Thursday, 2 February 2012

Kalecki on Full Employment

Below I reproduce an article on the 'Political Aspects of Full Employment' written by the Polish economist Michal Kalecki and first published in 1943.

Kalecki states that full employment can be gained if the government instigates a programme of "public investment (e.g. builds schools, hospitals, and highways) or subsidizes mass consumption (by family allowances, reduction of indirect taxation, or subsidies to keep down the prices of necessities), and if, moreover, this expenditure is financed by borrowing and not by taxation." Such ideas obviously contradict the mainstream economic opinions being promoted in Europe today (that are leading to spiralling unemployment) and are therefore still highly relevant.

Kalecki is part of a long line of prominent left-wing Polish economists that include Rosa Luxemburg, Włodzimierz Brus, Oskar Lange and more recently Tadeusz Kowalik. These economists have dealt with such things as the realities of early peripheral capitalism in Eastern Europe; the harsh realities of the Great Depression in countries such as Poland; the injustices and imbalances of the Stalinist command economy and the negative effects of the shock-therapy return to capitalism after 1989.

These economists often bridge the traditions of both Marxist and Keynesian economics and attempt to offer concerete and practical solutions to immediate economic problems. Kalecki is famous for having devised many of the ideas of Keynes, before Keynes himself (but was less known in the English speaking world.)He came to these ideas through applying the methodologies of Marxist economics.

Unfortunately many of the ideas of economists such as Kalecki have recently been largely neglected, not least in his native Poland. In light of the present 'Great Recession' in Europe, the Polish left could do a lot worse than return to these works as a way of helping to devise an alternative economic policy for the left.

The article below was written in the perspective of socio-economic life in inter-war Poland. By 1939 around 8m people were unemployed, which equalled a third of the population.

Political Aspects of Full Employment1
by Michal Kalecki

1. A solid majority of economists is now of the opinion that, even in a capitalist system, full employment may be secured by a government spending programme, provided there is in existence adequate plan to employ all existing labour power, and provided adequate supplies of necessary foreign raw-materials may be obtained in exchange for exports.

If the government undertakes public investment (e.g. builds schools, hospitals, and highways) or subsidizes mass consumption (by family allowances, reduction of indirect taxation, or subsidies to keep down the prices of necessities), and if, moreover, this expenditure is financed by borrowing and not by taxation (which could affect adversely private investment and consumption), the effective demand for goods and services may be increased up to a point where full employment is achieved. Such government expenditure increases employment, be it noted, not only directly but indirectly as well, since the higher incomes caused by it result in a secondary increase in demand for consumer and investment goods.

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  1. This used to be standard Keynesian thought, although it went out of popularity about the time when Britain went bust using it. It tends now to be more widely limited to the anti-cyclical principle that government spending should increase (based on borrowing) during the low period of the cycle and be cutback (and debts repayed) during the peak just seems to fail during the peak period. The result is that increasing and reducing levels of debt and taxation tends to be an alternative presented to the electorate as a difference in political party priorities (eg Labour and Conservative). I would see this as one of the inevitable difficulties facing democratic economies. Blair's Labour tried to play the 'balance over the cycle' card, but Conservative victory tells its own story.

    I understand your concerns about "the mainstream economic opinions being promoted in Europe today" (but don't know enough to agree - beyond my basic instinct that whatever the European Commission says must be wrong). However, I do get the feeling that many countries have over spent and over-borrowed in the better times and are now unable to borrow themselves out of it. Those who have been telling them this for years now have their 'proof' and are pushing the policies that may well be longer term requirements, but which no one will care about if there isn't a crisis atmosphere. Hopefully, when all the dust has cleared, a more balanced orthodox economics will permeate both electorates and politicians, but I wouldn't hold my breath. (Note the degree to which business lobby views in the media, which used to universally demand cuts in government expenditure and debt, has now widely turned into condemnation of those cuts.)

    I wondered what was so special about Kalecki, so I read some of his article. Much of it is addressed at the general reluctance at the time for governments to borrow (presumably more), which is no longer generally true (indeed the opposite). I particularly liked that "interest on the debt is financed by an annual capital tax" ie the people who end up with the "securities" will (within his own definitions) be taxed to pay the interest they receive on them.

    The securities are never repayed - "the national debt will continuously increase", so after a few years the taxation to pay the interest will be higher than the tax that would be necessary to pay for current expenditure. To prevent this reaching infinity, a cut-off date with some sort of mechanism for repaying the principle could be used (eg a higher than market rate level of interest or company style dividends). These would bring forward the date when interest payments (and the capital tax) exceeds current expenditure requirements. The alternative of buying back the securities requires taxation equivalent to the borrowing, so there's little point in continuing.

    It all seems pretty loony stuff now, but maybe it made sense some time: as you point out, they were very different circumstances. His essay 'A Theory of Commodity, Income, and Capital Taxation" has some fascinating stuff showing that entrepreneurs (capitalists) would be better off if capital was taxed, since wealth depends on combined Gross profit, which includes taxation. A 2% tax is considered, but just imagine how rich entrepreneurs would be if there was 100% tax.

    Thanks very much for getting me to think about something a bit different for a change. And, 'yes', I reckon I'm a bit loony myself, so you don't need to tell me.

  2. Hi, sorry for not responding earlier. Not much time at the moment.

    I don't think the ideas of Kalecki can be applied directly to the situation now. I think more that he provides a good theoretical and historical perspective for looking at the economic problems at the moment.

    The major lesson for me is his call for investment as a means to get out of the crisis. Of course nowadays this would be a different sort of investment and require for example green investments. But these would not only be a correct thing to do economically but also in order to sustain the environment, etc.

    The question of debt is interesting. For many countries, such as the UK, credit for investment could be taken relatively easily as interest rates are so low and so much of the banking system is under state control now. For a country like Poland it would be more tricky and they would be undoubtedly punished by rating agencies, etc if they attempted to increase their levels of public debt. The best thing at the moment would be for the EU to instigate at European wide investment programme. It would both have the resources to start this and the economic and political strength to stand up to international markets.

    I have not read his article on capital taxation, but will do so.


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