Theories of Growth in Different Social Systems[1](1970) M.

Kalecki
1. The paper purports to develop the idea that the institutional framework of a social system is a basic element of its economic dynamics and thus of the theory of growth relevant to that system. The idea sounds plausible but nevertheless there is a tendency in Western economics--which shows at present a considerable interest in the theory of economic growth--to deal with something like a general theory of growth working on--models fairly remote from the realities of the present capitalist, socialist, or mixed economies. Actually the writings in question usually relate (at least by implication) to some sort of idealized laisser-faire capitalism. Their problems and results are easily translatable into the categories of a socialist system and, what is of interest, they fit in better here than with capitalism but not quite well still, for they concentrate frequently on points which do not happen to be most essential. There thus arises a situation which is not infrequent in the history of economic thought: theories are being created which may raise problems of great interest but are not very conducive to understanding what actually happened, is happening, or should be happening. 2. To my mind the central problem of the laisser-faire capitalist system to which apply the theories referred to above is that of effective demand, i.e. that of finding markets for its products at full utilization of resources. It is also this problem that in the 1950s was still generally in the centre of interest of Western economists in connection with the theory of cyclical fluctuations and with the problem of government intervention to counteract them. But from the time the discussion of economic dynamics has concentrated on problems of growth the factor of effective demand was generally disregarded. Either it was simply assumed that in the long run the problem of effective demand does not matter because apart from the business cycle it need not to be taken into -111Questia Media America, Inc. www.questia.com Publication Information: Book Title: Socialism: Economic Growth and Efficiency of Investment. Publisher: Oxford University. Place of Publication: New York. Publication Year: 1993. Page Number: 111.

consideration; or more specifically the problem was approached in two alternative fashions: (i) The growth is at an equilibrium (Harrodian) rate, so that the increase in investment is just sufficient to generate effective demand matching the new productive capacities which the level of investment creates. (ii) Whatever the rate of growth the productive resources are fully utilized because of long-run price flexibility: prices are pushed in the long run in relation to wages up to the point where the real income of labor (and thus its consumption) is enough to cause the absorption of the full employment national product. I do not believe, however, in justifying the neglect of the problem of finding markets for the national product at full utilization of resources either in fashion (i) or (ii). It is generally known that the trend represented by the case (i) is unstable: any small fortuitous decline in the rate of growth involves a reduction of investment, and in consequence of the national income, in relation to the stock of equipment, which affects investment adversely and induces a further fall in the rate of growth. The belief that such disturbance creates merely a downswing followed by an upswing in relation to the growth proceeding at an equilibrium rate, i.e. that it yields a trend cum business cycle is mathematically indefensible: the underlying equations are incapable of producing a solution corresponding to a combination of an exponential curve with a sine line.[2] Nor do I subscribe to the long-run price flexibility underlying theories of the type (ii). The monopolistic and semi-monopolistic factors involved in fixing prices--deeply rooted in the capitalist system of all times--cannot be characterized as temporary short-period price rigidities but affect the relation of prices and wage costs both in the course of the business cycle and in the long run. 3. To my mind the problem of the long-run growth in a laisser-faire capitalist economy should be approached in precisely the same fashion as that of the business cycle. The pure business cycle is a special case of the general phenomenon of trend cum business cycle where the rate of growth is equal to zero, i.e. where the economy is stationary. In the argument on which the theories of the business cycle were based certain quantities were assumed constant--this was partly linked with inadequate accounting for technical progress--which in an expanding economy must certainly -112Questia Media America, Inc. www.questia.com Publication Information: Book Title: Socialism: Economic Growth and Efficiency of Investment. Publisher: Oxford University. Place of Publication: New York. Publication Year: 1993. Page Number: 112.

grow. Thus it is necessary to deal with this limitation (which ties down the theory of the business cycle to a stationary economy) and arrive at a movement of the system comprising both the trend and cyclical fluctuations. Or to put it somewhat differently: the central problem of the dynamics of the laisser-faire capitalist system is to show what makes the system expand if the solutions on the lines (i) and (ii) are discarded as inadequate. Indeed, the mere fact that capital accumulation creating new production potentialities is feasible does not prove yet that this investment will be forthcoming and the new production potentialities will be adequately used. There may arise a question at this point whether this problem is still of interest in the world of today in which the laisser-faire capitalist system is dead because of widespread government intervention. I still believe that the enquiry into dynamics of a laisser-faire system is of importance both in connection with economic history, even fairly recent one, and because the present state of capitalist economies is an offshoot of a somewhat chaotic interplay between the laisser-faire tendencies and of government action. In any case these complicated phenomena cannot be adequately portrayed by models of laisser-faire economies referred to above in which the problems of effective demand and of utilization of resources are neklected. There is probably some interconnection between government intervention and these models but rather psychological in character: the high level of employment creates a climate favourable to their construction being unperturbed by the problem of effective demand. 4. As already mentioned in section I the models of growth developed in Western economies are related explicitly to some sort of idealized laisser-faire capitalist economies with the implication, however, that the problems tackled are so general in character that with slight modifications the results are relevant to problems of a socialist system. This is perfectly true: indeed they do apply to socialist economies where the problem of effective demand is really solved in the way (ii) of section 2: prices are fixed by planning authorities in relation to wages in such a way as to achieve full utilization of resources (and this is true not only in the long run but even in a short period). -113Questia Media America, Inc. www.questia.com Publication Information: Book Title: Socialism: Economic Growth and Efficiency of Investment. Publisher: Oxford University. Place of Publication: New York. Publication Year: 1993. Page Number: 113.

The trouble, however, arises out of the fact that the models to which we refer do not concentrate frequently on essential problems rooted in the realities of socialist economies. Two points of this character are worth emphasizing as examples. i. Most of the studies on long-run economic growth are written in terms of comparative statics. For instance, the problem of what capital-output ratio secures in a uniformly expanding system the highest real wage, while full employment is maintained, maybe of small practical importance; for if the initial capital-output ratio is less, the retooling of the stock of capital in order to achieve this paradise means a long period of higher investment, in the early part of which the real wage would fare worse than if no change in the capital-output ratio were attempted. We have here a typical case of sacrificing the present for the future which I believe to be a political problem of first rank in the socialist economy. But the basis for political decisions on problems of this nature is a thorough economic enquiry into the transition from one curve of growth to another. ii. Nowhere in Western models discussed here appears the problem of long-run development bottlenecks. When national income grows at a high rate the expansion of certain industries lags behind that of demand for their products because of certain organizational or technological factors, for instance shortage of appropriately trained personnel or difficulties in adaptation of technical improvements (the latter is especially the case in agriculture). The resulting gaps have then to be made good by foreign trade and to maintain the balance of the latter either some exports have to be increased or some imports replaced by home production. These operations will be usually accompanied by higher outlays of capital and labour and in this way affect profoundly the problems of economic growth. The contradiction between consumption in the short period and in the long run and the long-run bottlenecks, appearing under the guise of the difficulties in balancing foreign trade, are in fact the central problems of a realistic theory of growth in a socialist economy. 5. As observed at the end of section 3 the models of laisser-faire capitalist economies which do not deal adequately with the prob-114Questia Media America, Inc. www.questia.com Publication Information: Book Title: Socialism: Economic Growth and Efficiency of Investment. Publisher: Oxford University. Place of Publication: New York. Publication Year: 1993. Page Number: 114.

lems of effective demand and utilization of resources are not a substitute for an enquiry into the effects of government intervention aimed at tackling these problems. Nevertheless the literature on this crucial subject of contemporary capitalism is astonishingly scarce. Perhaps there exists here a rather perverse division of labour: the government acts to achieve a high utilization of resources and the economists take this state as the point of departure in their discussion without mentioning who is responsible for it. There is, however, one exception to the rule: much space is being devoted to the theory of economic development of mixed underdeveloped economies. By the way, the problem of deficiency of effective demand does not arise here, for government investment is large in relation to the productive potential which is very low despite abundance of labour. As a result the situation is characterized by inflationary pressures on scarce supply of necessities rather than by inadequate effective demand, even though disguised and also open unemployment is in existence. It seems to me that the central problem here is at whose expense the country is to be developed. If inflationary pressures on scarce supplies of necessities, especially of food persist, it is the broad poverty-stricken masses of the population that bear the burden of high investment. If this is to avoided, the rate of growth of supply of necessities must be kept in line with the rate of growth of the national income. And to make room for investment, consumption of nonessentials out of higher incomes must be restrained by an appropriate fiscal policy. This, however, makes the non-inflationary rate of growth dependent on agrarian conditions because they determine to a great extent the feasible progress of agriculture and thus of supply of necessities. The main part of financing investment is played in this context by the ability to grow food faster. This must be supported none the less by financial measures in the strict sense aiming at restraining the increase in consumption of non-essentials. As in a socialist economy, the problem of saving present for future consumption is involved here. But the contradiction is less acute, the sacrificed consumption being of the rich and the well-to-do. This possibility, however, is too good to be true. In fact agrarian conditions prevailing in most of these countries (dependence of the peasant on the landlord, the merchant or the money lender) permit the supply of food to expand only slowly. -115Questia Media America, Inc. www.questia.com Publication Information: Book Title: Socialism: Economic Growth and Efficiency of Investment. Publisher: Oxford University. Place of Publication: New York. Publication Year: 1993. Page Number: 115.

As a result the non-inflationary rate of growth of national income is rather low. But if it is fairly high, inflationary pressures are rampant and no relative shift in composition of consumption to the advantage of necessities, as described above, takes place. 6. We shall now illustrate the fact discussed above at some length--that to each social system there corresponds an appropriate theory of growth by showing that the same formula for the rate of growth of national income should be interpreted in a different fashion depending on the social system we deal with. Let us denote the level of real national income in a given year by Y and the increment of that income from the beginning to the end of the year by Y. The latter will consist of three elements:(i) the productive effect of gross investment 1/m I where m is the so-called capital-output ratio and I the level of gross investment (i.e. before deduction of depreciation); (ii) the negative effect of the shrinkage of productive capacity as a result of scrapping of obsolete equipment, -aY; and (iii) the increase of national income due to better utilization of the existing productive capacities as a result of organizational improvements, uY. We thus obtain

or

where r is the rate of growth of national income. In a socialist economy all three coefficients m, a, and u are determined, so to say, on the supply side: m and a depend on the decision of planning authorities as to technique of production (capital intensity of new production and policy of scrapping obsolete equipment); u represents the rate of growth of utilization of existing equipment as a result of organizational progress. The formula will remain entirely correct in a laisser-faire capitalist economy but the interpretation of the coefficients is quite different. The rate of change in the degree of utilization of existing equipment u depends on effective demand and in the business cycle it will even change its sign. But even if we take the long-run view, u is still determined, at least in part, on the demand side if we do not believe in the long-run flexibility of prices (cf. section -116Questia Media America, Inc. www.questia.com Publication Information: Book Title: Socialism: Economic Growth and Efficiency of Investment. Publisher: Oxford University. Place of Publication: New York. Publication Year: 1993. Page Number: 116.

2). Even in m there may be demand elements: it is true that the new and thus most modern equipment is likely to work to capacity but some under-utilization of equipment because of lack of effective demand is not fully excluded even in this case. In the case of a mixed economy where the rate of increase of supply of necessities is too low in relation to the rate of growth of the national income a different problem will arise in interpretation. The coefficients m and u may have the same meaning as in the case of a socialist economy but the division of consumption as between necessities and non-essentials may signify inflationary pressures and the resulting redistribution of income to the advantage of higherincome groups. We see again here that the theory of growth of a social system of a certain type should reflect its crucial problems. -117Questia Media America, Inc. www.questia.com Publication Information: Book Title: Socialism: Economic Growth and Efficiency of Investment. Publisher: Oxford University. Place of Publication: New York. Publication Year: 1993. Page Number: 117.