Kalecki on weg-led growth

3 Oct, 2014 at 09:19 | Posted in Economics | 4 Comments

One of the main features of the capitalist system is the fact that what is to the advantage of a single entrepreneur does not necessarily benefit all entrepreneurs as a class. If one entrepreneur reduces wages he is able ceteris paribus to expand production; but once all entrepreneurs do the same thing — the result will be entirely different.

kaleckiLet us assume that wages have been in fact generally reduced … and in consequence unemployment vanishes. Has depression thus been overcome? By no means, as the goods produced have still to be sold … A precondition for an equilibrium at this new higher level is that the part of production which is not consumed by workers or by civil servants should be acquired by capitalists for their increased profits; in other words, the capitalists must spend immediately all their additional profits on consumption or investment. It is however most unlikely that this should happen … It is true that increased profitability stimulates investment but this stimulus will not work right away since the entrepreneurs will temporise until they are convinced that higher profitability is going to last … A reduction of wages does not constitute a way out of depression, because the gains are not used immediately by the capitalists for purchase of investment goods.

[h/t Chris Dillow]

4 Comments

  1. The man who missed it by a hair’s breadth

    Comment on ‘Kalecki on weg-led growth’

    Kalecki addressed two important questions:

    (i) the relationship between profit and employment,

    (ii) and the difference between a partial wage rate change and an overall wage rate change.

    To take the second point first: Kalecki was perfectly right in pointing out that even it where true that a partial wage cut could increase employment in one firm it would be a fallacy of composition to maintain that this holds for the economy as a whole. For a consistent analysis of the partial-global interrelations see (2014a; 2014b).

    With regard to point (i) Kalecki has to be praised for being the first to take overall profit explicitly into the picture. However, he got the relationship between profit and distributed profit wrong (2011; 2013b).

    This can be regarded as a trivial offense because Keynes did not get it right either:
    “His Collected Writings show that he wrestled to solve the Profit Puzzle up till the semi-final versions of his GT but in the end he gave up and discarded the draft chapter dealing with it.” (Tómasson und Bezemer, 2010, pp. 12-13, 16)

    Or, to jump directly into the present, Keen did it not get right either (2013a).

    Or, to to take the broader picture: Neither Classicals, nor Walrasians, nor Marshallians, nor Keynesians, nor Marxians, nor Institutionialists, nor Monetary Economists, nor Austrians, nor Sraffaians, nor Evolutionists, nor Game theorists, nor Econophysicists ever came to grips with profit (cf. Desai, 2008).

    To sum it up: The profit theory is false since Adam Smith.

    Kalecki recognized that profit is the pivotal concept for the analysis of how the economy works. In market contrast to his fellow economists, he did not take Walsras’s zero profit economy for one moment seriously. Yet he stumbled at the very last step: he did not get the formal foundations right. In this respect Orthodoxy and Heterodoxy is one big family.

    Egmont Kakarot-Handtke

    References
    Desai, M. (2008). Profit and Profit Theory. In S. N. Durlauf, and L. E. Blume
    (Eds.), The New Palgrave Dictionary of Economics Online, pages 1–11. Palgrave
    Macmillan, 2nd edition. URL http://www.dictionaryofeconomics.com/article?id=
    pde2008_P000213.

    Kakarot-Handtke, E. (2011). What is WrongWith Heterodox Economics? Kalecki’s
    Profit Theory as an Example. SSRN Working Paper Series, 1845803: 1–9. URL
    http://ssrn.com/abstract=1845803.

    Kakarot-Handtke, E. (2013a). Debunking Squared. SSRN Working Paper Series,
    2357902: 1–5. URL http://papers.ssrn.com/sol3/papers.cfm?abstract_id=
    2357902.

    Kakarot-Handtke, E. (2013b). The Emergence of Profit and Interest in the
    Monetary Circuit. World Economic Review, 2: 106–118. URL http://wer.
    worldeconomicsassociation.org/article/view/60 or http://ssrn.com/abstract=1973952.

    Kakarot-Handtke, E. (2014a). Towards Full Employment Through Applied Algebra
    and Counter-Intuitive Behavior. SSRN Working Paper Series, 2456184: 1–25.
    URL http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2456184.

    Kakarot-Handtke, E. (2014b). The Truly General Theory of Employment: How
    Keynes Could Have Succeeded. SSRN Working Paper Series, 2406891: 1–25.
    URL http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2406891.

    Tómasson, G., and Bezemer, D. J. (2010). What is the Source of Profit and
    Interest? A Classical Conundrum Reconsidered. MP

    Comment by Egmont Kakarot-Handtke— 3 Oct, 2014 #

  2. Either Kalecki is confused or I am. Initially he says “Let us assume that wages have been in fact generally reduced … and in consequence unemployment vanishes.” Well that assumes that reduced consumption by employees is made good by INCREASED consumption by EMPLOYERS.

    Indeed, he rightly says “A precondition for an equilibrium at this new higher level is that . . . . capitalists must spend immediately all their additional profits on consumption or investment.”

    He then says “It is however most unlikely that this should happen..”. His reason being that the propensity of employers to consume is lower than that of employees. Quite right. But that contradicts his initial assumption that “unemployment vanishes”.

    In short, I’m entirely unclear as to what Kalecki is trying to tell us in the above passage.

    If he is trying to tell us that there is nothing about free markets that ensures an escape from recessions, that is not correct. There is the Pigou effect. The latter effect works in theory, though it works far too slowly in the real world.

    Comment by Ralph Musgrave— 3 Oct, 2014 #

    • I think that Kalecki’s argument is intended as a reductio ad absurdum. He assumes that lower wages have led to full employment and then offers a disproof.

      Comment by Min— 7 Oct, 2014 #

  3. Unless of course they can sell credit cards to the workers in lieu of wage increases…

    Comment by NeilW— 3 Oct, 2014 #


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