In the wake of the Great Financial Crisis, people rediscovered the wisdom and writing of John Maynard Keynes. This decade, people are revisiting and discovering the work of Polish economist Michał Kalecki, who died in 1970. Kalecki wrote about why companies invest, how hot economist can be sustained, and the political economy of full employment. Why would anyone ever root for a weaker labor market? On this episode of the podcast, we spoke with professor Jan Toporowski, an expert on Kalecki’s work. This transcript has been lightly edited for clarity.
Key insights from the pod:
Who was Michal Kalecki? — 3:36
What did Kalecki and Keynes agree on? — 9:04
What did Kalecki think about business cycle management? — 16:37
What are the politics of full employment? — 19:52
What did Kalecki get wrong? — 30:14
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Joe Weisenthal: (00:10)
Hello, and welcome to another episode of the Odd Lots podcast. I'm Joe Weisenthal.
Tracy Alloway: (00:15)
And I'm Tracy Alloway.
Joe: (00:16)
Tracy, you said something on a recent episode, and I don't remember which one it was. One of our macro ones, maybe like Neil [Dutta] and Connor [Sen] or something like that. This idea still that we sort of talk about relief at the idea of labor market softening. It's kind of perverse.
Tracy: (00:34)
First of all, thank you so much for listening to what I say. I really appreciate that. Secondly, I think what I said is it feels really weird that you have a central bank, specifically the Federal Reserve, that is saying basically that they want to push the unemployment rate up.
Joe: (00:50)
And significantly. So we’re around 3.5% unemployment right now in United States, a 50 year low. You’d think...
Tracy: (00:58)
That it sounds great.
Joe: (00:59)
Yeah, that seems unambiguously good, and especially, you know, after coming after years of slow labor market growth, some of the fears during the worst of the Covid pandemic about how much unemployment there is. And yet here we are, and it's almost always talked about as a problem to be solved rather than an opportunity to be embraced.
Tracy: (01:19)
Yeah. There's always concern that you're running an economy too hot, right? If employment gets too low. But then that just brings up all these really big picture questions about, well, what is the economy for? Shouldn't we be aiming for a system that kind of works for everyone where hopefully the unemployment rate is very, very low? But I guess the risk is, and the concern is, that you don't want to run it in such a way that it starts pushing up prices and you get this unrelenting inflation.
Joe: (01:49)
Right. And inflation is bad, and it hurts people and people don't like it. But nonetheless, I think people find it strange that the central bank, and part of what they see as an outcome of optimal monetary policy, will put so many, at least another million and a half people out of work. They find it strange when weak labor market data often leads to a stock market rally.
Tracy: (02:11)
The whole ‘bad news is good news,’ that feels perverse.
Joe: (02:13)
And, you know, you'd think, okay, a lot of people have jobs. That means a lot of spending, corporate profits are really high. These are good things. And yet at some level, it's like, all of this is bad. And we shouldn't just jump away from that. Like we shouldn't sort of move on. And of course, there's room to discuss soft landings and all that, but some of these root questions, I think, are still worth thinking about.
Tracy: (02:37)
Like why do investors hate full employment?
Joe: (02:41)
Exactly. So, I'm really excited about our guest. One of the economists from the old days that people sometimes talk about when they talk about the political economy of full employment or maximum employment is an economist named Michal Kalecki, he’s talked about this. His work comes up every once in a while.
So we're going to be speaking to an economist who himself has studied a lot of Kalecki’s work and has done his own work on a lot of these questions, trying to understand a little bit more about this condition that full employment brings. We're going to be speaking to a professor at SOAS University in London. And so Jan Toporowski thank you so much for coming on Odd Lots.
Jan Toporowski: (03:25)
Thank you very much for inviting me.
Joe: (03:27)
Why don't you tell us a little bit about your work and your research and sort of what drove you to focus on some of these topics?
Jan: (03:36)
Well, I came into this kind of work, I actually came across Kalecki when I first came to study economics. Now, at the time I actually didn't do my undergraduate studies in economics. It was more in sociology and political science. The first job that I got was in fund management for the Church of England for an institution, an august institution called the Church Commissioners for England.
And because I had done one course in introductory economics, they thought, ‘Oh well he knows something about it.’ And they put me into the exchange investments department. Now this was in 1974. You are obviously too young to remember what happened around 1974. But there was an oil price shock, which in England was rapidly followed by a collapse in the real estate market. A collapse in the stock market. A couple of brokerage houses went bust banks started, some of the more fringe banks went bust. A major bank tottered. The Bank of England had to call in the senior City of London figures to try and shore up the position.
As a newcomer to all of this, I thought this was tremendously exciting. And I thought, well, I need to find out more about it. I need to study economics. So I went, I registered at Birkbeck College, part of the University of London, for an MSC in economics. And I was actually greatly disappointed because all my professors would stand up and say, ‘look we have this general equilibrium model of the economy.’
And my senior professor, the senior professor there, a very distinguished American British economist, I remember standing in class and saying, ‘Look, the economy out there, it's in equilibrium. We know it's in equilibrium. You know, the model say so.’ And I remember sitting there thinking, I don’t know what world this man lives in.
You know, what he was saying had, you know, no bearing, showed no understanding of what was really going on. I remember going down into the library and flicking through some books and coming across a Polish name — Michael Kalecki. I thought, ‘oh, I wonder what he has to say about this.’ I didn't realize that there were any distinguished Polish economists. So I started reading the book and it was his early essays on the business cycle.
And suddenly it all made sense. And it's continued to make sense. Since then, albeit I think I take a rather different view to many followers of Kalecki in the sense that I have this background in banking and finance, all the best do, this has always been my approach to the work of Kalecki. So I think your question, the issues that you are raising are absolutely fundamental to my understanding of Kalecki. And I wish they were more fundamental to the understanding of many of my friends and colleagues who follow Kalecki.
Tracy: (07:45)
Well, Jan, talk to us then about what it was that you read that made sense to you. And I'm particularly interested in the relationship between the business cycle and, you know, theoretical equilibrium levels and full employment as you kind of just alluded to.
Jan: (08:04)
The general equilibrium approach is essentially a static approach. It tells you what situation will arise where there will be no further change. This actually doesn't happen in the real world. What you have in the the real world is a constant state of flux. And this is why Kalecki’s approach to economics focusing on a business cycle I think is really much more satisfying than the approach, for example, of Keynes in the General Theory which was essentially a static approach to a problem that is fundamentally dynamic.
Joe: (09:04)
So, what don't you explain, because when I think of Keynes, he also wrestled with these topics of why doesn't a market economy on its own create full employment? Why is investment inadequate in typical times? Why do we tend to these periods of stagnation? How did Kalecki differ from Keynes on these questions?
Jan: (09:24)
Let me start off with what he agreed Keynes on. And he agreed with Keynes that capitalism is fundamentally a system in which the level of output, the overall level of output, and the overall level of employment is determined by the level of investment, the level of business investment.
Now obviously in the post-war, post-second World War economy, government spending also has a lot to do with it. But fundamentally the level of activity in the private sector is really determined by the level of investment, and the question is what causes that level of investment to be unstable? Much more unstable for example than consumption?
This was an answer that, in many respects, tormented Kalecki throughout his life. He, he would put forward various models and then reflect on them and decide that no that they were wrong. Keynes sort of tried to cover up this problem by saying, ‘oh, it's all due to Animal Spirits. It's all due to uncertainty.’
The problem with this is that uncertainty and animal spirits are not measurable in the same way that, for example, steel production is measurable. It's really pushing the solution onto what cannot be seen and cannot be observed. And Kalecki’s background was as an engineer, and he found this deeply unsatisfactory and he tried to resolve it.
Certainly he thought the rate of interest didn't have much impact. Business men, he thought, were on the whole much more cynical, much more hard bitten than to be influenced by, let's say, ephemeral moods and temperament. In fact, the way in which corporations are constructed, the hierarchical bureaucratic way in which business corporations are constructed is really in order to eliminate the effect of passions and biases on issues like investment.
In the end what Kalecki thought was really most importantly the issue of capacity utilization. Businesses will invest if they've got customers that cannot be satisfied from existing production even at full capacity. And what they will then do is — let's say if the restaurant is full and there are still customers at the door — then the restaurant owner will invest in more tables and expand his premises.
So, and he then explained it interestingly enough in the form of a very nice parable. He said in the United States, there are cities which are joined by more than one railway line. And if they're both operating at less than full capacity the effects of competition between them will be that eventually one of those railway lines will go out of business, and you'll end up in a situation with much less capacity, actually much less employment and much less output. So what is the answer to this problem of underutilization of capacity?
Joe: (14:21)
Build a third railway?
Jan: (14:22)
Build a third railway, exactly, you've read the article. It's a lovely parable. And then of course, the first two railway lines will be busy ferrying all the workers and the steel required for building the third railway line.
Then of course, you've now got three railway lines at the end of this. What do you do then? And so he said, well, the answer is you build a fourth rail line. And he said, well, you know all this sounds paradoxical. But he said, well, it's the system that's paradoxical. And the reason why it's paradoxical is that it's a system that depends on the level of investment. And what's critical about the level of investment is that it's the level of investment that, according to Kalecki and also Keynes, that determines how much profits, businesses will make. Businesses invest a lot. They will make a lot of profits. If they don't invest so much, then you have this problem of excess capacity discouraging economic activity, discouraging investment.
Tracy: (16:14)
So my understanding of Keynes is that Keynes also wrote a lot about the business cycle and believed that the business cycle could be managed in one way or another through monetary policy or smoothed in some way. What does Kalecki say about managing the business cycles, or investment given its importance in the cycle?
Jan: (16:37)
Well, Kalecki thought that managing the economy by trying to influence the level of investment is really a fool’s game, because you may lower the rate of interest or lower the rate of taxation, you know, give additional tax allowances. And then you find that, okay, business takes up a certain amount of investment, does some investment, and then requires further tax cuts, further cuts in the rate of interest in order to invest further.
And it really doesn't make sense. It didn't make sense for Kalecki, because the purpose of investment shouldn't be to maintain full employment. There are other instruments for doing this. The purpose of investment should be to provide the capacity for the amount of consumption that is required in the economy.
That's how a rational economy would operate. So, this again, was a small difference between Keynes and Kalecki. Keynes wanted investment to be the leader. Kalecki argued that in fact, you can create the equivalent of an investment boom through fiscal stimulus. It has the same effect of expanding profits and particularly using the fiscal stimulus to provide additional public goods and public services, which would be provided free. So this gets around the problem of raising wages. You can increase real wages by providing free public goods. And then of course, the other way is redistribution from higher incomes to lower incomes, again by various transfer payments.
Joe: (18:57)
So to bring it up to today. And I don't know if we have full employment, because I'm not even sure what that means, but we have very low unemployment, the lowest in 50 years. Some might say, okay, that's close to full employment, but that's a separate debate.
But the Fed is coming in, it wants to raise rates. It talks about how the optimal situation would be at least a 1% increase, 1.5 million people laid off. You have investors who get sort of a sense of relief every time the labor market data comes in weak. Why is there this discomfort in a state of the economy, which on paper, you'd think lots of spending good, lots of reason to invest, do CapEx, why is there this rebellion about that?
Jan: (19:52)
Kalecki argued that it's purely political? He argue in his famous article “ The Political Aspects of Full Employment,” which I would recommend to anyone who doesn't know much Kalecki, it’s very easy to read. There’s not a single equation.
Joe: (20:15)
That’s why I've read it.
Jan: (20:17)
Good. He argued there that, you know, there's no doubt that full employment is more rational for the system as a whole. It's more rational. Profits are higher, employment is higher. Everything is better if you have full employment. However full employment strikes at the heart of another feature of capitalism, which is the question of labor discipline.
If you have a state of full employment, then it becomes difficult to discipline workers in the factory or in the office. If a worker can leave his or her place of employment and immediately get another one, then where is the labor discipline?
Tracy: (21:18)
Ah, it's about control.
Jan: (21:20)
It's really about the control of labor. And Kalecki argued that what would tend to happen is that in a state of full employment, you would get a political coalition put together by major employers, people in finance, central bankers, all of whom would argue that the situation is somehow manifestly unsound.
Unsound in what way? Well, inflation. And sure enough, you know, we’ve had inflation, but we also know at the moment that inflation is coming down quite rapidly because so much of the current inflation was simply an energy market adjustment to sanctions on Russian energy. So it’s kind of a future inflation because the future is unknown, right? And unknowable, it's very, very easy to, to say ‘Well, things may appear okay at the moment, we have these economists with all these models showing that there's some terrifying inflation around the corner.’
Tracy: (22:57)
This kind of reminds me of the debate over work from home, which is, you know, post-pandemic people started working from home and there didn't seem to be much of a hit on productivity, and a lot of companies still met whatever their internal benchmarks are. So then you had a lot of bosses who started talking about a degradation of corporate culture and how it's bad people are working from home. They might be doing okay on a pure numbers basis, but in the long run, it's going to impact the company by hitting culture.
Jan, can you maybe connect more of what we've seen over the past year or two Kalecki’s ideas? Do you think the post-pandemic maybe shift towards worker power has vindicated some of his ideas?
Jan: (23:46)
I think it has. It’s vindicated a lot of his ideas because it's actually weakened the power of many businesses, particularly businesses in activities [like] retail, hospitality, these kinds of activities, transport even, which just saw their markets shrinking quite drastically. What then happened, however, was that the speed of the recovery, as you know, lockdown was removed.
I think a lot of those businesses took advantage of that situation to start raising their prices. And my view is that they were raising their prices because many of them had gotten seriously into debt. Many of them had got, had found their political position weakened.
They had to go knocking at the door of governments, asking for loans, asking for tax rebates, various other public subsidies. Governments had responded by insisting on no layoffs, this kind of thing. It put companies, particularly corporations, into a difficult bind. And a lot of them got out of this by borrowing at record low rates of interest, and then seeking to recover that borrowing by raising their prices. So you have my explanation of the inflation would be twofold.
One is that you have energy costs which is a temporary phenomenon. But the other one is what Richard Koo referred to a type of balance, sheet effect where firms are trying to clear off debt by raising prices.
And I think they were doing it quite successfully, but that then feeds into a narrative that all of this is the consequence of full employment and therefore you must show that the state of full employment is financially unsound. Of course, because the inflation has very little to do with what's happening in the labor market. Wage increases have lagged price increases. Unions and workers in general have a much weaker position in the labor market. To some degree, actually, individual workers are benefiting from labor shortages. But in terms of organization, in terms of power, what we politically call the power in the factories, workers still remain weak, because worker organizations are weak.
Joe: (28:12)
So we just have a couple minutes left, but on the inflation question. A term that you hear from political activist sometimes in the US, probably around the world, is ‘greedflation.’ And I'm curious if you think that's a useful frame. It kind of doesn't sound like it listening [to you], of course, there are opportunistic situations and that for balance sheet reasons, corporations feel the impulse to raise prices. But greed kind of seems like one of these things that's kind of immeasurable. I'm curious in your perspective, or Kalecki’s perspective, is that a useful analytical mode?
Jan: (28:53)
Personally, I wouldn't use the word, the term ‘greed,’ because it seems to me a kind of moralizing the fact that it's business practice to get the best possible price for your output.
I think there is a sense in which if you have excess capacity, the excess capacity may, under certain circumstances, cause a business to not to raise prices to moderate greed. But on the whole, I think business decisions are not made on a kind of moral issue. You try to get the best outta the market. That's the nature of the system.
Tracy: (29:54)
So, one thing that I always like to ask economists who have written biographies of other economists or who have studied their work, is there any area in which you disagree with Kalecki? Or think that maybe he got it wrong, or maybe this particular theory could be improved or expounded upon?
Jan: (30:14)
Yes. I think actually his political judgment sometimes went askew. I mean, if I can give a particular example from the United States, he thought the student movement against the Vietnam War was headed for failure. And I think this was a misjudgment.
He thought that American capitalism would be divided between, American multinationals would be much more sensitive to the way in which America's perceived abroad and domestic American businesses that only operate in within the United States who would maybe be much more bullish.
I'm not sure that this distinction works quite well in the United States. I regret that he didn't write more about money and finance, because I think it's too easy to dismiss his ideas as being characteristic of the long period between 1929 and the 1970s when you know, really the stock market and finance were not terribly important and were in fact dependent on state support.
I think the situation now is rather different and needs more working on. This would be my regret and and my criticism, plus the fact that he was an engineer and a feature of the type of economics of his time, was that you had to create a neat mathematical model.
He knew this wasn't enough. You had to have some kind of roots in the way in which the system operated. But he believe that once he'd put forward the equation, that was enough. And I don't think it was.
Joe: (33:56)
Jan Toporowski. I'm afraid we’re out of time. But that was fantastic. Really appreciate your coming on. And I feel like perhaps, you know, Keynes sort of got this revival after the great financial crisis, and it feels like with Kalecki’s thoughts, right now, as people wrestle with some of this thing, more people are gonna be discovering him. So, appreciate you coming on Odd Lots.
Jan: (34:15)
Thank you. Thank you very much for this opportunity,
Joe: (34:31)
Tracy. I really enjoy that. It does feel like, well, I mean, there's a lot there. The political aspects you brought about working from home, this sort of rebellion against worker autonomy, worker power, what happens when it's really easy potentially to find another job? I think it's, for one thing, that's a pretty important idea right now.
Tracy: (34:54)
Oh, absolutely. I also thought the question of why, so if you argue that, you know, private sector activity is dependent on the level of investment, but then why does the level of investment change? Why is it more unstable than consumption? That is a question that comes up all the time here on Odd Lots right? Why do these business cycles exist? Why do firms seem to potentially overreact to slow periods and then overreact to more active periods? I think it's still open to debate, but it was definitely interesting to hear Kalecki’s ideas on that.
Joe: (35:32)
Yeah. And this idea that, and Keynes, as Jan pointed out, like Animal Spirits. Uncertainty. These are all vibes, you know? And I think vibes are important, but also they're a little bit unsatisfying.
Tracy: (35:48)
You’d choose capacity utilization over vibes?
Joe: (35:51)
Yeah. I mean, why do vibes change, right? If you lean too heavily into the vibes theory of economic cycles then you're just moved on to the question of ‘why do vibes change?’ And so some of these questions about capacity utilization, I do think they're helpful. I love the railroad example of like, okay, the problem is just keep building railroads, which you will maintain full demand. But then you'll end up with a hundred railroads. And this sort of contradiction of the system is very interesting.
Tracy: (36:20)
As a regular user of Amtrak, I say build all the railroads, build all the railroads, build them all. No I am open to any and every possible explanation, or I should say policy suggestion, for smoothing business cycles. And this was a fascinating one. All right. Shall we leave it there?
Joe: (36:35)
Let's leave it there.