An essay on the theory of the business cycle kalecki

Much more typical, in his view, at the firm level, is a situation of constant variable costs over a wide range of capacity utilization, with sharp cost increases only emerging close to full capacity. In the first place, interest on an increasing national debt as indeed on all the debt cannot be a burden to society as a whole because in essence it constitutes an internal transfer.

Secondly, in an expanding economy this transfer need not necessarily rise out of proportion with the tax revenue at the existing rate of taxes. He then goes on to discuss various methods of taxation that could be used to service public debt without impeding output and employment in the event that his second condition was not met.

  • Michal Kalecki et l'essor de la macroéconomie.
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Of course, this is somewhat different to the circumstance of a sovereign currency issuer facing no revenue constraint, but a similar consideration arises in modern monetary systems in terms of the potential inflationary effects of paying interest on the debt. Even in a possible monetary system of the future in which interest were paid on reserves rather than bonds, the same reasoning would apply. Under most scenarios, provided the nominal rate of growth exceeds the nominal rate of interest, inflationary pressures will remain under control see Interest, Money and Crisis.

There is his profit equation — with its close connection to the sectoral balances identity as well as to the insight shared by MMTers and Post Keynesians that profit is a function of aggregate demand — and his theory of distribution, in which nominal output is a mark-up over aggregate wages and indicates how incompatible nominal wage and profit claims are resolved through inflation. There are also differences between Kalecki and MMT that could have been discussed in greater depth.

Most notable, in this respect, is that Kalecki would undoubtedly take issue with the MMT view over the viability of a job guarantee program. Even so, as noted in the discussion, the reason for the disagreement on this issue relates to differing assessments of the political obstacles rather than technical considerations. Since MMT acknowledges the existence of political constraints and provides room for disagreement on these matters, the agreement over the economic analysis of full employment seems more reflective of the broad analytical compatibility between the approaches of Kalecki and MMT than do the differences in political analysis.

One wonders what these old timer economist, living and working under a gold standard, would have thought about our fiat system. They had their hands full with fascism and we are stuck with a world wide corporatocracy that takes no prisoners. Very interesting. What I find troubling is the assertion that the same is true for the business sector and investment. Could you explain this? So, the idea with investment is that profitability is the primary motivation for capitalists; only to the extent that interest rates eat into this expected profitability is that central banks can affect interest rates, according to MMT and Kalecki.

Clearly, if central banks increase interest rates to a level that affects expected profits, then investment and aggregate demand should fall and employment with them. Hi Magpie. I started to answer your first question and it turned into a post. I am at the proofreading stage. What Kalecki means by investment financing itself is simply that it generates an equivalent amount of saving thinking in terms of the simplest two-sector model.

That is, investment leads to income and saving.

Studies in the Theory of Business Cycles | | Taylor & Francis Group

This means private investment does not require a prior pool of saving, since it can be financed by private credit creation and the loan repaid once the income is generated from the investment. He is not suggesting that the private firm faces no revenue constraint. The firm either needs to obtain the funds through borrowing or draw upon retained earnings.

Regarding interest rates and profit, Kalecki has a dynamic process in mind. Since profit is high this period, it will impact positively on expectations of future profitability, driving further investment. In an expansionary phase of rising investment and profitability, rentiers will be able to charge higher interest since demand for loans is strong and profitability is strong and interest is a share out of gross profits.

This reduces the rate of capacity utilization and profitability Kalecki rejects the neoclassical assumption of rising marginal cost in most sectors until almost full capacity is reached. This lower profitability reduces profit expectations, negatively feeding into investment.

Michał Kalecki

The reverse happens at the bottom of a slump. In terms of the effects of interest rates, they are complex. When interest rates rise, rentiers and people on fixed incomes enjoy higher spending power, but firms face higher costs of borrowing if the interest rate rise applies also to the longer rates and home owners with variable rate mortgages will suffer a loss of spending power. So the overall effect is ambiguous. It also depends on the different spending propensities of the various social groups.

Empirically, it might be found in specific instances that one effect dominates the other. Kalecki did not consider interest rates to be an important determinant of investment. You want a big fat profit margin, because then funding is easy. I take it PeterC lives in Australia. However, in a few months we have employment slowing down.

Magpie: There is no doubt that many monetary authorities during the neo-liberal period have come to regard their interest-rate policy in terms of inflation targeting, although they view this as consistent with employment objectives in the long run neoclassical thinking about automatic tendency to the NAIRU and providing flexibility over the business cycle in which they view a short-term Phillips Curve tradeoff.

In the neoclassical long run, they think low, stable inflation is conducive to growth. I gather there is not much evidence for their claim of low inflation being conducive to growth. The neo-liberal period has not had a strong growth performance. These figures are according to Andrew Kliman. You can find the post by scrolling to the bottom of this page.

Maybe Neil can confirm or correct if he reads this. I would also observe, without evidence at hand, that some of the strongest growth performances in the post-war period have tended to come from the least neo-liberal economies e. The question of whether inflation targeting has proved more effective than alternative approaches is also open to debate. Here is a billy blog post , which partly discusses evidence on this question. But I just meant that the overall effect of an interest rate change will depend on the specific circumstances.

That is not so much based on Kalecki as on my understanding of Post Keynesians, leading MMTers such as Mosler, and the apparent implications of the capital debates. Thanks, Neil. Not sure what I had in mind there. I think I heard a different comparison made fairly recently.

Maybe it was cherry picked.

Not sure. In other words, I believe all this mumbo jumbo is mainly rhetoric, rationalization for public consumption. One possibility I see is that rentiers are the real beneficiaries of this policy and that any ensuing unemployment is at worst, just a collateral damage, at best a bonus. Good comment. Sorry to misinterpret.

Heresy to say, but I suspect the gold standard system never operated as advertised on the tin.

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  5. An MMT study needs to be done on this…. The function of the price system is to distribute that surplus among the capitalists and firms in the economy. This does seem reminiscent of the idea in volume III of Capital that aggregate profit equal, for Marx, to aggregate surplus value is unaltered in magnitude and merely redistributed in exchange. Intuitively, it seems to me that there might be a connection in that greater monopoly could be expected to come with greater capital intensity.

    This is just an idle thought on my part. It is not discussed in the review. It seems that a key difference remains in the explanation of the determination of aggregate profit. Kalecki emphasizes capitalist expenditures, the budget deficit, the trade surplus and saving out of wages. Marx and TSSI economists emphasize labor time. It makes me wonder if these two explanations can be reconciled in a useful way.

    Depoliticizing monetary policy

    One explanation involves expenditures expressed in price magnitudes Kalecki. According to Marx and TSSI economists, in aggregate the price sum aggregate profit and the value sum aggregate surplus value should amount to the same total, expressed either in money or labor-time terms. Are they just two ways of looking at the same thing?

    Let me add one more question to this interesting topic. You mentioned Kalecki.


    What about his direct intellectual successors? The recent paper on the European crisis gives an excellent example of applying Kaleckian analysis. What is great about these people is they have quantitative models and use a unique method of analysis and modelling which I instantly recognize as an engineer. Adam, thanks for the link to such an interesting paper.

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    There are a lot of aspects covered. There seem to be some differences in interpreting the position of nations with currency sovereignty, particularly the US and Japan, although even on this point there is a degree of similarity in that the authors highlight the lack of fiscal and monetary coordination in the EMU member nations. One aspect that struck me, although it was not expressed in these terms in the paper, and I may be reaching, is how it would be helpful for labor as a whole if German workers were able to push successfully for wage increases and stronger deficit expenditure in Germany.

    German wage growth in excess of improvements in productivity would raise unit labor costs in Germany relative to the periphery and seem to offer a preferable way of boosting competitiveness of the periphery rather than relying on wage reductions and austerity outside of Germany to reduce non-German unit labor costs. Although the establishment frames this as nonsensical on the grounds that it would entail Germany deliberately reducing its competitiveness, from the perspective of labor, increased competitiveness per se is not a good goal, especially under a common currency arrangement, since it is simply code for wage growth falling short of growth in productivity, and a resulting redistribution of income from labor to capital.

    Studies in the Theory of Business Cycles : 1933-1939

    In real terms, this amounts to German workers producing a surplus in real goods and services beyond their own consumption that goes both to capital and non-German consumers. In the context of a common currency, the associated trade deficits in the periphery then jeopardize the German banking system. This leads to the apparent German preference for only bailing out the periphery but indirectly the German banks on the strict proviso that austerity is unleashed in the periphery with the aim of cutting wages, reducing unit labor costs and raising competitiveness in these nations.

    It seems that it would be much better from the perspective of labor both German and non-German to push for German wage growth and no austerity in the periphery, in fact deficit expenditure to enable strong employment and income growth throughout the EMU. It seems that nationalistic prejudices are being successfully exploited by establishments to push through the austerity, which helps neither German nor non-German workers.

    Another alternative, of course, would be for individual nations to exit the EMU and reassert currency sovereignty. If the address matches an existing account you will receive an email with instructions to retrieve your username. Tools Request permission Export citation Add to favorites Track citation.

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