Most people know Polish economist Michal Kalecki for his "profit equation," which looks like this:
This simply stated that business profits were equal to the sum of capitalist consumption, investment, government deficits and net exports, minus worker savings.
Kalecki was a contemporary of Keynes and a supporter of his economic views, particulary, that government has the power to establish and maintain full employment via deficit spending.
But Kalecki believed that full employment would never be achieved and he gave his reason why in an article he published entitled, "Political Aspects of Full Employment." Basically, Kalecki said that the full employment delivered by Keynesian policy would eventually lead to a more assertive working class and weakening of the social position of business leaders, causing the elite to use their political power to force the displacement of the Keynesian policy even though profits would be higher than under a laissez faire system: The erosion of social prestige and political power would be unacceptable to the elites despite higher profits.
Boy, was he right!!!
18 comments:
Anticipated Rodger Mitchell, too. Capitalists will be capitalists. Can't have the help getting uppity.
Kalecki from Mike's link:
"This suggests that there is a political background in the opposition to the full employment doctrine, even though the arguments advanced are economic. That is not to say that people who advance them do not believe in their economics, poor though this is. But obstinate ignorance is usually a manifestation of underlying political motives."
So what Kalecki perhaps asserts here is that their their "motives" make them "morons".... hmmmmm now we may be getting somewhere....
rsp,
Bob,
Could be...
I'm going to keep taking the position that they are stupid anyway just for arguments sake if nothing else...
this back and forth argument between "ignorant or subversive?" often becomes a revealing process imo...
rsp,
Wow, stunningly correct observation on the political business cycle. That almost perfectly explains the resistance, or active subversion, of all the business leaders and institutions supporting austerity.
Thinking he was channeling Veblen when he wrote this?
"The erosion of social prestige and political power would be unacceptable to the elites despite higher profits."
Well, that kind of stupidity explains why you can lead a culture to return-on-coordination ... but you can't make 'em leverage it.
They'd rather keep position in a group, than see the group do well? That actually fit's the "selfish-component" theory of group evolution. I.e., we're poised half-way between being eusocial and anti-social. Always looking out for numero uno PLUS group, never either in isolation.
This is really not news. Humans have always been this way. It's simply another way to say "multi-level selection."
This reference to Kalecki is very opportune. In the paper linked to, Kalecki goes against a piece of received wisdom very dear to free-marketeers. I am talking about the confidence fairy myth:
"2. In current discussions of these problems there emerges time and again the conception of counteracting the slump by stimulating private investment. This may be done by lowering the rate of interest, by the reduction of income tax, or by subsidizing private investment directly in this or another form. That such a scheme should be attractive to business is not surprising. The entrepreneur remains the medium through which the intervention is conducted. If he does not feel **CONFIDENCE** in the political situation, he will not be bribed into investment. And the intervention does not involve the government either in 'playing with' (public) investment or 'wasting money' on subsidizing consumption.
"It may be shown, however, that the stimulation of private investment does not provide an adequate method for preventing mass unemployment." (Section IV, paragraph 2)
Nowadays even mainstream economists, like Paul Krugman (a great fan of Keynes), deride that myth. Indeed, it's difficult to find a single believer in the confidence fairy among PKers. The faithfuls are reduced to business people and ultra-free-marketeers.
And yet, people hardly ask the obvious question: where does the confidence fairy come from?
"The state of long-term expectation, upon which our decisions are based, does not solely depend, therefore, on the most probable forecast we can make. It also depends on the **CONFIDENCE** with which we make this forecast — on how highly we rate the likelihood of our best forecast turning out quite wrong. If we expect large changes but are very uncertain as to what precise form these changes will take, then our confidence will be weak.
"The state of **CONFIDENCE**, as they term it, is a matter to which practical men always pay the closest and most anxious attention. But economists have not analysed it carefully and have been content, as a rule, to discuss it in general terms." (J.M. Keynes, The General Theory, chap. 12 The State of Long-Term Expectation)
So, there you have it, boys and girls. That politically convenient piece of received wisdom, beloved of ultra-free-marketeers and business people, was fathered by his lordship, J.M. Keynes, no less.
Kalecki was wrong in the 1950s and 60s: those decades enjoyed high levels of employment. Moreover, while high employment levels makes it easier to get wage increases, an economy which is near capacity also enables employers to bump up profits.
I conclude that recent objections to stimulus from employers derive from ignorance rather than malice. That is, my guess is that employers suffer from the same deficit-phobia as Rogoff, Reinhart, the IMF, OECD and Peterson Foundation, and for the same reasons.
I agree with Mike Norman.Kalecki is valid in his essential points wich it is shown in statements (and policy) by European leaders like Angela Merkel´s speech in Davos there she explicitly told that the purpose behind the Austerity politics was basicly to drive the wages down,in level of Asian countries even though it drive down profits for buisness for a while,she more or less openly stated so,i guess she was not really aware that the crowd also was visited by journalist etc.
One should not underestimate power and politics role in economics,something we could learn from such John K. Galbraith Thorstein Veblen,Michal Kalecki and many today almost forgotten economists from the past.
Incidentally, about the profit equation:
Pn = Cp + I + Dg + Ee - Sw
Holding Cp, I, Dg and Ee constant, an increase in Sw (workers' savings), means a decrease in Pn (corporate profit); a decrease in Sw means an increase in Pn.
When one wins, the other loses.
And this does not stop when Sw is nil: Sw can be negative.
If Sw is negative, it means that workers are disaving (i.e. getting into debt) to pay for their consumption: Pn is even larger.
Magpie, there has been different meanings on on how to reinterpret Kalecki, but it´s clear that Kalecki used this formula as deliberate simplification:
Aggregate Supply-is
Gross profits (Pt) Wages and salaries (Wt)and Aggregate Demand -is
Gross investment (It)
Capitalists’ consumption (Ct)
Workers’ consumption (Lt)
flow variables in money
units, so that, if t is measured in years, Pt is profits from the
start to the end of year t, Lt is workers’ consumption throughout
year t and so on and so forth. Then the first column (Pt + Wt)
represents the aggregate price of the products and services
produced throughout the year, that is, supply; the second column
(It + Ct + Lt ) represents the money demand that is allocated
during the year to purchase the economic output. In this way,
Kalecki is stating that supply (St = Pt + Wt) is equal to demand
(Dt = It + Ct + Lt). Therefore,
Pt + Wt = It + Ct + Lt. or
Aggregate Supply: St = Pt + Wt,
that is, the aggregate price of supply is equal to profits plus
wages and salaries;
(b) Aggregate Demand: Dt = It + Ct + Lt + ∆dt –∆mt,
that is, aggregate demand is investment plus consumption plus
change in debts minus increase in hoarding.Kalecki used this equation as a deliberate simplification. He expanded this formula in other places well aware that it was not applicable in a universal way.
Thanks for the reminder, Jan.
Again, from
Pt + Wt = It + Ct + Lt
Where there is no foreign sector; now, making It, Ct, and Lt constant, an increase in Wt needs a decrease in Pt and vice versa. When workers lose, capitalists win, and viceversa.
Incidentally, Lt - Wt = -St. In other words, the equation Norman included in the text, if memory serves.
It's simple to see from the sectoral balance identity that saving has to come from somewhere. if the external sector is in balance or net saving, it is not contributing to any other sector's surplus and could be taking from it. Same with government.
Set (X - M) and (G - T) to zero and look at what happens in ((S - I). Typically there are net savers and net borrowers. The net savers are the upper 20% in general and the lower 80% are the net borrowers, evidenced in societies like the US where income and wealth inequality is large and increasing. This means that the bottom 80% are borrowing what the top 20% are saving in this scenario. How sustainable is that, especially when profit share is increasing?
So to have that level of saving at the top in the ownership class then working class as to go in debt to the degree that NX and the fiscal balance do not offset.
Magpie,
Your comment brings up the most important discussion point yet.
Why are public and policy discussions divided and focused on Corp profits VERSUS labor savings? Why not the running SUM of those points? [Because of competition between components, instead of return-on-coordination. Aka, lack of preparation and practice at either voluntary or forced coordination.]
Why on earth isn't the discussion about net corp/labor agility, quality of distributed decision-making, and rate of exploring NET, not silo options?
Capitalists will be capitalists. Tom Hickey
How did a distinction between capital and labor occur in the first place?
labor is one of the recognized forms of capital;
Down on the farm, some forms of capital are just considered more equal than others.
Shit happens. Have to ask one of the inmates.
Tom -- I read something earlier today about the wealthy saving 37% of their income at this time. Demand leakage is growing.
Demand Leakage - gotta be on of the most Class-Correct terms ever invented.
Who on earth FIRST came up with that?
We have to stop using it.
Regardless of who introduced such a convoluted term, their intent is working.
Their implicit double-negative has been accepted well enough in economics to effectively bury the original meaning it masks.
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