Michal Kalecki Economic Analysis

Post – Kalecki, Michal Kalecki

Josef Steindl used Kalecki's approach in an analysis of certain (neglected) long run developments in advanced capitalist economies. In his book Maturity and Stagnation in American Capitalism (Steindl, 1952) and a later article (1979) Steindl explored the viability of capitalism's powers of recovery. His central question is: can a mature capitalist economy return to its growth path after it has experienced a severe shock, or will it stagnate?

Steindl follows Kalecki's methodology and categorisation of industries by structure (oligopolistic and competitive). These differences in structure result in different patterns of competitive behaviour and have different consequences for profit margins, internal accumulation and capacity utilisation. If a (primary) depression occurs in the volume of investment and economic activity there will be different reactions in the two sectors. The logic of oligopolistic competition will cause a secondary squeeze on investments which tends to prolong economic stagnation. For in response to the shock, the decrease in the margin of net profits over total costs will be smaller and the degree of capacity utilisation lower than in the competitive sector. Investment is here determined by recent internal accumulation, the degree of capacity utilisation and indebtedness, and the rate of profit, all of which are sensitive to the shock. So in order to maintain the 'gearing ratio' between capital and equity, investment expendi­tures are cut and the economy stagnates. Obviously the general trend towards increasingly oligopolistic structures throughout advanced capitalist economies is reducing their potential to recover from shocks.

Clearly this represents a particularly relevant piece of analysis given that stagnation characterised much of the 1970s and is likely to occupy a central position in the 1980s. Yet virtually no attention has been paid to Steindl's work! This can be partially explained by the inopportuneness of the analysis: it appeared in a period when stagnation was not in evidence (Steindl explains the absence of stagnation by reference to Kalecki's article on the economic situation in the US (1972b) in the preface to the second edition). However at the same time there was considerable interest in industrial structures which form the basis of Steindl's analysis. The most plausible explanation of the disregard for this work is that it could not be incorporated into the prevailing theoretical structure.

Robinson and Eatwell adopt and develop Kalecki's macro-economic framework in their Introduction to Modern Economics (1973). They use a two-sector, two-good, two-class model which pays particular attention to the monetary aspects of the produc­tion and exchange of goods by dealing with money supply and the rate of interest. We can use this to examine the debate about money supply. The model assumes that the production of investment goods is related to demand originating in the con­sumption goods sector. Entrepreneurs issue bills against themsel­ves to cover their needs for consumption goods (for themselves and their workers) occuring between the placement and delivery of orders. When orders are completed, bills equal in value to the orders are cancelled. So consumption goods serve as money, being used for the payment of wages and dividends. Thus the stock of money always adjusts to the volume of aggregate production.

What would happen if the markets for goods and money are in equilibrium while the supply of labour exceeds demand? Is there an adjustment process that will eradicate unemployment? The model assumes that the number of employees and the quantity of capital employed are determined by the level of aggregate demand and that the average product of labour and capital employed are constant. It is further assumed that the real wage equals the marginal (and average) product of labour, that prices are derived via a mark-up and that investment is a function of aggregate profits.

Now a decrease in the real wage will increase the profit per worker but will adversely affect the demand for consumption goods. So employment will fall and aggregate profits remain constant. Consequently there is no incentive to increase invest­ment and move towards full employment. A similar outcome was demonstrated earlier in this chapter.

These results are totally at variance with those derived from the IS/LM model, which relies on an exogenously fixed supply of money, on investment being determined by the rate of interest, and on the concept of decreasing marginal product of labour.

We have seen that Kalecki restricted the use of supply and demand analysis of price formation to primary production. In the manufacturing sector he applied a mark-up interpretation of price formation with entirely different laws of motion. This has attracted considerable criticism because of the difficulty of precisely specifying the size of the mark-up and its consequences for inflation. Robinson and Eatwell (1973) hold that there is a minimum level of mark-up necessary to cover overhead costs and 'normal' profits, taking into account expected capacity utilisation. This being the case, the minimum will vary across industries and will be positively related to capital-output ratios. Industries with high capital—output ratios typically possess barriers to entry which will facilitate 'extra' profits. Such listings of the factors determining the level of mark-up may appear unsatisfactory, but they can nevertheless be superior to more 'rigorous' economic analysis. Their strength is that they assign social and political factors a role in the actual determination of economic reality; for example, trade-union power is not exclus­ively economic.

However, Alfred Eichner has attempted a rigorous analysis of the size of the mark-up in The Megacorp and Oligopoly: Micro Foundations of Macro Dynamics (1976). His microeconomic foundations are explicitly derived from Kalecki. He posits, drawing on empirical evidence, that the size of the mark-up is conditioned by a firm's desire for internally generated funds to finance its investments. In this sense there is an internal demand for and supply of internal funds. Price adjustments-i.e. adjust­ments of mark-ups over constant marginal costs-can alter inter­temporal cash flow by changing the return on investments thereby financed and because sales may decline following price rises. The demand for additional funds is related to the Marginal Efficiency of Investment (including returns to advertising and R&D) which is the return, measured in future cash flow, expected from incremental current investment. The supply of internal funds, i.e. the size of the mark-up, is limited by reactions to price rises. Clearly there is the possibility of a substitution effect and an entry factor besides meaningful government intervention. These two functions, supply and demand for additional funds, then interact to determine the size of the mark-up.

Eichner extends the concept of the mark-up, like Kalecki, to the question of income distribution, within the context of politically influenced wage determination. He maintains that 'the "cost-plus" pricing model, together with an institutionally or politically determined wage rate, provides the micro foundations for post-Keynesian macro-dynamic theory' (Eichner, 1973). He is particu­larly illuminating over the aggregate short-run adjustment pro­cess between savings and investment. Here, given that household savings play a minimum role in business accumulation, it is business savings and investment that diverge because actual sales differ from expected sales, especially when the economy is pushed off its secular growth path. Thus we have a different adjustment process from the usual Keynesian formulation. 'Any surplus [deficit] of savings relative to investment within the [oligopolistic] sector will, of course, have to be offset by a deficit (surplus) in some other sector, for in aggregate the Keynesian condition that S — I still holds' (Eichner 1973). Thus an increase in investment does not initiate a pronounced multiplier process, for adjustment is achieved by a change in income distribution - a phenomenon noted by Kalecki in relation to foreign trade. This reasoning also lays the foundation for a wage-price spiral. To achieve planned cash flow prices will be raised and once we include a trade union strategy of maintaining some historic relationship between wages and profits, the possibility of a spiral becomes self-evident. Eichner (1976) extends the analysis to illustrate the ineffectiveness of governmental attempts to steer the economy thus complement­ing Steindl.

These are glaringly crucial issues. Interestingly Eichner com­ments in his preface, 'The appearance of this work has also been retarded by the hostility of other economists to the ideas which it contains' (1976).