In August 2021, the Financial Times commentator Martin Sandbu announced the return of class conflict as a central theme in economic debate. Sandbu urged his readers to study an underappreciated Polish economist if they wanted to make sense of the new context: “Every downturn rekindles interest in John Maynard Keynes. This one should call attention to Michal Kalecki.”
Sandbu’s twinning of Kalecki with Keynes was symptomatic. Kalecki achieved international renown in the 1930s and ’40s as a cofounder of what came to be known as the Keynesian revolution. He developed some of the same economic ideas as Keynes independently of him while giving them a more radical thrust. Yet the legacy of Keynes still overshadows that of Kalecki.
By the time of his death in Warsaw, in 1970, Kalecki had passed into the company of “interesting” but neglected thinkers, both for an older generation of mainstream economists and for more recent post-Keynesian and heterodox scholars. The latter sought in Kalecki’s work a more contemporary criticism of capitalism than that provided by Karl Marx, and a sharper critique of its workings than Keynes could offer.
In what follows, I will give an account of Kalecki’s trajectory from Poland to London and New York and back to his native country, and summarize his distinctive contribution to economic thought, especially in relation to that of Keynes.
Michał Kalecki was born on June 22, 1899, in the Polish industrial city of Łódź. He came from a Jewish family that had assimilated into Polish culture and grew up speaking Polish, which served as a common language in a city that mixed Russians, Poles, Germans, Austrians, and Jews. His father, Abram Kalecki, owned a small spinning mill, which afforded him a life of modest comfort, supporting an elegant wife, Klara, and then their son.
However, the outbreak of revolution in the Russian Empire in 1905 shattered their comfort. As the empire’s largest industrial center, Łódź was thrown into chaos with riots, street fighting, assassinations, and factory occupations by workers. The brutal attempts of the authorities to suppress the revolt merely exacerbated the crisis.
Despite the imposition of martial law, in 1905, at the request of the larger factory owners, social unrest continued right up to the outbreak of World War I. The socialists were not the only source of instability. Polish nationalists targeted Jewish businesses and socialist leaders for attack. In 1910, Klara Kalecka left her luckless family. Three years later, in 1913, Abram Kalecki shut down his factory.
The young Kalecki completed his school education in an atmosphere of insecurity, insurrectionary chaos, and, from 1915, German occupation that reduced the city to poverty. He went on to study engineering in Warsaw and then Gdańsk, with a brief period of military service in between. But the drying up of financial support forced him to abandon his studies. He returned to Łódź, where he supported himself and his father with business and financial journalism, becoming an expert on the international corporations that dominated manufacturing and mining in Poland.
This led to Kalecki’s first proper job, at the Institute for the Study of Business Cycles and Prices (Instytut Badań Koniunktur Gospodarczych i Cen), established in Warsaw in 1928 by the Polish Ministry of Trade and Industry. He was the institute’s specialist on business cartels. The post enabled him to marry Ada Szternfeld, who was also from Łódź.
Lange and the Business Cycle
The work in Warsaw also introduced Kalecki to the more academically accomplished Oskar Lange and his Union of Independent Socialist Youth (Związek Niezależnej Młodzierzy Socjalistycznej). Lange, a Marxist, had received his doctorate in economics from the ancient university in Kraków. He had been expelled from the Polish Socialist Party for being too left-wing.
Lange’s Union of Independent Socialist Youth was thus independent of the older-established Polish Socialist Party. But it was also too critical of developments in the neighboring Soviet Union to be aligned with the Polish Communist Party. Many of Kalecki’s first economic analyses appeared in the union’s monthly Socialist Review (Przegląd Socjalistyczny) until the Polish authorities shut it down at the end of 1932.
In the following year, the institute published Kalecki’s Essay on the Business Cycle Theory (Próba teorii koniunktury). The text set out to show that, in defiance of neoclassical orthodoxy, market forces do not work to bring capitalist economies to any kind of stable equilibrium, with all resources fully utilized, but rather cause those economies to oscillate naturally between booms and slumps. Arguably, the essay contains in summary the essential ideas of Kalecki’s economics, even if, in years to come, he would modify their mathematical formulations.
Poland had suffered a military coup led by Józef Piłsudski in 1926, ostensibly to prevent the installation of a nationalist government. However, as the Polish economic situation deteriorated in the wake of the 1929 crash, with the biggest fall in national income for any country in Europe at that time, the military government became more and more repressive, emulating the bombastic nationalism and xenophobia of the Italian Fascists.
In 1935, unable to secure a permanent university position in his native country, Oskar Lange went to the United States on a Rockefeller Fellowship. In 1936, Kalecki’s turn came. He travelled first to Sweden, then to London, where Keynes had just published his General Theory of Employment, Interest and Money. Although the coincidence between their ideas was striking, there was a notable divergence between their respective political economies.
Defining the Revolution
To understand the intellectual coincidence between the two economists — indeed, to understand the nature of the so-called Keynesian revolution itself — we must first define what that revolution was. There is a common interpretation among economists and other scholars that unites the post-Keynesian school of economic thought with more mainstream Keynesians. It brings together followers of Keynes like Joan Robinson and Nicholas Kaldor with theorists of the post-1940s neoclassical synthesis, such as Paul Samuelson, Oskar Lange, and John Hicks.
According to this perspective, aggregate demand constrains production and employment in a capitalist market economy. The Keynesian revolution effectively discredited the neoclassical idea that had prevailed in the field since the 1870s, which held that full employment would be assured so long as there was sufficient flexibility of prices and wages.
However, the idea that market demand limits output and employment was not new in the time of Keynes and Kalecki. It was already well known before the 1930s — not just in the underworld of “underconsumptionist” theorists, such as Jean Charles de Léonard Sismondi, Karl Marx, Thorstein Veblen, and John A. Hobson, but also among widely respected theorists of the monetary business cycle.
The latter included Ralph Hawtrey, whose 1913 book Good and Bad Trade contains the first use and definition of the term “effective demand”:
A want becomes an effective demand when the person who experiences the want possesses (and can spare) the purchasing power necessary to meet the price of the thing that will satisfy it.
Uncertainty and Expectations
If this definition of the Keynesian revolution is questionable, there is another one that later took hold, following the path of Keynesians such as George Shackle. According to this line of thought, the core of Keynes’s revolution was the introduction of uncertainty and expectations into the process of economic decision-making. The notion that people hold money because they are uncertain about the future has become a staple of post-Keynesian monetary theory.
This is certainly an idea that Keynes employed in an original way in the monetary analysis of his General Theory. Yet once again we must recall that leading economists had discussed the concepts of uncertainty and expectations well before Keynes added his monetary and philosophical reflections on the subject.
In the United States, the work of Veblen and Frank Knight had established uncertainty and expectations as the foundation of institutions and decision-making. In Europe, Friedrich Hayek, whose political economy shared nothing with that of Keynes or Kalecki, made uncertainty a cornerstone for the accounts of market process and entrepreneurship associated with the Austrian school. For their part, Marxists had also long contrasted the “chaos” of market capitalism with the certainty that economic planning could provide.
Keynes put forward a more refined version of the “market chaos” idea by arguing that modern market economies lack coordination of the kind that a hypothetical auctioneer, famously spoken of by the nineteenth-century French economist Léon Walras, is supposed to provide. In theory, a Walrasian auction is meant to fix equilibrium prices, perfectly matching supply and demand. In practice, this is far from being the case.
This idea has made something of a comeback among New Keynesian economists, who emphasize the problems related to information or the lack thereof in decentralized decision-making. But here too we cannot accurately describe Keynes as the originator of this theory. Swedish economists, among others, had explored it before Keynes presented his distinctive critique.
In fact, the fundamental intellectual innovation that Kalecki and Keynes shared was something different. It was their realization that the level of investment is what determines output and employment in a capitalist economy containing only capitalists and workers, where production is undertaken for profit.
Kalecki’s explanation for this — and that of Keynes, though it is not the one expressed in his General Theory — was disarmingly simple. If capitalists sell their goods to earn a profit, then the most that they can collectively recover by selling those goods to their workers is the total value of what the capitalists have paid the latter in wages. If some individual capitalists earn more than this, others will have to earn less.
In other words, capitalists will have to sell to someone other than their workers if they wish to obtain a profit in excess of their wage costs. The purchasers can only be the capitalists themselves, buying equipment for investment, or luxury goods for their own consumption.
In this context, Kalecki was recalling the arguments of Karl Marx in volume II of Capital. Marx had raised exactly the same question, asking how capitalists can convert their profits into money: after all, they are not interested in exploiting their workers merely for the benefit of obtaining surplus produced commodities.
Marx came up with a very similar answer to Kalecki’s: in an economy where there is no investment, the money that the capitalists obtain as profits is thrown into circulation by the capitalists themselves, buying goods for their own consumption. Kalecki reached this conclusion by reading Rosa Luxemburg’s classic work The Accumulation of Capital, which had made use of Marx’s argument on this point to show its inconsistency with other aspects of his work.
This definition of what was fundamentally innovative in the ideas of Keynes and Kalecki is important because it clarifies the contrast between their work and the macroeconomic theory of their time. In the neoclassical version of macroeconomics, it is the total amount of available factors of production that determine output and employment.
Within this framework, the real wage rate is supposed to determine the demand of business for labor, and thus the employment level. Higher wage rates will lower the demand for labor and boost unemployment. Kalecki demolished this line of argument, showing that changes in the wage rate in fact have complex and contradictory effects on output and employment that tend to cancel each other out overall. Keynes accorded this analysis high praise.
The main alternative to the neoclassical perspective was the underconsumptionist one. Its origins can be traced back to the Ricardian socialists of the mid-nineteenth century, who argued that poverty and unemployment exist because workers do not receive the full value of their labor. A later critic of the neoclassical school, J. A. Hobson, who is best remembered today for his classic book on imperialism, linked this claim to the unequal distribution of income, arguing that people with higher incomes save too much.
From this standpoint, if real wages are low, this means that consumption is inadequate to deliver full employment. Thorstein Veblen and the followers of Marx held this view. The underconsumptionists were thus the original proponents of the idea that effective demand is what constrains aggregate output and employment.
This became the standard interpretation of Marx’s theory about wages and unemployment, articulated by the US economist Paul Sweezy in his classic 1942 summary of Marxist economics, The Theory of Capitalist Development. It has also been a feature of more recent “neo-Kaleckian” growth theory, which identifies a low share of wages in total income as the key determinant of underemployment.
Profit and Prices
However, while Keynes and Kalecki both deplored low wage rates for moral and social reasons, this was not because they believed that low wages were themselves the cause of unemployment. A focus on the wage share is also a misleading policy tool in an economy that produces for profit rather than for the sake of increasing wages.
Kalecki was adamant that investment is what determines output and employment because, stripped to its essentials, the money that capitalists spend on investment accrues to them through the market process as profits. Those profits are what motivate production and employment.
In the more extended version of his profit theory, Kalecki found that several factors may increase profits: the consumption of capitalists (as Marx had argued), a fiscal deficit being run by the government, or a foreign trade surplus, all of which bring to capitalists money they did not expend on wages. Yet household saving — in particular saving by workers — reduces profits, since money paid out as wages does not flow back into the pockets of capitalists as workers spend it.
One can easily show that in an economy in which incomes are received only by capitalists in the form of profits, or by workers in the form of wages, the total quantity of profits as cash flows in the economy will be equal to the level of investment plus the fiscal deficit, plus the foreign trade surplus, plus the consumption of capitalists, but minus the savings of workers.
Many radical economists are steeped in the literature that insists on the tendency of the rate of profit to fall, or in the misleadingly titled “neo-Kaleckian” growth theory. This leads them to argue that it is the movements in the total quantity or share of profits that are decisive in the evolution of a capitalist economy.
Yet Kalecki himself argued that capitalists are not interested in how much profit is being made across the whole economy, whether in absolute terms or in proportion to total output. It is the profits made by their own firms that motivate them. The share of each individual capitalist in the overall profits that are being made will depend on their market power and the state of demand in the economy.
In this way, Kalecki brought the price system into his analysis. It did not perform the trivial function of making supply equal demand in each market; rather, Kalecki followed the approach of Marx, whose framework had the price system, with wages, determining the distribution of profits among capitalists in the economy. If wages go up, this redistributes profits from the capitalists engaged in production of luxuries and investment goods, where wage costs are higher, to capitalists in the wage-goods sector, where the spending enabled by those higher wages boosts the quantity of sales.
After the Revolution
By thinking through the income and expenditure flows in a capitalist economy, Kalecki and Keynes independently worked out the key factor that decides the level of employment. They also shared a commitment to full employment. That commitment was common enough after the experience of the Great Depression: what divided economists at the time was the question of how it could be achieved.
Adherents of the neoclassical school argued that the unemployed would find work only if wages fell sufficiently. For the underconsumptionists, on the other hand, one could solve unemployment by raising wages. Rejecting both arguments, Keynes and Kalecki insisted that government expenditure was key.
After 1945, there was a strong association between the name of Keynes and a general doctrine of aggregate demand management. Indeed, the postwar decades came to be known as the Keynesian era. Yet the broad thrust of government policies in that epoch bore only a superficial resemblance to the ones that Keynes himself had advocated.
Keynes wanted permanently low interest rates — leading to what he called the “euthanasia of the rentier” and a “socialization of investment” — and higher taxes on the rich. But he thought that governments should restrict fiscal stimulus to periods of economic recession. Keynes was also cautious about supporting the blueprint for a comprehensive welfare program put forward during World War II by his fellow British Liberal William Beveridge, believing that it would burden the taxpayer excessively.
For Keynes, the best way to carry out fiscal stimulus was through public works rather than the expansion of welfare and public services. He saw nationalization of private firms as an irrelevance. Overall, he considered that it was possible to secure full employment without transforming capitalism.
Postwar fiscal policies in Europe and North America embraced the logic of aggregate demand management, which economists loosely referred to as a Keynesian approach. However, the plans for social insurance and state control of leading economic sectors that many governments implemented were much closer to the ideas of J. A. Hobson, who had already put such proposals on the table before the First World War.
Capitalism and Full Employment
Kalecki’s political economy was far more radical. Keynes sometimes wrote as if we could have full employment under capitalism just as soon as everyone came to their senses and realized the soundness of his ideas. Kalecki, on the other hand, knew that capitalists would contest full employment because it threatened their “power in society.” Under a regime of full employment, employers would no longer be able to brandish the fear of the sack over their workers to keep them subservient.
The working class would, Kalecki predicted, “acquire confidence” once the shadow of the dole queues was removed. In this way, he believed, full employment would enable the transition to socialism, rather than the economic crises that Marxists had traditionally seen as the catalyst for that transition. Along the way, there would, of course, be distributional problems — for example, if workers in certain industries pushed for higher wages than their counterparts elsewhere. But this would present a political challenge rather than an economic one.
Kalecki did consider the possibility that capitalists might respond to the loss of their power with an investment strike. However, he doubted that they would forego profitable opportunities simply in order to make a political point: “Capitalists do many things as a class but they certainly do not invest as a class.” As we have already noted, it is the profits of their individual firms that motivate investment decisions, rather than the profits of the capitalist class as a whole.
In a response to critics of her economic theories, titled The Accumulation of Capital: An Anti-Critique, Rosa Luxemburg referred to investment (and the consumption of capitalists) as a “family matter,” because capitalists made the arrangements among themselves rather than directly with the working class. Kalecki conceded that the monetary system and government policy in a capitalist society could be matters of “family” agreement among capitalists. However, if they made investment the subject of common agreement, this would mean constituting what Rudolf Hilferding described as a “general cartel,” through which capitalists agreed on the overall dimensions of production and distribution.
Such a cartel would allocate production and profits among capitalists in proportion to their productive capital. Kalecki thought that such agreements could be effective in times of stagnant demand. But they would tend to break down in a boom, as the incentives to renege on a commitment to restrict production became greater. In any case, the cartel would be difficult to police among small and even medium-sized enterprises.
Rudolf Hilferding himself was skeptical about the idea that capitalists could make a general cartel effective. Polish Marxists of the generation preceding Kalecki recognized that while a cartel of this kind might in theory bring about economic stability, it would be at the cost of social stagnation. High employment might be assured, but the cartel would frustrate the social and political aspirations of workers and their families. This is what the sociologist Ludwik Krzywicki and Kalecki’s early mentor Oskar Lange referred to as “industrial feudalism.”
Kalecki’s skepticism about the possibility of an investment strike therefore points to a more general critique of an idea put forward by Keynes, who believed that, with the “socialization of investment,” capitalism could be saved and made to function efficiently. Ever since the policy ideas of Kalecki and Keynes gained currency in the 1940s, talk of an impending inflationary catastrophe has become the way in which capitalists agree among themselves, with their supporters in the economics profession, that it is essential for their “confidence” to receive a boost in the face of working-class demands.
Kalecki’s “full employment road to socialism” challenged a naive interpretation of Marx that saw the immiseration of the working class as the precipitating factor for a socialist transformation of society. Kalecki’s own experience of antisemitism, fascism, and Stalinism had convinced him that the impoverishment of workers and their families did not lead naturally or inexorably to a better understanding of their situation and its possibilities. The rise of right-wing populism in our own time after the crash of 2008 has reaffirmed that lesson.
The War Economy
The death of Keynes meant that he was not in a position to comment on the policies with which his name was associated or the popular interpretations of his own work. Kalecki, in contrast, lived for a quarter century after the war. From 1945 to 1955, he worked successively for the International Labour Organization and the United Nations in Montreal and New York before returning to Warsaw, where he combined a role at the Polish Planning Commission with researching and teaching.
Kalecki did not lose faith in the cardinal principle of the Keynesian revolution: namely, the ability of the state to secure full employment through fiscal policy. But he was much more critical of how this had been achieved, insofar as it was achieved at all, in the capitalist countries.
This disillusionment arose in part from his own experience of McCarthyism in the supposedly neutral diplomatic corridors of the UN. The UN leadership under Dag Hammarskjőld had allowed J. Edgar Hoover’s FBI to operate in its environs, ostensibly to keep an eye on US citizens. Yet the FBI cast its net much wider, and Kalecki witnessed firsthand the persecution of the Left in the United States.
He also noted that high-employment policies in Europe and North America during the 1950s had rested upon the foundation of expenditure on armaments and the Cold War. To some degree Kalecki had anticipated this development in his 1943 article “Political Aspects of Full Employment,” which had pointed to the link between “securing full employment by military spending” and fascism. While he acknowledged that military Keynesianism raised employment, he stressed that its main economic function was to maintain profits.
Kalecki identified the roots of German and Japanese industrial success after the war in their previous experience of military defeat. He pointed to the ban on heavy armaments production that the victorious powers had imposed on those countries as a key factor. Rearmament in the context of the early Cold War obliged the former Axis states to buy military equipment from the United States and Britain. In exchange, they won access to those markets for their industrial exports.
The resulting arrangement handed industrial superiority to Germany and Japan, whose leading industrialists had no choice but to invest in civilian industry, while their US and British counterparts were sedated with arms contracts. The performance of war-related economic sectors depended on political decisions. Production for civilian use, on the other hand, fostered more dynamic and socially useful markets.
In the final decade of his life, Kalecki gradually fell out with the political authorities in Poland. The purpose of socialism, he believed, was to improve the lives of working people, and he was unforgiving of avowedly socialist governments that failed to secure such improvement.
For Kalecki, the usual reason for failure was the pursuit of some political goal, such as military superiority or forced industrialization, that promised future triumphs but diverted resources from the supply of wage goods for workers today. As shortages of basic consumer goods, so-called meat crises, became endemic in Communist-ruled Poland, Kalecki’s criticisms of visionary planning aroused the hostility of its political leadership.
The political response to dissent was primitive. After the defeat of Poland’s Arab allies by Israel in the Six-Day War of 1967, the government of Władysław Gomułka incited antisemitic prejudice against the country’s small remaining Jewish population. It orchestrated a purge of Jews from positions in the government, the universities, and the professions.
The Polish authorities also condemned Kalecki and other critics for engaging in “revisionism” and “sowing confusion in political economy.” They expelled Kalecki’s followers from the ruling party, fired them from their jobs, and drove them into exile.
Kalecki was horrified, and not merely by the recurrence of the ancient social pathology of antisemitism. At times he even wondered whether the US government was involved in the effort to crush the modern research in political economy that he had built up in Warsaw. In bad health, he travelled in the spring of 1969 to stay with old friends in the UK at Cambridge. But in the summer he returned to Poland, where he died on April 17, 1970.