Michal Kalecki was a young polish economist who was born in Poland in 1899. He was civil engineer but his family’s economical state did not allow him to continue his studies. Warsaw’s institute of research in business cycle and prices made him it member in 1929. After leaving Warsaw’s institute he went abroad. He started his work with oxford institute of statistics. In 1945 he starts working with the international labor office and United Nations where he developed the world economic report. After going back to his birth place he joined polish academy of sciences. Central school of planning and statistics was joined by Michal Kalecki in 1961. His work in academic discipline was appreciated and produce a lot of work is this field. In 1943 his well-known essay “theory of economical fluctuations” was published and “theory of economic dynamics” in 1954. Many of his articles were given importance and it was taken as an educational material in theory of business cycles. The collection of his articles was continued even after his death which includes “the dynamics of capitalist’s economy”, “economic growth of socialist and mixed economy”, and essays on “developing economics”. He was a great economist who finds out the essentials for turning point for the Keynesian by developing his own mathematical and economic growth and macro-economic cycle. His work has been translated by many authors especially in English and polish. His work gave birth to the modern economical ideas and was adopted by many economists of the world. Kalecki was the first economist who put up the issue of income distribution and the issue to determine prices in a non-competitive context. After World War II most Keynesian accepted the importance of his work and developed theory of effective demand in kaleckian version and created systems as neo-kaleckian system.
Theory of effective demand:
In the theory of effective demand he says that by adding consumption and investment , income can be find out, formulate it as Y= C+I where Y refers to income and C refers to consumption and I refers to investment. Workers consumption will be separate from capitalist. As the assumption about the workers consumption tendency is 1, wage bill (W) is coincided and the remaining is equal to cpP where cp is the tendency to consume and p refers to profit. All the above add up to make income; so
This equation later on takes the form as;
I+Y-P (1-cp) =Y
P=1/ (1-CP) I
As W= Y-P;
Kaleckian theorem of “widow’s cruse” fits in the last equation. Capitalists only have the power to decide about more investments but earning is not in their hand they cannot judge in advance about the profits. Earnings can be gained by Lower consumption and more investments. Keynesian multiplier suggests the same thing about that investment is the only way to determine profits where as Kalecki had a more cleared vision about savings for future investments. Because by increment in investments will increase the profit until it come up with the basic funds with which investments were made. Kalecki’s bowley’s law determines the level of employment and the level of income in the current system of investments which was discovered in 1937. This empirical law says that the wages shared in national income must remain constant throughout the time. We can simplify this by
q = P/Y
if q = profit,
Y = 1 / (1-cp) (I/ Q);
As the tendency to save the capitalist is lowered the income will be higher needed to supply funds to the investments that have been made. Moreover three hypotheses were made by Kalecki which is helpful in the determination of profit share. They are as follows;
There is no perfect competition that exists in the world.
In the case of full employment and full use of plant, the average variable expense in constant.
Prices are set with accordance to the average variable cost.
The phenomenon of productive variance, market concentration and vertical integration, large organization has a unrestricted market power which certainly lead them to decide prices of products where as mostly people assume that the variations in demand or conditions of recession are the factors to decide product prices. Industries have their own point of view about these variations they say that the costs of labor is also a significant factor in deciding prices. The degree of monopoly is another factor which depends upon market power. In fact the whole economy depends on the degree of monopoly in various sectors and the average margin of profit depends on the degree of monopoly. In case of increase demand in the industry where the employment and the plant is not utilized fully, the industry can raise productivity without raise in prices which increases income without the increment in level income. It depends on the competition in the market. Kalecki later on considers monopoly as a class conflict by bargaining wages for the distribution of income.
The trade cycle:
In the theory of business cycle Kalecki used the theory of effective demand. Unlike Keynes who determined the output level from the investments decisions, he determined the level of investments. He says that the business cycle mostly depends on the level of investments. According to him we made our investments in business on the basis of our assumption about profit and interest rate but he always ignored the interest rate. It depends on the long term and short term liabilities that are used to finance therefore the long run rate are kept smaller than that of short run rate.
There still exists a problem, if the gap between the profitability and the interest rates remains constant than how investment can grow. In business cycle Kalecki says that investments depend on national income and the capital stock. Investment decreases capital stock whereas increases national income. It is just like the special version of the principle of adjustment of capital stock. Hypothesis related to time lag structure explains the cyclic movement of investment.