The Intellectual Capital of Michal Kalecki: A Study in Economic Theory and Policy
Selected Essays on the Dynamics of the Capitalist Economy, 1933-1970
"Political Aspects of Full Employment"
Collected Economic Papers, Volume 4
The General Theory of Employment, Interest and Money
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.…
This is exclusive content for subscribers only.
Try two months of unlimited access to The New York Review for just $1 a month.
Continue reading this article, and thousands more from our complete 55+ year archive, for the low introductory rate of just $1 a month.