t a l i s t exploitation on the basis of the discrepancy between labour time and the value of labour power. His explanation depends more on economic, p o l i t i c a l and social factors which make this discrepancy possib l e , as Garegnani (1978) correctly points out. But, to our mind, he did pretend to demonstrate

movements of the profit rate are determined univocally by the movements of the rate of surplus value. In this sense, the Marxian “Law of value” has serious problems. Nevertheless, Marx’s point can be stated in somewhat different terms. We could say that at the core of Marx’s concept i s the notion that in the capitalist mode of production, economic, p o l i t i c a l and social conditions are such that, the c a p i t a l i s t can pay the productive workers with wages which, when expressed in products (at prices production) are less than the net product (at i t s price of production) which they themselves (the workers) have produced. Or what adds up to the same thing, the capitalists obtain a profit because they can charge a price which is over and above their production costs (including wage c o s t s ) . More precisely, Steedman (1977) demonstrated that positive profits appear if and only if, "the system is to be capable of producing surplus labour (employing an amount of labour greater than required in producing the real wages for that amount of labour, together with the means of production used for that purpose). The conditions for profitability, production of physical surplus and "production" surplus labour are thus identical".

Kalecki does never (to our knowledge) refer to the “Law of value”, and he does not use it to explain the existence of a surplus accruing to capitalists. We may assume –though he never says it explicitly-- that he agreed with Marx and that this exploitation was not anything else but unpaid labour. The law of value would be the mechanism by which exploitation would be processed. Thus, it seems an extreme position to reduce Marx’s labour theory of value - as the sane Garegnani does - as an instrument which Marx used solely to determine the rate of p r o f i t in a non circular manner.

classical economics that profits are indeed a surplus⁷. Moreover, he does not start from values to arrive at production prices, but conceives prices as determined by firms which mark-up unit prime costs. The size of the mark up will depend on the “organic composition of capital” (a term he does not use), but also on the degree of imperfection of the market.

Kalecki however retains the general focus of Marx and in particular the idea that the distribution of income is determined ultimately by the class struggle (see especially Kalecki, 1971 [1991]). But he takes into consideration the new reality of imperfect competition, as an element which is not marginal, but rather decisive, in contemporary capitalism. And he also used in his approach the theories on imperfect competition which had appeared in academic thought. In his conception, businesses are now “price makers”, in that that they can fix their prices in accord with their monopolistic control over their markets. Thus, the distribution of income is determined as much in the labor force market as in the market of commodities.

How far does in this particular point Kalecki departs from Marx? We are of the opinion that not too much. In fact, we can quote here another of Marx’s sentences which point into the same direction where Kalecki developed the theory:

“The monopoly price of certain commodities would merely transfer a

7 In his lectures on the economics of capitalism at the Central School of Planning and Statistics, he used the term “rate of exploitation” in reference to the relative share of profits in income, denoted here (and in Kalecki’s lectures) with the letter e.

portion of the profit of the other producers of commodities to the commodities with a monopoly price. A local disturbance in the distribution of the surplus- value among the various spheres of production would take place indirectly, but they would leave the boundaries of the surplus-value itself unaltered. If a commodity with a monopoly price should enter into the necessary consumption of the laborer, it would increase the wages and thereby reduce the surplus- value, if the laborer would receive the value of his labor-power, the same as before. But such a commodity might also depress wages below the value of labor-power, of course only to the extent that wages would be higher than the physical minimum of subsistence. In this case the monopoly price would be paid by a deduction from the real wages… and from the profit of the other capitalists”. (Marx, 1909, Vol. III, Part VII, Chapter L;

http://www.econlib.org/library/YPDBooks/Marx/mrxCpC46.html)⁸.

It is unfortunate that this intuition of Marx whereby monopoly prices may affect the distribution of income was not developed by his followers.

Profits and wages

We can finally consider the connection between wages, profits and effective demand. Here, as we will see, there is a fundamental break by Kalecki from Marx.

Of course, Marx was aware of the double role of wages in capitalism. He recognized that wages are simultaneously an element of demand and an

8Marx was referring here mostly to the monopoly caused by the land rent. But nothing would prevent us from extending the notion to include monopoly power arising from market conditions.

element of costs. Now, his judgment of the effects of a change in wages on profits is very clear: in whatever circumstance, a rise (lowering) in wages provokes a fall (increase) in profits. Both variables move in an inverse direction.

As we saw in the previous chapter, Kalecki's conclusion is different, in that he acknowledged that a fall (rise) in wages will not bring about a rise (fall) in profits.

We may, of course, say that Kalecki discussed mostly the case of a closed economy. In the more realistic example of an open economy, an increase in wages will provoke a fall in profits. This is so because the growth in the sales of the domestic businesses (equivalent to the increase in the consumption of the workers) will be lower that the increment in its costs (equivalent to increase in wages plus the increase in imports). Thus, we might argue that Marx was closer to the true. But we should recognize also that Marx was reasoning within a closed-economy context.

It can be seen that unlike Marx, when he studied the relation between wages and profits, Kalecki does not suppose that the total product is given. On the contrary, it changes with changes in effective demand; and the latter changes with real wages (and the real consumption of the workers). Anyway, we may conclude that, on this point, the contradiction of interests between capitalists and workers is less strong in Kalecki than it was in Marx.

Conclusions

We mentioned at the beginning of this chapter that a large majority of Marxian economists were suspicious of Kalecki's economics, in spite of his closeness to Marx's overall vision of capitalism, and especially their common critical stand towards capitalism and their rejection of Say's Law. It may be useful to conclude this chapter by pointing out some reasons for this mistrust.

A first reason probably had to do with Kalecki’s failure to acknowledge Marx’s law of value. As we just mentioned, he always reasoned on the basis of prices; and in certain Marxian circles this is an unacceptable deviation from basic Marxian principles. This is, of course, a quite dogmatic attitude, but it nevertheless has been of certain importance in the development of Marxian economic theory.

The other reasons are more significant. As also discussed, unlike Marx, Kalecki did not think that wage increases would reduce profits. Rather, higher wages would normally be passed on to prices. Alternatively, if firms could not raise prices as much as unit costs rose, then higher wages would increase sales by as much as wages rose, so that profits would not fall. For some Marxists, this might be seen perhaps as a watering down of one of the inner contradictions of capitalism, and as a support for taming class struggle. Of course, Kalecki did see class struggle, and struggle for higher wages, as very important for workers’ advancement, but not so much because this would reduce profits, but rather because class struggle would bring about a shift from profits to wages, which would favour employment and enhance the bargaining power of workers.

The third reason for the coldness of Marxist economist vis-à-vis Kalecki is a bit more subtle. In Kalecki's different models of capitalist long-run evolution, nowhere the “law of the falling rate of profit” is given the central place accorded to it by Marx and his followers⁹. Apparently, Kalecki did not believe on the

9As far as we have been able to ascertain, this “law” is mentioned only once in Kalecki’s works. The full quote reads “The government spending policy

…permits the overcoming of one contradiction in the capitalist system: that of

actuality of this “law”, or in any case did not consider it important for the future of capitalism. In fact, in the words of one of his closest collaborators and followers “Kalecki...as well as most socialist, took it for granted that capitalism was threatened by a crisis of existence...But found the reason, given by Marx, as to why such a crisis should develop, unconvincing” (Steindl, 1990).

The last reason is closely related to the previous one. In Kalecki’s theory, demand manage through fiscal policy might lead to something close to the demise of business fluctuations. Moreover, growing government expenditure would generate an expansive tendency; thus ensuring high growth rates in the long run. In the first place, the aggregate demand would be permanently above what would have been the case if said expenditure had not existed, and in fact growth of output would be only limited by the growth of productive capacities. In the second place, unless the expenditure would be entirely financed with business profits, the levels and rate of profits, as well as the utilization of productive capacities, would also be above their “spontaneous” level, which would stimulate private investment and growth of the productive capacities.

Therefore, according to Kalecki's theory, the management of demand by the government could ensure, from a technical point of view, high rates of growth of output and of employment in advanced capitalism, with very mild cyclical fluctuations or none at all.

insufficient efficient demand. But if technical progress causes productive capacity to rise more slowly than the accumulation of capital, i.e. if the capital intensity of production increases, there comes into picture another contradiction of the capitalist system formulated by Marx in his law of falling rate of profit”, Kalecki (1945 [1990]: 385)

Now, beyond its technicality, this outlook points to a collision of Kalecki's vision with that of Marx and orthodox Marxism. The latter surely could not accept the idea that government intervention, and specifically intervention through government expenditure or a budget deficit, could affect the level of profits and growth. Indeed, a basic tenet of historical materialism is that the

“superstructure” (which is the place where the State belongs) cannot have a lasting influence on the economic “structure”. It is only the former that gives

rise to the inner laws of movement capitalism.

Now, if state expenditure can in fact influence the volume of profits and of national income then, on a certain vision, those inner laws could somehow be changed, or even violated. For example, the law of the rate of profit to fail could be counteracted by deficit spending. More in general, the general crisis of capitalism, which might have been delayed somewhat but would sooner or later come into view, could be avoided through government intervention.

Nevertheless, Kalecki was far from arguing that in reality capitalism had overcome its inner contradictions. Indeed, he emphasized that state intervention, and specifically demand management, is also limited, but due to political factors. He pointed out that in contemporary capitalism a “political cycle” tends to appear, induced by “stop and go” policies of State expenditure (Kalecki, 1943). In his view, a lasting boom would bring about political changes

—fear of a greater State intervention, weakening of “worker discipline”— and economic change –especially inflationary tendencies— which induce the capitalist class and its allies to struggle to reduce government expenditure, even though this would provoke a fall, not only in the levels of economic activity in general, but also in the level of private profits.

On the other hand, when there exists too low a level of employment, as a result of pressures from the masses or even without these pressures, capitalist governments are stimulated to intervene in order to revive the economic cycle and to reduce unemployment.¹⁰

In fact, in one of his last (and posthumous) papers, Kalecki stated that government intervention through demand management produced a “crucial reform” in capitalism. This “crucial reform” has brought about a considerable improvement in the standard of living and on employment in contemporary capitalism, which are now considerably better than in the “laissez faire” period.

But also owing to this “crucial reform”, the class struggle has been attenuated, with which capitalism has achieved a greater global political stability (Kalecki and Kowalik, 1971).

References

Kalecki, M. (1943). “Political aspects of full employment” in Collected works Kalecki, M. (1945). “Full employment by stimulating private investment?” in Collected works of Michal Kalecki, vol. 1, edited by J. Osiatynsky, Oxford University Press, 1990.

Kalecki, M. (1968). “The Marxian equations of reproduction and modem economics” in Collected works of Michal Kalecki, vol. II, edited by J. Osiatynsky, Oxford University Press, 1991.

Kalecki, M. (1971). “Class struggle and the distribution of national income” in

10 It is worth pointing out, incidentally, that the concept of the capitalist state implicit in Kalecki’s ideas is totally foreign to the official Marxist view (whereby the State is the simple instrument of the dominant classes), at the time (1943) he put forward theses ideas, and correspond better with the notion of the

“relative autonomy of State”, that was developed later by Marxian authors.

Collected works of Michal Kalecki, vol. II, edited by J. Osiatynsky, Oxford University Press, 1991.

Kalecki, M. and T. Kowalik (1971). “Observations on the `Crucial Reform”' in Collected works of Michal Kalecki, vol. II, edited by J. Osiatynsky, Oxford University Press, 1991.

Marx, K. (1909) “Capital: A Critique of Political Economy”. Charles H. Kerr and Co., Chicago, 1909.

of Michal Kalecki, vol. I, edited by J. Osiatynsky, Oxford University Press, 1990.

Steindl, J. (1990b). “Reflections on the present state of economics” in J. Steindl economic papers 1941-88, St. Martin's Press, New York.

Sweezy, P. M. (1942). The theory of capitalist development. Principles of marxian political economy, Oxford University Press, Oxford.

Galbraith, J. K. (1975) “How Keynes came to America”. In Milo Keynes (Ed.),

"Essays on John Maynard Keynes". Cambridge University Press, Cambridge.