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Michal Kalecki: A Neglected Prophet

The Intellectual Capital of Michal Kalecki: A Study in Economic Theory and Policy

by George R. Feiwel
University of Tennessee Press

Selected Essays on the Dynamics of the Capitalist Economy, 1933-1970

by Michal Kalecki
Cambridge University Press

Political Aspects of Full Employment”

by Michal Kalecki in Political Quarterly
Vol. 14 pp.

Collected Economic Papers, Volume 4

by Joan Robinson
Humanities Press

The General Theory of Employment, Interest and Money

by J.M. Keynes
Harcourt Brace


In the natural sciences it is common enough for the same discovery to come almost simultaneously from two independent sources. As a subject develops it 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, there is one notable example of this phenomenon, the discovery of the theory of employment by Maynard Keynes and Michal Kalecki. In the social sciences, experiments are not made in laboratories but thrown up by history. The problem to which both Keynes and Kalecki were searching for an answer was the breakdown of the market economy in the great depression of the 1930s.

The orthodox economists at that time were still reiterating the old doctrine which held that there was a natural tendency to “equilibrium” under the free play of market forces. They were enunciating the proposition that the central problem of economic analysis is the allocation of scarce means among different uses, as though the whole nation were a single peasant farmer, deciding what to grow to feed his family. This doctrine, in a garbled form, has been revived and, even today, is taught in the leading American textbooks.

However, in 1932 it was clearly impossible to deny that millions of workers were unemployed or that, in the US, real national income had fallen by 50 percent in three years. But these phenomena were attributed to “frictions” that held up the working of market forces; to the shortsighted folly of trade unions in preventing wages from falling faster; or to a scarcity of gold that was constricting the monetary system.

The unshakable faith in equilibrium was derived from a conception that ran deep into the heart of orthodox theory—the notion that the growth of wealth for society as a whole, like that of a single family, depends on saving. The theoretical argument went as follows. Orthodox economists, or the “classics” as Keynes called them, essentially saw saving as a form of spending. Whatever a person did not spend on consumption (which provided employment in the production of more consumer goods) would be saved, lent out at a rate of interest, and ultimately invested (which provided employment in the production of machinery and other capital goods).

A simple and obvious snag occurred independently to both Keynes and Kalecki. In a modern capitalist economy, accumulation is not controlled by household saving but by the investment decisions of firms seeking to maximize profits. In a depression, investment is low because the prospects for profit are weak and uncertain. This sets off a chain reaction in the economy at large. When investment falls, unemployment increases, and individual and aggregate income contracts. This has the obvious repercussion of depressing demand, both for consumer goods and for capital goods. Profits decline even further: both individual firms and the economy in general produce less.

Both Keynes and Kalecki saw government action as the only way to stop this downward spiral. A deliberate policy of government spending on public works, financed by borrowing, would be capable of creating jobs and raising income. The wages and, later, the profits would be spent, so that employment and incomes would increase. Each increase would lead to further spending. Because of this “multiplier effect” the total increase in incomes would be considerably greater than the original outlay, while savings would be increased by as much as government borrowing.

Accepting this Keynesian-Kaleckian point of view meant admitting that there is a fundamental defect in the laissez-faire doctrine and recognizing that household saving is a consequence rather than a cause of capital accumulation. The concept of a natural tendency to equilibrium is untenable in theory as well as untrue in reality.

The theoretical differences between Keynes and the classics were fundamental; the orthodox economists saw some of their most basic and most treasured assumptions being attacked and they naturally put up a stout resistance. After World War II it was no longer possible for governments in the capitalist world to return to complete laissez-faire; but academic teaching, especially in the US, resisted every attempt to reconsider the orthodox position. Keynes’s version of the new theory was emasculated and wrapped up again in equilibrium—the Kaleckian version was simply ignored.

In England the argument started in 1929 with a debate that turned on the issue of deficit financing—whether a government was justified in borrowing to finance public works which would reduce unemployment. Keynes at this time was still working on his Treatise on Money, which, upon publication, caused a great storm among Cambridge economists. However, despite the controversy that surrounded the Treatise it was quite clear by 1933 that what Keynes was looking for was not a theory of “money” but a theory to explain the output of the economy as a whole. By the summer of 1934 the main lines of the General Theory of Employment, Interest and Money had become clear, although the book was not to be published until 1936.

I had been writing some essays developing a number of the concepts of the main theory,1 and holding them back to be published when the General Theory was out. One of these appeared in the Economic Journal in June 1936. Soon afterward I received a letter, evidently from a foreigner visiting England, who said that he was interested in my article since it was close to some work of his own. I thought this very strange. Who could claim to be doing work that was close to this—the first fruits of the Keynesian revolution? When Michal Kalecki turned up, I was still more astonished. He had no party manners or small talk (which was quite okay with me); he plunged directly into the subject. He proved to be perfectly familiar with our new ideas and had even himself invented some of Keynes’s own more fanciful conceits, such as the device of burying banknotes in bottles in order to stimulate employment.

If the treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coalmines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again…there need be no more unemployment…. It would indeed be more sensible to build houses and the like; but if there are political and other difficulties in the way of this, the above would be better than nothing.2

As we talked, I felt like a character in a Pirandello play. I could not tell whether it was I who was speaking or he. He could challenge a weak point in Keynes’s formulation and quickly subdue my feeble attempt to defend it.

He told me that he had taken a year’s leave from the institute where he was working in Warsaw to write his own General Theory. (When his early Polish essays were published in English, it became clear that he had worked out the main points by 1933.) In Stockholm someone gave him Keynes’s book. He began to read it—it was the book that he had intended to write. He thought, perhaps further on there will be something different. No, it was his book all the way. He said: “I confess, I became ill. Three days I lay in bed. Then I thought—Keynes is better known than I am. These ideas will get across much quicker with him and then we can get on to the interesting question, which is of course the application of these theoretical ideas to policy-making. Then I got up.”

Kalecki did not make any public claim to his independent discovery of what became known as Keynes’s General Theory. I made it my business to blow his trumpet for him, but I was often met with skepticism. In the US, only Lawrence Klein recognized (in The Keynesian Revolution, 1947) that Kalecki’s system of analysis was as complete as Keynes’s and in some respects superior to it.

At the end of his life Michal told me that he felt he had done right not to make any claim to priority over Keynes. It would only have led to a tiresome kind of argument. Perhaps people have been skeptical of Kalecki’s contribution to the history of economic theory precisely because he did not demand recognition himself. Such dignified behavior is rare in this degenerate age. The only reference Kalecki ever made to the question is in the preface to a selection of essays, published, alas, posthumously. “The first part includes three papers published in 1933, 1934, and 1935 in Polish before Keynes’ General Theory appeared, and containing, I believe, its essentials.”3

The central conception of the theory of effective demand is expressed by Kalecki in a simple model of a “pure” capitalist economy which excludes foreign trade and government activity. The value of gross national product is then exhaustively divided into the incomes of workers and of capitalists:

The income of workers consists of wages and salaries. The income of capitalists or gross profits includes depreciation and undistributed profits, dividends and withdrawals from unincorporated business, rent and interest. We thus have the following balance sheet of the gross national product, in which we distinguish between capitalists’ consumption and workers’ consumption.


If we make the additional assumption that workers do not save, then the workers’ consumption is equal to their income. It follows directly then:

Gross profits = Gross investment + capitalists’ consumption

What is the significance of this equation? Does it mean that profits in a given period determine capitalists’ consumption and investment or the reverse of this? The answer to this question depends on which of these items is directly subject to the decisions of capitalists. Now, it is clear that capitalists may decide to consume and to invest more in a given period than in the preceding one, but they cannot decide to earn more. It is, therefore, their investment and consumption decisions which determine profits, and not vice versa.4

The recent recession has been a sharp reminder of the principle that Keynes and Kalecki discovered in the great slump of the 1930s. In a market economy, incomes are the result of expenditure. In Kalecki’s “pure” model, all incomes are derived, directly or indirectly, from the sale of goods and services, and the total amount of sales, obviously, is limited by the total expenditure of purchasers. When all employees spend their earnings immediately, week by week, their own outlay is sufficient to cover the wage bill of industry. Then gross profits, that is the excess of the value of sales over the wage bill, come from the outlay of capitalists, on investment and on spending out of interest, dividends, etc. which are derived from profits. The more each capitalist spends, the greater the profits that they all receive.

  1. 1

    Some of these are republished in Collected Economic Papers, Vol. IV (Humanities Press, 1972).

  2. 2

    J.M. Keynes, The General Theory of Employment, Interest and Money (Harcourt Brace, 1936), p. 129.

  3. 3

    Michal Kalecki, Selected Essays on the Dynamics of the Capitalist Economy, 1933-1970 (Cambridge University Press, 1971), p. vii.

  4. 4

    Kalecki, Selected Essays, pp. 78-79.

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