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Michael 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
Address for correspondence
PHARE-CNRS, Maison des Sciences Economiques, 106 112, boulevard de
lHopital, 75647 Paris Cedex 13, France; e-mail: michael.assous@wanadoo.fr
* I am grateful to Professors Richard Arena, Rodolphe Dos Santos Ferreira,
Gilbert Faccarello, Harald Hageman, Heinz Kurz and Antoine Rebeyrol for
helpul comments and suggestions on an earlier draft. I am especially indebted to
Professor Alain Beraud, with whom I had lengthy exchanges. I also gratefully
acknowledge Claude Marguet for detailed comments and useful observations.
Helpful remarks of two anonymous referees are gratefully acknowledged. Any
remaining errors in this paper are mine.
1 In his 1982 study, Patinkin affirmed that Kalecki had not analysed the
mechanisms by which the economy is likely to reach equilibrium with
unemployment without contrasting it with classical mechanisms. Moreover,
Patinkin did not think that Kalecki defined a general equilibrium model like the
one described by Hicks in 1937 (Patinkin 1982: 10 11).
2 Chapple aimed to demonstrate that Kalecki anticipated the key features of the
General Theory, which, as Patinkin defined them, are threefold. First, he claimed
Kaleckis works prior to the General Theorys publication contained the notion of
effective demand whose essence is, according to Patinkin, the well-known fortyThe European Journal of the History of Economic Thought
ISSN 0967-2567 print/ISSN 1469-5936 online 2007 Taylor & Francis
http://www.tandf.co.uk/journals
DOI: 10.1080/09672560601168488
Michael Assous
Michael Assous
1:1
I fI NI
1:2
W pC fC NC
0
1:3
W pI fI NI
1:4
NI NC N
1:5
I I
p
pI
; r; g
W W
C
C Cp
WN
pC
1:6
1:7
M kpI I pC C
1:8
N N
1:9
Michael Assous
wages (equations (1.3) and (1.4)). NI plus Nc results in aggregate employment demanded (equation (1.5)). Real investment depends on the inverse
of the product wages of the two production sectors11 and on the rate of
interest (equation (1.6)). The parameter g has been added to represent
explicitly a propensity to invest.12 The level of consumption demand is equal
to the demand of capitalists and the demand of workers who consume their
entire wages (equation (1.7)). Nominal money demand function is written,
in accordance with the quantity theory, as a function of nominal income. By
equating this demand function with the quantity of money, M , one gets the
equilibrium condition of the money market (equation (1.8)). Finally,
because the labour market is balanced, employment is equal to labour
supply (equation (1.9)). The endogenous variables are: Nc, NI, N, C, I, pc, pI,
r, W. The exogenous variables are: N ; M ; Cp . Equations (1.1), (1.2), (1.3),
(1.7) and (1.9) result in Kaleckis equation (1). Equations (1.1), (1.3),
(1.4), (1.5), (1.6), (1.7) and (1.9) result in Kaleckis equation (2). (The
solution of the model is discussed in Appendix 1.)
Thus, by constructing a model based on Says law, Kalecki described an
economy for which real variables and nominal variables are respectively
determined by the real and the monetary parts of the model and in which
market mechanisms spontaneously re-establish full employment. In order
to determine whether this result depends on the absence of hoarding,
Kalecki considered in his System II the implications of variations of cash
reserves owned by firms.
In Kaleckis System II, money supply is first assumed given.13 Money
demand is instead assumed to increase with income and to decline with the
interest rate. More precisely, Kalecki argued that agents choose between
cash reserves, which they need in order to make transactions insisting on
the transaction motive for financing production and financial assets,
which do not allow making transactions but yield interest.
In contrast to System I, individual economic agents in System II hold cash reserves
which can be increased or decreased. A cash reserve is necessary to run an enterprise
at a given turnover smoothly. The volume of this reserve depends not only on the
turnover of the enterprise, but also on the rate of interest. The higher the rate of
interest, the smaller the cash reserve held by an enterprise at a given turnover. Hence
if sales increase while the volume of money in circulation remains constant, that is, if
Michael Assous
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).
104
Was Kalecki insisting on the difficulty and the time necessary to render
money wages flexibly downwards or was he referring to some different
adjustment mechanism? The second characteristic of his conception of the
labour market provides some clarification:
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 Kaleckis 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 quasiequilibrium is determined. Yet if this level of employment is undetermined,
then so are quasi-equilibria. Kaleckis second hypothesis, according to
which money wages are related to the level of unemployment referred to
as follows with the equation W g N N , where g 5 0 allows one
to define a quasi-equilibrium (Kalecki 1990: 215 6). By replacing equation
(1.9) with the equation W g N N , Kaleckis 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 workers consumption, which boosts price and production
15 In an imperfect competition framework, Kalecki represented the increase in
workers power associated with a boom by a decline in mark-up in the pricing
equation (Kalecki 1971).
105
Michael Assous
I n I n r ;
I n S n r ; Y n
I n I n r ;
I n S n Y n
The singularity is that it is the interest rate and not nominal income that is
determined by the quantity of money: the interest rate determines nominal
investment, which, via the multiplier, determines nominal income. It results in a
rise in the inducement to invest, which increases national income without
affecting interest rate. Obviously a rise in the quantity of money, by reducing the
interest rate, increases nominal investment and employment. Keyness essential
contribution is therefore, according to Hicks, his liquidity preference analysis,
because without it the multiplier would have no role.
However, Hicks thought the economy described by Keynes corresponds more
closely to the following model:
M LY n ; r ;
I n I n r ;
I n S n Y n
in which nominal income has been introduced in the function of the demand of
money. For Hicks, this modification restricts considerably the opposition
between Keynesian theory and classical theory. Indeed, henceforth, a rise in
the inducement to invest triggers an increase in nominal income as well as in
interest rate, whereas a rise in the quantity of money reduces the interest rate
and increases employment. Graphically this result appears clearly. If LL, the
curve representing equilibrium of the money market in the plan (r, Yn) is
increasing, a rise in the inducement to invest shifts IS to the right and generates
107
Michael Assous
of the first two enabling passage easily from one to the other. He stressed
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 Kaleckis 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 Kaleckis 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, Kaleckis classical models are fully at
odds with Hicks classical model. Indeed, market clearing and full
employment exists in both of Kaleckis 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
a rise of national income and of the interest rate. It is only if LL is horizontal in
the case of the liquidity trap that a rise in the inducement to invest only causes a
rise of national income.
18 Last, aiming to show that it is possible to realise a complete synthesis between
classical tradition and the Keynesian theory, Hicks built a variant of the latter,
where the nominal income and the interest rate are the arguments for the
demand functions of money, investment, and savings, the model of generalized
General Theory, which he wrote as such:
M LY n ; r I n I n Y n ; r I n S n Y n ; r
Thanks to this, Hicks can also show that a rise in the inducement to invest causes
an increase in nominal income and in the interest rate, whereas a decrease in
the quantity of money reduces the interest rate and raises the nominal income.
108
Michael Assous
Michael Assous
Table 1 The features of the Kalecki, Hicks and Modigliani models
Labour market
Impact of shocks
Kalecki
Hicks
Modigliani
Demand of money
independent from
interest rate in the
crude classical
model. Demand for
money dependent
on national income
and interest rate in
the amended
classical and
Keynesian models.
Rises in the
inducement to
invest and in the
quantity of money
do not affect
employment in
Systems I and II
and entail both a
rise in employment
and interest rate in
System III.
Rises in the
inducement to
invest (when
sectoral supply
elasticities are not
identical) and in
the quantity of
money affect the
level of employment
in the classical
model but may have
no effect on it in the
Keynesian model
due to the existence
of the liquidity trap.
Rises in the
inducement to
invest and in the
quantity of money
affect employment
only in Keynesian
model.
W
pI
; NdC fC
W
pC
; Nd NdI NdC ; Nd Nd
W W
pI ; pC
Michael Assous
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 Says 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 Kaleckis 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
Modiglianis. Whereas in Modiglianis Keynesian model, money wages are
exogenous, they are endogenous in Kaleckis model. As a consequence,
while Modigliani, in a static comparative framework, attributed unemployment 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 fullemployment equilibrium unstable and he thus put implicitly into doubt
his 1934 analysis of the classical theory. Moreover, in his 1934 article
114
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pC
pC
Knowing W/Pc, one may determine the employment in the consumption
goods sector. Because employment in the two sectors of production is equal
to the supply of labour, one can then deduce the employment in the
investment goods sector. The quantities of consumption goods and
investment goods are then given by (1.1) and (1.2). From (1.4) one can
determine W/PI, from which the value of interest rate can be deduced.
Indeed, the equilibrium condition is fI(NI) I(pC/W, pI/W, r, g), which
implies that the rate of interest is an implicit function of NI, W/pc and W/pI.
With these variables now determined, the value of the equilibrium interest
rate can be deduced. The money variables are determined by (1.8).
Knowing W/pI and W/pc, W is given by:
C
I
0
M Wk 0
fc Nc fI NI
Then, pI and pC are determined by (1.3) and (1.4).
116
pC
pC
Knowing W/pc, employment in the consumption goods sector can be
determined. Because employment in the two sectors of production,
according to (1.5), is equal to the supply of labour, employment in the
investment goods sector can also be determined. Equations (1.1) and (1.2)
give the quantities of consumption and investment goods. Equation (1.4)
helps to determine real wages in the investment goods sector, W/pI, from
which the value of interest rate can be determined. Thus, in equilibrium,
fI(NI) I(pc/W, pI/W, r, g), which means that the interest rate is an implicit
function of NI, W/pI and W/pc. These variables being determined, the
equilibrium interest rate and nominal variables can also be deduced. When
0
0
W pI fI NI and W pC fC NC , by considering the new equilibrium
relation in the money market, one reaches the value of the nominal wage.
Thus:
C
I
0
M W 0
Lr
fc Nc fI Nc
Through (1.3) and (1.4) one determine pc and pI. System II, like System I,
is therefore also dichotomic.
fC NC Cp NI NC fC NC
M W
fI NI fC Nc
Lr
0
0
fI NI fC Nc
117
Michael Assous
fI NI I
p
pI
; r; g
W W
C
W g N N
or
0
fC NC Cp NI NC fC NC ;
M g N NI NC
i
fI NI fC Nc h
0
0
N
;
f
N
f
N
L
ff
I
I
C I
I
0
0
C
fI NI fC Nc
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.
Kaleckis second system is therefore no longer dichotomic.
Abstract
This article is based on Kaleckis 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 Kaleckis Systems I and II and the persistence of unemployment
Kaleckis System III. The present analysis stresses the relevance and the
originality of Kaleckis 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 Kaleckis 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, Says law, quasi-equilibrium, Modigliani, Hicks, IS-LM, theory of
liquidity preference, money wage flexibility
118