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Kalecki said other things, too

August 12, 2013

Mainstream economists periodically rescue authors from what they see as the economic graveyard. The latest exhumation is of Michal Kalecki by Paul Krugman.

Quoting from Kalecki’s well-known essay  Political Aspects of Full Employment, Krugman in his latest New York Times column tries to understand why companies might oppose full employment during a downturn.

Opposition to government spending seems counter-intuitive because you’d think businesses would want the economy to recover so that they could raise profits. Kalecki’s answer was that bosses understand that job-creation would undermine their influence:

In the great depression in the 1930s, big business consistently opposed experiments for increasing employment by government spending in all countries, except Nazi Germany.

The attitude is not easy to explain. Clearly, higher output and employment benefit not only workers but entrepreneurs as well, because the latter’s profits rise. And the policy of full employment outlined above does not encroach upon profits because it does not involve any additional taxation. The entrepreneurs in the slump are longing for a boom; why do they not gladly accept the synthetic boom which the government is able to offer them?

Every widening of state activity is looked upon by business with suspicion, but the creation of employment by government spending has a special aspect which makes the opposition particularly intense. Under a laissez-faire system the level of employment depends to a great extent on the so-called state of confidence. If this deteriorates, private investment declines, which results in a fall of output and employment (both directly and through the secondary effect of the fall in incomes upon consumption and investment). This gives the capitalists a powerful indirect control over government policy: everything which may shake the state of confidence must be carefully avoided because it would cause an economic crisis. But once the government learns the trick of increasing employment by its own purchases, this powerful controlling device loses its effectiveness. Hence budget deficits necessary to carry out government intervention must be regarded as perilous.

The “state of confidence” argument, it goes without saying, is nonsense. It’s just a ploy to stop people from supporting public spending to boost employment.

Krugman first blogged about Kalecki in May 2013 (h/t David Spencer), saying that he had been “reminded” (code for “read for the first time”) about Kalecki’s essay two-and-a-half years previously via a blog by Mike Konczal: one of those respected gatekeepers who you’re allowed to trust, unlike the hundreds of less-public academics who’ve been writing about Kalecki for decades.

It’s not clear that Krugman has read much else of Kalecki, although he does note that he was a naughty Marxist. Chris Sturr points out that “liberals like Krugman… go out of their way to distance themselves from Marx and Marxists (“I don’t see much of Marx in his writings”), lest anyone think they are flaming radicals.”

Krugman might have seen more of Marx if he’d read the rest of Kalecki’s essay:

Indeed, under a regime of permanent full employment, the ‘sack’ would cease to play its role as a disciplinary measure. The social position of the boss would be undermined, and the self-assurance and class-consciousness of the working class would grow. Strikes for wage increases and improvements in conditions of work would create political tension.

It’s hard to see a New York Times columnist writing about class-consciousness or strikes with anything other than a sneer. But you’d at least think that Krugman as academic might make some sort of attempt to convey the wider context of Kalecki’s writings.

That he doesn’t is perhaps because Kalecki’s approach completely opposes the neoclassical tradition from which Krugman hails. Kalecki thought that the assumptions of a model should be realistic. He never used the concept of utility. Equilibrium, for him, was a fiction. He disputed marginalism and rarely used the idea of supply and demand. He thought that analysis should take place at the level of the social class rather than the individual.

Unlike the physics-envious mainstream of economics, Kalecki didn’t think that “solutions” were ever likely, suggesting that analysis should vary according to time and place. What worked in India might not work in Cuba. He believed firmly that politics and power were important, unlike the neoclassicals, who imagine themselves to be neutral scientists labouring  in the background to present a range of objective answers to politicians.

Despite pre-empting Keynes’s notion of effective demand by several years Kalecki opposed blanket Keynesianism. In his Essays on Developing Economies he wrote that developing countries are often not limited by a temporary shortfall in demand but by a permanent deficit of capital. Developing countries don’t have enough capacity to be able to produce things, so the task of development should be to industrialise using government and outside help and to improve the use of technology.

Mainstream economists are often accused of ignoring alternatives. But they sometimes do rock down to eclectic avenue, as Eddie Grant never sang. They occasionally mention the heterodox in their writings, making it look like they are open to all kinds of ideas and that the mainstream constantly accommodates the fringe. This allows them to portray the rest of the fringe as lunatic and to dismiss it. So the apparent open-mindedness of Krugman and his ilk is actually conservative, enabling conventional economics to lumber onwards.

The study of political economy, like any other social science and any way of looking at human relations, is characterised by disagreement; by differing thought-systems each with their own merits and problems. Sometimes these thought-systems have to be considered in their entirety. It’s not always useful to pick the parts you like and to ignore the others. I can’t see how you can quote Kalecki on public spending and ignore his entire methodology. It’s a bit like Krugman on Keynes’s General Theory: he likes the parts about government spending but not the stuff about uncertainty and expectations.

Another example is Hyman Minsky. Everyone suddenly had their Minsky Moment in 2008 – but by then it was too late. A full understanding of Minsky’s vision of capitalism – as an inherently unstable if not non-viable system which tends to become unduly dominated by finance – would have alerted many in advance to the fact that the boom was unsustainable, rather than allowing them retrospectively to claim that they understand the crisis. A deep comprehension of Minsky would have required a vision of economics that was different to that of the mainstream, which sees capitalism as essentially stable and analytically understandable using techniques of equilibrium.

People can be eclectic if they want, but if their cherry-picking somehow further marginalises the margins, then in effect the whole exercise is more monolithic and less conducive to diversity, despite appearances.

So Krugman’s Kalecki moment doesn’t truly represent his progressive radicalisation and it’s unlikely to advance our collective ability to predict future economic outcomes using Kalecki’s methods. It’s just another example of the selective quoting of alternatives whenever it suits. Paradoxically, the periodic resurrection of radicals suppresses their broad insights.

14 Comments leave one →
  1. August 12, 2013 5:45 pm

    Mike Konczal hints in an ironic tweet that he may not be a respected gatekeeper.

    Point taken.

    But it’s weird that so many Kalecki scholars could have been ignored for so long and that it takes an economics blogger to make him known to people like Krugman. Kalecki is virtually unheard of in economics curricula. Only sociologists or political scientists really read him nowadays.

    Maybe the conveyance of Kalecki to Krugman via a blog is just yet another sign of how economics, or at least its dissemination, is changing?

  2. August 16, 2013 7:43 pm


    A very incisive comment.

    The point of picking and choosing from a radical economist’s thought to show one’s openmindedness to alternative approaches goes a long way into explaining the periodical resurrection of guys like Kalecki and even the Bearded One of Triers.

    I do have two quibbles, though.

    It was Keynes who, in modern times, first championed the confidence fairy myth. His lordship, who was a financial speculator and an elitist “middle-class” (as Paul Samuelson aptly said), in chap. 12 of the General Theory explains his view about the propensity of entrepreneurs to nervous breakdowns.

    The other thing is that for me is not clear Kalecki actually abandoned the marginalist paradigm.

    A good post, regardless.

  3. August 18, 2013 8:55 pm

    Magpie, thanks. I’d be particularly interested in why you think Kalecki never abandoned marginalism. The obvious consensus is that he was from an entirely different tradition. As Joan Robsinson said, he had the advantage of never having learnt the neoclassical stuff and therefore never had to abandon it. My (it goes without saying post-Keynesian) external PhD supervisor Geoff Harcourt says Kalecki is his favourite economist of the last century.

    • August 19, 2013 1:43 am

      Check for instance Basile and Salvadori. Kalecki’s pricing theory. Journal of Post Keynesian Economics. Winter 1984-1985. Vol. VII, No. 2 (page 249):

      The first equation they present is:

      m/p = g(p/P)

      m is marginal cost, p is price. For ease of representation, I do not include subindexes and P (capitular P) is the average price. g(p/P) would be a strictly positive function of p/P.

      That is the optimization conditions for pi(q) = p*q – m*q/G. Note we only need to re-define G = 1/g.

      • August 19, 2013 10:39 am

        I don’t doubt that you can cite examples where Kalecki engaged with marginalist thinking (i’m not enough of a Kalecki scholar to make a judgement on the extent to which this is true), but in essence he wasn’t a marginalist. In one of his most important contribution, the profit equation, he showed that interest rates aren’t necessarily the marginal cost of capital, throwing doubt over one of the main tenets of neoclassical thinking. The savings and investment relationship isn’t mediated by interest rates, and the stock of savings doesn’t dictate the rate of investment; rather the causality goes the other way round, and investment causes saving. As i’m sure you know this is one of the main recognitions of post-Keynesian economics.

        On confidence in chapter 12 of the GT: It’s one of my favourite chapters, and it’s incidentally the chapter that Krugman explicitly rejects. Surely the chapter is not aimed just at supporting the specific idea of the “state of confidence” in business investment? Keynes’s wider point is that there are things about the future that we simply cannot know, and that convention provides a guide. Confidence matters in all decisions, be they those of the consumer or capitalist. Expectations about the future are driven by unknowable unpredictable social forces — to a larger extent than neoclassicals will admit.

        In my view the famous beauty contest passage is one of the best of the chapter. He points out that expectations about stock prices depend on others’ expectations, which in turn depend on others’ expectations. The acknowledgement of this form of reflexivity debunks the notion that assets have a single, objective price, instead introducing an element of subjectivity and crowd behaviour.

  4. August 19, 2013 10:27 pm


    “In one of his most important contribution, the profit equation, he showed that interest rates aren’t necessarily the marginal cost of capital,”

    That’s a good point.

    “Surely the chapter is not aimed just at supporting the specific idea of the “state of confidence” in business investment?”

    There is, of course, more to chapter 12 than the confidence fairy. And much of it can be useful.

    But, whatever useful things are there in chapter 12, the confidence fairy is still there; however insightful other parts of that chapter may be, it doesn’t change the fact the confidence fairy “it’s just a ploy to stop people from supporting public spending to boost employment”.

    Frankly, I can’t ascertain what moved Keynes to include that in chapter 12, so I’ll guess the answer to your question (“Surely the chapter is not aimed just at supporting the specific idea of the “state of confidence” in business investment?”) is a matter of personal judgment.

    • August 20, 2013 9:59 am

      Yes, you’re right. It’s a matter of judgement as to which parts of the chapter should receive the biggest priority. And I suppose it’s just my particular interests and predilections which lead me to like the reflexivity/ beauty contest passage.

      Thanks for highlighting another point of contrast between Kalecki and Keynes, one which I hadn’t previously considered.

  5. October 12, 2013 8:47 pm

    Hey Dan,

    Old thread but interested to get your take on this one. Check out the marginalist WIki page. It says that Kalecki “attempted to integrate the insights of classical political economy, marginalism, and neoclassical economics. [He] believed that Marx lacked a sophisticated theory of prices, and neoclassical economics lacked a theory of the social frameworks of economic activity.” **

    This seems to me highly misleading. Thoughts?


    • October 13, 2013 7:11 am

      Yeah, I reckon that’s totally wrong. Kalecki definitely didn’t try to integrate neoclassical economics into his work. He thought it was wrong. He used the concept of the margin in his profit equation but he wasn’t what you’d call a marginalist. He was also no utiliitarian. Maybe you’d get away with the last sentence about Marx having no theory of prices and neoclassical economics lacking a theory of the social framework of economic activity, but I don’t see much ‘integration’ in his writings. Joan Robinson is quite clear on this.

      I think this Wikipedia entry is just another example of a mainstream economist being unable to accept that there might be different, competing traditions in economics; unable to accept the idea of pluralism in economic thought. As I imply in the post, to occasionally borrow insights from radicals and partially incorporate them into the mainstream is the best way of neutering them.

      • October 13, 2013 11:51 am

        Here’s a weird one. So, I followed the source cited in the Wiki article to show that Kalecki followed marginalism etc. which is a book by Steedman available here:

        So, I search that PDF for the term ‘Kalecki’ and I get nothing. This Wiki article is extremely dodgy!

      • October 13, 2013 7:41 pm

        Weird indeed. Just goes to show you can’t trust everything you read on Wikipedia. I’m not really into amending Wikipedia articles but it sounds like this one should get a radical bit of surgery.

    • Jim Farmelant permalink
      October 13, 2013 6:20 pm

      It perhaps would have been more accurate to say that Kalecki used certain concepts and tools that had been developed by the neoclassical economists in his own work. But that Kalecki never bought into the neoclassical paradigm, as such. In the case of Joan Robinson, she was originally trained as a neoclassical economist, but later drifted away from it after she had embraced Keynesianism.


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