Michaël Assous
1. Introduction
In his influential book Anticipations of the General Theory? Patinkin (1982)
concluded that before the publication of the General Theory Kalecki did not
deal with the notion of unemployment equilibrium in terms of a general
equilibrium system of simultaneous equations. In short, Patinkin claimed
Kalecki did not anticipate the Keynesian model,1 of which the more
relevant interpretation, according to him, is the IS-LM model (Patinkin
1990a,b). In 1995, Simon Chapple claimed in a closely argued article that:
‘an early version of the mainstream Keynesian model was constructed and
published by Kalecki before 1936’ (Chapple 1995: 521).2 Focusing on
three variants of the IS-LM model that allowed him to mimic the principle
conclusions of the neoclassical theory and to explain the persistence of
unemployment.
Centring on a discussion of Patinkin’s argument, Chapple pushed to the
background the differences between Kalecki’s (1934) model and the IS-LM
model. The aim of this paper is to highlight these differences4 by showing
how Kalecki’s model differs significantly from the two main variants of the
IS-LM model, those of Hicks (1937) and Modigliani (1944).5 Based on this
twofold comparison, the paper then shows that Kalecki’s model offers an
original explanation of the difference between classical models (based on
Say’s law) and types of models that were to be called later Keynesian
models. Showing that Kalecki’s theory is concerned, strictly speaking, with a
situation of unemployment ‘quasi-equilibrium’, one then understands that
the validity of his analysis does not depend on the existence of either of
these special assumptions of the liquidity trap (Hicks) or alternatively
absolute rigid money wages (Modigliani). Indeed, as Kalecki stressed in the
conclusion of his 1934 article, his theory aims at analysing the situation of
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Kalecki’s (1934) model
6 It is worth stressing Kalecki’s analysis differs also from Patinkin’s own IS-LM
model in terms of unemployment disequilibrium whose differences with
Modigliani’s 1944 model are discussed by G. Rubin in the 2004 supplement to
History of Political Economy. Patinkin’s model is based on the idea that when
money wages decline in the face of excess supply of labour, the economy does
not steer itself to full employment. His message is that even if full employment
equilibrium is globally stable, disequilibrium can be protracted and stubborn. By
assuming money wages do not fall in the face of excess supply of labour, Kalecki
underlined on the contrary that disequilibrium does not depend on money
wages adjustments – although induced variations on money wages play a part on
employment variations – but on investment variations caused by the evolution of
the profitability of equipment.
7 It is important to stress that in his 1934 perfectly competitive framework, the
focus of attention in terms of sectors of the economy was not the product
markets. In Kalecki’s model, prices are viewed as moving in line with marginal
costs so that the major cause of unemployment cannot be seen to be a mismatch
between the degree of monopoly, equal to zero, and the level of investment
expenditures (see Sawyer 1985, Lopez and Assous 2007 on the importance of
imperfect competition in Kalecki’s latter works) but only on the weakness of
capitalist expenditures.
8 Both production sectors operate with a constant and historically given capital
stock in which technology exhibits decreasing marginal productivity of labour.
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Michaël Assous
emphasized this point by considering two shocks: a rise in the labour supply
and an exogenous reduction in capitalists’ consumption – capitalists’
consumption being itself considered exogenously given. In both cases he
showed that the production of investment goods increases.
As Kalecki stressed, an excess supply of labour reduces money wages,
causing on the one hand a rise in employment and aggregate production –
because of the fall in real cost – and on the other hand a rise in investment.
Indeed, according to Say’s law and capitalists’ consumption assumed given,
capitalists invest the profits due to the fall in money wages. Finally, because
there is at the same time a rise in demand and in profitable output, a level
of macroeconomic equilibrium, characterized by a higher level of employ-
ment and of production of investment goods, is reached.
Considering the labour supply as constant, Kalecki envisioned a second
shock: an exogenous fall in capitalists’ consumption. Again, his analysis
rested on Say’s law. Thus, by reducing their consumption, capitalists
correspondingly increase investment. The price of investment goods rises
because demand is greater whereas the price of consumer goods falls
because demand is smaller. Finally, employment and production rise in the
investment goods sector and shrink in the consumption goods sector
(Kalecki 1990: 205).
Then, Kalecki concluded, the production of investment goods is an
increasing function of the supply of labour (assumed inelastic) and a
decreasing function of capitalists’ consumption:10
I ¼ f N ; Cp ð1Þ
The number of investment projects which pass the profitability test depends on the
mutual relation at a given moment between prices of consumer goods, prices of
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Kalecki’s (1934) model
investment goods, and wages (which are determinants of the expected gross
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I ¼ fI ðNI Þ ð1:2Þ
0
W ¼ pC fC ðNC Þ ð1:3Þ
0
W ¼ pI fI ðNI Þ ð1:4Þ
NI þ NC ¼ N ð1:5Þ
p pI
C
I ¼I ; r; g
; ð1:6Þ
W W
WN
C ¼ Cp þ ð1:7Þ
pC
M ¼ kðpI I þ pC C Þ ð1:8Þ
N ¼N ð1:9Þ
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Michaël Assous
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Kalecki’s (1934) model
the velocity of money circulation increases, the rate of interest rises, since there will
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Michaël Assous
[A]s long as it remains unchanged, existing unemployment does not ‘pressure’ the
market. Without going into the reasons for this, we shall continue to study System II,
except that now it permits the existence of some reserve army of the unemployed.
This we call System III.
(Kalecki 1990: 215)
consequence, less real balances are available for financing production. So the
interest rate increases until ‘the volume of investment projects is reduced to the
initial level (and naturally new production combinations are realized by
cancelling other projects which are unprofitable at a higher rate of interest)’
(ibid: 209).
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Kalecki’s (1934) model
Was Kalecki insisting on the difficulty and the time necessary to render
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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 obviously has its roots in Marxian
economics. It is indeed Marx who 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 certainly thought that
falling (rising) unemployment increases (decreases) the power of workers
to press for higher (lower) wages.15
The first hypothesis allows the determination of what Kalecki called a
position of quasi-equilibrium; it can be defined by a set of equations
identical to that of Kalecki’s second model, except that in each equation
the level of the supply of labour has been replaced by the level of actual
employment. Thus, as soon as actual employment is known, the quasi-
equilibrium is determined. Yet if this level of employment is undetermined,
then so are quasi-equilibria. Kalecki’s second hypothesis, according to
which money wages are related to the level of unemployment – referred to
as follows with the equation W ¼ g ðN N Þ, where g 5 0 – allows one
to define a quasi-equilibrium (Kalecki 1990: 215 – 6). By replacing equation
(1.9) with the equation W ¼ g ðN N Þ, Kalecki’s third model is obtained.
The endogenous variables remain Nc, NI, N, C, I, pc, pI, r, W. and the
exogenous ones are N ; M ; Cp . The model still has nine equations (see
Appendix 3). However, contrary to the other model, it is not dichotomic so
that shocks in demand now have an impact on employment. To show this,
Kalecki carries out two comparative statics exercises: first, an improvement
in the inducement to invest; and second, a cut in capitalists’ consumption
expenditures.
Consider the effects of an increase in the inducement to invest. This
leads to an increase in the price of investment goods. As a result,
production and employment expand in the investment sector. In turn, this
causes increased worker’s consumption, which boosts price and production
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Michaël Assous
aggregate production will expand until profits increase by the same amount
as the increase in real investment. Kalecki’s System III allows then the
expression of his theory of profit whereby capitalists get what they spend
(Kalecki 1990: 216 – 7). However, this is not the end result. As Kalecki
emphasized, the rise in prices and in money wages due to increases in
employment and production, leads to a rise in the ‘money value of
turnover’; this also causes a rise in the transaction demand for money that
can only be met by an increase in the rate of interest, which in turn reduces
the volume of investment (see Kalecki 1990: 217). But despite this
depressive effect, the new quasi-equilibrium is established at a higher level
of employment because of the upward movement of the schedule of
marginal profitability of new investment projects: ‘the increased output and
rise in prices in relation to wages in turn increase profitability, which
additionally stimulates investment activity’ (Kalecki 1990: 217).
Now consider how Kalecki envisions the effect of an exogenous decrease
in capitalists’ consumption. The price of consumption goods decreases and
production falls, which results in workers being pushed to the reserve army
of labour. Higher unemployment reduces consumer goods demand. Prices,
output and employment in the consumer goods sector decrease until
profits have fallen by the amount of the capitalist consumption decrease.
Then, because of the rise in unemployment, wages eventually go down.
However, as long as investment does not vary, prices in the consumption
goods sector fall pari passu as the money wages do, without entailing a
reduction in real cost. But if the lowering of money wages does not affect
firms’ costs, they reduce, however, the interest rate, which causes a rise in
investment and the hiring of some workers pushed initially into the reserve
army of the unemployed. Yet, in spite of the decrease in interest rate,
investment is likely to fall due to profitability deterioration. Thus, Kalecki
came to the conclusion that a decrease in capitalists’ consumption, and so a
rise in savings, can reduce investment and drive the economy into a
position where unemployment is higher.
Having explained the three variants of Kalecki’s 1934 model,now
compare it with the IS-LM model, focusing attention on the versions
described by Hicks (1937) and Modigliani (1944).
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Kalecki’s (1934) model
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Michaël Assous
of the first two enabling passage easily from one to the other. He stressed
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that the opposition between Keynes and the classical authors is neither a
conflict between rigidity and flexibility of money wages nor a conflict
between unemployment and full employment, but originates in liquidity
preference theory.
Now compare Hicks’ model with Kalecki’s 1934 model. It is worth noting
that the conceptions of the labour market advocated by Hicks and Kalecki
are radically different from one another when one considers classical
theory. Whereas Hicks assumed that the ‘rate of money wages per head can
be taken as given’ (Hicks 1937: 148), Kalecki supposed on the contrary that
the money wage rate decreases with an excess supply of labour. Moreover,
while Hicks’ article lacked an explicit account of how the labour market
works and in which state it happens to end up, Kalecki insisted on the idea
that for a system to be accepted by classical economists (Kalecki 1990: 201)
it must display full-employment equilibrium. As a result, the impact of a rise
in the inducement to invest and in the quantity of money differs
significantly in Hicks’ and Kalecki’s classical models.
Focus, to start with, on the way Hicks and Kalecki respectively envisioned
the effects of a rise in the inducement to invest. In his system of two
production sectors, Hicks showed that such a shock modifies the structure
of production. Thus, because total employment depends on how
production is divided between sectors, it will not necessarily remain
unchanged. Only if sectoral supply elasticities are identical will there be no
change in employment. On this point, Kalecki’s classical models are fully at
odds with Hicks’ classical model. Indeed, market clearing and full
employment exists in both of Kalecki’s classical models. Consequently, an
increase in the inducement to invest (i.e. a rightward movement of the
schedule of marginal profitability of new investment projects) always
elicits a rise in the rate of interest, which results in unchanged total
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Kalecki’s (1934) model
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Michaël Assous
20 From the idea that in a classical model the workers are rational, Modigliani
wrote the supply of labour in a conventional way: Ns ¼ F(W/P) or in the inverse
form: W ¼ F71(N)P. Therefore, by introducing a hypothesis of rigidity of money
wages, corresponding for him to the benchmark between classical and
Keynesian models, he rewrote this equation as W ¼ W0.
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Kalecki’s (1934) model
(Modigliani 1944: 68). In this model, one does not however find this
property in an obvious way. In fact, the quantity of money determines
national nominal income and the interest rate. Thus, it is only if one
supposes nominal investment and savings to be homogenous of degree one
with regard to the price level that this occurs. In 1944, Modigliani curiously
did not totally resolve Hicks’ (1937) problem.
In his second model, Modigliani replaced the quantity equation by a
function of money demand for which the arguments are nominal income
and interest rate. This meant to show that the introduction of the interest
rate in the demand function for money is perfectly acceptable in a classical
model when money wages are perfectly flexible. Indeed, as long as the
supply of labour depends on the level of real wages, the equilibrium
reached by the economy is not modified. Once again, this is true only if the
functions of nominal investment and nominal savings are homogeneous of
degree one in prices. It is worth noting that Modigliani’s classical models
are characterized by the flexibility of money wages and prices and its
ensuing clearance of the labour market; it is also characterized by the
ineffectiveness of a monetary expansion in increasing employment and by
the failure of an increase in the inducement to invest to reach the same
goal.
Last, Modigliani elaborated on a model representing the Keynesian
theory. He claimed a Keynesian outcome arises when two factors are jointly
present: rigidity of money wages and money demand depends on the
interest rate and nominal income. Thus, Modigliani argues that the
Keynesian model is characterized by a basic maladjustment between the
quantity of money and the wage rate, which explains the low level of
investment. He expands as follows:
What is required to improve the situation is an increase in the quantity of money (and
not necessarily in the propensity to invest); then employment will increase in every
field of production including investment.
(Modigliani 1944: 76 – 7)
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Michaël Assous
0
0
W W W W
21 Thus we have : NdI ¼ fI pI ; NdC ¼ fC pC ; Nd ¼ NdI þ NdC ; Nd ¼ Nd pI ; pC :
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Kalecki’s (1934) model
22 On this point, Kalecki’s 1939 Essays are directly related to Kalecki’s 1934 model.
For an account of the relationship of Kalecki’s 1934 model and Kalecki’s 1939
Essays, see Assous (2003).
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Michaël Assous
its analysis does not depend on the special assumption of absolutely rigid
money wages.
5. Conclusion
As the 1934 article proved, before the General Theory appeared, Kalecki had
already built a model able to express the main conclusions of the classical
theory and to express the persistence of unemployment. In the case of a
complete flexibility of prices and wages, he first elaborated a model of full
employment founded on Say’s law and then, considering the case in which
the demand for money depends on the interest rate, showed that the
economy reaches an identical equilibrium. In a third model, dedicated
to allow for unemployment, he referred to a conception of the labour
market for which, as long as unemployment remains unchanged, it does
not push down money wages. In this case, movements of employment
can be explained in terms of movements in aggregate demand, resulting
in Kalecki’s famous doctrine, which states that capitalists get what they
spend.
A formal representation of this argument has made it possible to show
that Kalecki did elaborate on an original IS-LM model that differs from the
models of Hicks and Modigliani. On the one hand, it seems that Kalecki
and Hicks developed a radically different analysis of the classical theory.
Contrary to Hicks, Kalecki did not think that the introduction of the
interest rate as an argument in the money demand function necessarily cast
a shadow on the classical theory, a conclusion Modigliani stressed again ten
years later. On the other hand, this comparison has highlighted the fact
that Kalecki developed a different model with unemployment from
Modigliani’s. Whereas in Modigliani’s Keynesian model, money wages are
exogenous, they are endogenous in Kalecki’s model. As a consequence,
while Modigliani, in a static comparative framework, attributed unemploy-
ment to the rigidity of money wages, Kalecki originally developed, with his
concept of quasi-equilibrium, a dynamic theory of unemployment
disequilibrium in which unemployment variations are due fundamentally
to the fluctuations of investment.
However, despite the originality of this model, Kalecki did not find it
timely to have his 1934 article translated. To explain this decision, three
hypotheses can be suggested. In 1944 Kalecki wrote that the flexibility of
prices and money wage could cause distribution effects making full-
employment equilibrium unstable and he thus put implicitly into doubt
his 1934 analysis of the classical theory. Moreover, in his 1934 article
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Kalecki’s (1934) model
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Barens, I. and Caspari, V. (1999). Old views and new perspectives: On re-reading Hicks’
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Chapple, S. (1991). Did Kalecki get there first? The race for the general theory. History of
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Kalecki, M. (1934). Trzy uklady. Ekonomista, 34: 54 – 70. Translated in Kalecki (1990:
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Kalecki’s (1934) model
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Through (1.3) and (1.4) one determine pc and pI. System II, like System I,
is therefore also dichotomic.
0
fC ðNC Þ ¼ Cp þ ðNI þ NC ÞfC ðNC Þ
fI ðNI Þ fC ðNc Þ
M ¼W 0 þ 0 LðrÞ
fI ðNI Þ fC ðNc Þ
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Michaël Assous
p
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CpI
fI ðNI Þ ¼ I ; r; g
;
W W
W ¼ g ðN N Þ
or
0
fC ðNC Þ ¼ Cp þ ðNI þ NC ÞfC ðNC Þ;
fI ðNI Þ fC ðNc Þ h 0 0
i
M ¼g ðN NI NC Þ 0 þ 0 L fðfI ðN I Þ; f C ðN Þf
C I ðN I ÞÞ
fI ðNI Þ fC ðNc Þ
where the interest rate is an implicit function of NI and Nc. The endogenous
variables are Nc and NI. The exogenous variables are N ; M and Cp . Thus,
employment in the two sectors is an implicit function of capitalists’
consumption, of the quantity of money, and of the supply of labour.
Kalecki’s second system is therefore no longer dichotomic.
Abstract
This article is based on Kalecki’s 1934 study entitled ‘Three Systems’. It aims
to show that before the General Theory Kalecki developed a mathematical
model capable of expressing both the main conclusions of the neoclassical
theory – Kalecki’s Systems I and II – and the persistence of unemployment –
Kalecki’s System III. The present analysis stresses the relevance and the
originality of Kalecki’s 1934 model by comparing it to the two main variants
of the IS-LM model – Hicks (1937) and Modigliani (1944) – around
which the neoclassical synthesis was built. It shows that although there does
indeed exist a formal proximity between Kalecki’s model and those of
Hicks and Modigliani, Kalecki can be considered the first to offer an
original explanation of the difference between classical and Keynesian
models that depends neither on liquidity preference as proposed by Hicks
nor on the rigidity of money wages as proposed by Modigliani.
Keywords
Kalecki, Say’s law, quasi-equilibrium, Modigliani, Hicks, IS-LM, theory of
liquidity preference, money wage flexibility
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