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One of the most-cited articles ever published by The Political Quarterly is a succinct discussion by Michal Kalecki of ‘Political Aspects of Full Employment’. Writing in 1943, Kalecki reflected on the implications of the government’s new-found ability to maintain full employment through public spending. Full employment would empower the working class: the employers’ sanction of dismissal would count for little if another job could readily be found.

Under fascism, state authority suppressed the working class, sustaining an alliance of business interests with fascist leaders. But in a democracy, this ‘solution’ is not available. We can expect to see instead business advocating modified and limited forms of government intervention: measures to promote private investment rather than public investment and tax cuts rather than government spending. These limited interventions would mitigate the severity of slumps but would not ensure sustained full employment, dampening the mobilisation of working class power.

A political business cycle

This pattern of protecting capitalist interests by ensuring periodic slumps was termed a ‘political business cycle’ by Kalecki, and the attractiveness of this term accounts for some of the 2783 citations counted by Google Scholar (as of November 2022). The idea of a ‘political business cycle’ was popularised by William Nordhaus, who argued that democratic politics would generate a pattern of pre-election fiscal stimulus followed inevitably by post-election slump.

Nordhaus based his analysis on the Phillips Curve: the claim that, as full employment is approached, inflation would rise. The Phillips Curve converts Kalecki’s class struggle into an empirical regularity. In its ‘expectations augmented’ version, it can be shown that some unemployment is ‘necessary’ to prevent runaway inflation, or, in Kalecki’s terms, to repress the working class sufficiently to allow profitability to be maintained under capitalism.

The Post-Keynesians

Nordhaus and other ‘political business cycle’ theorists did not share Kalecki’s political orientation at all. However, a group of relatively left-wing economists has embraced him as a more attractive exponent of Keynesian economics than Keynes himself (who was after all a Liberal and an Establishment figure). Contemporary Kaleckians are termed ‘Post-Keynesians’, as opposed to the ‘New Keynesians’ who expound the Keynesian-neoclassical synthesis that forms the basis of much contemporary macroeconomic modelling and research, particularly in policy bodies like Treasuries and central banks. Post-Keynesians are marginal figures in economics, but they are enjoying something of a revival in political economy.

In critiquing the business-friendly version of Keynesian policy, which favoured tax cuts and interest rate policy to steer private investment, Kalecki argued that the most effective economic stimulus was to promote mass consumption by putting money in the hands of those with the highest propensity to spend it. He favoured family allowances, for example. Whereas the convention of the day was that only investment could be funded by government borrowing (a convention incidentally revived by Gordon Brown), Kalecki explained how borrowing for household income support was a particularly effective stimulus policy. In so far as the stimulus promoted employment and increased wages, it would further increase demand in the economy and thus have a multiplied effect on economic activity.

Contrary to Kalecki’s expectation that business power would ensure that governments engineered periodic slumps in economic activity, British governments became committed to full employment and operated expansionary policies to achieve this. By the early 1970s, inflation and currency depreciation had become the principal preoccupations of policy-makers. Contributors to PQ saw the inflationary process as a political struggle for income shares. For KJW Alexander, writing in 1974, resolving this political problem called for deliberative political solutions, while Phelps Brown emphasised the need for a collective, coordinated process to bring the wage-price spiral to a halt. He noted that the government could cut the level of demand in the economy to bring down inflation, but no-one could favour that: ‘This remedy is worse than the disease.’

Falling out of favour

All this changed with the election of Thatcher’s Conservatives in 1979. In the 1980s, Kalecki was the subject of two appreciative commentaries in the pages of PQ. Writing just as monetarism was coming into ascendancy in the UK, Gareth Locksley highlighted Kalecki’s argument that the views and demands of capitalists would always exert a disproportionate influence on government policy. Andrew Henley offered a reassessment which highlighted how Kalecki identified long-term or structural tendencies towards stagnation in capitalism, by contrast with the cyclical focus of Keynesianism. Income (re)distribution was essential to combat stagnation, whereas Keynesianism looked for ‘positive sum’ policies that would be favoured by capital as well as labour. Henley also argued that the malign force of business interests in economic policy-making could only be expected to increase as a result of international economic integration and the rising monopoly power of multinationals.

As the climate shifted and a consensus developed among economists that governments could not achieve sustained increases in economic growth through demand management, Kalecki fell out of favour, even in PQ. Snowdon’s (2002) reflections on different versions of the political business cycle nodded briefly to Kalecki’s ‘Marxo-Keynesian’ account before providing readers with a review of the prevailing orthodoxy which emphasised the role of inflation expectations. On the orthodox analysis, the biggest challenge facing a Labour government was credibility, and delegating monetary policy to the central bank had been, in Snowdon’s eyes, a logical way to address that challenge. Little was lost by imposing this constraint, since ‘demand management policies have little effect on real variables such as unemployment and output in the long run’.

Matthew Watson (2003) saw the political foundations for New Labour’s economic programme differently. Anti-inflationary credibility could not provide an enduring basis for political success. The government also needed to generate a ‘feel good factor’ by ensuring that most people felt better off, or saw the prospect of becoming better off. A steadily rising stock market achieved some of that in New Labour’s early years, but then the dot.com bubble burst. Housing wealth became the principal engine for economic optimism, but, as Watson pointed out, rising house prices were always going to create losers as well as winners from the changing social distribution of wealth.

Insights for the 2020s

What insights does Kalecki offer for the 2020s? Kalecki’s insistence on the prosperity of the working class as the foundation of a thriving economy has particular resonance, as in many high income countries there has been a pronounced shift in the factor distribution of income away from labour and towards capital. For post-Keynesians, a central cause of contemporary stagnation is the surfeit of profits, often swilling around in companies with little idea of how to invest their cash surpluses. This idea has been taken up in Lucio Baccaro and Jonas Pontusson’s account of ‘growth models’. They argue that the failure of developed countries to generate ongoing improvements in material living standards is the central problem of contemporary democratic capitalism. They associate this failure with the ending of ‘wage-led growth’ and set out a new research programme of identifying national and international responses to the common problem of countering stagnation. Unlike the well-established ‘varieties of capitalism’ account of differences in national political economies, they locate the problem of stagnation in deficient demand rather than supply-side failings to do with innovation, education and training.

Leaving aside Kalecki’s precise claims about the relationship between income distribution and aggregate demand, much of the attraction of his work to subsequent generations stems from his willingness to be a political economist. As Baccaro and Pontusson put it, ‘[f]or macroeconomists inspired by Kalecki, power and distributive conflict are critical for understanding macroeconomic relationships and outcomes.’ For Kalecki, power was exercised by capitalists, who have disproportionate influence over public policy, in alliance with ‘rentiers’: the holders of financial assets. Contemporary contributions to the growth model literature grapple with divisions within and between capitalism and finance, and seek to identify which sectors of the economy are most favoured by the configuration of public policy institutions.

Post-Keynesians have invoked Kalecki to argue for the necessity of paying higher wages to stimulate demand, but Kalecki also saw a central role for the government in boosting the incomes of the people with the highest propensity to consume, meaning those who live hand-to-mouth with no savings to speak of. Kalecki’s endorsement of government borrowing to boost consumption deviates from contemporary mainstream thinking, even though the government’s economic support measures in the pandemic showed the value of doing exactly that. Unlike many on the left, he was not beholden to a materialist account of the creation of value through the accumulation of physical capital. The wealth of a society should be assessed by the wellbeing of its people, and the foundation of wellbeing in a market economy is having enough income to live a decent life. In Kaleckian economics, this is the most secure basis for a thriving economy.

  • Deborah Mabbett

    Deborah Mabbett

    Deborah Mabbett is Co-Editor of the Political Quarterly journal. She is also Professor of Public Policy at Birkbeck, University of London.

    Articles by Deborah Mabbett