Dr Kalecki on Mr Keynes

7 Dr Kalecki on Mr Keynes Hanna Szymborska and Jan Toporowski This chapter presents Kalecki s interpretation of the General Theory, contained in his review of the book from 1936. The most striking feature of this interpretation is that, despite criticizing a great deal of Keynes s analysis, particularly regarding the determinants of investment, Kalecki was highly impressed by Keynes s theory showing the effect of changes in investment on global employment, income and production levels. Kalecki s review and restatement of the key ideas of the General Theory is superior to the original due to a clearer and more concise account of the causes of changes in investment and their influence on the short-run equilibrium position, taking into consideration the distribution of income between capitalists and workers. But the review also criticized Keynes s methodology and does not even mention key elements of his analysis (notably his monetary and financial analysis). Kalecki s review of the General Theory was published in the third quarter of 1936 in Polish in the journal Ekonomista ( Economist ) and was humbly entitled Some remarks on Keynes s theory ( Parę Uwag o Teorii Keynesa ). The fact that it was not available in English until 1982 (translated by Targetti and Kinda-Hass) may be one of the key reasons why Kalecki s version of the effective demand theory did not initially gain as much recognition as it deserved, given the acclaimed superiority of his findings over Keynes s. Kalecki himself emphasized the precedence of his conclusions on the role of investment and demand on several occasions. In the introduction to his 1971 Selected Essays on the Dynamics of the Capitalist Economy he stated that the three papers written in 1933, 1934 and 1935 ( Outline of a theory of the business cycle, On Foreign Trade and Domestic Exports and The Mechanism of the Business Cycle, respectively) contain the essentials of the General Theory (Kalecki, 1971, p. vii). Furthermore, 108

Dr Kalecki on Mr Keynes 109 Kalecki remarks in a couple of footnotes to his 1936 review that his earlier ideas regarding the causality running from investment to savings rather than the opposite are analogous to the implication contained in the General Theory (Kalecki, 1936/1990, p. 228). According to G.C. Harcourt, Kalecki s review is conclusive evidence for his independent derivation of the key propositions of Keynes s work, albeit through different reasoning (Harcourt, 2006, p. 21). Kalecki began the paper with words of high appreciation of Keynes s book, describing that book as: without any doubt, a turning-point in the history of economics, although Kalecki himself was far from being an expert in the history of economic thought (Kalecki, 1936, p. 223). In his interpretation Kalecki distinguished between two parts of Keynes s theory: firstly, the determination of a short-term equilibrium with a given level of investment and given production apparatus ; and secondly, the determination of the level of investment (1936, p. 223). While he expressed his overall satisfaction with the way in which Keynes handles the first issue, Kalecki was more critical of the serious deficiencies characterizing Keynes s analysis of the determinants of investment. Despite a certain similarity between their conclusions, Kalecki and Keynes followed fundamentally different assumptions due to methodological differences. For the purposes of exposition, Kalecki temporarily adopted certain underlying assumptions of Keynes, analysing a closed economy with no government over a short period. Further, Kalecki maintained Keynes s proposition regarding the existence of a reserve army of the unemployed workers, although he remained sceptical about the use of wage unit as a basic unit of measurement. Nevertheless, he retained this premise for expositional purposes. In addition, Kalecki used the assumption typical of his own analysis, namely that workers do not save because living standards only allow them to consume whatever they earn, and that the economy is operating at less than full capacity. Contrary to the assumption of perfect competition in the General Theory, he considered the general case of imperfect competition, without assuming any particular market structure. Kalecki interpreted the first part of Keynes s proposition through an analysis of distribution. He identified the short-period equilibrium output for a representative, vertically integrated firm by reference to a marginal value-added curve, in which marginal value-added is the marginal product of labour times the price of that product. Having established that the short-run equilibrium (B in Figure 7.1) is determined by the intersection of the marginal value-added curve (MVA) with the

110 Hanna Szymborska Jan Toporowski A 0 C marginal labour cost (MLC), Kalecki noted that the total value-added indicates the size of social income, comprising of capitalist expenditure and workers consumption (lined area ABCO in Figure 7.1). Since workers expenditure is determined by their wage income, no spontaneous change in workers spending can take place. Kalecki therefore examined the consequences of an increase in capitalist spending. He argued that the expansion of capitalist production expenditure leads to increased marginal revenue in the short-run, shifting the equilibrium point to B (Figure 7.2). Subsequently, income and hence consumption of the wage-earners rises, resulting in higher incomes of the capitalist and demanding expansion in the economy as a whole, in the area A B C 0 (Kalecki, 1936, p. 226). In this way Kalecki showed the crucial role of capitalist consumption and investment decisions in the determination and persistence of short-run equilibrium (1936, p. 227). This conclusion is critical in B MLC MVA Production Figure 7.1 Determination of short-run equilibrium in Kalecki s interpretation Source: Kalecki, 1936/1990.

Dr Kalecki on Mr Keynes 111 A A 0 Kalecki s evaluation of Keynes. Because capitalist expenditure consists of consumption and investment, and capitalist income is devoted to consumption and saving, Kalecki directly inferred that it is investment which forces an equal amount of savings and exerts the most significant impact on the process of equilibrium formation. He further showed that his proposition holds even if the Keynesian assumptions of closed economy, perfect competition and constant money wages are relaxed. Investment therefore has a direct and exclusive effect on the levels of social income and employment in the economy (1936, pp. 228 229). Given the volume and composition of the production apparatus, employment ( Y ) is an increasing function of investment ( I ) (Equation 7.1). He reformulated this relationship into the Keynesian multiplier (Equation 7.2), implying that investment is a decisive factor influencing the short-term equilibrium and labour absorption at a given point in time (1936, p. 228). B C B MLC C MVA MVA Production Figure 7.2 Impact of an increase in capitalist expenditure on the short-run equilibrium in Kalecki s interpretation Source: Kalecki, 1936/1990.

112 Hanna Szymborska Jan Toporowski Y=f(I) (7.1) dy/di=f (I) (7.2) As previously mentioned, Kalecki s criticism was focused on the issue of investment determination contained in what he regarded as the second part of the General Theory. In the review, he identified two fundamental flaws of Keynes s marginal efficiency of investment approach. Kalecki argues that the approach could only explain the ex post level of investment, ignoring the ex-ante investment decisions, which are more relevant in determining the investment level in Kalecki s view (1936, p. 230). The weakness of Keynes s analysis was seen by Kalecki as a consequence of an inappropriate static approach attempting to explain an inherently dynamic issue (1936, p. 231), a view that was subsequently taken up by other critics (see, for example, Leontief, 1948). Kalecki noted that the initial investment decisions will rarely yield an equal level of actual investment due to certain realization problems and that therefore any short-period equilibrium is bound to move from period to period. He identified Keynes s lack of understanding of the inherent disequilibrating nature of investment, as waves of optimism associated with investment expansion divert its marginal efficiency away from the interest rate level, disturbing the equilibrium. Kalecki s summary of Keynes s fundamental theoretical insight (the determination of output and employment by the level of investment) also allowed Kalecki to demonstrate later on an essential element of Keynes s critique of the classics that Keynes had the most difficulty in expounding: a difficulty that provided the loophole of the re-establishment of pre-keynesian ideas, first under the neo-classical synthesis and subsequently in New Classical macroeconomics and the new neoclassical synthesis. This concerns the extent to which price and wage flexibility can bring an economy to full employment. The notion that the forces of supply and demand will bring an economy to full employment, if only wages will show sufficient flexibility, is an article of faith in pre-keynesian macroeconomics, Austrian economics and in neoclassical economics today. It is also a fallacy that both Kalecki and Keynes sought to expose. Keynes attempted this in Chapter 19 of the General Theory and subsequently in his 1939 paper on Relative Movements of Real Wages and Output (Keynes, 1936, Chapter 19; Keynes, 1939). Kalecki had done it in his earlier paper Three Systems, which was not published in English until 1990 (Kalecki, 1934). In his review, Kalecki showed the fallacy of flexible wages and employment with virtually irrefutable simplicity. If there is a general reduction

Dr Kalecki on Mr Keynes 113 in wages, then, in conditions of perfect competition, prices should fall proportionately. The fall in prices will leave real wages more or less where they were before. The change in prices will lower the MVA curve by a similar amount, leaving output and employment approximately where they were before. If, however, there is imperfect competition, then prices will not fall proportionately to wages. In that case, real wages will fall, and with it real consumption, output and employment. In this way Kalecki was able to demonstrate that wage reductions have either no effect on output and employment, or reduce them, depending on the degree of competition in the economy. The fact that Kalecki was able to present Keynes s theory through his own formulation in a much simpler way is evidence for his genius as an economist. Perhaps his single greatest achievement in interpreting the General Theory was to restate Keynes theory, accounting for the distribution of income amongst the social classes, namely workers and capitalists. Furthermore, by distinguishing between investment decisions and actual investment, Kalecki s interpretation reflects a more accurate and robust understanding of the role of investment and its impact on employment, which is proved by the fact that his exposition holds without the restrictive assumptions that Keynes had made. Moreover, Kalecki s account of Keynes s theory is more concise and his use of terms more comprehensive than Keynes s, making Kalecki s version of the theory presented in the review much more appealing and convincing than the original. Another advantage of Kalecki s analysis is the logical reasoning he presented in the review, accompanied by less flamboyant language. He was concerned with objective factors in explaining decline in investment and employment. This stands in sharp contrast with Keynes, who stressed the subjective and hence less straightforward aspects, such as expectations and uncertainty. Furthermore, while Keynes was largely averse to the use of technical tools, Kalecki possessed a good command of mathematics and statistics. This led Moggridge, the editor of Keynes s collected works, to admit that Kalecki was more useful in providing analytical tools; he even recalls daring attempts to label Keynes as an important post-kaleckian rather than Kalecki a left Keynesian (Moggridge, 1993, p. 167; King, 2002, p. 50). Moggridge further emphasized the disparity of fundamental interests of the two men: Kalecki aimed at thoroughly understand the determinants and mechanisms of economic processes, while Keynes was motivated by his desperate desire to influence policy (Moggridge, 1993, p. 23). Paradoxically, it is Kalecki s analysis which relies more on the interplay of socio-political and economic factors than Keynes, providing a more realistic dimension to his exposition.

114 Hanna Szymborska Jan Toporowski The more in-depth account of the effective demand theory confirms Sawyer s (1985, p. 179) observation that Kalecki was operating within his own macroeconomic framework, differing in many aspects from the approach represented by Keynes. The basic disparities are apparent in Kalecki s review. Apart from the fundamental methodological differences ( a deviationist from Marx examining a deviationist from Marshall who had come to similar conclusions Kaldor, 1989, p. 8), the nature of the theoretical investigation itself has a visibly different focus. Kalecki was predominantly concerned with the product markets, reflected for example in his use of measures such as value-added and his overall dissatisfaction with Keynes adoption of wage unit as a numéraire. In contrast, Keynes analysis in the General Theory treats the labour market in a more ambiguous way, holding onto his assumption of the wage unit as a numéraire, for the sake of his monetary analysis, while seeking to obtain from that analysis a theory of employment. Nevertheless, Keynes seems to have been rather ignorant of Kalecki s genius. The correspondence between Kalecki, Keynes and Robinson in 1937 betrays Keynes s sense of superiority over Kalecki (Moggridge, 1983). Methodological differences then caused Kalecki s resignation from Keynes s Cambridge Research Project in 1939 (Toporowski, 2011, p. 5). It is clear that it was Kalecki who truly broke with the traditional theory. In contrast, Keynes s breach with the classics was rather vague and, in places, rhetorical rather than analytical, as was noted by many of his contemporaries (Backhouse, 1999). In fact, Keynes s work ultimately became orthodoxy itself, even if academic economists have not ceased to argue about the meaning of that work. Keynes believed in the possibility of full employment by means of government economic policy rather than by institutional change. However, Kalecki considered full employment a special case, related to military spending (Kalecki, 1944) and subject to the class conflict inherent in the capitalist economy (Kalecki, 1943). However, a striking omission from Kalecki s review is any mention of money and finance, except in passing to state that, in Keynes s theory, the rate of interest is not determined by the demand and supply of new capital, but the supply of and demand for means of payment. This is a view that is not original to Keynes, but goes back to the monetary theory of Wicksell. However, Kalecki was able to draw from this the conclusion that investment effectively pays for itself. 7.1 Conclusion Kalecki s review of Keynes s General Theory is unusual for its simple exposition of Keynes s view of the determination of output and employment,

Dr Kalecki on Mr Keynes 115 the basic composition of aggregate demand and the distribution of income. It is unusual too for identifying the key weaknesses and inconsistencies in Keynes s theory, while recognizing its seminal refutation of classical theory. This gives Kalecki s review a unique position in 20thcentury macroeconomics, and unique relevance to the macroeconomics of the 21st century. References Backhouse, R. (ed.) (1999) Keynes: Contemporary Responses to the General Theory, Bristol: Thoemmes Press. Harcourt, G.C. (2006) The Structure of Post-Keynesian Economics. The Core Contributions of the Pioneers, Cambridge: Cambridge University Press. Kaldor, N. (1989) Personal recollections on Michał Kalecki in M. Sebastiani (ed.), Kalecki s Relevance Today, New York: St. Martin s Press. Kalecki, M. (1934/1990) Three Systems in J. Osiatyński (ed.), Collected Works of Michał Kalecki: Vol. I: Business Cycles and Full Employment, Oxford: Clarendon Press, 1990. Kalecki, M. (1936) Some remarks on Keynes s theory in J. Osiatyński (ed.), Collected Works of Michał Kalecki: Vol. I: Business Cycles and Full Employment, Oxford: Clarendon Press, 1990. Kalecki, M. (1943) Political Aspects of Full Employment in J. Osiatyński (ed.) Collected Works of Michał Kalecki: Vol. I: Business Cycles and Full Employment, Oxford: Clarendon Press, 1990. Kalecki, M. (1944) Three ways to full employment in J. Osiatyński (ed.), Collected Works of Michał Kalecki: Vol. I: Business Cycles and Full Employment, Oxford: Clarendon Press, 1990. Kalecki, M. (1971) Selected Essays on the Dynamics of the Capitalist Economy 1933 1970 Cambridge: Cambridge University Press. Keynes, J.M. (1936) The General Theory of Employment, Interest and Money, London: Macmillan. Keynes, J.M. (1939) Relative Movements of Real Wages and Output, Economic Journal, 49(193), March: 34 51. King, J.E. (2002) A History of Post Keynesian Economics since 1936, Northampton, MA: Edward Elgar Pub. Leontief, W. (1948) Postulates: Keynes s General Theory and the classicists in S. Harris (ed.) The New Economics, New York: Knopf, reprinted in W. Leontief Essays in Economics Theories and Theorizing Volume One, Oxford: Basil Blackwell, 1976. Moggridge, D.E. (ed.) (1983) The Collected Writings of John Maynard Keynes. Vol. XII, Economic Articles and Correspondence: Investment and Editorial, London: Macmillan. Moggridge, D.E. (1993) Keynes, Houndsmill, Basingstoke: Macmillan. Sawyer, M.C. (1985) The Economics of Michał Kalecki, Basingstoke: Macmillan. Toporowski, J. (2011) Shared ideas amid mutual incomprehension: Kalecki and Cambridge in P. Arestis (ed.) Microeconomics, Macroeconomics and Economic Policy: Essays in Honour of Malcolm Sawyer, Basingstoke: Palgrave.