Saturday, August 20, 2016

Kalecki’s “Political Aspects of Full Employment”

Michał Kalecki’s paper “Political Aspects of Full Employment” (1943) is an interesting paper.

Kalecki first notes that most economists had by 1943 come to accept that governments can crate full employment by aggregate demand management and by central bank control of the interest rate (Kalecki 1943: 322–323).

But then Kalecki notes that the political opposition to full employment policies had been quite severe in the 1930s, and makes this rather remarkable statement:
“There are, however, even more direct indications that a first class political issue is at stake here. In the great depression in the thirties, big business opposed consistently experiments for increasing employment by Government spending in all countries, except Nazi Germany. This was to be clearly seen in the U.S.A. (opposition to the New Deal), in France (Blum experiment) and also in Germany before Hitler. The attitude is not easy to explain. Clearly higher output and employment benefits not only workers, but entrepreneur as well, because their profits rise. And the policy of full employment outlined above does not encroach upon profits because it does not involve any additional taxation. The entrepreneurs in the slump are longing for a boom; why do not they accept gladly the ‘synthetic’ boom which the Government is able to offer them? It is this difficult and fascinating question with which we intend to deal in this article.” (Kalecki 1943: 324).
Big business “opposed consistently experiments for increasing employment by Government spending in all countries”?

Really? I am afraid Kalecki has it wrong here.

Take the United States as an example. Yes, there was vehement and hostile business opposition to the New Deal, but was it consistent?

In reality, American big business was divided in its view of Roosevelt’s New Deal.

Some businesses opposed him and some supported him. Intense business opposition was restricted to certain sectors:
“While encouraging the growth of big labor and ministering to the needs of the elderly and the poor, the New Deal also provided substantial benefits to American capitalists. Business opposition to Roosevelt was intense, but it was narrowly based in labor-intensive corporations in textiles, automobiles, and steel, which had the most to lose from collective bargaining. The New Deal found many business allies among firms in the growing service industries of banking, insurance, and stock brokerage where government regulations promised to reduce cutthroat competition and to weed out marginal operators. Because of its aggressive policies to expand American exports and investment opportunities abroad, the New Deal also drew support from high-technology firms and from the large oil companies who were eager to penetrate the British monopoly in the Middle East. Sophisticated businessmen discovered that they could live comfortably in a world of government regulation. The ‘socialistic’ Tennessee Valley Authority lowered the profits of a few utility companies, but cheap electric power for the rural South translated into larger consumer markets for the manufacturers of generators, refrigerators, and other appliances.” (Levy et al. 1986: 447–448).
So one must be careful not to make such a sweeping statement as Kalecki does. Big business learned to live with, and even appreciate, full employment aggregate demand management.

But with the central assumption of Kalecki’s paper in question, the rest of the paper’s arguments start to look a bit questionable too.

At any rate, Kalecki gives the following reasons for big business opposition to full employment:
(1) dislike of government intervention in solving the problem of unemployment
This, in Kalecki’s view, is part of a general laissez faire hostility to government intervention, and the power that businesses have in a free market economy to influence government and make it reject anything that might shake or impair their confidence or expectations (Kalecki 1943: 325).

(2) dislike of the form of government spending
Businesses fear that public investment by government might be a first step towards nationalising industry or directly taking away profits and investment opportunities in some areas from business (Kalecki 1943: 325).

(3) dislike of the social and political changes resulting from the maintenance of full employment
It is here that Kalecki sees a great fear of business people, as follows:
“… under a regime of permanent full employment, ‘the sack’ would cease to play its role as a disciplinary measure. The social position of the boss would be undermined and the self assurance and class consciousness of the working class would grow. Strikes for wage increases and improvements in conditions of work would create political tension. It is true that profits would be higher under a regime of full employment than they are on the average under laisser faire; and even the rise in wage rates resulting from the stronger bargaining power of the workers is less likely to reduce profits than to increase prices, and thus affects adversely only the rentier interests. But ‘discipline in the factories’ and ‘political stability’ are more appreciated by the business leaders than profits. Their class instinct tells them that lasting full employment is unsound from their point of view and that unemployment is an integral part of the ‘normal’ capitalist system.” (Kalecki 1943: 326).
I suspect there was a great deal of truth to (3).

Kalecki goes on to argue that mere interest rate cuts and encouraging private investment in the slump (either by income tax cuts or subsidies) will most likely not be an effective cure for involuntary unemployment, and that government investment will be required (Kalecki 1943: 328–329).

Kalecki concluded that capitalist countries, under attempts to create full employment through public investment, would descend into a “political business cycle,” in which at full employment a lobby of business leaders and rentiers would oppose this condition:
“But if attempts are made to apply this method in order to maintain the high level of employment reached in the subsequent boom a strong opposition of ‘business leaders’ is likely to be encountered. As has already been argued, lasting full employment is not at all to their liking. The workers would ‘get out of hand’ and the ‘captains of industry’ would be anxious to ‘teach them a lesson.’ Moreover, the price increase in the up-swing is to the disadvantage of small and big rentiers and makes them ‘boom tired.’

In this situation a powerful block is likely to be formed between big business and the rentier interests, and they would probably find more than one economist to declare that the situation was manifestly unsound. The pressure of all these forces, and in particular of big business-as a rule influential in Government departments-would most probably induce the Government to return to the orthodox policy of cutting down the budget deficit. A slump would follow in which Government spending policy would come again into its own.

This pattern of a ‘political business cycle’ is not entirely conjectural ; ....

The regime of the ‘political business cycle’ would be an artificial restoration of the position as it existed in nineteenth century capitalism. Full employment would be reached only at the top of the boom, but slumps would be relatively mild and short lived.” (Kalecki 1943: 329–330).
In one respect, Kalecki seems ignorant that the 19th century business cycle was much worse than what he envisaged as a post-1945 “political business cycle,” and certainly the actual experience of post-1945 cycles. In another respect, Kalecki was too optimistic.

When full employment Keynesian policies encountered serious problems in the 1970s, partly because of wage–price inflation and partly because of external shocks in the form of the oil crisis, full employment was abandoned in neoliberalism, and in its place was put the preference for mass unemployment instead.

Even worse, I don’t think Kalecki envisaged the other neoliberal weapon of class war: mass immigration to keep wages down and to create intense competition for scarce job opportunities in the First World.

BIBLIOGRAPHY
Kalecki, M. 1943. “Political Aspects of Full Employment,” Political Quarterly 14.4: 322–331.

Levy, L. W. et al. (eds). Encyclopedia of the American Constitution (vol. 1). Macmillan, New York.

5 comments:

  1. If you take the view that profit is the wages of capitalists and interest is the wages of bankers, then you can view the distributional struggle as just a wage battle between different sets of people over their share of the pie.

    Even within the mere employed there are demarcations between groups of people. Within the public sector there are unionised individuals and non-unionised individuals. It is rare for a union to be so Solomon like that it will argue for the wages of non-unionised labour as well as its members.

    And that's before we get onto the managers and directors who effectively act as agents taking money off all sides.

    In the 1970s there was clearly a profit squeeze, with insufficient wage going to the capitalists to make it worth their while doing anything. Clearly over the last 40 years that has changed around and now they are getting too much and still they do very little.

    The big winner have been the bankers who are getting a much larger slice of the pie. Even within Steve Keen's dynamic models, it is the share of income going to bankers and their eventual lack of spending that triggers debt deflationary collapse.

    So we can take Kalecki as an incomplete view of the landscape. I think his groupings are far too general and that there are more distributional groups battling for their share of the pie than just the traditional Capital and Labour.

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  2. In my opinion, Kalecki's view of the political business cycle is vindicated in the ever-recurring pressure on the Fed and other central banks to rise interest rates as soon as employment starts to recover from crises. But I don't want to write more on this, I'm writing a paper on the topic!

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  3. I'm not really sure one should equate the New Deal with the doctrine of Full Employment. The New Deal had a lot to it, from regulation, farm price supports, unionization, social security, etc. none of which related to full employment. And indeed, employment schemes were wound down in the New Deal in 1936-37 as it seemed they were reaching Full Employment.

    Also I agree Neil Wilson as it being a bit too simplistic to lump all Capitalists into one group. It's clear that higher wages and inflation do not cut into the profit margins of a manufacturer (and may in fact expand it), but does adversely affect banking and "rentier" interests. However, it's also clear that manufacturers do have some interests comparable to the other kinds of "Capitalists", discipline in the factory for one.

    Part IV of PAOFE, there was a great post about how with the US policy's switch to interest rate cuts and also tax cuts, the Great Moderation ended up exactly as he predicted it. http://www.interfluidity.com/v2/3451.html
    (That only concerns interest rate cuts, but can too to some extent explain the Reagan/Late Clinton/Bush administrations)

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  4. A 'Marxian' critique of Keynesian economics.

    "No matter how long or loud or passionately the good-hearted Keynesians beg for jobs and other New Deal-type reform programs, their pleas for the implementation of such programs are bound to be ignored by governments that are elected and controlled by powerful moneyed interests. The fundamental flaw of the Keynesian demand-management prescription is that it consists of a set of populist proposals that are devoid of class politics, that is, of political mechanisms that would be necessary to carry them out."
    http://www.atimes.com/atimes/Global_Economy/GECON-02-290814.html

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  5. " . . . full employment was abandoned in neoliberalism, and in its place was put the preference for mass unemployment instead."

    I think that 'a neolibralist' would argue that the 'market' will eliminate any involuntary unemployment and any unemployment is voluntary.
    Hence the emphasis on 'supply-side' policies to eliminate the voluntary unemployment.

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