Michal Kalecki Firms And Mark Ups

Michal Kalecki, Firms And Mark-Ups

Kalecki's crucial consideration is the microeconomic foundations of macroeconomic phenomena. Therefore he is concerned with the nature of a firm's production function and its pricing behaviour. So whereas the simplified '45° Keynesianism' can be criticised for ignoring the level of prices and wages and their impact on aggregate demand, Kalecki is exempt from such attacks.

Kalecki emphasized that the general conditions prevailing in the production of raw materials were very different from those in manufacturing (1954). The conditions in the raw materials sector explain why their prices are demand-determined. For example, supply cannot respond to changes in demand in the short run. Further, given the number of competitors, individual producers occupy a relatively weak position and output is the only choice variable open to them for achieving some acceptable level of sales revenue in the long run. Kalecki views prices in the manufacturing sector as being determined by the enterprises themselves (1971b). In Kalecki's theory of mark-up pricing, demand enters in an indirect manner through demand-determined prices for raw materials or wages. Because of the nature of inputs (they are reproducible), in the typical enterprise variations in output can be achieved at constant marginal cost up to full capacity. Thus average variable costs are also constant and these form the base for a mark-up factor in price determination. Enterprises, however, face constraints when choosing their mark-up. It must be enough to cover overheads and to generate some minimum profit (even where capital utilisation is low), whilst it should not be so high as to attract the attention of powerful competitors. Kalecki's firms inhabit an interdependent oligopoly where reac­tions can shift the relative profitabilities within the industry.

Kalecki's initial notion of mark-up (1938) drew on Abba Lerner's concept of degree of monopoly' (Lerner, 1934), which was the reciprocal of the price-elasticity of demand. However Kalecki found Lerner's formulation unsatisfactory as it relied on the traditional profit-maximising behaviour of a pure monopoly which was far from the reality of the manufacturing sector. Kalecki argued that firms do not follow some precise strategy aimed at profit maximisation. Instead, in oligopolistic structures, firms adopt some rule of thumb that takes into account the reaction of competitors. Within this framework he sees a hierarchy of profitability in an industry which only changes when -there is some shift in relative power brought about by, say, technical progress. In this context, the size of the mark-up on average variable costs is an indicator of the relative power of a firm in a particular industry. Though mark-up is indicative of a firm's power it is not an explanation of this power. To provide an explanation Kalecki adopts a minimum 'mechanical' approach, simply listing the most important factors. These include: the degree of concentration; the level of effective collusion (including price leadership); the practicability of competition in the form of advertising instead of price wars; shifts in overhead costs in relation to variable costs; and the power of the trade unions. This list is strikingly relevant yet notably absent from the orthodoxy. Though Kalecki concedes that the relation of overhead to variable costs has some influence on the size of the mark-up (during a boom as the ratio declines so will the mark-up, whilst in a slump the rising proportion of overheads in total costs places an upward pressure on the mark-up) his concept is not just a full-cost theory, for he includes competitors in the model (1954).