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BIATEC, Volume XIII, 10/2005

PROFILES OF WORLD ECONOMISTSMICHAL KALECKI

MICHAL KALECKIdoc. Ing. Ivan Figura, CSc.

Michal Kalecki was born on 22 June 1899 in Łódź. Hestudied engineering at the polytechnics in Warsaw andGdansk. In 1929 he joined the Research Institute ofBusiness Cycles and Prices in Warsaw, where he wor-ked for seven years.

During this period he formulated underlying ideas forhis macroeconomic theory that were similar to thosewhich Keynes came out with three years later in "TheGeneral Theory of Employment, Interest and Money"(1936). Kalicki presented them in 1933 at an internatio-nal conference of the Econometric Society held in Lei-den; they were published in 1935 in the French magazi-ne Revue d'Économie Politique, after he had developedthem in "An Essay on the Theory of the Business Cycle",published in Warsaw in 1933. He was at that time recog-nised only by a small circle of economists, especiallyeconometrists. Kalecki achieved wider acceptance onlyafter he was published in English and the similarity bet-ween his theory and Keynes's was demonstrated.

In 1936 he protested against the politically motivateddisciplinary measures taken against colleagues byresigning from the research institute; with a grant fromthe Rockefeller Foundation, he left to be a Travelling Fel-low first in Sweden and then in the United Kingdom – at

London and Cambridge. During the war years he workedin research at the Oxford Institute of Statistics, and afterthe war joined the International Labour Office in Montre-al, moving from there in 1946 to the United Nations Sec-retariat in New York where his main task was to preparethe World Economic Reports.

In 1955 he returned to Poland, becoming an economicadvisor to government bodies, a university professor anda member of the Polish Academy of Sciences.

His retirement was precipitated in 1968 and he resig-ned all his important posts. Even after resigning, howe-ver, he continued his research activity. This was shown innumerous research articles and in a lecture he gave atCambridge University in 1969 during the celebration ofhis seventieth birthday.

The eminent American economist J. K. Galbraith wrotea letter of thanks to Kalecki on the occasion of his birth-day, saying: "I wonder if you realise how much those ofus in the world around have owed to the intellectual capi-tal you have provided over these past decades…I belie-ve that your position in the world is unrepeatable". In1970 Kalecki was nominated for the Nobel Prize for Eco-nomics

Michal Kalecki died on 17 April 1970 in Warsaw.

Michal Kalecki has a permanent placein the history of economic thoughthaving independently discovered thebasic elements of Keynesian theory seve-ral years before the publication of J. M.Keynes's "General Theory". He madea significant contribution to the develop-ment of theories of the business cycle,growth, full employment, income distri-bution, the political boom cycle, the oli-gopolistic economy and risk. Although

he was among those world economistswho did not overestimate the effect ofmonetary factors on economic develop-ment, his views on many issues relatingto finance, interest and inflation remainstimulating. Much of Kalecki's work ser-ved as an inspiration to the CambridgeKeynesians – Robinson, Kaldor andGoodwin among others – and it is a signi-ficant source for the present-day, especi-ally American, Post Keynesianism.

The Kalecki Business Cycle Model

Kalecki did not write about money and finance ina separate, more extensive work. He addressed themrather in several independent articles and in variouschapters or parts of his numerous essays on econo-mic processes, in particular business cycles.

His business cycle theory is an "internal" theory,which means that he understood the business cycleto be above all a process generated by the internalstrengths of the economy. He created a macroecono-mic model for the cyclical fluctuation of economic

activity, one that explained the cycle, its automatismand regularity by means of endogenous changes,without the effect of external factors. In his initialmodel of the cycle he assumed the following for thepurpose of simplification: perfect competition, balan-ced trade, a balanced government budget, and thefact that workers consumed all their income and thatcapitalists saved all of theirs. In order to stress thecyclical components of the system, he abstractedthem from the long-term trend.

In explaining the cyclicality of economic develop-ment he posited that although the main source of

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investments is the aggregate savings of enterprises,the investment decisions of entrepreneurs are basedon the anticipated aggregate profitability in theexpected future period – the rate of profitability innew plants, estimated on the basis of current grossprofitability. He defined it as a ratio between totalgross profitability and the existing capital stock. Wit-hin the investment process he distinguished threestages each separated by a time-lag:

1. the decision to invest – orders,2. production of capital goods,3. actual investment – installation of capital goods For him, the very cyclicality of the economy was

a continual process in which cyclical developmentresulted from the dual role of investment - from thefact that "investment is not only produced but alsoproducing".

Kalecki wrote: "Investment considered as capita-lists' spending is the source of prosperity, and everyincrease of it improves business and stimulatesa further rise of spending for investment."

On the other hand, every investment producescapital equipment and expands the existing stock, itis – abstracted from technical progress – a simpleaddition to the older generation. The growth in thevolume of capital equipment, which depends on thesize of the investment orders realised in past periods,means that amid continuing profits there is a reducti-on in the rate of profit. In this way the growth of totalcapital stock has an adverse effect on its gross profi-tability and therefore on the demand for furtherinvestments. Investment orders grow more slowlyand by the next stage are in decline, triggeringa phase of depression. It is in this sense that Kaleckiformulated his well-known statement: "The tragedy ofinvestment is that it calls forth because it is useful."Where effective investment has fallen below the levelof depreciation, then the total capital stock will fall,halting the decline in profitability and inducing rene-wed growth in investment spending, which leads intothe cyclical phase of economic recovery.

Investments made in a certain period are determi-ned by the level of economic activity in the past peri-ods. This, wrote Kalecki, "creates a basis for analy-sing the dynamic of the economic process and inparticular makes it possible to demonstrate that thisprocess is connected to cyclical development".

In elaborating his cycle theory Kalecki took intoconsideration technical progress. He shows that,thanks to innovations, investments are not merely anaddition to the older generation of capital equipment.Instead of the profitability of capital declining, invest-ment projects become more attractive, investmentspending continues, aggregate demand expands,and therefore economic growth rises. "The effect that

a steady flow of innovations has on investment maybe compared with the effect of a steady rate of profitgrowth. This flow contributes to increasing the invest-ments per unit of time above the level without inno-vation… Innovations transform a static system intoa system of long-term growth". Kalecki considersinnovations to be factors of development which "donot allow the system to persist in a static position andwhich cause a long-term upswing".

The Kalecki model differs from the later Keynesmodel in which the balance of capital is assumed tobe constant and the investment decision is basedupon the marginal utility of capital in comparison withthe interest rate. Kalecki by contrast posited a balan-ce of capital which fluctuates over the course of thecycle and which, together with the expected aggre-gate profitability of capital, has a significant effect onthe investment decision.

Lawrence Klein, 1980 Nobel Laureate in Econo-mics, has written: "From a certain viewpoint theKalecki model is superior to the Keynes model,above all for the fact that it is considerably dynamic."

The interest rate

Most of Kalecki's views on interest-rate develop-ment were related to his interpretation of the busi-ness cycle.

Like Keynes, Kalecki saw the interest rate to be ina certain sense a monetary phenomenon and nota mechanism for bringing about equality betweensavings and investments. He wrote that "the rate ofinterest cannot be determined by the demand for andsupply of capital because investment automaticallybrings into existence an equal amount of savings.Thus investment 'finances itself' whatever the level ofthe rate of interest. The rate of interest is, therefore,the result of the interplay of other factors".

As for the effect the interest rate has on the invest-ment decisions of entrepreneurs, Kalecki reasonedthat their willingness to invest increases when theprofitability of capital equipment and the expectedprofitability inferred from this are higher, while it fallswhen the interest rate is raised. In general, however,he considered the interest rate to be a less significantfactor than the effect of aggregate profitability, "theinterest rate is of secondary importance for the will toinvest, the factor of prime importance being unques-tionably the gross profitability of existing plants”.Regarding the relationship between the interest rateand business cycle, Kalecki draws a distinction bet-ween the short-term and long-term interest rate.

The short-term interest rate is affected, accordingto him, on the one hand by transaction demand formoney, influenced by the volume of transactions,

and, on the other hand, by the supply of money frombanks.

The transaction demand for money, in other wordsthe money used as a medium of exchange, may bemet through a larger or smaller money supply. A lar-ger money supply in relation to the total value oftransactions enables transactions to be executedmore effectively and easily. The higher the short-terminterest rate however, the more unprofitable this "faci-litation", since revenue is lost by the short-term pla-cing of money in short-term deposits, bills and so on.

Where the value of transactions rises during therecovery phase, the need for a larger money supplygrows and the short-term interest rate is raised asa result. Banks react to this by increasing the supplyof money, which puts downward pressure on thedevelopment of the short-term interest rate. Duringthe depression, the volume of transactions declinesand so does the short-term interest rate. The banksreact by tightening the money supply, which has theopposite effect on the short-term interest rate by sup-porting an upward tendency.

The supply of money by banks does not react pro-portionately to the fluctuating value of transactions,on the basis of which it is possible to clarify the actu-al character of the cyclical fluctuation of the short-term interest rate. In general, according to Kalecki,bank money supply "fluctuates less than the value oftransactions and so the velocity of circulation ofmoney and the short-term interest rate increaseduring the recovery and decrease during the depres-sion", insofar as the banks do not make an exceptio-nal resort to the policy of "cheap money" during therecovery.

In the event that banks reacted to growing demandfor credit by raising the interest rate relatively steeply,then the upswing would be brought to an end; asKalecki shows, this is because "the precondition forthe upswing is that the rate of interest should not inc-rease too much in response to an increased demandfor credit”.

In clarifying the development of the long-term inter-est rate, Kalecki takes as a basis the possible substi-tution between a short-term asset, such as a bill ofexchange, and a long-term asset, such as a govern-ment security. He presents the example of the secu-rity owner who is comparing the potential performan-ce of the short-term and long-term asset over thecourse of the next several years. Rather than thecommon short-term interest rate, he takes into consi-deration the expected short-term interest rate overthe course of the expected period and the currentprofit on the long-term asset – the current long-terminterest rate. In addition he takes into account thedevaluation of the long-term asset. The cyclical fluc-

tuation of the short-term interest rate is then reflectedonly to small extent in the long-term interest rate,which does not fluctuate on a cyclical basis.

To the extent that Kalecki dealt with the effect of theinterest rate on the willingness to invest, he conside-red the most decisive factor to be the long-term inter-est rate. This is, according to him, relatively stableand a change in it is unlikely to have a substantialeffect on investment activity. This led him to rejectthose business cycle theories, according to which theend of the boom derives directly from an increase inthe rate of interest.

Kalecki in the end asserted that, on the basis oflong-term data, it is not at all certain whether con-sumption is really encouraged or discouraged bya higher rate of interest. Most likely is that its effectwould be made significantly clear only if the interestrate fell to a very great extent. The long-term interestrate could affect spending decisions, but may itself bechanged only slightly. Therefore Kalecki was alsosceptical about the effectiveness of monetary policy,which, mainly through the anticipated effect on theinterest rate, could have had no more than a relative-ly small effect on the level of aggregate demand.Where monetary policy affects demand, it does soabove all through its impact on investment.

In summarising his analysis of the interest rate,Kalecki stated: "Several authors have attached to theinterest rate a significant role in the progress of eco-nomic fluctuations. Since in fact the long-term inter-est rate is a determinant of investment and thus ofthe business cycle mechanism…and does not dis-play substantial cyclical fluctuation, it can hardly beconsidered a significant element of the businesscycle mechanism".

Inflation

Kalecki from the outset of his research dealt withthe issue of inflation in connection with the businesscycle and noted the process of "credit inflation". Heasked: "How can capitalists invest more than remainsfrom their current profits? This is made possible bythe banking system in various forms of credit inflati-on…Hence, …, without credit inflation there would beno fluctuations in investment activity. Business fluctu-ations are strictly connected with credit inflation…A similar type of inflation is the financing of invest-ments from bank deposits, a process usually notclassified as inflation but one which perhaps has thegreatest importance in the inflationary financing ofinvestments during an upswing in the businesscycle."

While in the UK during the war he examined inflati-on in more detail and devoted several articles to the

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subject. In one of them he posed the question: "Whatis inflation?". He considered it incorrect to identifyinflation with every increase in the level of prices. Hesaid that many of the factors increasing the level ofprices were not inflationary in the strict sense of theword. The increase in prices happens, for example,as a consequence, of currency depreciation or a one-off hike in wages but at the same time there does notemerge a self-regulating spiral process that could betermed inflation.

The essence of inflation may be approached moreclosely if its cause is understood in the followingsense: where there is increasing effective demandtogether with constant or declining supply, an equilib-rium is created by the effect of rising prices. But evenhere there arises the difficulty of measuring theextent and pace of inflation since prices may increa-se for reasons other than a relative shortage ofinputs. He sees the way around this obstacle to be inunderstanding that a cursed inflationary spiral emer-ges from the fact that, after the decline of real wagescaused by the increase in prices, it is not possible fornominal wages to “catch up with” the rising prices norfor the previous level of real wages to be restored.Workers strive to maintain their previous standard ofliving, in other words the previous level of real wages,by securing higher nominal wages. However the inc-rease in them is a cause of further increase in thelevel of prices and the “chase” continues.

Where there is a rich supply of inputs for the pro-duction of consumer goods, there is also more or lessa close correspondence between the prices of pro-ducts and their initial costs. The supply curve is hori-zontal or rising slightly. During inflation however it isrising steeply and prices rise considerably above thelevel corresponding to a “normal” relation betweenprices and initial costs.This increase represents infla-tionary profits. Their amount may be taken as a mea-sure of inflation. According to Kalecki, the advantageof such an approach is that inflation may be measu-red as a whole and in the way it is actually manifes-ted in individual sectors. It is important for the selec-tion of anti-inflationary measures since the fightagainst inflation means coming to terms with inflationin the markets for individual goods.

Kalecki considered not only the disproportionateincrease of prices to costs as being symptomatic ofinflation, but also the reduction of stocks. The runningdown of stocks indicated, according to him, a discre-pancy between consumption and the supply of con-sumer goods. While it may for a certain time stave offinflationary pressures, it is restricted by the volume ofstocks. Once stocks have been reduced to a critical-ly low level, the inevitable inflationary pressures willkick in and lead to the increase in prices. The intensi-

ty with which stocks are reduced may therefore beconsidered as latent inflation, measurable by the rateat which the stocks are spent. Latent inflation may,and often does, go hand in hand with actual inflation– the reduction of stocks is accompanied by an infla-tionary increase in prices and the creation of exces-sive profits.

The suppression of inflation during the war by theofficial regulation of prices was deemed ineffective byKalecki, on the grounds that prices continue to incre-ase illegally in such a situation and that this is reflec-ted both in excessive demand and in the randomdistribution of goods – not in accordance with theinterest of society but largely dependent on the arbit-rariness of the sellers. Open inflation could be restric-ted but suppressed inflation continues. He saw thebetter solution in economic rationing since priceregulation without a rationing system suffers from theuneven distribution of those goods that are in shortsupply.

He also took a critical stance against the policy ofusing wage stabilisation as a remedy to suppressinflation. He showed that prices in such a situationwill rise only up to the level where demand for con-sumer goods matches the available supply. In fact,real wages are not stabilised in this way, but will rat-her fall, while the continued reduction in the supply ofconsumer goods will be accompanied by a new inc-rease in prices and a subsequent decline in realwages. Besides its unfavourable effect on the livingstandards of those who had worked hard, the free-zing of wages reduced the incentive to raise produc-tivity in both the war sector and in the sectors manu-facturing consumer goods. It was for these reasonsthat Kalecki vehemently opposed the governmentprogramme of wage stabilisation and in this conne-ction he tended towards the introduction of the fullrationing system.

Kalecki devoted special attention to the issue ofhyperinflation. “The theory of hyperinflation is of inter-est even though the phenomen is rather is exceptio-nal, because this phenomenon is striking and becau-se, even though hyperinflation does not last too long,it leaves considerable traces in the economy in theyears to come”. Interest in the theory of hyperinflati-on also arises from the fact that it is “the one casewhere the quantity theory of money finds its fullapplication” wrote Kalecki, who had cast doubt on itsapplicability in the hyperinflation-free economy.

In such an economy, according to him, the increa-se in the supply of money in circulation causes anincrease in liquidity and a fall in the velocity of circu-lation of money, rather than a rise in the level of pri-ces. A reduction of the interest rate, occurring as theresult of a rise in the supply of money in connection

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with the profit outlook, does stimulate a rise in invest-ments and, under the multiplier effect, an increase inconsumption and output which leads eventually a risein prices. That said, this effect is insignificant sincethe reduction of the short-term interest rate is reflec-ted only partly and to a small extent in the long-terminterest rate. In such conditions, the effect of the inc-rease in money supply on prices will be only indirect.

This is not the case in the conditions of hyperinfla-tion. In this case every increase in the supply ofmoney in circulation directly induces a rise in the levelof prices. This results from rise in general preferen-ces for goods and the disposing of money. Themoney supply increment is speedily converted intogoods, within a timeframe whose length is a functionof the rate of acceleration of the increase in prices.The velocity of circulation of money again causes anincrease in prices, the rate of which is, according toKalecki, proportional to the money circulation veloci-

ty where it is assumed that macroeconomic policyensures a stable inflow of money through channels ofbudget deficit financing and bank loans.

On the other hand, the money circulation velocity isa function of the anticipated increase in prices andmay cause further acceleration of the price growth.An inflationary spiral may thus develop, driven by theincrease in the money circulation velocity. This “phe-nomenon of accelerated hyperinflation is nothing elsebut the galloping inflation which is based on increa-sing velocity of circulation”. It does not develop inde-finitely however, since the money circulation velocityhas maximum possible levels. But these are not rea-ched as a result of the previously taken stabilisationmeasures, whose initiation is forced by the reactionof various social groups to the hyperinflationaryeffects on income distribution and the overall econo-mic situation.

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Selected works of Michal Kalecki• Próba teorii koniunktury (1933), English translation: An

Essay on the Theory of the Business Cycle, • Essai d`une théorie du mouvement cyclique des affairs.

Revue d`Économie Politique, 2 (1935), • A Macroeconomic Theory of the Business Cycle. Eco-

nometrica, 2 (1935),• Principle of Increasing Risk. Economica, 4 (1937),• Essays in the Theory of Economic Fluctuations (1939),• What is Inflation? Oxford University, Institute of Statis-

tics, Bulletin June 7 (1941), • Studies in Economic Dynamics (1943),• Political Aspects of Full Employment. Political Quarterly,

14 (1943), • Theory of Economic Dynamics: An Essay on Cyclical

and Long-run Changes in Capitalist Economy (1954),

• A Model of Hyperinflation. Manchester School of Eco-nomics and Social Studies. Vol. 72, N°3 (1962),

• Zarys teorii wzrostu gospodarki socjalistycznej (1963),• Studies in the Theory of Business Cycles: 1933 – 1939

(1966),• Selected Essays on the Dynamics of the Capitalist Eco-

nomy, 1933 – 1970 (1971),• The collected works of Michal Kalecki: published in War-

saw between 1979 and 1988 in seven volumes underthe title "Dziela"; published in English between 1990and 1997 in seven volumes under the title "The Collec-ted Works of Michal Kalecki" by the Clarendon Press,Oxford.

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