Posted
May 22, 2010 by
Michał Kalecki. Drawing
by Manuel García
Jódar.
This essay was first
published in Political Quarterly in 1943; it is reproduced
here for non-profit educational purposes. A shorter version of this essay was published in The Last Phase in the Transformation of
Capitalism (Monthly
Review Press, 1972).
I
1. A solid majority of
economists is now of the opinion that, even in a capitalist system, full
employment may be secured by a government spending programme, provided there is
in existence adequate plan to employ all existing labour power, and provided
adequate supplies of necessary foreign raw-materials may be obtained in
exchange for exports.
If the government undertakes
public investment (e.g. builds schools, hospitals, and highways) or subsidizes
mass consumption (by family allowances, reduction of indirect taxation, or
subsidies to keep down the prices of necessities), and if, moreover, this
expenditure is financed by borrowing and not by taxation (which could affect
adversely private investment and consumption), the effective demand for goods
and services may be increased up to a point where full employment is achieved.
Such government expenditure increases employment, be it noted, not only
directly but indirectly as well, since the higher incomes caused by it result
in a secondary increase in demand for consumer and investment goods.
2. It may be asked where the
public will get the money to lend to the government if they do not curtail
their investment and consumption. To understand this process it is best, I
think, to imagine for a moment that the government pays its suppliers in
government securities. The suppliers will, in general, not retain these
securities but put them into circulation while buying other goods and services,
and so on, until finally these securities will reach persons or firms which
retain them as interest-yielding assets. In any period of time the total
increase in government securities in the possession (transitory or final) of
persons and firms will be equal to the goods and services sold to the
government. Thus what the economy lends to the government are goods and
services whose production is ‘financed’ by government securities. In reality
the government pays for the services, not in securities, but in cash, but it
simultaneously issues securities and so drains the cash off; and this is
equivalent to the imaginary process described above.
What happens, however, if
the public is unwilling to absorb all the increase in government securities? It
will offer them finally to banks to get cash (notes or deposits) in exchange.
If the banks accept these offers, the rate of interest will be maintained. If
not, the prices of securities will fall, which means a rise in the rate of
interest, and this will encourage the public to hold more securities in
relation to deposits. It follows that the rate of interest depends on banking
policy, in particular on that of the central bank. If this policy aims at
maintaining the rate of interest at a certain level, that may be easily
achieved, however large the amount of government borrowing. Such was and is the
position in the present war. In spite of astronomical budget deficits, the rate
of interest has shown no rise since the beginning of 1940.
3. It may be objected that
government expenditure financed by borrowing will cause inflation. To this it
may be replied that the effective demand created by the government acts like
any other increase in demand. If labour, plants, and foreign raw materials are
in ample supply, the increase in demand is met by an increase in production.
But if the point of full employment of resources is reached and effective
demand continues to increase, prices will rise so as to equilibrate the demand
for and the supply of goods and services. (In the state of over-employment of
resources such as we witness at present in the war economy, an inflationary
rise in prices has been avoided only to the extent to which effective demand
for consumer goods has been curtailed by rationing and direct taxation.) It
follows that if the government intervention aims at achieving full employment
but stops short of increasing effective demand over the full employment mark,
there is no need to be afraid of inflation.2
II
2. The above is a very crude
and incomplete statement of the economic doctrine of full employment. But it
is, I think, sufficient to acquaint the reader with the essence of the doctrine
and so enable him to follow the subsequent discussion of the political problems
involved in the achievement of full employment.
In should be first stated
that, although most economists are now agreed that full employment may be
achieved by government spending, this was by no means the case even in the
recent past. Among the opposers of this doctrine there were (and still are)
prominent so-called ‘economic experts’ closely connected with banking and
industry. This suggests that there is a political background in the opposition
to the full employment doctrine, even though the arguments advanced are
economic. That is not to say that people who advance them do not believe in
their economics, poor though this is. But obstinate ignorance is usually a
manifestation of underlying political motives.
There are, however, even
more direct indications that a first-class political issue is at stake here. In
the great depression in the 1930s, big business consistently opposed
experiments for increasing employment by government spending in all countries,
except Nazi Germany. This was to be clearly seen in the USA (opposition to the
New Deal), in France (the Blum experiment), and in Germany before Hitler. The
attitude is not easy to explain. Clearly, higher output and employment benefit
not only workers but entrepreneurs as well, because the latter’s 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 they not gladly accept 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.
The reasons for the
opposition of the ‘industrial leaders’ to full employment achieved by
government spending may be subdivided into three categories: (i) dislike of
government interference in the problem of employment as such; (ii) dislike of
the direction of government spending (public investment and subsidizing
consumption); (iii) dislike of the social and political changes resulting from
the maintenance of full employment. We shall examine each of
these three categories of objections to the government expansion policy in
detail.
2. We shall deal first with
the reluctance of the ‘captains of industry’ to accept government intervention
in the matter of employment. Every widening of state activity is looked upon by
business with suspicion, but the creation of employment by government spending
has a special aspect which makes the opposition particularly intense. Under a
laissez-faire system the level of employment depends to a great extent on the
so-called state of confidence. If this deteriorates, private investment
declines, which results in a fall of output and employment (both directly and
through the secondary effect of the fall in incomes upon consumption and
investment). This gives the capitalists a powerful indirect control over
government policy: everything which may shake the state of confidence must be
carefully avoided because it would cause an economic crisis. But once the
government learns the trick of increasing employment by its own purchases, this
powerful controlling device loses its effectiveness. Hence budget deficits
necessary to carry out government intervention must be regarded as perilous.
The social function of the doctrine of ‘sound finance’ is to make the level of
employment dependent on the state of confidence.
3. The dislike of business
leaders for a government spending policy grows even more acute when they come
to consider the objects on which the money would be spent: public investment
and subsidizing mass consumption.
The economic principles of
government intervention require that public investment should be confined to
objects which do not compete with the equipment of private business (e.g. hospitals,
schools, highways). Otherwise the profitability of private investment might be
impaired, and the positive effect of public investment upon employment offset,
by the negative effect of the decline in private investment. This conception
suits the businessmen very well. But the scope for public investment of this
type is rather narrow, and there is a danger that the government, in pursuing
this policy, may eventually be tempted to nationalize transport or public
utilities so as to gain a new sphere for investment.3
One might therefore expect
business leaders and their experts to be more in favour of subsidising mass
consumption (by means of family allowances, subsidies to keep down the prices
of necessities, etc.) than of public investment; for by subsidizing consumption
the government would not be embarking on any sort of enterprise. In practice,
however, this is not the case. Indeed, subsidizing mass consumption is much
more violently opposed by these experts than public investment. For here a
moral principle of the highest importance is at stake. The fundamentals of
capitalist ethics require that ‘you shall earn your bread in sweat’ — unless
you happen to have private means.
4. We have considered the
political reasons for the opposition to the policy of creating employment by
government spending. But even if this opposition were overcome — as it may well
be under the pressure of the masses — the maintenance of full
employment would cause social and political changes which would give a new
impetus to the opposition of the business leaders. Indeed, 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 laissez-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 adversely
affects only the rentier interests. But ‘discipline in the factories’ and
‘political stability’ are more appreciated than profits by business leaders.
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.
III
1. One of the important
functions of fascism, as typified by the Nazi system, was to remove capitalist
objections to full employment.
The dislike of government
spending policy as such is overcome under fascism by the fact that the state
machinery is under the direct control of a partnership of big business with
fascism. The necessity for the myth of ‘sound finance’, which served to prevent
the government from offsetting a confidence crisis by spending, is removed. In
a democracy, one does not know what the next government will be like. Under
fascism there is no next government.
The dislike of government
spending, whether on public investment or consumption, is overcome by concentrating
government expenditure on armaments. Finally, ‘discipline in the factories’ and
‘political stability’ under full employment are maintained by the ‘new order’,
which ranges from suppression of the trade unions to the concentration camp.
Political pressure replaces the economic pressure of unemployment.
2. The fact that armaments
are the backbone of the policy of fascist full employment has a profound
influence upon that policy’s economic character. Large-scale armaments are
inseparable from the expansion of the armed forces and the preparation of plans
for a war of conquest. They also induce competitive rearmament of other
countries. This causes the main aim of spending to shift gradually from full
employment to securing the maximum effect of rearmament. As a result,
employment becomes ‘over-full’. Not only is unemployment abolished, but an
acute scarcity of labour prevails. Bottlenecks arise in every sphere, and these
must be dealt with by the creation of a number of controls. Such an economy has
many features of a planned economy, and is sometimes compared, rather
ignorantly, with socialism. However, this type of planning is bound to appear
whenever an economy sets itself a certain high target of production in a
particular sphere, when it becomes a target economy of which the armament
economy is a special case. An armament economy involves in particular the
curtailment of consumption as compared with that which it could have been under
full employment.
The fascist system starts
from the overcoming of unemployment, develops into an armament economy of
scarcity, and ends inevitably in war.
IV
1. What will be the
practical outcome of the opposition to a policy of full employment by
government spending in a capitalist democracy? We shall try to answer this
question on the basis of the analysis of the reasons for this opposition given
in section II. We argued there that we may expect the opposition of the leaders
of industry on three planes: (i) opposition on principle to government spending
based on a budget deficit; (ii) opposition to this spending being directed
either towards public investment — which may foreshadow the intrusion of the
state into the new spheres of economic activity — or towards subsidizing mass
consumption; (iii) opposition to maintaining full employment
and not merely preventing deep and prolonged slumps.
Now it must be recognized
that the stage at which ‘business leaders’ could afford to be opposed to any kind
of government intervention to alleviate a slump is more or less past. Three
factors have contributed to this: (i) very full employment during the present
war; (ii) development of the economic doctrine of full employment; (iii) partly
as a result of these two factors, the slogan ‘Unemployment never again’ is now
deeply rooted in the consciousness of the masses. This position is reflected in
the recent pronouncements of the ‘captains of industry’ and their experts. The
necessity that ‘something must be done in the slump’ is agreed; but the fight
continues, firstly, as to what should be done in the slump
(i.e. what should be the direction of government intervention) and secondly,
that it should be done only in the slump (i.e. merely to
alleviate slumps rather than to secure permanent full employment).
2. In current discussions of
these problems there emerges time and again the conception of counteracting the
slump by stimulating private investment. This may be done by lowering the rate
of interest, by the reduction of income tax, or by subsidizing private
investment directly in this or another form. That such a scheme should be
attractive to business is not surprising. The entrepreneur remains the medium
through which the intervention is conducted. If he does not feel confidence in
the political situation, he will not be bribed into investment. And the
intervention does not involve the government either in ‘playing with’ (public)
investment or ‘wasting money’ on subsidizing consumption.
It may be shown, however,
that the stimulation of private investment does not provide an adequate method
for preventing mass unemployment. There are two alternatives to be considered
here. (i) The rate of interest or income tax (or both) is reduced sharply in
the slump and increased in the boom. In this case, both the period and the
amplitude of the business cycle will be reduced, but employment not only in the
slump but even in the boom may be far from full, i.e. the average unemployment
may be considerable, although its fluctuations will be less marked. (ii) The
rate of interest or income tax is reduced in a slump but not increased in the
subsequent boom. In this case the boom will last longer, but it must end in a
new slump: one reduction in the rate of interest or income tax does not, of
course, eliminate the forces which cause cyclical fluctuations in a capitalist
economy. In the new slump it will be necessary to reduce the rate of interest
or income tax again and so on. Thus in the not too remote future, the rate of
interest would have to be negative and income tax would have to be replaced by
an income subsidy. The same would arise if it were attempted to maintain full
employment by stimulating private investment: the rate of interest and income
tax would have to be reduced continuously.4
In addition to this
fundamental weakness of combating unemployment by stimulating private
investment, there is a practical difficulty. The reaction of the entrepreneurs
to the measures described is uncertain. If the downswing is sharp, they may
take a very pessimistic view of the future, and the reduction of the rate of
interest or income tax may then for a long time have little or no effect upon
investment, and thus upon the level of output and employment.
3. Even those who advocate
stimulating private investment to counteract the slump frequently do not rely
on it exclusively, but envisage that it should be associated with public
investment. It looks at present as if business leaders and their experts (at least
some of them) would tend to accept as a pis aller public
investment financed by borrowing as a means of alleviating slumps. They seem,
however, still to be consistently opposed to creating employment by subsidizing
consumption and to maintaining full employment.
This state of affairs is
perhaps symptomatic of the future economic regime of capitalist democracies. In
the slump, either under the pressure of the masses, or even without it, public
investment financed by borrowing will be undertaken to prevent large-scale
unemployment. But if attempts are made to apply this method in order to
maintain the high level of employment reached in the subsequent boom, strong
opposition by 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 upswing is to the
disadvantage of small and big rentiers, and makes them ‘boom-tired.’
In this situation a powerful
alliance is likely to be formed between big business and 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 again come into its own.
This pattern of a political
business cycle is not entirely conjectural; something very similar happened in
the USA in 1937-8. The breakdown of the boom in the second half of 1937 was
actually due to the drastic reduction of the budget deficit. On the other hand,
in the acute slump that followed the government promptly reverted to a spending
policy.
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.
V
1. Should a progressive be
satisfied with a regime of the political business cycle as described in the
preceding section? I think he should oppose it on two grounds: (i) that it does
not assure lasting full employment; (ii) that government intervention is tied
to public investment and does not embrace subsidizing consumption. What the
masses now ask for is not the mitigation of slumps but their total abolition.
Nor should the resulting fuller utilization of resources be applied to unwanted
public investment merely in order to provide work. The government spending
programme should be devoted to public investment only to the extent to which
such investment is actually needed. The rest of government spending necessary
to maintain full employment should be used to subsidize consumption (through
family allowances, old-age pensions, reduction in indirect taxation, and subsidizing
necessities). Opponents of such government spending say that the government
will then have nothing to show for their money. The reply is that the
counterpart of this spending will be the higher standard of living of the
masses. Is not this the purpose of all economic activity?
2. ‘Full employment
capitalism’ will, of course, have to develop new social and political
institutions which will reflect the increased power of the working class. If
capitalism can adjust itself to full employment, a fundamental reform will have
been incorporated in it. If not, it will show itself an outmoded system which
must be scrapped.
But perhaps the fight for
full employment may lead to fascism? Perhaps capitalism will adjust itself to
full employment in this way? This seems extremely unlikely. Fascism sprang up
in Germany against a background of tremendous unemployment, and maintained
itself in power through securing full employment while capitalist democracy
failed to do so. The fight of the progressive forces for all employment is at
the same time a way of preventing the recurrence of fascism.
Notes
1 This article corresponds roughly to a lecture
given to the Marshall Society in Cambridge in the spring of 1942.
2 Another problem of a more technical nature is
that of the national debt. If full employment is maintained by government
spending financed by borrowing, the national debt will continuously increase.
This need not, however, involve any disturbances in output and employment, if
interest on the debt is financed by an annual capital tax. The current income,
after payment of capital tax, of some capitalists will be lower and of some
higher than if the national debt had not increased, but their aggregate income will
remain unaltered and their aggregate consumption will not be likely to change
significantly. Further, the inducement to invest in fixed capital is not
affected by a capital tax because it is paid on any type of wealth. Whether an
amount is held in cash or government securities or invested in building a
factory, the same capital tax is paid on it and thus the comparative advantage
is unchanged. And if investment is financed by loans it is clearly not affected
by a capital tax because if does not mean an increase in wealth of the
investing entrepreneur. Thus neither capitalist consumption nor investment is
affected by the rise in the national debt if interest on it is financed by an
annual capital tax. [See ‘A Theory of Commodity, Income, and
Capital Taxation’]
3 It should be noted here that investment in a
nationalized industry can contribute to the solution of the problem of
unemployment only if it is undertaken on principles different return than
private enterprise, or it must deliberately time its investment so as to
mitigate from those of private enterprise. The government must be satisfied
with a lower net rate of slumps.
4 A rigorous demonstration of this is given in my
article to be published in Oxford Economic Papers. [See ‘Full
Employment by Stimulating Private Investment?’]
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