Tag Archives: michal kalecki

Kalecki. Geniusz Zapomniany

h/t Matias Vernengo, I came across this nice short documentary Kalecki. Geniusz Zapomniany (Kalecki: Forgotten Genius) on the life of the Polish 🇵🇱 economist Michal Kalecki.

Michal Kalecki with India’s first Prime Minister Jawaharlal Nehru. Click the picture to see the documentary in a new tab. 

I also came across this nice article by Marc Lavoie, Kalecki And Post-Keynesian Economics, in the book, Michał Kalecki In the 21st Century, edited by Jan Toporowski and Łukasz Mamica and published in 2015. Toporowski also appears in the documentary above.

In that article Marc Lavoie says that although the work of Kalecki is “extensive and paramount”, some Post-Keynesian authors have been reluctant to accept it. Marc Lavoie argues that it ought to not be that way and that “some post-Keynesians believe that Kalecki, rather than Keynes, provides the best foundations for post-Keynesian theory”.

The importance of national accounts and flow of funds is underemphasized by economists. It’s as crucial as calculus and real analysis is to physics. Economists confound income flows with financial flows, but matters of national accounts were kindergarten stuff for Kalecki. With such advantage, Kalecki made a huge amount of progress in his work on economic dynamics.

Remarkable Admission On Fiscal Policy

There’s a paper by Jason Furman who is the Chairman of the Council of Economic Advisers which concedes how wrong economists were on fiscal policy. The link is a file hosted at the White House’s website! The paper starts off with a remarkable admission on fiscal policy (h/t and words borrowed from Jo Michell)

A decade ago, the prevalent view about fiscal policy among academic economists could be summarized in four admittedly stylized principles:

  1. Discretionary fiscal policy is dominated by monetary policy as a stabilization tool because of lags in the application, impact, and removal of discretionary fiscal stimulus.
  2. Even if policymakers get the timing right, discretionary fiscal stimulus would be somewhere between completely ineffective (the Ricardian view) or somewhat ineffective with bad side effects (higher interest rates and crowding-out of private investment).
  3. Moreover, fiscal stabilization needs to be undertaken with trepidation, if at all, because the biggest fiscal policy priority should be the long-run fiscal balance.
  4. Policymakers foolish enough to ignore (1) through (3) should at least make sure that any fiscal stimulus is very short-run, including pulling demand forward, to support the economy before monetary policy stimulus fully kicks in while minimizing harmful side effects and long-run fiscal harm.

Today, the tide of expert opinion is shifting the other way from this “Old View,” to almost the opposite view on all four points. This shift is partly the result of the prolonged aftermath of the global financial crisis and the increased realization that equilibrium interest rates have been declining for decades. It is also partly due to a better understanding of economic policy from the experience of the last eight years, including new empirical research on the impact of fiscal policy as well as observations of the reaction of sovereign debt markets to the large increases in debt as a share of GDP in the wake of the global financial crisis. In the first part of my remarks, I will discuss the theory and evidence underlying this “New View” of fiscal policy (with, admittedly, the core of this theory being an “Old Old View” that dates back to John Maynard Keynes and the liquidity trap).

Compare that to the Post-Keynesian view, which according to Wynne Godley and Marc Lavoie in their book Monetary Economics written before the crisis (from chapter 1, Introduction):

The alternative paradigm, which has come to be called ‘post-Keynesian’ or ‘structuralist’, derives originally from those economists who were more or less closely associated personally with Keynes such as Joan Robinson, Richard Kahn, Nicholas Kaldor, and James Meade, as well as Michal Kalecki who derived most of his ideas independently.

… According to post-Keynesian ideas, there is no natural tendency for economies to generate full employment, and for this and other reasons growth and stability require the active participation of governments in the form of fiscal, monetary and incomes policy.


Kalecki And Keynes, Part 2

Continuing from the previous post, Kalecki And Keynes …

The General Theory of Employment, Interest and Money was published in January, 1936.

Meanwhile, … , Michal Kalecki had found the same solution.

His book, Essays in the Theory of Business Cycles, published in Polish in 1933, clearly states the principle of effective demand in mathematical form. At the same time he was already exploring the implications of the analysis for the problem of a country’s balance of trade, along the same lines that I followed in drawing riders from the General Theory in essays published in 1937.

The version of his theory set out in prose (published in ‘Polska Gospodarcza’ No. 43, X, 1935) could very well be used today as an introduction to the theory of employment.

He opens by attacking the orthodox theory at the most vital point – the view that unemployment could be reduced  by cutting money wage rates. And he shows (a point that Keynesians came to much later, and under his influence) that , of monopolistic influences prevent prices from falling when wage costs are lowered, the situation is still worse, because reduced purchasing power causes a fall in sales on consumption goods …

Michal Kalecki’s claim to priority of publication is indisputable.

– Joan Robinson, Kalecki And Keynes in Essays In Honour Of Michal Kalecki, 1964. 

Kalecki And Keynes

Michal Kalecki swam into my ken just after the publication of the General Theory of Employment, Interest and Money, in 1936. The small group who had been working with Maynard Keynes during the gestation of the book understood what it was about, but amongst the public as a whole it was still a mystery. Kalecki, however, knew it all. He had taken a year’s leave from the institute where he was working in Warsaw to write the theory of employment but Keynes’ book came out, and got all the glory. Michal never made any claim for himself and I made it my business to blow his trumpet for him, but most of the profession (including Keynes) just thought that I was being kind to a lame duck. Only since the publication of his essays written in Polish from 1933 to 1935 has it been generally recognized that he had already worked out all the essentials of what became known as Keynes’ theory (Selected Essays on the Dynamics of the Capitalist Economy, Cambridge University Press, 1971). He showed that it is investment, not private saving, that brings about capital accumulation; that a government deficit, in a slump, will increase employment; that cutting wages only makes the slump worse; that the rate of interest depends upon supply and demand of the stock of money, not on the flow of saving, and that it is the forward-looking expectation of profits that induces firms to accumulate.

The question of glory did not seem to me to be important. As Michal was the first to admit, his ideas would have taken a long time to establish while with Keynes they burst upon the world as a revolution. But I was deeply impressed by the fact that two thinkers of such different background and habits of thought could arrive at the same diagnosis of the economic situation. Logic is the same for everybody; the same logical structure, if it is not fudged, can support quite different ideologies, but for most social scientists ideology leaks into the logic and corrupts it.

In the natural sciences, it is common enough for the same discovery to come almost simultaneously from two independent sources. The general development of a subject throws up a new problem and two equally original minds find the same answer, which turns out to be validated by further work. In the history of economic thought, the case of the discovery of the theory of employment by Keynes and Kalecki is unique.

– Joan Robinson in PORTRAIT: Michal Kalecki, Challenge, Vol. 20, No. 5, November/December, 1977, pp. 67-69, http://www.jstor.org/stable/40719591

Kalecki And Keynes On Wages

The blogger writing for Social Democracy For The 21st Century: A Post Keynesian Perspective has an interesting post about Keynes’ view on wages.

I have a few points to add, which may not be contradictory to that post. It’s possible Keynes’ understanding changed from his discussions with Kalecki. In fact, Jan Toporowski, biographer of Michael Kalecki sees Kalecki’s position as far superior compared to that of Keynes. In an article titled Kalecki And Keynes On Wages, he says:

Both Kalecki and Keynes realised that their macroeconomic analysis depended critically on the inability of the labour market to be brought into equilibrium by changes in wages, as postulated by neoclassical theory. In 1939 therefore they wrote their explanation for this inability of free markets in capitalism to attain the equilibrium imagined by Robbins, in which all resources, including labour, are fully utilised. Keynes however got stuck on the effects of wages on the short-period equilibrium in an abstract Marshallian model. Kalecki was able to demonstrate more clearly the complex real income effects of wage changes.

Kalecki’s approach to the subject was much clearer, and free of Marshallian dilemmas applied to historical data.

Jan Toporowski

Jan Toporowski, Levy Institute, May 2011

In the article, Toporowski points out the debate between Keynes and John T. Dunlop, Lorie Tarshis and Michal Kalecki. He also quotes Keynes from the GT:

in the short period, falling money wages and rising real wages are each, for independent reasons, likely to accompany decreasing employment; labour being readier to accept wage-cuts when employment is falling off, yet real wages inevitably rising in the same circumstances on account of the increasing marginal return to a given capital equipment when output is diminished.

Keynes was not fully correct on this but it is interesting to note that he was almost there. Perhaps his own quote explains: he himself couldn’t escape from old ideas which ramify into every corner of our minds.

In his book Post-Keynesian Economics: New Foundations, pp 277-278, Marc Lavoie says:

Indeed, in several versions of post-Keynesian short-run model of employment, higher real wages are conducive to higher levels of employment.

In their biography, Michal Kalecki (Great Thinkers In Economics), Julio López G and Michaël Assous point out that it was Michal Kalecki who first figured this out before Dunlop-Tarshis-Kalecki (1939) in his 1938 paper The determinants of distribution of the national income, also published in Collected works of Michal Kalecki, Vol. I, edited by J. Osiatynsky, Oxford University Press, 1990.


Collected Works Of Michal Kalecki - Volume 1


So here’s Kalecki. It’s great and humble of him to call it the “Keynesian theory”, although he found something contrary to Keynes’ own point. But that’s the thing about Keynes – he said a lot of things which is contrary to his own revolutionary thoughts. Heterodox economists see it in a nicer way. Joan Robinson would have said, “Keynes should not have said that”. Keynes’ opponents would pounce on his several vulnerabilities. And then there’s the bastardization of Keynes’ work. Most of economics before the crisis simply states: “Keynes is wrong”.  Over to Kalecki:

Final remarks

1. There are certain ‘workers’ friends’ who try to persuade the working class to abandon the fight for wages in its own interest, of course. The usual argument used for this purpose is that the increase of wages causes unemployment, and is thus detrimental to the working class as a whole.

The Keynesian theory undermines the foundation of this argument. Our investigation above has shown that a wage increase may change employment in either direction, but that this change is unlikely to be important. A wage increase, however, affects to a certain extent the distribution of income: it tends to reduce the degree of monopoly and thus to raise real wages. On the other hand, ‘real’ capitalist incomes tend to fall off because of the relative shift of income from rentiers to corporations, which lowers capitalist propensity to consume.

If viewed from this standpoint, strikes must have the full sympathy of ‘workers’ friends’. For a rise in wages tends to reduce the degree of monopoly, and thus to bring our imperfect system nearer to the ideal or free competition. On the other hand, it tends to increase the thriftiness of capitalists by causing a relative shift of income from rentiers to corporations. And ‘workers’ friends’ are usually admirers both of free competition and or thrift as a virtue of the capitalist class.

2. Another question may arise in connection with the Keynesian theory of wages. Is not the struggle of workers for higher wages idle if they lose whatever gain they may make in the form of a higher cost of living? We have shown that wage reduction causes a change in the distribution of the national income to the disadvantage of workers, and that in the event of an increase in wages the reverse occurs. This is not to deny, however, that changes in real wages are much smaller than those in money wages; but never the less they may be quite material, especially as we are dealing with averages which reflect only slightly great fluctuations in real wages in particular industries.

We noticed above the great stability of the relative share of manual labour in the national income. This is not in contradiction with the influence of money wages upon the distribution of the national income. On the contrary, the resistance to wage cuts prevents the degree of monopoly from rising in the slump to the extent it would if ‘free competition’ prevailed on the labour market. Although, in fact, the relative share of manual labour is more or less stable, this would not obtain if wages were very elastic.

It is quite true that the fight for wages is not likely to bring about fundamental changes in the distribution of the national income. Income and capital taxation are much more potent weapons to achieve this aim, for these taxes (as opposed to commodity taxes) do not affect prime costs, and thus do not tend to raise prices. But in order to redistribute income in this way, the government must have both the will and the power to carry it out, and this is unlikely in a capitalist system.

Kalecki’s Profit Equation

In my post The Transactions Flow Matrix, I went into how a full transactions flow matrix can be constructed using a simplified national income matrix. Let us reanalyze the latter. The following is the same matrix with some modifications – firms retain earnings and there are interest payments.

FU is the undistributed profits of firms. From the last line we immediately see that

SAVh + FU – If – DEF = 0

or that

FU = If + DEF – SAVh

This is Kalecki’s profit equation which says among other things that firms’ retained earnings is related to the government deficit! The equation appears in pages 82-83 of the following book by Michal Kalecki but Google Books may not allow the preview of the pages!

In their book Monetary Economics, Wynne Godley and Marc Lavoie say this in a footnote:

Note that neo-classical economists don’t even get close to this equation, for otherwise, through equation (2.4), they would have been able to rediscover Kalecki’s (1971: 82–3) famous equation which says that profits are the sum of capitalist investment, capitalist consumption expenditures and government deficit, minus workers’ saving. Rewriting equation (2.3), we obtain:

FU = I+ DEF − SAVh

which says that the retained earnings of firms are equal to the investment of firms plus the government deficit minus household saving. Thus, in contrast to neo-liberal thinking, the above equation implies that the larger the government deficit, the larger the retained earnings of firms; also the larger the saving of households, the smaller the retained earnings of firms, provided the left-out terms are kept constant. Of course the given equation also features the well-known relationship between investment and profits, whereby actual investment expenditures determine the realized level of retained earnings.

The above can of course also be written as:

I = SAVh + SAVf + SAVg = SAV

if one realized that the retained earning of firms is also their saving:


Business accountants know the connection between retained earnings and shareholders’ equity and in our language – which is that of national accountants/2008 SNA – it adds to their net worth just like household saving adds to their net worth.

Assuming away capital gains, we know from many posts that:

Change in Net Worth = Saving

Another View: Where Do Profits Come From

(h/t Magpie) I found this paper Where Do Profits Come From: Answering The Critical Question That Few Ever Ask – published by The Jerome Levy Forecasting Center – which has the following diagram among others:

(click to expand)

Where do we find the undistributed profits in the Federal Reserve’s Flow of Funds Statistic Z.1?

In Table F.102, there’s an item called “Total Internal Funds”:

(click to expand)

Post Keynesian Markup Pricing

I was collecting some articles by Basil Moore and I found this table from an article In Praise Of Markets – Wage Imitation And Price Stability (unsure as to why the article is titled “praise of markets”). The article appeared in Challenge in 1982.

Post Keynesians adopt Kaleckian theory of pricing. There are two sectors – fix price and flex price.

(The following table is for the fix-price sector).

Of course, this is just a quick and dirty way of getting into Post Keynesian pricing theory which has a rich literature and has obsessed all the leading PKEists for years.

During the 1970s, wages in advanced economies rose due to the rise in the bargaining power of labour unions and this led to a wage-price spiral. As wages increased, firms increased prices in response. This led workers to demand higher wages so as to be compensated for inflation – leading to further price rises. The pricing was also complicated by increase in other costs such as energy prices which led to an increase in markup as well. When firms faced more wage costs, they borrowed more from banks and this led to a huge increase in the money stock. (I am resisting the usage of the  word “supply” for money, as it is misleading). Monetarism came to popularity as the Monetarists led by Milton Friedman were making a lot of noises and saw the relationship and used their political powers to ask central banks to “control” the money stock. When central banks responded saying they do not and cannot control the money stock, Milton Friedman declared them “incompetent”!

Some central banks were forced to bow into political pressures and had to raise short term interest rates (i.e, they still weren’t controlling the money stock, because it cannot be controlled). This had the additional complication that firms’ interest costs (on borrowings) increased and they were forced to increase prices more. In the end, interest rates was raised to such a high level that it led to a huge fall in demand and employment, even though Monetarists’ theories continued claiming that wages will fall and “free markets” will lead to full employment!

During the period (70s/80s), there were also debates about the “velocity of money” – the supposed stability of the relationship of money stock and money income. Some Keynesians try to argue that the relationship is not stable etc. However Marc Lavoie, in an article in response to a comment to his earlier article on endogenous money pointed out:

… The second point I want to raise is the question of the stability of the velocity of money. Gedeon says that an unstable velocity is the typical post Keynesian argument and she goes into a detailed  analysis of a demand for money function that would exhibit this characteristic … I do not think that the stability or instability of the velocity of money is a fundamental question since it ignores the more vital issue of causation. Provided it is recognized that money does not determine income, post Keynesians can feel comfortable  with either stable or unstable velocity.

Monetarism is no longer as popular now as it used to be, but traces can easily be found in most theories of economics such as the “New Consensus”.