{"id":11127,"date":"2010-08-13T16:37:59","date_gmt":"2010-08-13T06:37:59","guid":{"rendered":"https:\/\/billmitchell.org\/blog\/?p=11127"},"modified":"2010-08-13T16:37:59","modified_gmt":"2010-08-13T06:37:59","slug":"michal-kalecki-the-political-aspects-of-full-employment","status":"publish","type":"post","link":"https:\/\/billmitchell.org\/blog\/?p=11127","title":{"rendered":"Michal Kalecki – The Political Aspects of Full Employment"},"content":{"rendered":"

\t\t\t\tI have been in Sydney today for meetings. I caught an early train and then back again in the afternoon. Trains journeys are great times to read and write and this blog has been written while crossing the countryside (Sydney is nearly 3 hours south of Newcastle by train). The trip is slower than car because the route is still largely based on the first path they devised through the mountains and waterways that lie between the two cities. The curves in places do not permit the train to go faster. The government is promising however a fast train with a much more direct path (up the F3 freeway I guess). Anyway, several readers have asked me whether I am familiar with the 1943 article by Polish economist Michal Kalecki<\/a> – The Political Aspects of Full Employment<\/a>. The answer is that I am very familiar with the article and have written about it in my academic work in years past. So I thought I might write a blog about what I think of Kalecki’s argument given that it is often raised by progressives as a case against effective fiscal intervention.
\n
\nI dealt with Kalecki’s arguments extensively in one of the chapters of my PhD. Also in 1999, I specifically published a peer-reviewed article arguing that the concerns raised by Kalecki about the opposition that the captains of industry would raise if any government tried to maintain full employment are not binding on a modern Job Guarantee scheme. You can read a working paper version of that article for free – The Job Guarantee and inflation control<\/a>.<\/p>\n

The Job Guarantee<\/strong><\/p>\n

To refresh your memories or introduce you as a new reader to the work I have done on the Job Guarantee concept here is a brief summary of its features. Hardened billy blog-types can skip to the next section (as long as you are sure you know all the ins and outs).<\/p>\n

The Job Guarantee that I have advocated for many years now is based on a fundamental understanding of the way the modern monetary system operates. While it may be construed as a job creation scheme it is actually a macroeconomic policy device to ensure full employment and price stability is maintained over the private sector business cycle.<\/p>\n

Full Employment:<\/u><\/p>\n

The Government operates a buffer stock of jobs to absorb workers who are unable to find employment in the private sector. The pool expands (declines) when private sector activity declines (expands). The Job Guarantee fulfills this absorption function to minimise the costs associated with the flux of the economy. So the government continuously absorbs into employment, workers displaced from the private sector.<\/p>\n

The “buffer stock” employees would be paid the minimum wage, which defines a wage floor for the economy. Government employment and spending automatically increases (decreases) as jobs are lost (gained) in the private sector.<\/p>\n

So the Job Guarantee works on the “buffer stock” principle. I first thought of this idea during my fourth year as a student at the University of Melbourne (in the late 1970s). The basis of the policy came to me during a series of lectures on the Wool Floor Price Scheme introduced by the Commonwealth Government of Australia in November 1970.<\/p>\n

The scheme was relatively simple and worked by the Government establishing a floor price for wool after hearing submissions from the Wool Council of Australia and the Australian Wool Corporation (AWC). The Government then guaranteed that the price would not fall below that level by using the AWC to purchase stocks of wool in the auction markets if demand was low and selling it if demand was high. So by being prepared to hold “buffer wool stocks” in low demand and release it again in times of high demand the government was able to guarantee incomes for the farmers.<\/p>\n

However, with some lateral thinking you can easily see that what the Wool Floor Price Scheme generated was “full employment” for wool! If the Government fixed the price that it was prepared to pay and then was willing to buy all the wool up to that price then you have an equivalent scheme.<\/p>\n

This works just the same for labour resources – just unconditionally offer to buy all labour at a stated fixed wage and you create full employment. What should that wage be?<\/p>\n

Job Guarantee Wage:<\/u>
\nTo avoid disturbing private sector wage structure and to ensure the Job Guarantee is consistent with stable inflation, the Job Guarantee wage rate is best set at the minimum wage level. The Job Guarantee wage may be set higher to facilitate an industry policy function. The minimum wage should not be determined by the capacity to pay of the private sector. It should be an expression of the aspiration of the society of the lowest acceptable standard of living. Any private operators who cannot “afford” to pay the minimum should exit the economy.<\/p>\n

Social Wage:<\/u><\/p>\n

The Government would supplements the Job Guarantee earnings with a wide range of social wage expenditures, including adequate levels of public education, health, child care, and access to legal aid. Further, the Job Guarantee policy does not replace conventional use of fiscal policy to achieve social and economic outcomes. In general, the Job Guarantee would be accompanied by higher levels of public sector spending on public goods and infrastructure.<\/p>\n

Family Income Supplements:<\/u><\/p>\n

The Job Guarantee is not based on family-units. Anyone above the legal working age is entitled to receive the benefits of the scheme. I would supplement the Job Guarantee wage with benefits reflecting family structure. In contrast to workfare there will not be pressure applied to single parents to seek employment.<\/p>\n

Funding:<\/u><\/p>\n

The Job Guarantee would be funded by the sovereign government which faces no financial constraints in its own currency. In the context of the current outlays that are being thrown around in national economies, the investment that would be required to introduce a full blown would be rather trivial. It would be operated locally though.<\/p>\n

Inflation control:<\/u><\/p>\n

The Job Guarantee maintains full employment with inflation control. When the level of private sector activity is such that wage-price pressures forms as the precursor to an inflationary episode, the government manipulates fiscal and monetary policy settings (preferably fiscal policy) to reduce the level of private sector demand.<\/p>\n

This would see labour being transferred from the inflating sector to the “fixed wage” sector and eventually this would resolve the inflation pressures. Clearly, when unemployment is high this situation will not arise.<\/p>\n

But in general, there cannot be inflationary pressures arising from a policy that sees the Government offering a fixed wage to any labour that is unwanted by other employers.<\/p>\n

The Job Guarantee involves the Government “buying labour off the bottom” rather than competing in the market for labour. By definition, the unemployed have no market price because there is no market demand for their services. So the Job Guarantee just offers a wage to anyone who wants it.<\/p>\n

NAIBER:<\/u><\/p>\n

In contradistinction with the NAIRU approach to price control which uses unemployed buffer stocks to discipline wage demands by workers and hence maintain inflation stability, the Job Guarantee approach uses the ratio of Job Guarantee employment to total employment which is called the Buffer Employment Ratio (BER) to maintain price stability.<\/p>\n

The ratio that results in stable inflation via the redistribution of workers from the inflating private sector to the fixed price Job Guarantee sector is called the Non-Accelerating-Inflation-Buffer Employment Ratio (NAIBER). It is a full employment steady state Job Guarantee level, which is dependent on a range of factors including the path of the economy. Its microeconomic foundations bear no resemblance to those underpinning the neoclassical NAIRU.<\/p>\n

It also wouldn’t be worth estimating or targetting. It would be whatever was required to fully employ labour and maintain price stability.<\/p>\n

Workfare or Work-for-the-Dole:<\/u><\/p>\n

Many people think that the Job Guarantee is just Work-for-the-Dole in another guise. The Job Guarantee is, categorically, not a more elaborate form of Workfare. Workfare does not provide secure employment with conditions consistent with norms established in the community with respect to non-wage benefits and the like.<\/p>\n

Workfare does not ensure stable living incomes are provided to the workers. Workfare is a program, where the State extracts a contribution from the unemployed for their welfare payments. The State, however, takes no responsibility for the failure of the economy to generate enough jobs. In the Job Guarantee, the state assumes this responsibility and pays workers award conditions for their work. Under the Job Guarantee workers could remain employed for as long as they wanted the work. There would be no compulsion on them to seek private work. They could also choose full-time hours or any fraction thereof.<\/p>\n

Training<\/u><\/p>\n

The Job Guarantee would be integrated into a coherent training framework to allow workers (by their own volition) to choose a variety of training paths while still working in the Job Guarantee. However, if they chose not to undertake further training no pressure would be placed upon them.<\/p>\n

Unemployment benefits:<\/u><\/p>\n

I would abandon the unemployment benefits scheme and free the associated administrative infrastructure for Job Guarantee operations. The concept of mutual obligation from the workers’ side would become straightforward because the receipt of income by the unemployed worker would be conditional on taking a Job Guarantee job.<\/p>\n

I would start paying a Job Guarantee wage to anyone who turned up at some designated Government Job Guarantee office even if the office had not organised work for that person yet.<\/p>\n

Administration:<\/u><\/p>\n

For financial reasons explained below, the Job Guarantee would be financed federally with the operational focus being local. Local Government would be an important administrative sphere for the actual operation of the scheme. Local administration and coordination would ensure meaningful, value-adding work was a feature of the Job Guarantee activities.<\/p>\n

Type of Jobs:<\/u><\/p>\n

Surveys of local governments<\/a> that we have done reveal a myriad of community- and environmentally-based projects that could be completed if Federal funds were forthcoming.<\/p>\n

The Job Guarantee workers would contribute in many socially useful activities including urban renewal projects and other environmental and construction schemes (reforestation, sand dune stabilisation, river valley erosion control, and the like), personal assistance to pensioners, and other community schemes.<\/p>\n

For example, creative artists could contribute to public education as peripatetic performers. The buffer stock of labour would however be a fluctuating work force (as private sector activity ebbed and flowed). The design of the jobs and functions would have to reflect this. Projects or functions requiring critical mass might face difficulties as the private sector expanded, and it would not be sensible to use only Job Guarantee employees in functions considered essential.<\/p>\n

Thus in the creation of Job Guarantee employment, it can be expected that the stock of standard public sector jobs, which is identified with conventional Keynesian fiscal policy, would expand, reflecting the political decision that these were essential activities.<\/p>\n

Open Economy Impacts:<\/u><\/p>\n

The Job Guarantee requires a flexible exchange rate to be effective. A once-off increase in import spending is likely to occur as Job Guarantee workers have higher disposable incomes. The impact would be modest. We would expect any modest depreciation in the exchange rate to improve the contribution of net exports to local employment, given estimates of import and export elasticities found in the literature.<\/p>\n

I will come back to open economy issues in a later blog seeing as there has been some consternation from some commentators recently.<\/p>\n

Environmental benefits:<\/u><\/p>\n

The Job Guarantee proposal will assist in changing the composition of final output towards environmentally sustainable activities. These are unlikely to be produced by traditional private sector firms because they have heavy public good components. They are ideal targets for public sector initiative. Future labour market policy must consider the environmental risk-factors associated with economic growth.<\/p>\n

Possible threshold effects and imprecise data covering the life-cycle characteristics of natural capital suggest a risk-averse attitude is wise. Indiscriminate (Keynesian) expansion fails in this regard because it does not address the requirements for risk aversion. It is not increased demand per se<\/em> that is necessary but increased demand in certain areas of activity. <\/p>\n

Summing up<\/u><\/p>\n

The Job Guarantee can provide a government with a policy framework to maintain continuous full employment without putting pressure on the inflation rate.<\/p>\n

Does it solve all problems? Answer: Definitely not. It is a safety net buffer stock system only.<\/p>\n

The maintenance of full employment – Kalecki and the Captains of Industry<\/strong><\/p>\n

It is easy to show that the introduction of the Job Guarantee and compared the outcomes to a NAIRU economy. However, there are further issues that arise when we consider the maintenance of full employment using the Job Guarantee policy. <\/p>\n

While orthodox economists typically attack the Job Guarantee policy for fiscal reasons, economists on the left also challenge its validity and effectiveness. In 1943, Michal Kalecki published the Political Aspects of Full Employment, in the Political Quarterly, which laid out the blueprint for socialist opposition to Keynesian-style employment policy. The criticisms would be equally applicable to a Job Guarantee policy.<\/p>\n

Note the references to Kalecki’s 1943 article come from the collection published in 1971 – Michal Kalecki “Political Aspects of Full Employment”, Selected Essays on the Dynamics of the Capitalist Economy<\/em>, Cambridge: Cambridge University Press, 138-145.<\/p>\n

Kalecki’s article begins by defining what he calls the economics of full employment and it is very interesting to re-read it in the light of the present crisis. He adopts what was then the emerging Keynesian position that:<\/p>\n

\n… 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.\n<\/p><\/blockquote>\n

He says that “(i)f 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.”<\/p>\n

Remember he was writing in 1942 and while governments had gone off the gold standard the convertible currency mentality was still firmly in place waiting to be restored in the Post War period by the Bretton Woods agreement.<\/p>\n

In a fiat monetary system such as most nations operate within today the reference to government expenditure being “financed” by taxes or debt-issuance is redundant. A sovereign government is never revenue constrained because it is the monopoly issuer of the currency. But Kalecki’s point is that the stimulus works by increasing effective demand (purchasing intentions backed by cash) and so the more public demand can be created the more stimulatory it will be.<\/p>\n

He further notes that the expenditure multiplier will magnify that initial spending injection. So pretty straight Keynesian macroeconomics being outlined.<\/p>\n

He then goes on to describe how the government gets the funds:<\/p>\n

\nIt 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.\n<\/p><\/blockquote>\n

In the language of Modern Monetary Theory (MMT), the government just credits bank accounts when it spends (or posts a cheque) and debits them when it taxes. The funds that it borrows (that is, the funds the private sector use to purchase the public debt instruments) come from the government spending. It is a wash. The government spends and then drains the reserves by selling bonds. The private sector do not have to “use up” any holdings of prior savings to purchase the debt.<\/p>\n

Of-course, the government spending creates demand which leads to an expansion of output and income. The income growth, in turn, generates extra saving in the economy. In this way, spending brings forth saving.<\/p>\n

Kalecki’s imaginary process is totally unnecessary in a modern monetary economy operating a fiat currency system. There is no necessity to drain the reserves that are created by the deficit spending. The government is in fact doing the private sector a favour by issuing debt because it is providing the bond holders with a risk-free (guaranteed) annuity (income stream) which it can always fall back on when speculation in other financial assets is subject to excessive uncertainty about price movements.<\/p>\n

The government could just as easily pay the same return on bank reserves held at the central bank if it wanted to provide a reward to the private sector. The point is that a reserve balance is equivalent to a 1-day government bond with zero return (unless there is a support rate paid). Draining the reserves by issuing a government bond merely alters the duration composition of the outstanding government securities. <\/p>\n

Kalecki then showed why the central bank can always maintain “the rate of interest at a certain level … however large the amount of government borrowing.” He said that:<\/p>\n

\nIn spite of astronomical budget deficits, the rate of interest has shown no rise since the beginning of 1940.\n<\/p><\/blockquote>\n

As is the case in the current period. The central bank sets the interest rate and it can control longer-term interest rates if it so chooses. There is a question as to whether it can control all rates. It can but that would require it to offer an infinite fixed-price offer for all securities, which is not practical. But by controlling key rates (for example, longer term bonds) the central bank can condition the other rates via shifts in portfolio compositions.<\/p>\n

Finally, to complete his story on what a Keynesian expansion involves he said:<\/p>\n

\nIt 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 … 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.\n<\/p><\/blockquote>\n

Once again, a very similar story to that offered by MMT. In this paragraph it is clear that unless inflation is sourced from a cost shock (like an energy price hike), then expanding nominal aggregate demand will only come up against what Keynesians used to call the “inflation barrier” if there is no capacity of the real economy to respond to that demand impulse.<\/p>\n

I have often indicated that my economic roots come from Marx through Kalecki. Kalecki was a Marxist economist. Marx was the first to really get to grips with the idea of effective demand – that is, spending backed by cash. Kalecki understood this intrinsically.<\/p>\n

There has been a debate which fascinated me as a graduate student as to whether Keynes was influenced by Kalecki’s work as he wrote the General Theory which was published in 1936. Keynes had published the Treatise on Money<\/a> in December 1930. At this stage Keynes, influenced by his mentor Alfred Marshall was still operating in the Quantity Theory of Money paradigm. However the Treatise demonstrates that Keynes was starting to have doubts about the mainstream macroeconomics that he was operating within.<\/p>\n

For a start he observed changes in monetary aggregates that were not associated with changes in the price level and vice versa. That possibility had to that date been denied by economists working in this tradition. He started to look for alternative explanations for inflation and focused on the relationship between investment and saving. He noted that if investment was greater than saving then inflation will result and vice versa. He realised then that when the economy is recessed (saving draining demand more than investment is injecting demand) then spending had to be stimulated and saving discouraged.<\/p>\n

At the time, the then orthodoxy claimed that thrift was needed when there was recession. Keynes said of this “For the engine which drives Enterprise is not Thrift, but Profit.”<\/p>\n

So there was some hint that he was moving away from the “classical” tradition and moving along a path that would realise the General Theory some six years later. But it remains that the Treatise was still very much a work within the Quantity Theory of Money tradition.<\/p>\n

Kalecki, however, never worked in that tradition. He clearly understood what Marx had been writing in the Theory of Surplus Value about effective demand and in 1933 published (via the Research Institute of Business Cycle and Prices in Poland) a famous piece in Policy Proba teorii koniunktury<\/em>, which broadly translates to a Search for a Theory of Demand and outlined his very comprehensive understanding of business cycle dynamics. It is a very rich model of the macroeconomy and how aggregate demand interacts with the aggregate supply capacity of the economy.<\/p>\n

He presented his theory in 1933 to the International Econometrics Association, which was a prestigious body. He subsequently published the paper in English in 1935 (in Econometrica). So a much richer version of the General Theory was in the public arena some 3 years before Macmillan published Keynes’ tome.<\/p>\n

Joan Robinson, who was a Cambridge academic at the time, wrote later in her Collected economics papers that:<\/p>\n

\nMichal Kalecki’s claim to priority of publication is indisputable. With proper scholarly dignity (which, however, is unfortunately rather rare among scholars) he never mentioned this fact. And, indeed, except for the authors concerned, it is not particularly interesting to know who first got into print. The interesting thing is that two thinkers, from completely different political and intellectual starting points, should come to the same conclusion. For us in Cambridge it was a great comfort.\n<\/p><\/blockquote>\n

Kalecki did not meet Keynes (at Cambridge) until 1937 and the latter was fairly dismissive. The issue of whether Keynes had been influenced by Kalecki’s earlier work remains unresolved. Staunch followers of Keynes say no, whereas those scholars who do not see Keynes as being the central figure in the development of the theory of effective demand, such as me, lean to the view that the transition from the Treatise (1930) to the General Theory (1936) was so great that it is likely that Keynes knew what Kalecki had written and published and was influenced by it.<\/p>\n

The 1943 article that I have been discussing in this blog – The Political Aspects of Full Employment<\/em> – extended Kalecki’s business cycle model to include political considerations.<\/p>\n

Anyway, all that was a digression.<\/p>\n

After outlining the economics of effective demand and showing that technically full employment was the logical consequence of a government permitted to use its fiscal capacity to manage total spending, Kalecki then introduced what he called the political aspects.<\/p>\n

Accordingly, Kalecki (1971: 138) said:<\/p>\n

\n… the assumption that a Government will maintain full employment in a capitalist economy if it knows how to do it is fallacious. In this connection the misgivings of big business about maintenance of full employment by Government spending are of paramount importance.\n<\/p><\/blockquote>\n

The alleged opposition by big business to full employment mystified Kalecki because the higher output and employment would seemingly be of benefit to workers and capital alike. <\/p>\n

Kalecki (1971: 139) lists three reasons why the industrial leaders would be opposed to full employment “achieved by Government spending.”<\/p>\n