GENERAL INTRODUCTION

FIRST DRAFT
In 1933 Michael Kalecki, a young self-taught economist, published in
Poland a small book, An essay on the theory of the business cycle. Kalecki
was then in his early thirties (he was born in 1899). He had firstly begun
mathematical studies at the Warsaw University, and then started a university
degree in engineering at Gdansk University Engineering College. But he
discontinued studies shortly before graduation because of his difficult economic
conditions. He came from an assimilated Polish-Jewish family1, who had been
relatively well-off. However, his father had lost the mill he owned and had to
accept a job as a bookkeeper in his brothers company.
Kalecki had had no economic training, but his socialist political inclination
led him to study Marxs Capital, as well as the Marxian economic literature. He
further developed his practical knowledge of economics working for a
creditworthiness intelligence firm. This led him to begin more systematic studies
of economics. In the late 1920s he entered into regular collaboration with two
Polish economic journals; writing lots of reports on large concerns, on economic
conditions in particular markets, and on international economic relations.
Afterwards, he got a job at the Institute for the Study of Business Cycle and
Prices, where his Essay booklet was published. In that book the theory of
effective demand, which was to initiate, albeit in John Maynard Keynes's
version, a new phase in economic ideas, was first presented.

Unlike most of Polish Jews, Kaleckis Polish was perfect. Probably Yiddish

had not been his mother tongue.

Kaleckis output and employment analysis is tightly linked with that of

dynamics, and more specifically with the business cycle theory. Kalecki set up
for the first time the essentials of his overall outlook and of his theory in the
already mentioned booklet Essay on the Business Cycle Theory. His main
objective in that work was to demonstrate the intrinsic instability of capitalist
economies. In his endeavour, Kalecki was firmly rooted in his Marxian
economics upbringing. In fact Marxian economics had been for long interested
in analysing the long-run evolution of capitalist economies, with the purpose of
explaining why these economies were subject to fluctuations; which might bring
about economic crises and, ultimately, the demise of this economic system.
Nevertheless, Kalecki thought that rigorously explaining cycles required
mathematical techniques; which were rather out of the ordinary among Marxian
economists. In the booklet we just mentioned he used dynamical analysis, and
was able to develop a macroeconomic system whose solutions were
endogenous deterministic cycles of constant amplitude. In this undertaking
Kalecki joined another long-standing non-Marxian tradition. Attempts at
explaining why economic cycles occur were abundant. The point, however,
was that verbal and general explanations had not matched with mathematical
rationalizations.
Kaleckis main contribution in his booklet then was to combine a very
precise and neat macroeconomic model, with a rigorous mathematical
explanation of why cycles tend to take place in a capitalist economy. Moreover,
and this is certainly not a trivial point, in his macroeconomic model he put
forward the first version of the principle of effective demand to appear in print.

Kalecki starts with a situation at a given point of the cycle in which

capital stock and capitalists expenditure (in real terms) are assumed given,
and then develops a dynamic analysis of output and employment. Therefore,
he did not confine his analysis to a time period in which are given the main
economic variables. In one of his first theoretical papers he uses the term
quasi-equilibrium or short period-equilibrium, to make it clear that when he
discusses the effects of changes in one variable upon the remaining variables,
he abstract from the effects and consequences of changes in some key
variables, such as the stock of capital, and other stocks, which are
autonomously moving. Changes in these stocks will in turn alter investment,
saving and other behaviour.
Kalecki thus refers to a temporary equilibrium position in the Marshallian
sense. A position that would subsequently change as variables that had been
held constant would be permitted to change. In particular, he emphasizes that if
the assumption of a given volume and structure of capital equipment is
abandoned, then as a result of changes in capital stock, there would be a
continual movement through a series of short-period equilibria or quasiequilibria. Moreover, this movement will be cyclical and any position of final
equilibrium will never be reached, because business fluctuations will
permanently take place2.

Depending on the versions of his business cycle theory, Kalecki thinks

fluctuations are endogenous or exogenous. After his 1933 unsuccessful attempt

to explain business cycle endogenously, Kalecki changeed the course of his
research and adopted Frischs explanation. In reference to Frisch Swinging

We may agree or not with Kaleckis theory of the cycle as such. But, to
our mind, we should not lose sight of the fact that he was the first economist to
provide a rigorous analytical framework, alternative to the general equilibrium
theory, to study the general properties, and more specifically the stability
properties, of a capitalist (or decentralized, to use the parlance of the general
equilibrium theory) economy. Within this analytical framework, the issue of
unemployment in capitalism can be given a dynamical explanation.
Keynes observed, "we oscillate, avoiding the extreme fluctuation in
employment and in prices in both directions, round an intermediate position
appreciably below full employment and appreciably above the minimum
employment a decline below which would endanger life" (1964, p. 254). With
his cycle theory, Kalecki gave a precise and rigorous explanation for this
phenomenon, showing that investment, and with it output and employment,
tend to cyclically fluctuate around a trend line.
Accordingly, Kaleckis macroeconomic theory, and more particularly his
theory of output and employment, should not be interpreted as a static theory.
More specifically, what concerned Kalecki is not an economy whose level of
output and employment remain constant over time; it is instead an economy
whose capital stock is continuously varying, together with output, employment

System he accepted the idea the economy had a natural tendency, in absence
of erratic shocks, to reach its equilibrium state. By modifying his 1939 non linear
model in accordance with Kaldors 1940 model, Kalecki returned to an
endogenous explanation he however definitively abandoned in the later
versions.

and unemployment. Moreover, employment and unemployment may cause

wages to vary; but this variation may not adequately stimulate aggregate
demand, so that unemployment fluctuations continue to prevail, though the
intensity of fluctuations may changes over time.
Correspondingly, once we recognise that Kaleckis short-run output and
employment theory is concerned, strictly speaking, with a situation of
unemployment quasi-equilibrium, we also understand that the validity of his
analysis does not depend on the special assumption of absolutely rigid money
wages.
This takes us to a second point, a point on which Kalecki insists,
concerning wage reductions and employment. The reader will surely recall that,
as Keynes fittingly remarked, this is a key point in classical (and neoclassical)
economics. Indeed, in this school of thought, wage flexibility is the basic
mechanism ensuring that a capitalist economy tends to full employment
equilibrium. This is the reason why state intervention in the economy is
irrelevant at best, and even possibly nefarious.
The gist classical and neoclassical argument is as follows. Let us
suppose that unemployment arises. This will bring about a decline in wages,
which will provoke a fall in prices. Given the nominal quantity of money, its real
quantity will rise. This causes a fall in the interest rate that stimulates new
investment. The process only stops when full employment has been reached.
On this question, Kalecki makes a double argument. One is that wages
do not necessarily decline at the requisite rate, in the face of excess supply. He
sets forth his argument in a very important, but neglected paper (which was
published in English only in the 1990s). Kaleckis argument is rich in details

and it is that unemployment, as such, does not push money wages down:
Namely, while the existing [emphasis in the original] unemployment does not
exert any pressure on the market, we postulate that changes [emphasis in the
original] in unemployment cause a definite increase or fall in money wages,
depending on the direction and volume of these changes (Kalecki 1990: 215).
This conception of the labour market has its roots in Marx and classical
economics. The former developed the concept of the reserve army of the
unemployed, the role of which was to regulate the capitalist system by exerting
a disciplinary effect. Kalecki thinks that falling (rising) unemployment increases
(decreases) the power of workers to press for higher (lower) wages. In an
imperfect competition framework, he represents the increase in workers power
associated with a boom by a decline in mark-up in the pricing equation (Kalecki
1971).
The second argument is that even if money wages decline, employment
would not increase. Kalecki was certain that declining wages rates are
unfavorable to aggregate demand. To him, the real issue is not only the
existence of a long-run static equilibium with unemployment, but the possibility
of protracted unemployment by declining wages. The phenomena Kalecki then
tries to describe must thus be regarded as disequilibrium dynamics. His
argument is that focusing on static equilibrium conditions is misplaced. In this
respect, Kalecki probably thought Keynes very likely choose the wrong
battleground to refute Classical arguments. The issue is not to demonstrate
that there could be a long-run equilibrium with excess supply of labor but
instead to demonstrate that a private market economy cannot and will not steer
itself to full employment equilibrium as Classical economists as Pigou defined

it. And it is this argument which allows Kalecki to express the idea that starting
from a stable situation of short-period equilibrium with unemployment, money
wage flexibility do not lead to an increase in employment, an idea allowing him
to conclude wage rigidity, instead of being the cause of unemployment, is on
the contrary the warranty of a certain level of employment3. We will present in
sketch the basic ideas in the following, but we fully develop Kaleckis argument
later on.

Although Keynes expresses his theory with equilibrium analysis and

comparative statics, it is the same conclusion he arrives at in Chapter 19 of the

General Theory.