CHAPTER VIII

KALECKI THE SOCIALIST ECONOMIST

First draft
As is well known Kalecki came from a Marxian cultural background. We
must keep in mind, though, that during Kaleckis formative years, Marxism was a
very vital intellectual current. Out of the Soviet Union and the communist parties
of which Kalecki was never a member-- there was not an official Marxist
school of thought, with enough power to impose its own theoretical version
above the rest. But in spite of his background, Kaleckis approach did not leave
an imprint in Marxian economic ideas. His theories were, and still are, received
with suspicion by most Marxist economists.
In this chapter we will link Kalecki and Marxs theories. It is not our
purpose to suggest that the former was a Marxist. Rather, what we would like is
to show how in some general principles formulated by Marx, one finds in
embryo the theory of effective demand, as well as some points later developed
by Kalecki (and by modern heterodox economics). Had Marxists followed the
path opened by Kalecki (and by others), they would have been able to develop
a much more interesting economic theory.
Realization and the levels of economic activity
Let us first of all link Kaleckis theory of effective demand with the socalled problem of realization of Marxist economic thought. We begin with a
purely national accounts perspective. Consider a private, closed economy in

conditions of expanded reproduction1. To simplify, we will suppose that all of

the sectors of this economy are vertically integrated. We will also assume that
workers are paid at the end of the production period.
Using Marxs categories, we can state the problem as follows. At the
beginning of any productive period, the capitalists possess a certain endowment
of means of production and hire a labor force. At the end of a productive period,
part of the means of production has been used up. In their place, the capitalist
now have commodities, which must be sold. The entirety of these commodities
is equivalent to the global (gross) output; which, in terms of value, can be
separated into constant capital, variable capital and surplus value (or,
simplifying, net profits).
The realization of these commodities takes place in the course of the
process of circulation. This has as its starting point the money which the
capitalist throw into the market. A part of this money they use to replace the
machinery and equipment worn out during this period. This expenditure (and
demand) serves to realize the constant capital included in the global product.
Another part of this money is used to pay the labor force hired. The workers
spend all of their wages to buy the necessities of life which they themselves
have produced during the period of production. Through this expenditure (and
demand) the variable capital is realized. In the third place, the capitalist throw
money into the market for their personal consumption and to expand their
endowment of the means of production. Through the latter two types of
expenditures, as much for their personal consumption as for their (net)
1

Expanded reproduction denotes a situation in which capital accumulation is

taking place; or, to state it differently, net investment is positive.

accumulation, the capitalists realize the surplus value (or net profit) contained in
the global product. Therefore, the surplus value is realized through the
consumption of capitalists and their accumulation or net investment2.
As we can see, there is almost a one-to-one correspondence between
Kaleckis and Marxs conceptions of how output and profits are realized. And in
fact, Kalecki used Marxs schemes of reproduction to illustrate his theory
whereby profits equal capitalist consumption plus their investment (Kalecki 1939
[1990], and 1968 [1991]). However, the Marxian foundations of Kaleckis
approach go beyond the purely accounting principle.
Indeed, even though Marx did not formulate a theory of effective
demand, he established certain fundamental, very general principles which
could serve as a basis for such a formulation. These principles are embedded in
what Sweezy (1942) called the qualitative aspect of the theory of value, and they
were taken up in Kaleckis theoretical construct. Synthetically, the idea is the
following. In capitalism, which is a developed mode of commodity production, the
2 The equivalence between accumulation and net investment may seem

strange, since Marxian economic theory also includes in accumulation the

increment of variable capital from one period to the following. We, however,
exclude this last element from our definition of accumulation, because we
assume that the workers advance their labor to the capitalists, and that they are
paid for their work at the end of the productive period. As a consequence, for
each period, the surplus value not consumed by the capitalist, and which is used
for the expansion of the production in the following period that is, that which
accumulates exclusively encompasses the increment of constant capital. This
increment is nothing other than net investment.

products of labor appear as commodities, i.e. as goods which are produced for
others. Thus, the search for a profit, which is contained in the prince of production
of the commodities but which can only be obtained from its sale, will be the
incentive of production.
The topic of effective demand, with which Kalecki begins, is directly
related to Marxs proposition of capitalism as a fully developed mode of
commodity production. The labor contained in the sum of commodities
produced the total product only reveals itself as socially necessary if
commodities are realized; that is, sold at their prices of production. But this is
far from granted.
Moreover, both authors identify demand, and more specifically
investment demand, and not production, as the moving force of the capitalist
economy. We showed in the previous chapter that Kalecki argued that in a
capitalist economy nothing guarantees that output is produced at a level
compatible with the full employment of the productive forces. Marx was well
aware of this possibility3. As Kalecki (1968 [1991]: 465) put it That Marx was
3

Marxs clear perception of the realization problem made natural for his

followers to understand that a capitalist economy cannot ensure full utilization of

its productive resources, manpower in the first place. Coming from that culture,
Kalecki, when he formulated his version of the principle of effective demand,
would not, as Keynes put it, believe [himself] to be writing a book on economic
theory which will largely revolutionizethe way the world thinks about economic
problems. Rephrasing Galbraiths (: 133) words, we may say that it was not in
the Marxian, but in the classical (or non-socialist) tradition [that it was]
assumed that the economy, if left to itself, would find its equilibrium at full

deeply conscious of the impact of effective demand upon the dynamics of the
capitalist system follows clearly from this passage of the third volume of Capital
The conditions of direct exploitation and those of the realization of surplus
value are not the same. They are separated not only by time and space, but
also logically. The first ones are merely limited by the productive capacity of
society, the second ones by the proportion of the various branches of
production and by the consumer power of the society. However, he did not
systematically scrutinize the process described by his reproductions schemes
form the point of view of the contradiction inherent in capitalism as a result of
the problem of effective demand.
Indeed, in many parts of Capital Marxs reasons as if full employment of
resources prevailed. Anyway, he always insisted on the difficulty of realizing the
surplus vale contained in the sum total of commodities. This led at least one of
his followers, Rosa Luxemburg, to strongly deny that expanded reproduction
could take place in capitalism. Her denial followed from her notion that
capitalists had no reason to accumulate, because they knew beforehand that
the surplus value could not be realized. Therefore, realization of profits could
only take place through foreign trade, through exchange with non-capitalist
sectors of any given country, or thanks to government purchases of goods and
services (for example in arms).
Kalecki was a great admirer of Luxemburgs work. He recognized that on
her quest for the motives of expanded reproduction, she emphasized the
essential role of capital accumulation, which led naturally toward a theory of
employment. Milo Keynes; "ESSAYS ON JOHN MAYNARD KEYNES";Cambridge University
Press, 1975

investment decisions. He also thought highly of her intuition on the role of

foreign markets and government expenditure in the realization of profits. But he
rejected her overall conclusion about the impossibility of expanded reproduction
in capitalism. He also proved that, as shown in a previous chapter, it is not total
exports, or total government expenditure, which contribute to raise profits, but
only a trade surplus, and a budget deficit. Anyway, he concluded: Rosa
Luxemburg stressed the point that, if capitalists are saving, their profits will be
realized only if a corresponding amount is spent by them on investmentthe
necessity of covering the savings gap by home investment or exports was
outlined by her perhaps more clearly than anywhere else before the publication
of Mr. Keyness General Theory (Kalecki, 1939 [1990]: 255).
Theories of value and of distribution
We will contrast now Kaleckis and Marx's theories of distribution. As an
antecedent, let us first of all recall that, according to Marxs law of value4,
prices are only a transfigured form of values, which are determined by the total
amount of labour socially necessary to produce a commodity. Prices in
particular sectors will deviate upwards (downwards) from values, whenever the
organic composition of capital5 in the sector is above (below) the average.
However, in the aggregate, the surplus value, as well as variable capital and
constant capital, will have the same magnitude if they are expressed in values
4

In fact, Marx never explicitly defined the Law of value. But from his work we

take it that our inference regarding its meaning is correct.

5

In modern parlance, the organic composition of capital could be made

equivalent to the ratio between cost of materials plus depreciation allowances,

over total wages.

or in prices. Also it would follow that capitalist profit is quantitatively equivalent

to the unpaid work. Capitalists can exploit workers because they can pay then a
wage which although is the equivalent of the "value" of their labour power, it is
below the "value" of what they produce.
Further, in Marxs approach, income distribution is determined, ultimately,
by the struggle and the strength of capitalists and workers. The rate of surplus
value, equivalent, grosso modo, to the relation between net profits and the
wage bill, is determined by the productivity and the real wage per worker. The
first is considered as a given for purposes of analysis; the second, however,
converges towards the value of labour power which depends on historical and
moral factors, which can change over the medium or long term.
Changes in the real wage and in the rate of surplus value appear to be
determined exclusively in the labor force market. Let us state this in another
way: in Marxs theory of distribution, prices seem to play a passive role, in the
sense that, he works with the (implicit) assumption that businesses are pricetakers, and that they cannot influence on the latter.
It is well known, particularly after Sraffas (1960) work, that l o g i c a l
reasons do not exist to state that prices are derived from "values"; nor that
p r o f i t i s (quantitatively) equivalent to unpaid labour6; nor, l a s t l y , that the

I t i s clear that Marx never pretended to explain c a p i t a l i s t exploitation

on the basis of the discrepancy between labour time and the value of labour
power. His explanation depends more on economic, p o l i t i c a l and
social factors which make this discrepancy possib l e , as Garegnani
(1978) correctly points out. But, to our mind, he did pretend to demonstrate

movements of the profit rate are determined univocally by the movements of the
rate of surplus value. In this sense, the Marxian Law of value has serious
problems. Nevertheless, Marxs point can be stated in somewhat different
terms. We could say that at the core of Marxs concept i s the notion that in the
capitalist mode of production, economic, p o l i t i c a l and social conditions are
such that, the c a p i t a l i s t can pay the productive workers with wages which,
when expressed in products (at prices production) are less than the net product
(at i t s price of production) which they themselves (the workers) have
produced. Or what adds up to the same thing, the capitalists obtain a profit
because they can charge a price which is over and above their production
costs

(including

wage

costs).

More

precisely,

Steedman (1977)

demonstrated that positive profits appear if and only if, "the system is to be
capable of producing surplus labour (employing an amount of labour greater
than required in producing the real wages for that amount of labour, together
with the means of production used for that purpose). The conditions for
profitability, production of physical surplus and "production" surplus labour are
thus identical".
Kalecki does never (to our knowledge) refer to the Law of value, and he
does not use it to explain the existence of a surplus accruing to capitalists. We
may assume though he never says it explicitly-- that he agreed with Marx and
that this exploitation was not anything else but unpaid labour. The law of value
would be the mechanism by which exploitation would be processed. Thus, it
seems an extreme position to reduce Marxs labour theory of value - as the sane
Garegnani does - as an instrument which Marx used solely to determine the rate
of p r o f i t in a non circular manner.

classical economics that profits are indeed a surplus7. Moreover, he does not
start from values to arrive at production prices, but conceives prices as
determined by firms which mark-up unit prime costs. The size of the mark up
will depend on the organic composition of capital (a term he does not use), but
also on the degree of imperfection of the market.
Kalecki however retains the general focus of Marx and in particular the
idea that the distribution of income is determined ultimately by the class struggle
(see especially Kalecki, 1971 [1991]). But he takes into consideration the new
reality of imperfect competition, as an element which is not marginal, but rather
decisive, in contemporary capitalism. And he also used in his approach the
theories on imperfect competition which had appeared in academic thought. In
his conception, businesses are now price makers, in that that they can fix their
prices in accord with their monopolistic control over their markets. Thus, the
distribution of income is determined as much in the labor force market as in the
market of commodities.
How far does in this particular point Kalecki departs from Marx? We are
of the opinion that not too much. In fact, we can quote here another of Marxs
sentences which point into the same direction where Kalecki developed the
theory:
The monopoly price of certain commodities would merely transfer a

In his lectures on the economics of capitalism at the Central School of

Planning and Statistics, he used the term rate of exploitation in reference to

the relative share of profits in income, denoted here (and in Kaleckis lectures)
with the letter e.

portion of the profit of the other producers of commodities to the commodities

with a monopoly price. A local disturbance in the distribution of the surplusvalue among the various spheres of production would take place indirectly, but
they would leave the boundaries of the surplus-value itself unaltered. If a
commodity with a monopoly price should enter into the necessary consumption
of the laborer, it would increase the wages and thereby reduce the surplusvalue, if the laborer would receive the value of his labor-power, the same as
before. But such a commodity might also depress wages below the value of
labor-power, of course only to the extent that wages would be higher than the
physical minimum of subsistence. In this case the monopoly price would be paid
by a deduction from the real wages and from the profit of the other
capitalists.

(Marx,

1909,

Vol.

III,

Part

VII,

Chapter

L;

http://www.econlib.org/library/YPDBooks/Marx/mrxCpC46.html)8.
It is unfortunate that this intuition of Marx whereby monopoly prices may
affect the distribution of income was not developed by his followers.
Profits and wages
We can finally consider the connection between wages, profits and
effective demand. Here, as we will see, there is a fundamental break by Kalecki
from Marx.
Of course, Marx was aware of the double role of wages in capitalism. He
recognized that wages are simultaneously an element of demand and an

Marx was referring here mostly to the monopoly caused by the land rent. But

nothing would prevent us from extending the notion to include monopoly power
arising from market conditions.

element of costs. Now, his judgment of the effects of a change in wages on

profits is very clear: in whatever circumstance, a rise (lowering) in wages
provokes a fall (increase) in profits. Both variables move in an inverse direction.
As we saw in the previous chapter, Kalecki's conclusion is different, in that he
acknowledged that a fall (rise) in wages will not bring about a rise (fall) in profits.
We may, of course, say that Kalecki discussed mostly the case of a closed
economy. In the more realistic example of an open economy, an increase in
wages will provoke a fall in profits. This is so because the growth in the sales of
the domestic businesses (equivalent to the increase in the consumption of the
workers) will be lower that the increment in its costs (equivalent to increase in
wages plus the increase in imports). Thus, we might argue that Marx was closer
to the true. But we should recognize also that Marx was reasoning within a
closed-economy context.
It can be seen that unlike Marx, when he studied the relation between
wages and profits, Kalecki does not suppose that the total product is given. On
the contrary, it changes with changes in effective demand; and the latter
changes with real wages (and the real consumption of the workers). Anyway,
we may conclude that, on this point, the contradiction of interests between
capitalists and workers is less strong in Kalecki than it was in Marx.
Conclusions
We mentioned at the beginning of this chapter that a large majority of
Marxian economists were suspicious of Kalecki's economics, in spite of his
closeness to Marx's overall vision of capitalism, and especially their common
critical stand towards capitalism and their rejection of Say's Law. It may be
useful to conclude this chapter by pointing out some reasons for this mistrust.

A first reason probably had to do with Kaleckis failure to acknowledge

Marxs law of value. As we just mentioned, he always reasoned on the basis of
prices; and in certain Marxian circles this is an unacceptable deviation from
basic Marxian principles. This is, of course, a quite dogmatic attitude, but it
nevertheless has been of certain importance in the development of Marxian
economic theory.
The other reasons are more significant. As also discussed, unlike Marx,
Kalecki did not think that wage increases would reduce profits. Rather, higher
wages would normally be passed on to prices. Alternatively, if firms could not
raise prices as much as unit costs rose, then higher wages would increase
sales by as much as wages rose, so that profits would not fall. For some
Marxists, this might be seen perhaps as a watering down of one of the inner
contradictions of capitalism, and as a support for taming class struggle. Of
course, Kalecki did see class struggle, and struggle for higher wages, as very
important for workers advancement, but not so much because this would
reduce profits, but rather because class struggle would bring about a shift from
profits to wages, which would favour employment and enhance the bargaining
power of workers.
The third reason for the coldness of Marxist economist vis--vis Kalecki
is a bit more subtle. In Kalecki's different models of capitalist long-run evolution,
nowhere the law of the falling rate of profit is given the central place accorded
to it by Marx and his followers9. Apparently, Kalecki did not believe on the
9

As far as we have been able to ascertain, this law is mentioned only once in

Kaleckis works. The full quote reads The government spending policy
permits the overcoming of one contradiction in the capitalist system: that of

actuality of this law, or in any case did not consider it important for the future
of capitalism. In fact, in the words of one of his closest collaborators and
followers Kalecki...as well as most socialist, took it for granted that capitalism
was threatened by a crisis of existence...But found the reason, given by Marx,
as to why such a crisis should develop, unconvincing (Steindl, 1990).
The last reason is closely related to the previous one. In Kaleckis theory,
demand manage through fiscal policy might lead to something close to the
demise of business fluctuations. Moreover, growing government expenditure
would generate an expansive tendency; thus ensuring high growth rates in the
long run. In the first place, the aggregate demand would be permanently above
what would have been the case if said expenditure had not existed, and in fact
growth of output would be only limited by the growth of productive capacities. In
the second place, unless the expenditure would be entirely financed with
business profits, the levels and rate of profits, as well as the utilization of
productive capacities, would also be above their spontaneous level, which
would stimulate private investment and growth of the productive capacities.
Therefore, according to Kalecki's theory, the management of demand by
the government could ensure, from a technical point of view, high rates of
growth of output and of employment in advanced capitalism, with very mild
cyclical fluctuations or none at all.
insufficient efficient demand. But if technical progress causes productive
capacity to rise more slowly than the accumulation of capital, i.e. if the capital
intensity of production increases, there comes into picture another contradiction
of the capitalist system formulated by Marx in his law of falling rate of profit,
Kalecki (1945 [1990]: 385)

Now, beyond its technicality, this outlook points to a collision of Kalecki's

vision with that of Marx and orthodox Marxism. The latter surely could not
accept the idea that government intervention, and specifically intervention
through government expenditure or a budget deficit, could affect the level of
profits and growth. Indeed, a basic tenet of historical materialism is that the
superstructure (which is the place where the State belongs) cannot have a
lasting influence on the economic structure. It is only the former that gives
rise to the inner laws of movement capitalism.
Now, if state expenditure can in fact influence the volume of profits and of
national income then, on a certain vision, those inner laws could somehow be
changed, or even violated. For example, the law of the rate of profit to fail could
be counteracted by deficit spending. More in general, the general crisis of
capitalism, which might have been delayed somewhat but would sooner or later
come into view, could be avoided through government intervention.
Nevertheless, Kalecki was far from arguing that in reality capitalism had
overcome its inner contradictions. Indeed, he emphasized that state
intervention, and specifically demand management, is also limited, but due to
political factors. He pointed out that in contemporary capitalism a political
cycle tends to appear, induced by stop and go policies of State expenditure
(Kalecki, 1943). In his view, a lasting boom would bring about political changes
fear of a greater State intervention, weakening of worker discipline and
economic change especially inflationary tendencies which induce the
capitalist class and its allies to struggle to reduce government expenditure, even
though this would provoke a fall, not only in the levels of economic activity in
general, but also in the level of private profits.

On the other hand, when there exists too low a level of employment, as a
result of pressures from the masses or even without these pressures, capitalist
governments are stimulated to intervene in order to revive the economic cycle
and to reduce unemployment.10
In fact, in one of his last (and posthumous) papers, Kalecki stated that
government intervention through demand management produced a crucial
reform in capitalism. This crucial reform has brought about a considerable
improvement in the standard of living and on employment in contemporary
capitalism, which are now considerably better than in the laissez faire period.
But also owing to this crucial reform, the class struggle has been attenuated,
with which capitalism has achieved a greater global political stability (Kalecki
and Kowalik, 1971).

References
Kalecki, M. (1943). Political aspects of full employment in Collected works
Kalecki, M. (1945). Full employment by stimulating private investment? in
Collected works of Michal Kalecki, vol. 1, edited by J. Osiatynsky, Oxford
University Press, 1990.
Kalecki, M. (1968). The Marxian equations of reproduction and modem
economics in Collected works of Michal Kalecki, vol. II, edited by J. Osiatynsky,
Oxford University Press, 1991.
Kalecki, M. (1971). Class struggle and the distribution of national income in
10

It is worth pointing out, incidentally, that the concept of the capitalist state

implicit in Kaleckis ideas is totally foreign to the official Marxist view (whereby
the State is the simple instrument of the dominant classes), at the time (1943)
he put forward theses ideas, and correspond better with the notion of the
relative autonomy of State, that was developed later by Marxian authors.

Collected works of Michal Kalecki, vol. II, edited by J. Osiatynsky, Oxford

University Press, 1991.
Kalecki, M. and T. Kowalik (1971). Observations on the `Crucial Reform' in
Collected works of Michal Kalecki, vol. II, edited by J. Osiatynsky, Oxford
University Press, 1991.
Marx, K. (1909) Capital: A Critique of Political Economy. Charles H. Kerr and
Co., Chicago, 1909.
of Michal Kalecki, vol. I, edited by J. Osiatynsky, Oxford University Press, 1990.
Steindl, J. (1990b). Reflections on the present state of economics in J. Steindl
economic papers 1941-88, St. Martin's Press, New York.
Sweezy, P. M. (1942). The theory of capitalist development. Principles of
marxian political economy, Oxford University Press, Oxford.
Galbraith, J. K. (1975) How Keynes came to America. In Milo Keynes (Ed.),
"Essays on John Maynard Keynes". Cambridge University Press, Cambridge.