The Kalecki hypothesis

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Writing in 1943 , the outstanding Polish economist Michael Kalecki affirmed that "even in a capitalist system, full employment may be secured by a government spending...." He wrote that "a solid majority of economists" shared this view.

His hypothesis was qualified by only two conditions. First, governments needed to have plans for full employment of "labour power." Second, governments had to be able to pay for needed imports of raw materials through exports. By this, he meant governments needed to have access to foreign currency. Securing domestic currency was no problem. Governments simply paid for employment programs by issuing government bonds.

The Kalecki hypothesis has dominated the economic thinking of the left since the end of World War II. Though such thinking is often attributed to John Maynard Keynes alone, in fact Kalecki came to similar conclusions about how the macro-economy operated about the same time as Keynes. Kalecki, trained in Marxist economics, aligned himself politically with labour, while Keynes, a self-declared liberal, was more ambiguous about his politics.

Today, the necessity for government spending, and the importance of full employment, no longer command the support of a solid majority of economists. The stagflation crisis of the 1970s altered the balance of political power, to which intellectuals are seldom indifferent. The rise of American business tipped economic thinking against full employment policies supported by labour. Anti-inflationary policies secured the support of most American economists. From the 1970s until the employment crisis of today, only socialist, labour, and social democratic economists continued to support the use of public investment to create jobs. Overall, the left wanted planning to be extended to control price inflation, as well as employment.

When successive employment crises struck in 1981-82, in 1990-92, and again in 2008-09 it was the left that argued government spending could restore employment, and fix the capitalist economy.

A seeming paradox was at work. Left economists have spent the years since Kalecki propounded his hypothesis trying to make capitalism better, or save it from itself during a crisis. Yet, by definition, left economists want to transform capitalism, not get business running again.

However, Kalecki saw a transformative agenda behind a policy of maintaining full employment. Trade unions would be strengthened, business ability to dispose of labour weakened, and governmental institutions modified when full employment maintenance became the over-riding priority. Many left economists support full employment for similar reasons today.

Kalecki also anticipated that such a policy would be opposed by a powerful alliance of business and rentier interests. Such people opposed government deficits, and government intervention, let alone full employment as a societal goal. He predicted a sort of political cycle in which short-term deficit spending would be permitted when the economy slumped, but not planned deficits to maintain full employment. Thus the economy would undergo a series of mild recessions, disciplining labour to accept poor working conditions, and wages. Importantly, the fear of unemployment would remain at the centre of capitalist economics.

The Canadian left today needs to push ahead on the transformative agenda of full employment as laid out by Kalecki, using public investment financed by public monetary creation to create institutional reforms across society. To this agenda needs to be added a steady state approach to the exploitation of natural resources, and a green approach to production and consumption.

What Canadian social democratic governments have not accepted are the important insights provided by Kalecki about how employment creation is not constrained by government deficits: government can simply create money. In the U.S., Jamie Galbraith (son of Canadian-born economics legend John Kenneth) is making such a Kalecki argument today Kalecki himself thought any sharp rise in government debts from deficit spending could be dealt with through a capital tax.

The problem of employment creation today is much as Kalecki saw it in 1943, the obstacles are political, not economic. However difficult it has been for left economists to stand up in debate, and call for monetary creation in support of full employment, now that the policy has been adopted by the U.S. central bank to save American banks, the task should be somewhat less daunting than in the past.


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