Michal Kalecki Definition Theories

Michal Kalecki, Determinants Of National Income and Its Distribution

Kalecki first formulated his macroeconomic framework (1933, 1935) to examine the debate between Rosa Luxemburg and Tugan-Baronovski (Kalecki 1972b) over the conditions necessary (the availability of lands to be conquered or sustained en­trepreneurial demand) for permanent capitalist growth. He refined this framework to study the level, movement and distri­bution of national income.
If we assume constant input coefficients and market shares (between manufacturing sectors and firms) we can examine labour's share in national income. Clearly in the manufacturing sector labour's share is determined by the various mark-up levels and the relation between the price of raw materials and wages (i.e. the price of inputs). High levels of mark-up represent a large difference between price and marginal costs and thus a relatively low share for wages in national income. With a given mark-up labour's share will be low when raw materials costs are high in relation to labour costs.

This is Kalecki's starting point when analysing the multiplier. Here, income distribution is made an explicit determinant of the level of aggregate income. His analysis contains further unusual elements. He assumes different marginal propensities to save for different groups and develops the concept of the multiplier within Marx's reproduction schema (1954, 1968a). Here there are two classes of actors, workers and capitalists, operating in the context of the Gross National Income = Gross National Expenditure/Output identity. This can be represented as in Table 1. In Department III (wage goods) part of the output is consumed by the workers who produce it. The remainder is sold to the workers in the other Departments. This sale equals the wage bill in Departments I and II and the profits in Department III. The value of production in Departments I and II is the sum of their wages and profits. We have seen that the wages in Departments I and II equal profits in Department III. Thus total profits equal the value of production in Departments I and II

Table 1

Kalecki uses this scheme extensively to examine the con­sequences of different propensities to save, of wage rises and of different levels of autonomous expenditure (by private investors, the government or from abroad).

A cornerstone of Kalecki's reasoning is his demonstration that the aggregate income of entrepreneurs is proportional (and with the assumption that workers do not save, exactly equal) to their aggregate demand for investment and consumption goods in each period (e.g. 1971a). If we assume that workers spend all they earn then

P = I + CC (from Table 1)

After an injection of investment (workers cannot, like capitalists, autonomously change their expenditure) national income ex­pands to the point where profits (taken out in accordance with the mark-up) are equal to the sum of capitalists' consumption and investment. The relation between the expansion and the injection is of course the multiplier So capitalists' income expands to meet the level of production of capitalists' goods, assuming that there is no government or foreign trade: budget deficits and export surpluses create ad­ditional accumulation in the business world equal to their level.

Within this framework it can be seen that employees' aggregate income is a by-product of the individual decisions made by entrepreneurs. With the factors determining the distribution of income given, national income will be positively related to the level of entrepreneurial expenditure on investment and consump­tion and other elements of autonomous expenditure. Of course with autonomous expenditure given, labour's aggregate income will be positively related to its share in national income.

Concomitantly, income distribution determines the distri­bution of profits between economic sectors. High unit labour costs in the economy as a whole will effect high output in the firms producing wage goods and thereby high profits in this sector. So, far from squeezing profits, high labour costs merely redistribute profits. Clearly a general rise in wages would have a similar outcome. Below full capacity higher wages can be paid for by increased aggregate production (Kalecki, 1939, 1954, 1971a). Thus we can see that orthodox microeconomic rationality does not hold for macroeconomic relationships.

But what is the effect of a rise in real wages on investment decisions? In answering this question, Kalecki draws a distinction between short- and long-term rates of interest. He observes that there is a positive functional relationship between the velocity of circulation of money and the short term interest rate. They tend to vary in sympathy with the business cycle because the value of transactions fluctuates more than the supply of money from banks. The long-term interest rate is determined by the average of expected short-term rates over the time horizon, adjusted by past experience and the risk of depreciation of long-term assets. This average does not reflect cyclical fluctuations and if, for some reason, it falls, the impact of this is dampened by a counteracting and simultaneous decrease in the risk of depreciation (Kalecki, 1954).

Only the long-term rate is relevant for investment decisions. But due to its relative stability, it can be ignored as one of the major determinants of the volume of aggregate investment. The most decisive factors that influence investment expenditure over the next time period are: recent tendencies in profit levels; the existing stock of physical capital; the potential for financing investment internally; and technical progress which once in­corporated improves a firm's relative position in an industry (Kalecki, 1968b). With the exception of technical progress, these factors tend to accentuate instability. Consequently Kalecki's theory of the business cycle, in which investment decisions are the dominant element, emphasizes dynamics rather than comparative statics.

Kalecki rejects the orthodox assumption of decreasing mar­ginal productivity of labour (with less than full capacity utilization), for he believes it provides a misleading presentation of the relation between real wages and aggregate employment (1939, 1971a). We have seen that though an increase in real wages effects a reduction in profits in the investment and entrepreneurial goods sectors, this is compensated by additional profits in the wage goods sector. As aggregate profits are not squeezed in the short run (following a rise in real wages) there are no detrimental effects on future aggregate investment and entrepreneurial consumption. With a given level of entrepreneurial expenditures and capacity utilization, there is a positive relationship between real wage and output and employment. An increase in real wages raises output because labour has a high propensity to consume. With a relatively inelastic supply of labour (the majority working an institutionally given number of hours per week) the situation could be described by Figure 1.

In this closed economy with no government, the LD function represents aggregate demand for labour at various levels of real wages, assuming a constant level of investment expenditure and given propensities to save.

Figure 1

The function has a positive slope because higher real wages imply higher employment (and profits) in the wage-goods sector with unchanged production in the other sectors. The prevailing level of real wages is arrived at as a result of the operation of the same factors determining the level of mark-up and the relation between wages and material costs as well as certain structural factors. The level of unemployment at this wage rate is represented by the distance AB and an increase in the volume of investment would shift the LD function to the right and reduce unemployment. Note that reductions in real wages do not deplete the ranks of the unemployed and that union-induced wage rises are not the cause of unemployment; rather it is the weakening of their bargaining power (for example in slumps) that is a portent of unemployment (1971a).

Kalecki applies an analogous reasoning to the question of taxation (1937) to illustrate the contention that taxation will not reduce investment levels, an issue of particular relevance when government spending is being blamed for so many ills. Consider an increase in taxes to finance additional government expenditure with the level of budget deficit unchanged. If the taxes fall on employees' disposable incomes the resultant shift from private to public demand will leave the level of aggregate production unchanged. But if profits provide the taxes and they cannot be compensated by a rise in the mark-up, aggregate production could actually increase! Because investments are based on past decisions there will be no current reduction in investment and production. If there is no reduction now there will be none in the future. Further, if the government expenditure employs idle labour there will be an increase in demand for wage goods and an increase in their provision.

In an analysis of US statistics (1972a), Kalecki compared the structure of national income in 1937 with that of 1955. He concluded that the share of consumption in national income had decreased sharply, partly due to increased taxation of private consumption and partly because of the enhanced power of Big Business whose mark-up was relatively high. That national in­come doubled during the period whilst the share of consump­tion declined relatively was only possible because government had increased its relative share, financed by corporate taxes. With a falling share of consumption in national income, private investment on its own could not have produced such a favourable development of national income. Thus Kalecki is highlighting the supportive role of government in the process of capital accumulation.

Thus we find in Kalecki an integration of the micro and macro aspects of the economy. Building from the behaviour of oligopo­lists he formulates a relevant pricing policy where mark-up is a crucial factor. This he applies to the interdependent issues of the distribution and level of national income where autonomous expenditure by entrepreneurs is the crucial force behind the cyclical movements of an advanced capitalist economy. Using Marx's reproduction schema he applies his insights to the most pressing of our problems and arrives at policy formulations quite at variance with the orthodoxy. His analysis is simple, complete, yet rich in detail. Concerning the very pertinent question of growth, Kalecki regarded the neo-classical theories as an in­adequate and unacceptable portrait of the development of a capitalist industrialised economy. Paradoxically he viewed such theories as suitable only as abstract reflections on the growth path of a planned economy! For Kalecki, whether growth emerges from short-run cyclical movements is dependent on the existence of'development factors'. Most important here is the intensity of technical progress because it lowers production costs. Without this there would be insufficient investment opportunities for long-run economic growth for capitalism as a whole. In one of his last papers (1968b) Kalecki outlined a theory of capitalist growth in terms of moving equilibrium and incorporated both short-term fluctuations and technical progress whilst denying the validity of purely mechanistic theories.

Having summarised Kalecki's comprehensive challenge to orthodoxy, what then has been his impact on the bulk of economists? How have his insights been developed?