History of Economic Ideas, XI/2003/1

KALECKIS CONTRIBUTION TO THE EMERGENCE OF ENDOGENOUS CYCLE THEORIES: AN INTERPRETATION OF HIS 1939 ESSAYS Michael Assous
Thema-Phare University of Cergy-Pontoise and CNRS The aim of this paper is to focus on Kaleckis contribution to the emergence of endogenous business cycle theories, of which Kaldor (in Kaldor 1960, pp. 177-192) is the Wrst. More precisely, I want to demonstrate that this new type of theory is the result of a two-step process of which Kaleckis 1939 Essays (in Kalecki 1990, pp. 223-318) form the Wrst one and Kaldors model the second one. From this study, it appears that Kaleckis contribution is altogether puzzling. Indeed, after his 1933 unsuccessful attempt to explain the business cycle endogenously, Kalecki changed the course of his research and adopted Frischs cycle explanation. As his work was reaching its highest point, he put together the essential elements Kaldor would use to construct the Wrst endogenous business cycle theory. In order to develop this idea I shall proceed in three points. First I shall deal with the origin of Kaleckis Essays. Then, after showing how Kalecki introduced a non-linear function to his system I will discuss the degree of endogeneity of his business cycle theory. Finally, I will study how Kaldor, in reference to Kaleckis system achieved his aim: building an endogenous cycle theory.

tions endogenously is not new. In 1933, when Wrst constructing such a theory, Kaleckis purpose is obvious. It consists in explaining observed cycles with a system whose solutions are endogenous, deterministic cycles of constant amplitude. In substance, the demonstration of the intrinsic instability of capitalist economy is at stake. From this point of view, using a linear mixed diVerence and diVerential equation, Kalecki tried to convince economists at the Leyden 1933 meeting of the Econometric Society that this aim had been reached thanks to the speciWcation of the parameters of his system. That is to say that for a particular value of the parameters, the solution of his system gave rise to cyclical solution of constant amplitude.
Alas, Frisch was there to point out that since the Greeks it has been accepted that one can never say an empirical quantity is exactly equal to a precise number. Given his aim, this was a deadly blow to Kalecki. (Goodwin 1989, in Sebastiani 1989, pp. 249-250)

In the Weld of mathematical business cycle the will to analyse Xuctua-

As a consequence, since this date Kalecki has changed the course of his research. In reference to Frischs Swinging Sytem, he accepted the idea that economy had a natural tendency, in absence of erratic

110 Michael Assous shocks, to reach its equilibrium state. From this standpoint, Kaleckis genius is to have succeeded in demonstrating in 1934, and thus two years ahead of Keynes General Theory, that economy could reach an unemployment equilibrium. It is however in 1939, in his Essays in the Theory of Economic Fluctuations, that on this issue Kaleckis analysis reached its highest point. Indeed, by attempting to improve Keyness analysis, he showed that economy could attain a stable equilibrium even if during the adjustment process long-term expectations deWned by Keynes are assumed to vary. Then, it is precisely at this moment that he put together the essential elements and especially a non-linear investment function necessary to construct an endogenous business cycle theory. This didnt escape Kaldor since it is thanks to Kaleckis analysis that he managed to conceive the Wrst theory of this new type. Thus, I will attempt to demonstrate that Kaleckis contribution to endogenous dynamical analysis, though involuntary is altogether crucial. In order to throw some light on this unusual episode of the history of economic thought, I will proceed in three points. First, I will deal with the origin of Kaleckis 1939 Essays. Then I will analyse it, emphasizing the reasons that led him to introduce a non-linear investment function. Finally, I will study how, in 1940, thanks to Kaleckis analysis, Kaldor succeeded in explaining cycle endogenously seven years after the unsuccessful attempt of Kalecki.

1. The origins of Kalecki inspiration for his 1939 Essays Frisch and Keynes represent two major sources of inspiration for Kalecki. Each, in his own way, leads him to deal with the question of the convergence of economy towards a stable equilibrium. From this point of view, Frischs inXuence, though less apparent than Keyness, may be more crucial in the development of Kaleckis thought. Indeed, through his criticism of Kaleckis Wrst business cycle theory, he demonstrated that Kaleckis analysis was Xawed, insofar as he explained Xuctuations without considering that economy could naturally converge towards a state equilibrium. Moreover, it was Frisch and not Keynes who caused Kalecki to concentrate on the question of equilibrium. However, this does not mean that Keynes has exerted only a minor inXuence on Kaleckis thought. As we will see, one of the most original aspects of Kaleckis theory results from an attempt to improve Keyness General Theory, in particular his analysis of the determinants of investment and, as a consequence, his analysis of unemployment equilibrium. 1.1. Frischs Swinging System To understand Frischs impact on Kaleckis thought, it is worth mak-

An interpretation of Kaleckis 1939 Essays 111 ing a comparison of Kaleckis Wrst theory of the business cycle with Frischs Swinging Sytem. This will show that Frischs critiques of Kaleckis original business cycles, which are prima facie merely technical, are in fact of deep theoretical signiWcance. Frischs and Kaleckis theories of the business cycle both have in common to be expressed mathematically. Thus they can both be considered as the Wrst result of the econometric approach Frisch deWned so brillantly in the Wrst issue of Econometrica in 19311. Each combines two essential elements. Indeed, a soluble mathematical model is developed in each case from a set of carefully chosen and empirically observable facts. That is the reason why the diVerence between his own and Kaleckis system appeared so clearly to Frisch. As Tinbergen emphasized in 1935 the exact form in which it is presented [Kaleckis theory] creates the possibility of a clear and fruitful discussion (Tinbergen 1935, p. 270). Furthermore Frisch and Kalecki presented their business cycle theories in the form of a linear mixed diVerence and diVerential equation so that the contrast between their approaches becomes obvious when their equations are solved. Kalecki suggested the following solution based on the speciWcation of parameters. As it is now well known, a linear mixed diVerence and diVerential equation can give rise to any of the three following types of oscillatory behaviour, depending on the value of the parameters chosen in the equation of the system (the coeYcient of the Wrst order term): a) For a negative coeYcient, its amplitude of Xuctuation may grow ceaselessly, thus being unstable. b) For positive coeYcient, it may be stable, with an ever-decreasing amplitude, c) if equal to zero, its behaviour may lie exactly in between the other two so that it neither grows nor decreases in violence.

As Goodwin emphasized
Kalecki very sensibly chose the value zero thus avoiding the dilemma, since his aim, in the Marxian tradition, was to explain how and why capitalism was, by its very nature, bound to oscillate. His solution combined theoretical necessity with practical convenience since it determined the one parameter for which he had no evidence. (Goodwin 1989, in Sebastiani 1989, p. 249)
1. In the editorial of the Wrst issue of Econometrica, Frisch wrote: Thus, econometrics is by no means the same as economic theory, atlthough a considerable portion of this theory has a deWnitely quantitative character. Nor should econometrics be taken as synonymous with the application of mathematical to economics. Experience has shown that each of these threepoints, hat of statistics, economic theory, and mathematics, is a necessary, but not by itself a suYcient, condition for a real understanding of the quantitative relations in modern economic life. It is the uniWcation (underlined by the author) of all three that is powerful. And it is uniWcation that constitutes econometrics (Frisch 1931, in Hansen 1964, p. 417).

112 Michael Assous Indeed, Kaleckis purpose was to construct a system whose solution would have been endogenous, deterministic cycles of constant amplitude. Therefore, according to him, the demonstration of the intrinsic instability of economy was at stake2. This feature of Kaleckis approach becomes all the more evident when compared to Frischs solution. Contrary to Kalecki, Frisch accepts the idea that economy has a natural tendency to reach its equilibrium state, in other words, that the system is intrinsically stable. From this point of view, if the cycles observed are undamped, it is because of erratic shocks. Using an idea of Wicksell as well as the results of Yule and Slutsky on time series, Frisch showed that these shocks do not need to have any regularity in timing and violence to explain the maintenance of the oscillation. As regards Frischs analysis of the cycle, it is not surprizing that Kaleckis solution did not convince him. Frisch wrote in 1935:
The imposition of the condition that the solution shall be undamped is in my opinion not well founded. It is more corect, I think, to be prepared to accept any damping which the empirically determined constants entail, and then explain the maintenance of the swings by erratic shocks. (Frisch 1935, in Kalecki 1990, p. 447)

Thus, when Frisch criticized Kaleckis solution, it is in reality Kaleckis approach to the dynamics of capitalist economy he criticized. This did not escape Kalecki and from 1934, Kalecki was wondering what the mechanisms were by which economy could converge to a stable equilibrium. His genius, on this precise point, was to succeed, two years before the publication of the General Theory, in demonstrating the stability of an unemployment equilibrium3. However, on this question, Kalecki encountered diYculties, which he tried to overcome in 1936, by referring to the General Theory 1.2. Keyness General Theory Keynes General Theory constitutes a major source of inspiration for
2. In the preface of his Essay on the Business Cycle Theory published in polish, Kalecki wrote that: the aim of this study is to provide an explanation, indeed one of several possible explanations, of the automatic mechanism of business Xuctuations in a closed economy []. Moreover, the automatic mechanism of business Xuctuations is deWned here much more stricly than usual. We do not, for instance, seek to examine an automatic restoration of equilibrium which has been distorted by disproportions of development. Instead, we want to set out a mechanism which would explain the relative regularity (stressed by the author) of business Xuctuations (Kalecki 1933, in Kalecki 1990, p. 66). 3. Kalecki dealt with unemployment equilibrium when he discussed the validity of Says Law in an article entitled Three System, published in the Polish review Ekhonomista and only translated in english in 1990 (Kalecki 1934, in Kalecki 1990, p. 201). In respect to the link between this article and the anticipation of the General Theory issue, see Osiatinsky (1985); Chapple (1995); Assous (2001).

An interpretation of Kaleckis 1939 Essays 113 Kaleckis Essays insofar as it deals in a slightly diVerent manner with the problem of the convergence of economy to a stable underemployment equilibrium. Indeed Keynes, in contrast with Kalecki, laid the emphasis more on expectations. And, as we will see in the second section, a fundamental innovation of Kaleckis Essays results from his wish to incorporate this aspect into his theory of business cycles. However, if Keyness book seems to have persuaded Kalecki to treat this topic more thoroughly, this does not mean that he adopted the same analysis as that of Keynes. On the contrary, from this standpoint, Kaleckis reading of Keyness theory is highly critical. In order to understand this point, we must examine Kaleckis review of KeynesGeneral Theory published in Polish in 1936. Kaleckis main criticism of Keynes was that he assumed exogenous long-term expectations impling in the short-term that the level of investment was determined by the rise in price of investment goods through which the marginal eYciency of capital and the rate of interest equalised.
However, because, as Keynes holds in another part of his book, the fact of the existing situation enter, in a sense disproportionately, into the formation of our longterm expectations, the expectations will become more optimistic and a diVerence between the marginal eYciency of investment and the rate of interest will arise again. Equilibrium, then, is not reached, and the growth of investment will still persist (Kalecki 1936, in Kalecki 1990, p. 231)

Therefore, according to Kalecki, if expectations have to be taken into account for the determination of a short-run equilibrium, their integration must be fully made. That is to say, the economist must be prepared to accept that expectations are determined endogenously. In a way, Kaleckis criticism amounts to denying the split made by Keynes in his book between chapter 11 on marginal eYciency and chapter 12 on long term-expectations. But, in rejecting Keyness distinction between short and long-term expectations Kalecki is compelled to discover what the mechanims by which the investment level can reach a deWnite level are, his aim being to explain how the economy converges to an unemployment equilibrium. To deal with this problem, he suggested abandoning the assumption of an inWnitely elastic supply of equity capital by turning to the principle of increasing risk. As we will see, it is thanks to this principle that Kalecki succeeded in integrating endogenous expectations into his analysis and in explaining both the convergence of economy to a stable unemployment equilibrium and the business cycle with a non-linear model. 2. Kaleckis 1939 contribution: a non-linear business cycle theory A crucial innovation of Kaleckis 1939 Essays consists in the introduc-

114 Michael Assous tion of a non-linear function into a dynamical system. By discussing Frischs and Keyness inXuences on Kalecki, we observed that the latter aimed at demonstrating how economy could converge to a stable unemployment equilibrium. In this section, our purpose is to show that Kaleckis wish to express his theory of the business cycle with a non-linear function originated in research on this question. More precisely, we want to stress that Kaleckis used this new type of function in order to demonstrate the stability of unemployment equilibrium and that his analysis of the business cycle are based on the results obtained thereby. It is therefore appropriate to consider on the one hand, the degree of stability of Kaleckis unemployment equilibrium, and on the second hand the degree of endogeneity of his business cycle theory.

2.1. The degree of stability of equilibrium We have previously explained the reasons why Kalecki disagreed with Keyness analysis of investment insofar that it is based on the assumption that long-term expectations are exogenous. As he wrote to Keynes in a letter dated from 1937, in an attempt to convince him:
the increase of prices of investment goods which equates the marginal eYciency based on the initial state of expectations to the rate of interest, does not create an equilibrium; for at the same time expectations improve to some extent and thus investment increases further. (Kalecki 1939, in Kalecki 1990, p. 524)

And it is why, according to him, instead of assuming that long-term expectations are exogenous, the principle of increasing risk would be more appropriate. For, as he underlined it in his fourth essay:
It is this assumption [that the rate of risk is independent of the amount invested] which has to be dropped, I think, in oder to obtain a realistic solution of the problem of limited investment. It is reasonable to assume that marginal risk increases with the amount invested. For the greater the investment, the greater is the reduction of the entrepreneurs income from his own capital when the average rate of proWt falls short of the rate of interest. (ibid., p. 287-88)

Indeed, if marginal risk increases with capital invested, it becomes possible to justify the deWnite level of investment without assuming that either the prices of investment will rise or the expected future returns are a decreasing function of the amount invested. On the contrary, with this principle it becomes possible to explain the convergence of economy to a stable equilibrium when expectations vary during the process whatever the variations. For, by virtue of this principle, even if prospective proWts improve rapidly, investment spending cannot

An interpretation of Kaleckis 1939 Essays 115 increase at the same pace. After some time the risk will become so high that entrepreneurs will be discouraged from investing. Graphically, it allows Kalecki to describe the process of adjustment of economy with a non-linear function of investment decisions. Assuming that the expected receipts of each investment projects are estimated on the basis of the present state of aVairs, these receipts being estimated on the basis of current proWts determined by the current national income, Kalecki suggested expressing investment decisions of entrepreneurs, D, as a S-shaped function of the current national income Y. For according to him
when things are improving entrepreneurs become more optimistic about their future, and the rate of investment decisions increases strongly; but after a certain point doubts begin to arise as to the stability of this development, optimisim ceases to keep pace with boom, and the rate of investment decisions tends to increase less rapidely. In the slump a symetrical development is likely to occur. (ibid., p. 310)

Therefore, thanks to the principle of increasing risk, and in spite of waves of optimism or pessimism Kalecki can explain the mechanism by which economy reaches a stable unemployment equilibrium. In order to demonstrate this, it is still necessary to expose the system from which Kalecki drew a second function f between current national income and the spending of investment. The originality of this last function is to integrate the determinants of income distribution and a time-lag of investment. The model concerns a closed economic system without trend. Indicating with t, total real income of capitalists at time t, capitalists consumption is related to gross real proWts (capitalistsincome) by means of the linear function4 C = + C where C is a positive constant (Wxed volume of capitalists consumption) and is a positive constant too, but smaller than 1. Then ignoring workers saving, so that workersconsumption is equal to the total real wages received Cw = Wt and assuming that the relative share of wages in real national income is Wxed and determined by the degree of monopoly, real national in4. For convenience, we have changed Kaleckis notation. Kalecki wrote the real gross proWts y, real capitalists consumption c, the undelivered investment goods W and the consumption capitalist delay. The other symbols have not been changed.

116 Michael Assous come can be related to investment spending by means of a function f. For, since

Wt =a Yt we can write Yt = C + C tw + I t = Wt + t Then, after transformation

Yt =
or

I t + C (1 a )(1 )

Yt = f (It) Furthermore, under the assumption that there is an average gestation lag of investment equal to a positive , we can rewrite Yt in function of Dt. Indeed, if the production of the investment goods requires the Wxed time interval , then the value of the undelivered investment goods at time t is

UDt = t D( )d
and accordingly, the average production value of the investment goods UDt industry per unit of time is I t = : It = 1 D( )d t

which means that the output of capital goods at time t is equal to an average-expressed in continuous terms-of the orders placed in the interval (t , t). Therefore it follows approximately that
It = D
t

An interpretation of Kaleckis 1939 Essays 117 and if we assume that there exists a lag between capitalist income, t, t and consumption out of it, c, we get:

Y = f (Dt) or Yt+ = f (Dt)

, with being the consumption capitalist delay, 2 which represents the dependence of the rate of investment decisions at time t on the national income at the same time. Thus, on the assumption that only is non-linear and that the stock of capital is Wxed, Kalecki describes the process of adjustment of the economy as follows in the plane (D, Y):
Where = +

It appears from this chart that, according to Kalecki, the dynamic process leads economy to a stable equilibrium. Indeed, we can suppose the time is divided into periods and that in the Wrst period the level of national income is Y1 and the rate of investment decision is D1. Since investment decisions determine the national income in the next period, the national income will be Y2 in the second period. But, for this new level of income, the rate of investment decision is above D1 and equal to D2. Therefore, the national income goes on growing. However, after a relatively small number of periods the diVerence between Y, D and YB, DB is negligible, i.e. the position of equilibrium is pratically reached (ibid., p. 315). Of course, if the point Y, D is below the f curve so that investment decisions are lower than those which

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have determined the present national income this process is reversed, and the system travels downwards towards B (ibid., p. 315). In a nutshell, if capital stock is constant, a deviation of income from equilibrium, whatever the reasons, initiates an adjustment process towards the stable equilibrium B. Now, it is worth putting the emphasis on the fact that Kalecki focuses only on this type of situation. In retrospect, it can appear puzzling. Indeed, with a non linear function, we could expect Kalecki to have discussed the case in which cuts f by below, that is to say a situation in which the economy can attain both stable and unstable equilibrium. However, as we have seen, Kalecki introduced a non-linear function for taking into account long-term expectations. Then, according to him, it is necessary to demonstrate the stability of equilibrium in spite of the variations of the expectations. As we shall see in the third section, it is precisely because Kaldor abandonned this idea that he succeeded in oVering a new theory of the business cycle built on Kaleckis system. However, before dealing with this problem, it is still necessary to consider how Kalecki explains the dynamic process described in this paragraph when capital stock is variable. As we will see, his explanation is directly linked to his conception of equilibrium in the short-term. 2.2. The degree of endogeneity of the business cycle Up to now, we have implicitly assumed that investment spending doesnt aVect the capital stock during the dynamic process so that the economy reached equilibrium in moving up . However, by relaxing this assumption, the dynamic of the economy changes. Economically, it results from the existence of the investment time-lag previously mentionned. The latter, indeed, introduced two diVerences of time into the system. A Wrst one between investment decision and investment spending which increases global demand and a second one between investment decisions and deliveries of equipment which, in aVecting positively the capital stock, decreases global demand. Then, since the pace of variation of investment decisions is diVerent from the one of capital stock, the dynamic becomes cyclical. In order to represent it, Kalecki kept reasoning in the (Y, D) plane. However, he then drew a family of curves related to a diVerent stock of capital, and hence to a given value of investment necessary to the maintenance of the existing capacity (the amount of depreciation being Wxed). The superior curves are connected with the lowest level of capital stock. For, with a same level of income, investment decisions are greater when the volume of equipment is low. From this conclusion, it follows that if equipment deliveries are weaker than the maintenance level of equipment, so that the equipment is decreasing, the

An interpretation of Kaleckis 1939 Essays 119 increase in the investment decision described previously will be strenghtened. That is to say that the curve on which the economy moves up will also move upwards. On the contrary, if the volume of equipment deliveries is greater than the volume of depreciated equipment, the dynamic process will be hampered. So that the curve on which economy moves up will move downwards. Therefore, if at the intersection of curves f and , investment decisions are greater than the maintenance volume of equipment, the volume of capital will grow and the economy will move up on a downward-shifting curve instead of being in equilibrium. However, if investment decisions are lower than the maintenance volume of equipment, the reverse will occur. Eventually, Kalecki suggested the following representation of the trajectory of the economy.

As we can see, the case considered is a self-stimulated cycle. In order to understand the conditions necessary to obtain this result, we need to focus on Kaleckis explanation of the cycle mechanism. Let us Wrst consider the inXexion point E for which the deliveries of investment goods are just equal to the maintenance level of equipment. Thus, as the volume of equipment is constant, the curve is stationnary in the considered period, and since E is above f, national income increases and the point Y, D tends to move up this curve. However, in following periods investment activity increases causing the growth of equipment and the curve shifts downwards. As a consequence the selfstimulating process of the rise in investment decisions and national income is hampered and the economy attains point F located on a lower curve. At this point, where intersects f, national income is neither expanding nor shrinking. However, because of deliveries of investment ordered previously, capital equipment is expanding. Consequently, investment decisions fall causing a decrease in income, which in turn depresses investment decisions. Graphically the curve

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shifts downward causing point Y, D to move vertically and up this one until investment activity is equal to the level of maintenance. As a consequence, from this moment, capital equipment shrinks, thus hampering the downward movement. Finally, point Y, D reaches H. Here, income ceases to fall, but the curve shifts upwards because of the decrease of equipment, thus the moving point comes back to point E and a new cycle begins (ibid., p. 317). As regards this explanation, we could believe that Kaleckis cycle are perfectly endogenous. But this is not the case, and Kalecki himself emphasized it when he wrote:
Clearly it is an arbitrary and even unlikely assumption that the moving point comes back to its initial position E the trajectory may well be a spiral and not a closed curve. If the Xuctuations produced by our mechanism have a tendency to subside, this means that the spiral converges towards point B, and in this way the system tends to attain long-run equilibrium. But as shown by the investigations of Prof. Frisch (Propagation Problem and Impulse Problems in Dynamics, in Economic Essays in Honour of Gustav Cassel, and unpublished works), this is prevented by the existence of erratic shocks. Since the relationships represented by f and are in reality not quite stable functions, the actual dynamic process may be imagined as the result of the operation of the mechanism described above and random shocks. Now Professor Frisch has shown that, if the basic mechanism produces slightly damped Xuctuations, the existence of shocks establishes a state of relatively regular undamped Xuctuations with an average period similar to that of the Xuctuations created by the basic mechanism. (ibid., p. 318)

Consequently, as Kalecki himself recognised, his theory, though nonlinear, is only semi-endogenous: its degree of endogeneity depends on the magnitudes of the parameters involved. More precisely, this depends on the importance of the shifts of the investment decision curve and hence on the sensibility of investment decisions to capital variations. Indeed, it is only in the case when these shifts are suYciently strong that a monotonic return to the stationnary equilibrium does not occur. However, in spite of his low degree of endogeneity, Kaleckis theory opens up new vistas in the Weld of endogenous cycle research. Kaldor didnt miss this fact, since his ground-breaking Wrst endogenous cycle theory published in 1940 (in Kaldor 1960, pp. 177-192), one year after the publication of Kaleckis Essays, was greatly indebted to Kaleckis work. 3. From exogenous to endogenous business cycle theory: the Essays reconsidered by Kaldor As regards Kaldors analysis of the necessary and suYcient assumptions from which an endogenous business cycle can be deduced, it

An interpretation of Kaleckis 1939 Essays 121 appears that Kalecki is undoubtedly the economist who most deeply inXuenced Kaldor. To demonstrate this, we shall deal Wrst with Kaldors innovation and secondly with his reconsideration of Kaleckis theory.

3.1. Kaldors innovation Although his analysis is in retrospect a turning point in the history of business cycle theory, Kaldor tells us in the introduction to his article that he will not attempt to put forward any new theory of the trade cycle. As he writes
The theory here presented is essentially similar to all those theories which explain the trade cycle as a result of the combined operation of the so-called multiplier and the investment demand function as, e.g.,the theories put forward in recent years by Mr. Harrod and Mr. Kalecki. The purpose of the present paper is to show, by means of a simple diagrammatic apparatus, what are the necessary and suYcient assumptions under which the combined operation of these two forces inevitably gives rise to a cycle. (Kaldor 1940, in Kaldor 1960, p. 177)

In fact, as regards these necessary and suYcient assumptions which lead to an endogenous business cycle model, Kaldors words become more understandable. Indeed, such a theory must possess at least one linear function (investment function or saving function) to make the stationary equilibrium unstable. And from this point of view, the theory nearest to it, [] is Mr. Kaleckis theory given in chapter 6 of his Essays in the Theory of Economic Fluctuation (ibid., p. 188). For if Kaleckis non-linear function is used to obtain this result, business cycles become endogenous. And this is precisely what Kaldor showed in the appendix to his article. Viewed thus, his contribution may seem thin. However, with respect to Kaleckis use of non-linearity, Kaldors contribution is revolutionary. As we have seen, Kalecki introduced a nonlinear investment function because he knew that when capital stock is Wxed, the economy converges to a stable equilibrium. Hence, Kalecki couldnt arrive at Kaldors result. We can see this clearly by studying how Kaldor transforms Kaleckis theory into an endogenous one. 3.2. Kaleckis business cycle theory reconsidered In order to achieve this project, Kaldor referred to the framework deWned by Kalecki and especially to his diagram in the plane (Y, D) used previously. Firstly, following Kalecki, Kaldor draws a family of S-shaped curves e1 representing the rate of investment decisions at time t, given the quantity of equipment available, where e1 represents a small-

122 Michael Assous er quantity of equipment than e2, and so on (ibid., pp. 188-189). However, in contrast to Kalecki, he assumes that for a given quantity of equipment (e3 in the chart) a curve cuts f from underneath which corresponds to an unstable equilibrium. That is to say a point from which, if disturbed, the system will diverge. As regards the cycle mechanism, this change is vital for it allows us to consider the case where the stationary equilibrium where saving = Investment and net investment is zero is an unstable one (ibid., p. 189). Hence there can be a conWguration in which if the economy is not initially in this point, it can never attain it, whatever the parameter values may be. That is to say, situations for which cyclical Xuctuations are endogenous. Kaldor represents this by the trajectory AGCF. Indeed, as he rightly underlines
If we assume that the time-lag is small relatively to the time needed to reach successive curves (i.e. relatively to the rate at which the total quantity of equipment is increasing), so that a position of short period equilibrium can be reached before signiWcant changes occur in the amount of equipment in existence, the cyclical movement of the system will be indicated by the trajectory AGCF5. (ibid., p. 190)

Supposing that, in the initial position, the system is at k. So, under the latter assumption, the system will move up the same curves and

5. In order to render clearer the comparison between Kaleckis Essays and Kaledors model, B has been replaced by C.

An interpretation of Kaleckis 1939 Essays 123 reach the point l. Here, owing to the gradual accumulation of equipment (the economy is above RR which represent the locus of points on the e curve where the level of investment decisions corresponds to replacement so that net investment is zero (ibid., p. 189)) the economy will move up the f curve until it reaches F. At this point, since equilibrium is unstable, a downward moving cumulative process is set up which lands the system at A (ibid., p. 190). Then, as A is below RR, capital equipment shrinks so that economy moves up the f curve until it reaches G. But, as with point F, the latter is unstable. Consequently, an upward cumulative movement follows which lands the system at C and a new cycle appears (ibid., p. 190). In conclusion, whatever the initial position-unless economy is initially in B (the stationnary equilibrium) the development of economy will inevitably be cyclical. Indeed, if at the begining the system is placed in proximity of B, a moving cumulative process is set up which on the right of B is downward and on the left is upward, which will give rise to an endogenous cycle. This last development shows that the Wrst endogenous business cycle theory was the result of a two-step process in the Wrst step of which Kalecki played a crucial role. Indeed, we can see that it is by modifying the direction of his research under the inXuence of Frisch that Kalecki has succeeded in introducing a non-linear function thanks to which Kaldor has determined the necessary and suYcient assumptions leading to an endogenous business cycle theory. From this standpoint, his contribution is speciWc, for it was by abandoning the goal to produce an endogenous theory that he has put together the essential elements that such a theory requires.

References
Allen, R.G.D. (1969), Thorie Macroconomique, Paris: Armand Colin. Arena, R. and Raybaut, A. (1998), Credit and Wnancial markets in Keyness conception of endogenous business cycles, in: G. Abraham-Frois (ed.), Non-linear Dynamics and Endogenous Cycles, New York: Springer Verlag. Arena, R. (2001), Hicks et la thorie du cycle daVaires: une interprtation, lHarmattan, (Cahiers dEconomie Politique, 39). Assous, M. (2001), Kalecki a-t-il anticip le concept keynsien dquilibre de sousemploi?, Contribution la quatrime Universit dt en Histoire de la Pense et mthodologie conomiques. Beraud, A and Faccarello, G., (2000), Nouvelle histoire de la pense conomique, tome III, Paris: La Dcouverte et Syros. Frisch, R., (1933), Propagation Problems and Impulses problems in Dynamic Economics, in: Economic essays in Honour of Gustav Cassel, Londres: Georges Allen & Unwin, pp. 171-205. Reprinted in Robert A. Gordon and Laurence R. Klein (eds.), Readings in Business Cycles, Homewood, Ill.: Irwin 1965. Frisch, R. and Holme, H. (1935), The Characteristic Solutions of a Mixed DiVerence

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