Jan Toporowski: It is . . . possible to identify in The General Theory and Kalecki‘s work key ideas that they had in common. The first is that in a capitalist economy output and employment are determined by business investment, so unless investment is high enough the economy is unlikely to be at full employment. Secondly that investment determines saving, rather than the other way around. Both men denounced the doctrine of the social value of thrift that so comforted the complacent Victorian bourgeoisie and that just made such a comeback today. Finally, contrary to the Neoclassical and the Ricardian-Marxist view both men argued that wage rises would increase employment rather than decreasing it. Underlying this commonality of view on how the capitalist economy works was a fundamental principle of the economic method that Kalecki explicitly employed to great effect and Keynes in a somewhat more haphazard way: the principle of the circular flow of income. This is the idea that incomes are determined by expenditure decisions, rather than being decided in complex games of exchanging resources, capital or labor. The principle goes back to the work of the French Physiocrat François Quesnay but had been lost to political economy by the 19th century with the ascendency of the idea that prices integrate individual exchange decisions, so all you need is correct prices. Nevertheless, a hundred years ago the great Joseph Schumpeter recognized the importance of the circular flow of income. The principle, he declared, showed “how each economic period becomes the basis for the subsequent one, not only in a technical sense but also in the sense that it produces exactly such results as will induce and enable the members of the economic community to repeat the same process in the same form in the next economic period; how economic production comes about as a social process. . . . As long as economic periods were viewed merely as a technical phenomenon, and the fact of the economic cycle through which they move had not been recognised, the connecting link of economic causality and an insight into the inner necessity and the general character of economics was missing. It was possible to consider the individual acts of exchange, the phenomenon of money, the question of protective tariffs as economic problems, but it was impossible to view with clarity the total process which unfolds itself in a particular economic period” (Schumpeter writing in 1912). Sadly, that principle has been lost again with New Classical Economics, New Keynesians, the New Neoclassical Synthesis, and others — all of them — returning to the classical position in which, for better or worse, but largely worse, prices rather than the circular flow of income are held to integrate economic decisions.
However, the similarities between Kalecki and Keynes should not blind us to the differences in their respective approaches. Keynes the moderate conservative was ever enthusiastic about the possibilities of policies that would allow capitalism to flourish as it needs to if it is to provide full employment. Kalecki was more skeptical. He accepted that fiscal and monetary policies could provide some stimulus to business investment, but he did not regard this is a sustainable position in the long run. More importantly, he doubted the willingness of business to support a regime of full employment. He also criticized Keynes’s weak understanding of industrial investment processes and corporate finance beyond stock-market operations. Unlike Keynes, Kalecki did engage with the problems of developing countries. Kalecki also distinguished himself from Lange in emphasizing the central problem of economic development is a financial one, but not the saving constraint that has exercised development economists from the time of Gustav Cassel onwards. For Kalecki, the financial constraint appeared in the first instance as a foreign exchange boundary on the amount of investment and consumption goods that may be imported. In the second place, the financial constraint emerged out of the social structure of economy: growth in employment at low levels of income would put pressure on food supplied by the agricultural sector; the resulting food-price inflation would redistribute income towards farmers and, through higher rents, to landowners. The higher food prices would therefore fail to stimulate food supplies. This made land reform and the taxation of landowners and the middle classes a prerequisite for successful industrialization. Kalecki was also skeptical of the benefit of foreign direct investment in fostering the modernization of the economy.
. . . [A] particular need in the 21st century is the urgent need to recover Kalecki’s vision and the integrating principle of the circular flow of income. Without it economists have regressed to those Victorian values that celebrate the alleged thrift of the rich. One of the self-professed New Keynesians, the chairman of the Federal Reserve Ben Bernanke, attributes the macroeconomic imbalances, so-called macroeconomic imbalances, the US economy, and even the financial crisis since 2008 to the so-called Chinese savings glut. It’s apparent that the economics profession needs followers of Kalecki to point out that the Chinese people were never so wealthy, nor earned on a sufficient scale, to distort the American economy in a way alleged by Bernanke. In our development economics of the 21st century we need to return to Lange and Kalecki’s vision of economic development . . . as a social process, a vision that emphasized economic development as changing social structures, rather than merely adding to the endowments of individuals.
I have a particular and personal agenda in pursuing my research on Kalecki. This agenda is to recover for the 21st century the monetary theory of Kalecki, rooted in the Wicksellian business cycle theory rather than in the functionalist approach to money that has predominated in British and North American economics. Central to the Wicksellian business cycle approach is the idea that the most important money, which determines the scale of investment, employment, and economic dynamics, is put into circulation by business, not by governments or central banks. Again if I can quote Schumpeter . . . “it may be more useful . . . to look upon capitalist finance as a clearing system that cancels claims and debts and carries forward the differences. . . . In other words: practically and analytically, a credit theory of money. . . .” This is perhaps the key theoretical distinction between Kalecki and Keynes. Behind Kalecki’s analysis was a vision of credit as a clearing system of capitalist finance whereas his preoccupation with policy and his own financial investments restricted Keynes’s monetary vision to the clearing of payments between commercial banks and the central bank.
Jan Toporowski is Professor of Economics at the School of Oriental and African Studies, University of London. His latest book is Michał Kalecki: An Intellectual Biography, Volume I Rendezvous in Cambridge 1899-1939 (2013). The video shows Toporowski’s SOAS Inaugural Lecture, delivered on 18 April 2012. The text below the video is an edited partial transcript of the lecture.