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Ideas to Occupy Economics – A Note on Michal Kalecki: Pranjal Rawat

June 13, 2014

Guest post by PRANJAL RAWAT

A revolution of sorts is on the cards for the students of economics amidst a great surge of international support for radical restructuring of the subject and its pedagogy. From the politically incorrect ‘Non-Autistic Economics’ movement to the Post-Crash Society in Manchester to the Jadavpur University Heterodox Economics Students’ Association (JUHESA) in Kolkata we see an underlying common theme. The narrowness of the neoclassical economics is being criticized. Take for instance what the preamble of JUHESA has to say about Neoclassical Economics, “Students have rightly found it appalling that a theory which could neither predict nor suggest remedies to the biggest recession in more than half a century, continues to be taught as the sole approach to economic analysis the whole world over.” This so-called revolution will remain just a source of media income and wash over without changing much, unless scholars of economics take it upon themselves to destroy the inertia and raise arms against the old order. Revolutions exists only in retrospect, the rest is all popular gossip. For that purpose, it would do well to draw strength from the life and work of Michal Kalecki (1899 – 1970), a post-keynesian economist, whose work has remained relevant for a period longer than it took for American economy to recover from the Great Depression only to crash in the Great Recession.

Great economists are just the summaries of changing economic thought on the  brink of changing economic circumstances. Michal Kalecki was one such mind who brought to the table as much depth in persona as depth in theoretical approach. A Polish born scholar of political economy, whose lack of fame is attributed to the usual pomp and snob of global intelligentsia who ignored his work repeatedly. There is much to take away from Kalecki, both in theorizing or modeling and in positioning oneself in history so as to improve the lives of people and better the understanding of the economy. Born to a poor textile manufacturer whose unfortunate career was to collapse right during his son’s foray into formal university education, Kalecki is the typical rags-to-intellectual story that people surprisingly appreciate lesser than they should. During this engineering course that Kalecki never completed, he had even managed to generalize Pascal’s little theorem for a polygon with 2n sides. Repeated misfortunes of poverty and family, did not hold Kalecki back from publishing in renowned journals such as Econometrica and Revue d’Economie Politique. He was majorly influenced by Marxist economic thought and this is clearly evident in his leanings towards political economy. He wrote articles on economic problems for a socialist journal and a few newspapers, before being appointed to the Institute for Business Cycle and Price Research of Warsaw in 1929. He published a few articles in the early 1930s which constituted a major part of the Keynesian theory. However, he published in Polish and the world easily ignored him just as it does non-English research today. In 1937 when Kalecki met Keynes, who in his stride completely missed out the ingenuity and originality of Kalecki’s work, Kalecki never mentioned his priority of publication. This depicted Kalecki at his best, more substance than show, and more for the cause than for the credit. His dedication to help the process of planning in the ‘Third World’ took him around the globe, to India, Cuba and Mexico. Unlike Keynes, his work never needed reinterpretation and explanation because it was already exacting, methodical and coherent. He kept publishing till his death in 1970.

Academics and Politics

The first remarkable feature of the Kaleckian approach is the high degree of realism that is not compromised on in formal modeling. As we all know, every economic model arrives with a loss of realism (in simplifying assumptions) and the degree of abstraction increases with simplicity. Kalecki refused to ‘let go’ of certain real assumptions that neoclassical school does very easily. Between 1933 and 1937, he had chalked out the basic principles of Keynesian effective demand. In Outline of a Theory of the Business Cycle (1933) he presents the simple Keynesian model with Consumption and Investment spending, he however divides consumers and producers into two classes- capitalist and workers. This approach of class analysis in spending and earning allows deep insights into the working of the capitalist system and the implications of owning the means of production. The choice of class and corresponding class interests as the source of decision making as opposed to the ‘common household’ approach tells us that Kalecki could not lump workers and peasants with the owners of big business. This approach allowed insights into class conflict, trade unionism and in explaining who were ‘Masters’ of their own fate and who simply had no control over their lives. His investment functions, all of which he kept being revised and improved upon until his death, were simple yet not simplistic enough to overlook finer concepts such as ‘time taken for construction’ and the subsequent difference between ‘taking of investment order’,’ delivery of final investment goods’ and ’actual gross accumulation’. By splitting investment into three simultaneous process, the latter two lagging the former, Kalecki could attribute some booms and busts to the systematic errors (read short sightedness) of the capitalists: failing to factor in the fact that investment projects take time to be completed. Thus by adopting Marx’s schemas  of reproduction, which were in fact based on Quesnay’s Tableau économique, Kalecki uses a heterodox tool to traverse newer roads. On Foreign Trade and ‘Domestic Exports’ (1934) he anticipates the Mundell-Fleming model’s results when he describes the differences of an injection via higher exports as opposed to an injection via higher government spending. Under fixed exchange rates, he concludes that since higher production mandates higher imports of foreign raw materials, any economy highly dependent on imports (e.g. India) could boost its output via higher government spending only so much without a balance of payments crisis (e.g. India in 1991). In Costs and Prices (1943) which summarizes his ideas about pricing strategies of firms, he blatantly assumes oligopolistic imperfect markets which leads him to assign a vital role to the degree of monopoly in price determination. This highly unusual way of beginning with imperfect markets is in fact highly representative of the real world. The assumption of perfect competition that is today rarely observed does not surprisingly lower the confidence of neoclassical policy recommendation and prediction. A theory grounded in imperfect markets, based on general market structures rather than utopian free markets allows itself greater room to manoeuvre. His explanations of what effects the degree of monopoly still find great relevance even today, simply because the class interests can directly lead to monopolistic aggression.

The second remarkable aspect about Kalecki’s approach was that he was able to link political events and economic events. The political power of the business class and of the workers (brought to significance via the trade union), could affect the macroeconomic conditions, and vice versa). He observed that during the economic depression of 1929-1930, firms opposed government spending to boost profits and output. They would rather have low profits than a scenario where the government spends to maintain higher employment and corresponding higher profits. Mainstream economic theory cannot explain this situation because it only considers the change in economic circumstance but overlooks the “political aspects of full employment”. Investment decisions are affected by the ‘state of confidence’ the capitalists have about the profitability of ventures. Any happening that may shake this confidence results in recession and thus lowers employment. Thus governments are advised to do nothing to disturb the state of confidence. This gives the capitalists an “indirect control” of government policy. This is very similar to how India Inc. and other business lobbies threaten the Indian government from time to time. Once the government begins to intervene regularly to restore full employment, an entire weapon of the business class is disabled. Often calls for ‘austerity’ are attempts at keeping governments from rescuing the economy and thus allowing big business to retain substantial political power. Government expenditure can be directed towards investment or welfare schemes, the capitalists oppose the former because it crowds out private investment and oppose the latter because  they feel there is no such thing as a ‘free lunch’. And getting used to ‘free lunches’ may lead the masses to demand further egalitarian reforms. He theorizes that firms facing a downturn may choose to tacitly collude to ‘protect’ profits. He also believed that trade unionism directly counters the generally high degree of monopoly. In this he reveals an opinion that capitalism is fundamentally disadvantageous towards labor and trade unionism is more about balancing this political and economic inequality than what is often stereotyped as ‘ganging up’ on a struggling entrepreneur. He presented an insight that under fascism, the capitalists do not worry too much about full employment because the state breaks trade unions and government spending is directed towards war efforts (keeping profitability high). The political views of Kalecki might have been incorrect or outdated, but there is no doubt that the nature of ‘political business cycles’ must be explored further. Joan Robinson claims that the post war period of the ‘Keynesian Revolution’, which let governments maintain full employment, began to display similar politically caused business cycles. Recently, Paul Krugman attempted to find political explanations about the behavior of firms during the recession of 2007-2009.

Lastly, academics might allow us to look beyond conventions and established boundaries but it is political activism that will allow us to cross them. As Noam Chomsky would put it ‘academicians must be activists’. Kalecki’s political activism involved publishing in non-mainstream journals, lobbying western governments, advocating against the armchair economist, and advising planning agencies of developing countries. As an advisor he often told governments that he would take time, sometimes up to six months, to understand “your history, politics and sociology and make myself familiar with your institutions”. In his own words, his life was also a ‘series of protests and resignations’. In 1936, he resigned from the Warsaw Institute when two of his friends were made to resign owing to political pressure. In 1955, he resigned from the United Nations in New York in protest at McCarthyism and political pressure on his work. The FBI also maintained a file on his name where they called him a ‘communist’ and a ‘Marxist’. He next resigned from the Polish Planning Commission in 1961, because his figures and ideas were in conflict with Stalin’s plans of heavy industry. As opposed to what the Soviet leader wanted, Kalecki endorsed enhancing the consumer goods industry and to help increase real wages. Finally, two years before his death in 1970, he resigned from the School of Planning and Statistics, Warsaw when he saw a purge of Jewish intellectuals from their jobs, despite being too eminent to be affected himself. In a twist of fate, two years later Stalin’s plans had to be scrapped when workers took to the streets protesting low real wages and scarcity of wage-goods. This symbolizes much of what happened to Kalecki’s ideas: rejection by short-term political ambitions, appreciation in long-term retrospect. To hold one’s intellectual fort against both the political ambitions of New York and Moscow is certainly difficult. But this is exactly what Economics needs at this time: an unflinching, unnerving, unshaken resolve to explain the functioning of the economic system that is both pluralistic in outlook and holistic in endeavor.

Pranjal Rawat is a student of Economics at Presidency University, Kolkata. Comments & suggestions can be sent to rawat.pranjal007@gmail.com

 

References and Further Readings

 1.Feiwel G. R. (1975): ‘The Intellectual Capital of Michal Kalecki’, University of Tennessee Press, Knoxville.

2. Harcourt, G. C. (2006), The Structure of Post Keynesian Economics, Cambridge University Press, Cambridge.

3. ISIPE (2014): ‘Open Letter’, International Student Initiative for Pluralist Economics.

4. JUHESA (2013): ’A Preamble’, Jadavpur University Heterodox Economics Students’ Association, Kolkata.

5. Kalecki, M. (1971): Selected Essays of the Dynamics of the Capitalist Economy,  Cambridge University Press,  Cambridge.

6. Robinson, Joan (1952): ‘Collected Economic Papers’, Basil Blackwell, Oxford.

3 Comments leave one →
  1. Susmita Rakshit permalink
    June 21, 2014 3:52 AM

    An eminently readable piece. Liked it a lot. .

    • Pranjal permalink
      July 11, 2014 2:15 PM

      Thank you for your kind words, although, it will be more joy reading Kalecki himself. :)

  2. Phil Tomlinson permalink
    July 7, 2014 1:15 AM

    Enjoyed this. Thank you

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