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.
