GENERAL INTRODUCTION FIRST DRAFT In 1933 Michael Kalecki, a young self-taught economist, published in Poland a small book, An essay on the theory of the business cycle. Kalecki was then in his early thirties (he was born in 1899). He had firstly begun mathematical studies at the Warsaw University, and then started a university degree in engineering at Gdansk University Engineering College. But he discontinued studies shortly before graduation because of his difficult economic conditions. He came from an assimilated Polish-Jewish family 1, who had been relatively well-off. However, his father had lost the mill he owned and had to accept a job as a bookkeeper in his brother s company. Kalecki had had no economic training, but his socialist political inclination led him to study Marx s Capital, as well as the Marxian economic literature. He further developed his practical knowledge of economics working for a creditworthiness intelligence firm. This led him to begin more systematic studies of economics. In the late 1920s he entered into regular collaboration with two Polish economic journals; writing lots of reports on large concerns, on economic conditions in particular markets, and on international economic relations. Afterwards, he got a job at the Institute for the Study of Business Cycle and Prices, where his Essay booklet was published. In that book the theory of effective demand, which was to initiate, albeit in John Maynard Keynes's version, a new phase in economic ideas, was first presented. 1 Unlike most of Polish Jews, Kalecki s Polish was perfect. Probably Yiddish had not been his mother tongue.
Kalecki s output and employment analysis is tightly linked with that of dynamics, and more specifically with the business cycle theory. Kalecki set up for the first time the essentials of his overall outlook and of his theory in the already mentioned booklet Essay on the Business Cycle Theory. His main objective in that work was to demonstrate the intrinsic instability of capitalist economies. In his endeavour, Kalecki was firmly rooted in his Marxian economics upbringing. In fact Marxian economics had been for long interested in analysing the long-run evolution of capitalist economies, with the purpose of explaining why these economies were subject to fluctuations; which might bring about economic crises and, ultimately, the demise of this economic system. Nevertheless, Kalecki thought that rigorously explaining cycles required mathematical techniques; which were rather out of the ordinary among Marxian economists. In the booklet we just mentioned he used dynamical analysis, and was able to develop a macroeconomic system whose solutions were endogenous deterministic cycles of constant amplitude. In this undertaking Kalecki joined another long-standing non-marxian tradition. Attempts at explaining why economic cycles occur were abundant. The point, however, was that verbal and general explanations had not matched with mathematical rationalizations. Kalecki s main contribution in his booklet then was to combine a very precise and neat macroeconomic model, with a rigorous mathematical explanation of why cycles tend to take place in a capitalist economy. Moreover, and this is certainly not a trivial point, in his macroeconomic model he put forward the first version of the principle of effective demand to appear in print.
Kalecki starts with a situation at a given point of the cycle in which capital stock and capitalists expenditure (in real terms) are assumed given, and then develops a dynamic analysis of output and employment. Therefore, he did not confine his analysis to a time period in which are given the main economic variables. In one of his first theoretical papers he uses the term quasi-equilibrium or short period-equilibrium, to make it clear that when he discusses the effects of changes in one variable upon the remaining variables, he abstract from the effects and consequences of changes in some key variables, such as the stock of capital, and other stocks, which are autonomously moving. Changes in these stocks will in turn alter investment, saving and other behaviour. Kalecki thus refers to a temporary equilibrium position in the Marshallian sense. A position that would subsequently change as variables that had been held constant would be permitted to change. In particular, he emphasizes that if the assumption of a given volume and structure of capital equipment is abandoned, then as a result of changes in capital stock, there would be a continual movement through a series of short-period equilibria or quasiequilibria. Moreover, this movement will be cyclical and any position of final equilibrium will never be reached, because business fluctuations will permanently take place 2. 2 Depending on the versions of his business cycle theory, Kalecki thinks fluctuations are endogenous or exogenous. After his 1933 unsuccessful attempt to explain business cycle endogenously, Kalecki changeed the course of his research and adopted Frisch s explanation. In reference to Frisch Swinging
We may agree or not with Kalecki s theory of the cycle as such. But, to our mind, we should not lose sight of the fact that he was the first economist to provide a rigorous analytical framework, alternative to the general equilibrium theory, to study the general properties, and more specifically the stability properties, of a capitalist (or decentralized, to use the parlance of the general equilibrium theory) economy. Within this analytical framework, the issue of unemployment in capitalism can be given a dynamical explanation. Keynes observed, "we oscillate, avoiding the extreme fluctuation in employment and in prices in both directions, round an intermediate position appreciably below full employment and appreciably above the minimum employment a decline below which would endanger life" (1964, p. 254). With his cycle theory, Kalecki gave a precise and rigorous explanation for this phenomenon, showing that investment, and with it output and employment, tend to cyclically fluctuate around a trend line. Accordingly, Kalecki s macroeconomic theory, and more particularly his theory of output and employment, should not be interpreted as a static theory. More specifically, what concerned Kalecki is not an economy whose level of output and employment remain constant over time; it is instead an economy whose capital stock is continuously varying, together with output, employment System he accepted the idea the economy had a natural tendency, in absence of erratic shocks, to reach its equilibrium state. By modifying his 1939 non linear model in accordance with Kaldor s 1940 model, Kalecki returned to an endogenous explanation he however definitively abandoned in the later versions.
and unemployment. Moreover, employment and unemployment may cause wages to vary; but this variation may not adequately stimulate aggregate demand, so that unemployment fluctuations continue to prevail, though the intensity of fluctuations may changes over time. Correspondingly, once we recognise that Kalecki s short-run output and employment theory is concerned, strictly speaking, with a situation of unemployment quasi-equilibrium, we also understand that the validity of his analysis does not depend on the special assumption of absolutely rigid money wages. This takes us to a second point, a point on which Kalecki insists, concerning wage reductions and employment. The reader will surely recall that, as Keynes fittingly remarked, this is a key point in classical (and neoclassical) economics. Indeed, in this school of thought, wage flexibility is the basic mechanism ensuring that a capitalist economy tends to full employment equilibrium. This is the reason why state intervention in the economy is irrelevant at best, and even possibly nefarious. The gist classical and neoclassical argument is as follows. Let us suppose that unemployment arises. This will bring about a decline in wages, which will provoke a fall in prices. Given the nominal quantity of money, its real quantity will rise. This causes a fall in the interest rate that stimulates new investment. The process only stops when full employment has been reached. On this question, Kalecki makes a double argument. One is that wages do not necessarily decline at the requisite rate, in the face of excess supply. He sets forth his argument in a very important, but neglected paper (which was published in English only in the 1990s). Kalecki s argument is rich in details
and it is that unemployment, as such, does not push money wages down: Namely, while the existing [emphasis in the original] unemployment does not exert any pressure on the market, we postulate that changes [emphasis in the original] in unemployment cause a definite increase or fall in money wages, depending on the direction and volume of these changes (Kalecki 1990: 215). This conception of the labour market has its roots in Marx and classical economics. The former developed the concept of the reserve army of the unemployed, the role of which was to regulate the capitalist system by exerting a disciplinary effect. Kalecki thinks that falling (rising) unemployment increases (decreases) the power of workers to press for higher (lower) wages. In an imperfect competition framework, he represents the increase in worker s power associated with a boom by a decline in mark-up in the pricing equation (Kalecki 1971). The second argument is that even if money wages decline, employment would not increase. Kalecki was certain that declining wages rates are unfavorable to aggregate demand. To him, the real issue is not only the existence of a long-run static equilibium with unemployment, but the possibility of protracted unemployment by declining wages. The phenomena Kalecki then tries to describe must thus be regarded as disequilibrium dynamics. His argument is that focusing on static equilibrium conditions is misplaced. In this respect, Kalecki probably thought Keynes very likely choose the wrong battleground to refute Classical arguments. The issue is not to demonstrate that there could be a long-run equilibrium with excess supply of labor but instead to demonstrate that a private market economy cannot and will not steer itself to full employment equilibrium as Classical economists as Pigou defined
it. And it is this argument which allows Kalecki to express the idea that starting from a stable situation of short-period equilibrium with unemployment, money wage flexibility do not lead to an increase in employment, an idea allowing him to conclude wage rigidity, instead of being the cause of unemployment, is on the contrary the warranty of a certain level of employment 3. We will present in sketch the basic ideas in the following, but we fully develop Kalecki s argument later on. 3 Although Keynes expresses his theory with equilibrium analysis and comparative statics, it is the same conclusion he arrives at in Chapter 19 of the General Theory.