note on kalecki

5/22/2018 Note on Kalecki

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Vladimir Gligorov

Comments for the macro group

As I am not going to attend the reading of Kaleckis well -known paper, let me quote

Kalecki from his paper A Theory of Profits (1942)(Laski and Walther say the same except for

the causal interpretation) and then add few comments:

What is the proper meaning of this equation? [The profit equation: gross profits equal

capitalistsconsumption plus gross private investment (workers do not save).] Does it mean that

profits in a certain period determine capitalists' consumption and investment, or the other way

round? The answer to this question depends on which of these quantities is directly subject to the

decisions of capitalists. Now, it is clear that they may decide to consume and to invest more in a

certain short period than in the preceding period, but they cannot decide to earn more. It is

therefore their investment and consumption decisions which determine profits, and not the other

way round.

If the period which we consider is short, we may say that capitalists' investment and

consumption are determined by decisions formed in the past. For the execution of investment

orders takes a certain time, and as to the capitalists' consumption, it is only with a certain delay

that the capitalists' standard of living reacts to the change of factors which influence it.

If capitalists decided always to consume and to invest in a given period what they haveearned in the preceding period, the profits in the given period would be equal to those in the

preceding one. In such case they would remain stationary, and the problem of how to read the

above equations would lose its importance. But such is not the case. Although profits in the

preceding periods are one of the important determinants of capitalists' consumption and

investment, capitalists in general do not decide to consume and invest in a given month what

they have earned. This explains why profits are not stationary, but fluctuate in time.

The first thing to notice is that, in this passage, Kalecki uses the relation of determination

not that of causality. He does, however, say that capitalists may decide to consume and to invest

more in a certain short period than in the preceding period, but they cannot decide to earn more,

which may suggest a causal interpretation of the profit equation, but that would not be without

problems.


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One is that it is the individual capitalist that makes the decisions, but not the capitalists as

a group, which would be necessary if these decisions were to have causal powers or, in other

words, that the reference to the decision makers could be understood causally. This is what that

whole business of representative individuals and rational expectations is all about.

The other is that in causal relations, if the cause is controlled, the effect is controlled too.

So, it cannot be said that they cannot decide to earn more. Now, they may or may not be

motivated by profits, which is what this whole thing about the micro-foundations of

macroeconomics is about, and I think that Kalecki would certainly want to argue that capitalists

are motivated by the prospects of earning profits.

Then there is the problem of the possible stochastic interpretation of the determination

relation, which could make sense, though the equation is not written that way, while probabilistic

causation is another kettle of fish altogether.

Finally, Kalecki here speaks about the increase in consumption and investment, as he

wants to say later on that profits in the preceding periods are one of the important determinants

of capitalists' consumption and investment A causal interpretation of this determination

would be somewhat difficult in part because tracing down the causal chain to the initial decision

to invest would imply, assuming causality to be transitive, that with that decision all the

subsequent profits and their distribution between consumption and investment would have been

determined. Otherwise, if read as written, it would mean that increase in profits causeinvestments by and consumption of the capitalists, which would contradict the previous

statement. Causality is usually taken to be asymmetric, while determination may not be.

So, I do not think that it is clear that causal interpretation of the profit equation is

warranted and if relied on, it would make this passage hard to understand.

Second, Kalecki aims to explain in the Political Aspects article why is it that profit

earners choose to support anti-cyclical public spending but not full employment one even though

the latter would increase their profits. In Full Employment by Stimulating Private Investment

he gives, among others, a secular stagnation type of an argument: (I)f technical progress

causes productive capacity to increase more slowly than the accumulation of capital, i.e. if the

capital intensity of production increases... there comes the law of falling rate of profits The

logical solution of this problem is that the function of private enterprise should in this case be

taken over by the government.Thus state-owned factories will constitute an ever-increasing


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share of industrial equipment, which will be a symptom of the inability of private enterprise to

fulfil its part in the regime of full employment. Then he leaves the political issues to another

paper.

Which is the Political Aspects paper where he argues that the political explanations,

which are the real topic of the article. He apparently does not consider the case of increasing

capital intensity of production but the one where effective demand is just deficient (for reasons

discussed in the Full Employment by Stimulating Private Investment), but capital intensity

does not change, which, that deficiency, necessitates public spending and investment. Then he

gives three reasons why capitalists use their influence to limit public spending needed for

permanent full employment and support it in the case of deep recessions and why they prefer

public investments rather than social and wage transfers. I do not find those to be political in the

proper sense of that word, but that is another issue.

Third, how is distribution of national income between profits and wages determined? In

most cases, it seems that some type of monopoly power, in the market as well as in democratic

politics, plays a role, which also means that indeed capitalists do tend to determine profits in

order to determine wages. How this works if it works at all is not altogether clear and I

understand that Kalecki gave up on the monopoly (e.g. mark-up) theory of distribution, but I am

not an expert on his thought so I rely on secondary sources for that.

note on kalecki

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