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.


Of course there are many complications that should be brought back into the argument—the balance of trade, government spending, saving by workers out of earned income, and the fact that some families draw income from both work and property—but the central core of the argument is exhibited in this simple model.

How could a self-evident proposition produce a revolution in economic thought? The significance of a proposition lies in what it denies. Kalecki’s conception (like Keynes’s) denies that accumulation depends upon household savings, and thus denies also that there exists a natural tendency to equilibrium in a private enterprise economy. Furthermore, it contradicts the classical notion that interest on capital is the “reward for waiting,” or that real wages measure the “marginal product of labor” so that each “factor of production” receives a fair return for what it contributes to industry. In short, the new theory of Keynes and Kalecki provided, a diagnosis of the immediate problem of extensive unemployment and at the same time undermined the basis of orthodox, classical doctrine.

There were three differences between the two versions of the new theory (besides numerous minor ones where sometimes Kalecki, sometimes Keynes, sometimes both were on weak ground). The most striking difference was the emphasis that Kalecki gave to the distribution of income between wages and profits. Keynes allowed for this to a certain extent in his treatment of the “multiplier,” which R.F. Kahn originally described as the relation between an increase in investment and the increase in the total amount of output and employment. But Keynes interpreted the notion of the multiplier in terms of his conception of the propensity to consume:

The fundamental psychological law, upon which we are entitled to depend…is that men are disposed, as a rule and on average, to increase their consumption as their income increases, but not by as much as their income increases.5

This led to much confused debate among Keynesians about the proposition that savings equal investment. Kalecki’s view on this subject is both simpler and more convincing—he held that an increase in the amount of investment first and foremost increases undistributed profits.

A second difference was in their treatment of competition. Keynes did not accept the “perfect competition” of the textbooks, but some vague old-fashioned notion of competition that he never formulated explicitly. Kalecki, on the other hand, derived from “imperfect competition” the modern theory which holds that prices of manufactures are formed by the addition of a gross profit margin to prime costs. Both agreed that the general level of prices in money terms is primarily determined by the level of money-wage rates. Keynes did not live long enough to see how painfully true his theory was. Kalecki diagnosed inflation as an expression of class warfare.

A final point of contrast. The General Theory contains an elaborate exposition of the role of money, finance, and the level of interest rates, while Kalecki deals with these subjects in a cursory way. An example of the degree to which Keynes dwelt on monetary phenomena is his famous theory of “liquidity preference.” This concept was devised to answer the question of why people hold wealth in the form of idle cash balances when they might be receiving interest on this wealth by buying bonds, stocks, or other securities. Keynes shows that since the future is uncertain, it is quite rational to hold cash rather than securities.

This theory of preference for liquidity becomes an important link in the General Theory for it demonstrates how a rise in the holdings of idle balances tends to raise the rate of interest, discourage investment and so work against full employment. Kalecki, while content with Keynes’s conclusions, is much less concerned with these monetary mechanisms. His main emphasis is on the ways in which investment decisions are based not so much on the rate of interest as on access to financing. He recognized that businesses of various sizes have greater or lesser abilities to raise money according to the principle of “to him that hath shall be given, and from him that hath not shall be taken away.”

Many of the differences between the theories of Keynes and Kalecki can be traced to a difference in intellectual backgrounds. Keynes had a “long struggle to escape” from the classical economic traditions in which he had been trained. Kalecki’s starting point in Marx’s analysis of the distinct roles of wages and profits and of the theory of accumulation in volume two of Capital enabled him to take shortcuts that would have been impossible for Keynes. This also accounts for the differences in their subsequent fates. The mainstream of orthodox American economics was able to absorb Keynes’s theory. The various revolutionary concepts of the General Theory were diluted and then reintegrated into the doctrine of stable equilibrium and the harmony of interests, as in Paul Samuelson’s grand “neo-classical synthesis,” which proposed that a combination of fiscal policy and market forces can bring about a condition of steady and relatively peaceful growth. This is the theory in which most American economics students are trained. Kalecki’s theory was more difficult to emasculate, its sharp and uncompromising language could not be digested, and so it was totally ignored.

Keynes liked to believe in the power of ideas to influence the course of history. He sometimes maintained that when the principles of employment policy were understood, economic affairs would be conducted rationally, and he even went so far as to predict a happy future in which our grandchildren could devote themselves entirely to the arts and graces of life.

Kalecki’s vision of the future was more realistic. In a remarkable article published in 1943 on the “Political Aspects of Full Employment,” he foresaw that when governments understood how to control the commercial trade cycle we should find ourselves in a political trade cycle. A continuous high level of employment would not be welcome to business leaders:

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.6

But unemployment is not popular with the general public, and, especially when an election is looming, a government will try to attract support by increasing public expenditure and engineering a boom:

In the slump, either under the pressure of the masses, or even without it, public investment financed by borrowing will be undertaken to prevent large-scale unemployment. But if attempts are made to apply this method in order to maintain the high level of employment…a strong opposition of “business leaders” is likely to be encountered…. Big business would most probably induce the Government to return to the orthodox policy of cutting down the budget deficit. A slump would follow in which Government spending policy would come again into its own.7

This was a fairly accurate prediction of what we have experienced, both in the US and in Britain, in the last thirty years of alternating go and stop.

Kalecki’s diagnosis underestimated what turned out to be the effects of the balance of payments in the British case, and of the interplay between hot and cold war in the US. He also underestimated the importance of financial policy and of exchange rates, putting his main emphasis on the role of government spending. But his analysis has certainly turned out to be nearer the mark than Keynes’s agreeable daydream.

Kalecki’s article ended with some paragraphs that have never been reprinted:

Should a progressive be satisfied with a regime of the “political business cycle” as described in the preceding section? I think that he should oppose it on two grounds:

1) that it does not assure lasting full employment; 2) that Government intervention is tied down to public investment and does not embrace subsidizing consumption. What the masses now ask for is not the mitigation of slumps but their total abolition. Nor should the resulting fuller utilization of resources be applied to unwanted public investment merely in order to provide work….

Government spending necessary to maintain full employment should be used to subsidize consumption (through family allowances, old age pensions, reduction in indirect taxation, subsidizing of prices of necessities). The opposers of such Government spending say that the Government will then have nothing to show for their money. The reply is that the counterpart of this spending will be the higher standard of living of the masses. Is not this the purpose of all economic activity?8

These passages today seem pathetically optimistic; they are a painful reminder of what a mixed blessing thirty years of near-full employment has turned out to be.

Looking back over the era of growth and “you never had it so good,” we can see what a dreadful waste it has been (quite apart from the horrors) to fend off depression by means of the arms race. In the early days of the Keynesian revolution, it was necessary to carry on a determined attack against orthodox theory just to prove that government expenditure could increase employment. Anything would be better than nothing—pay men to dig holes in the ground and fill them up again! As soon as the concept of an employment policy was accepted, the question should have changed. When it was no longer a matter of debate whether governments could maintain an adequate level of economic activity, attention should have been focused upon what activities governments should support.

But Keynesian theory was bowdlerized in mainstream teaching in such a way as to prevent the emergence of these questions. The entire intellectual effort of interpreting the General Theory was focused on the dilemma of excess savings—how to ensure that there were sufficient investment outlets to absorb available funds. This narrow preoccupation obscured some vital issues. In the first place, the amount of saving in an economy is not determined in a rational manner by society at large; instead it is a function of the distribution of income, between rich and poor, between households and firms, and it is strongly influenced by the level and pattern of taxation. A rational policy, as Kalecki observed, would be to consider first how much investment is required, and then arrange for the remainder of national income to be devoted to amenities and to be consumed by those who are in need. When the investible resources of the nation are under the control of profit-seeking corporations—well, we know the uses to which they are put.

The last paragraph of Kalecki’s article is even more poignant to read today:

“Full employment capitalism” will have, of course, to develop new social and political institutions which will reflect the increased power of the working class. If capitalism can adjust itself to full employment a fundamental reform will have been incorporated in it. If not, it will show itself an outmoded system which must be scrapped.9

The failure to develop new institutions and attitudes while maintaining a more or less continuous growth of national income left no way for the workers to get a better deal, other than through traditional wage bargaining. The struggle of people to maintain their share of income, which has now spread to every group in society, is the basic cause of the inflationary stagnation which is threatening to bring the era of high employment and growth to an end.

When Kalecki recovered from the shock of finding that Keynes had written his book, he cheered himself by thinking: now we can get on to the important thing—applications to real problems. The rest of his life was devoted to using theory to diagnose economic problems and using problems to refine economic theory. He was caught in England by the war, and at the Oxford Institute of Statistics made a number of studies and proposals, some of which (through Keynes) had an influence on wartime economic policy. Working with a small team at the United Nations, he contributed to the annual World Surveys, setting a standard of original analysis and attention to factual detail which was seldom attained elsewhere in these monumental volumes.

In 1955 Kalecki returned to Poland and spent the rest of his life there. He died in 1970. He produced a number of studies in the theory of socialist development, and, in the Planning Commission, gave advice on policy which, when it was rejected, the authorities later had bitter cause for regret.

Some of his most interesting work was concerned with the problems of development. When he was called in to advise on the third Five Year Plan for India, he emphasized that an indispensable condition for industrialization was the development of an adequate agricultural surplus, and he argued that the prerequisite for agricultural development was radical agrarian reform. Here, once more, history is tragically proving his diagnosis right. He saw through the myths of “aid” and “capital transfers” fifteen to twenty years before they became fashionable targets for radical criticism.

On all these questions Kalecki’s views were a challenge to the authorities. His unbending integrity and sharp style of argument made him something of an awkward cuss to any institution that sought to employ him. These same characteristics inspired great devotion in his pupils and assistants, and his acid wit delighted his friends. Many of his sayings still circulate.

In the early days of the “electronic brain” Nemchinov gave a lecture in Warsaw, in which he explained that if you put a self-contradictory question to the apparatus it stops and hoots. “Ah” said Kalecki, “I see, a man may still be more intelligent than a machine, but he has not so much character.”

At an international seminar where a black economist made a pompous speech, Kalecki was asked what he thought of it. “I have no race prejudice,” he said, “I can say I think the man is an ass.”

At the retirement of a colleague, speeches were being made about his many honors, glorious achievements, and remarkable successes. Kalecki muttered to his neighbor, “What makes it so remarkable is that he is a very stupid man.”

Between his sharp tongue and his radical opinions, it is no wonder that he was not appreciated by the complacent apostles of “equilibrium” among orthodox economists. Perhaps now that doubt and division are spreading among the public, if not within the profession, he may get a hearing at last.

Professor George R. Feiwel’s book, The Intellectual Capital of Michal Kalecki: A Study in Economic Theory and Policy,10 is a gallant attempt to break through the conspiracy of silence that has kept the young generation in the US from learning of Kalecki’s work. The major part is concerned with modern capitalism. There is a brief survey of Kalecki’s contributions to problems of the Third World, a synopsis of his work on planning, and the sad story of the end of his life in Poland. There, after a crisis that Kalecki predicted, things seem to have taken a turn for the better, and his memory is now honored—the usual fate of rejected prophets.

This Issue

March 4, 1976