Great Thinkers in Economics Series Series Editor: A.P. Thirlwall is Professor of Applied Economics, University of Kent, UK. Great Thinkers in Economics is designed to illuminate the economics of some of the great historical and contemporary economists by exploring the interactions between their lives and work, and the events surrounding them. The books are brief and written in a style that makes them not only of interest to professional economists, but also intelligible for students of economics and the interested lay person. Titles include: Julio López G. and Michaël Assous MICHAL KALECKI Alessandro Roncaglia PIERO SRAFFA William J. Barber GUNNAR MYRDAL Paul Davidson JOHN MAYNARD KEYNES Peter D. Groenewegen ALFRED MARSHALL Michael Szenberg and Lall Ramrattan FRANCO MODIGLIANI Gavin Kennedy ADAM SMITH John E. King NICHOLAS KALDOR Gordon Fletcher DENNIS ROBERTSON Geoffrey Harcourt and Prue Kerr JOAN ROBINSON Forthcoming titles in the series include: Esben Sloth Anderson JOSEPH A. SCHUMPETER Michael A. Lebowitz KARL MARX Gerhard Michael Ambrosi ARTHUR C. PIGOU J.R. Stanfield JOHN KENNETH GALBRAITH Warren Young and Esteban Perez ROY HARROD Roger Middleton ROBERT SOLOW Paul Mosley and Barbara Ingham SIR ARTHUR LEWIS Robert Dimand JAMES TOBIN Great Thinkers in Economics Series Standing Order ISBN 978–14039–8555–2 (Hardback) 978–14039–8556–9 (Paperback) (outside North America only) You can receive future titles in this series as they are published by placing a standing order. Please contact your bookseller or, in case of difficulty, write to us at the address below with your name and address, the title of the series and the ISBN quoted above. Customer Services Department, Macmillan Distribution Ltd, Houndmills, Basingstoke, Hampshire RG21 6XS, England. Michal Kalecki Julio López G. and Michaël Assous © Julio López G. and Michaël Assous 2010 Softcover reprint of the hardcover 1st edition 2010 978-1-4039-9937-5 All rights reserved. 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A catalog record for this book is available from the Library of Congress. 10 9 8 7 6 5 4 3 2 1 19 18 17 16 15 14 13 12 11 10 Contents Preface vi 1 Michal Kalecki’s Life and Work 1 2 Kalecki’s Theory of Profits and Output 23 3 Genesis and Originality of Kalecki’s Theory 42 4 The Theory of Prices and Income Distribution 67 5 Kalecki’s Long-Run Theory of Effective Demand: The Trend and Business Cycles 91 6 Kalecki’s Macroeconomics of Public Finance and of Monetary Policy 129 7 Kalecki’s Open Economy Macroeconomics 152 8 Michal Kalecki: A Pioneer of Development Economics 174 9 Kalecki: The Socialist Economist 192 10 Michal Kalecki’s Intellectual Legacy 214 Notes 226 Bibliography 245 Author Index 255 Subject Index 257 v Preface This is a book about Michal Kalecki’s economic theory of the capitalist economy. It purports to be a thorough guided tour through Kalecki’s published works.1 Kalecki is a very important, and also a very peculiar, figure among twentieth-century economists. His ideas had their moment of glory and wide international recognition during the period when Keynesianism pre-dominated in the economics landscape. The coincidence is unsurprising: Joan Robinson and Austin Robinson, two of Keynes’s closest collaborators, had recognized the priority of Kalecki in having put forward many of the basic concepts contained in the principle of effective demand. Later on, Kalecki’s economics went out of fashion, simultaneously with, but at a faster rate than, Keynesianism loosing its central place in economic thinking and policymaking. Today, when the world economic crisis forces authorities and pundits to acknowledge the importance of Keynes’s legacy, very few call for a reassessment of Kalecki’s economics. The main objective of this book is to contribute to such a reassessment, and in this context to arouse the interest of readers in knowing more about, and hopefully reading directly from, this extraordinary Polish and socialist economist. In this Preface, we intend to give a glimpse of what they can find in this book. When Kalecki arrived to England in 1936, a few months after the publication of Keynes’s masterwork, The General Theory of Employment, Interest and Money, he was a complete unknown to British economists. However, without any university degree, and having spent less than five years, working as an academic economist, he had developed a brilliant career in his native Poland, both in theoretical and in applied economics. Among other things, he had produced the first national accounts estimates for his country. Besides, and this is what has given him most of his reputation in economics, in different pieces written in the first half of the 1930s, he had anticipated many aspects of the principle of effective demand, which Keynes was to put forward some years later. Kalecki however gave to this principle a distinctive flavour, much closer to the Marxian than to the Marshallian tradition. Embedding it in the framework of business-cycle analysis, he had produced the first mathematical model of the cycle within this framework; a model vi Preface vii which at the time gave him credit among such renowned mathematical economists as Ragnar Frisch and Jan Tinbergen. Also, he had linked the principle of effective demand with a theory of how profits come into being, giving birth to the sentence encapsulating his theory, “when workers spend what they earn capitalists earn what they spend”. He had also shown that profits, and with them demand, can be augmented when a country is able to gain a trade surplus, and when the govern- ment engages in deficit spending. He applied this latter idea to a study of Germany in the early 1930s, in a short and brilliant article which was surely the first one where the Nazi economy was analysed using the principle of effective demand. Finally, in a comprehensive and rigorous article, he had shown how the real and the monetary sectors interact in an economy where the classical assumptions rule. This piece came almost as an aside to his main subject of interest, and Kalecki never referred to it and never republished it during his lifetime. But here Kalecki put forward, for the first time, what later came to be known as the “Keynes effect”, and this is probably the first publication where a complete and precise exposition of the working and the logic of Say’s Law was made. Had Keynes read Kalecki’s paper, he probably would not have written “Prof. Pigou’s the- ory of unemployment ... is the only attempt with which I am acquainted to write down the classical theory of unemployment precisely” (Keynes 1964: 279). But then, Keynes did not read Polish! This was Kalecki’s background when he came to England. At the time, the “Keynesian revolution” was raging, and in such an intellectually fertile milieu Kalecki was able to proceed with his academic career, first at Cambridge University and later at the Institute of Statistics at Oxford University. In this stage of his professional life, Kalecki completed his theory of the capitalist economy with a theory of price formation and of income distribution. He combined the latter with his theory of profits, arriving at a formulation of the principle of effective demand where the latter has, to use the modern parlance, rigorous microeconomic foundations. However, these foundations were radically different from the conven- tional ones, because Kalecki recognized that firms have to make their living and to take decisions in an environment where uncertainty is pervasive, and thus agents cannot optimize a known function under definite restrictions. And Kalecki also showed that, in taking their pri- cing decisions and in setting what he called their “degree of monopoly”, firms also determine income distribution; and thus they also affect the macroeconomy. viii Preface World War II soon came to occupy a large part of Kalecki’s scholarly efforts, and he wrote on several aspects of war finance, having as his main concern how to guarantee that the burden of the war effort be borne equitably, ensuring an egalitarian distribution of the available consumer goods. But he also found time to further develop his t heory of the capitalist economy, and he was able to give a more complete and realistic foundation to his theory of the determinants of investment decisions, crucial for his theory of the business cycle. In this context, he brought into being his “principle of increasing risk”, where he empha- sized the dual role of profits in the determination of investment, both as a source of finance and as an indicator of profitability. Apart from that, he participated in one of the most original and insightful reflections on economic policies to overcome massive unemployment in a devel- oped capitalist economy. The book issued on the subject, The Economics of Full Employment, included as its central piece “Three Ways to Full Employment”, which was to become one of Kalecki’s most renowned papers. In this paper Kalecki showed that if the government had the will, it could with appropriate policies bring about full employment, relying mostly on public expenditure and income redistribution in favour of the poor. At about the same time, however, Kalecki warned that important political changes would occur under full employment, and that these changes, or the fear they arouse among the dominant classes, would give birth to obstacles which would prevent the govern- ment from carrying out its full employment measures in full strength. These were the Political Aspects of Full Employment, the title he gave to one of his best-known and most-quoted papers, where he put forward his theory of the political business cycle; another one of his pioneering ideas. Kalecki spent the next stage of his professional life, between 1947 and 1954, working at the United Nations in New York; and most of what he wrote during this period is hidden in various collective documents of that organization. McCarthyism was in full rage during his stay in the US, which limited his professional contacts, as well as his influence, on economic thinking in that country. Anyway, while there, Kalecki could complete his Theory of Economic Dynamics, his magnum opus summariz- ing his overall theory of the capitalist economy. Also, he could find time to reflect on the economics of underdeveloped nations. Though he wrote only a few papers on the subject, his approach and ideas showed a profound perception of the domestic institutional and structural obstacles facing economic growth in this type of country; a perception which was surely aided by his Polish origin and experience. His work Preface ix at the United Nations brought with it invitations to visit as consultant Latin America and India; and these visits left a lasting imprint in those parts of the world. This is why Indian and Latin American Structuralist economic thinking had, and still have, a very distinctive Kaleckian flavour. Kalecki returned to Poland in 1955, remaining there until his untimely death in 1970. Poland was a relatively liberal communist country in the mid-1950s, and at the moment of his arrival Kalecki was given a position of certain responsibility in economic planning. But the political situation deteriorated, and soon he lost his capacity to have any influence on the economic strategy and economic policy decisions. He therefore dedicated himself entirely to the academic interests, and devoted most of his effort to reflect on the economic growth of the socialist economy. His reflections resulted in another one of his master- ful works, Introduction to the Theory of Growth of the Socialist Economy. Moreover, his enormous intellectual appeal brought him close to an important number of Polish economists, and that gathering soon gave life to a very lively and idiosyncratic Polish School of economics. As any attendant to the seminars that Kalecki conducted at that time at the Central School of Planning and Statistics will surely recollect – and one of the present authors (JL) attended those seminars – the l iveliness of the discussions there had nothing to do with the dullness of economic debate in most of the other communist countries. Sadly, that School of thought was attacked and dismantled by the authorities during the political repression Poland suffered in 1968; and two years later, on April 17, 1970, Kalecki died. The above is a brief summary of the life and work of the man about whose economic ideas we are writing this book. We do not make apologies about our prejudices and sympathy. We are not writing a book about a person chosen at random, but about the ideas of the economist from whom we have learned most of our economics, and who has had the greatest influence in our professional lifes. And one of us – JL – actually had the enormous fortune to study with him in the late 1960s. Our enthusiasm for Kalecki’s economics is the most important message we want to convey to our readers. There are several books on Kalecki’s economics which we have consulted extensively in the process of writing this book. Without being exhaustive, we want to mention Bhaduri (1986), Feiwell (1975), Kriesler (1987) and Sawyer (1985). Of course, we would not have been able to write this book without the masterful edition of the Collected Works of Michal Kalecki, edited by Jerzy Osiatinsky. We are also thankful to Tony