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Vladimir Gligorov

Comments for the macro group
As I am not going to attend the reading of Kaleckis well-known paper, let me quote
Kalecki from his paper A Theory of Profits (1942) (Laski and Walther say the same except for
the causal interpretation) and then add few comments:
What is the proper meaning of this equation? [The profit equation: gross profits equal
capitalists consumption plus gross private investment (workers do not save).] Does it mean that
profits in a certain period determine capitalists' consumption and investment, or the other way
round? The answer to this question depends on which of these quantities is directly subject to the
decisions of capitalists. Now, it is clear that they may decide to consume and to invest more in a
certain short period than in the preceding period, but they cannot decide to earn more. It is
therefore their investment and consumption decisions which determine profits, and not the other
way round.
If the period which we consider is short, we may say that capitalists' investment and
consumption are determined by decisions formed in the past. For the execution of investment
orders takes a certain time, and as to the capitalists' consumption, it is only with a certain delay
that the capitalists' standard of living reacts to the change of factors which influence it.
If capitalists decided always to consume and to invest in a given period what they have
earned in the preceding period, the profits in the given period would be equal to those in the
preceding one. In such case they would remain stationary, and the problem of how to read the
above equations would lose its importance. But such is not the case. Although profits in the
preceding periods are one of the important determinants of capitalists' consumption and
investment, capitalists in general do not decide to consume and invest in a given month what
they have earned. This explains why profits are not stationary, but fluctuate in time.
The first thing to notice is that, in this passage, Kalecki uses the relation of determination
not that of causality. He does, however, say that capitalists may decide to consume and to invest
more in a certain short period than in the preceding period, but they cannot decide to earn more,
which may suggest a causal interpretation of the profit equation, but that would not be without
problems.
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One is that it is the individual capitalist that makes the decisions, but not the capitalists as
a group, which would be necessary if these decisions were to have causal powers or, in other
words, that the reference to the decision makers could be understood causally. This is what that
whole business of representative individuals and rational expectations is all about.
The other is that in causal relations, if the cause is controlled, the effect is controlled too.
So, it cannot be said that they cannot decide to earn more. Now, they may or may not be
motivated by profits, which is what this whole thing about the micro-foundations of
macroeconomics is about, and I think that Kalecki would certainly want to argue that capitalists
are motivated by the prospects of earning profits.
Then there is the problem of the possible stochastic interpretation of the determination
relation, which could make sense, though the equation is not written that way, while probabilistic
causation is another kettle of fish altogether.
Finally, Kalecki here speaks about the increase in consumption and investment, as he
wants to say later on that profits in the preceding periods are one of the important determinants
of capitalists' consumption and investment A causal interpretation of this determination
would be somewhat difficult in part because tracing down the causal chain to the initial decision
to invest would imply, assuming causality to be transitive, that with that decision all the
subsequent profits and their distribution between consumption and investment would have been
determined. Otherwise, if read as written, it would mean that increase in profits cause
investments by and consumption of the capitalists, which would contradict the previous
statement. Causality is usually taken to be asymmetric, while determination may not be.
So, I do not think that it is clear that causal interpretation of the profit equation is
warranted and if relied on, it would make this passage hard to understand.
Second, Kalecki aims to explain in the Political Aspects article why is it that profit
earners choose to support anti-cyclical public spending but not full employment one even though
the latter would increase their profits. In Full Employment by Stimulating Private Investment
he gives, among others, a secular stagnation type of an argument: (I)f technical progress
causes productive capacity to increase more slowly than the accumulation of capital, i.e. if the
capital intensity of production increases... there comes the law of falling rate of profits The
logical solution of this problem is that the function of private enterprise should in this case be
taken over by the government.Thus state-owned factories will constitute an ever-increasing
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share of industrial equipment, which will be a symptom of the inability of private enterprise to
fulfil its part in the regime of full employment. Then he leaves the political issues to another
paper.
Which is the Political Aspects paper where he argues that the political explanations,
which are the real topic of the article. He apparently does not consider the case of increasing
capital intensity of production but the one where effective demand is just deficient (for reasons
discussed in the Full Employment by Stimulating Private Investment), but capital intensity
does not change, which, that deficiency, necessitates public spending and investment. Then he
gives three reasons why capitalists use their influence to limit public spending needed for
permanent full employment and support it in the case of deep recessions and why they prefer
public investments rather than social and wage transfers. I do not find those to be political in the
proper sense of that word, but that is another issue.
Third, how is distribution of national income between profits and wages determined? In
most cases, it seems that some type of monopoly power, in the market as well as in democratic
politics, plays a role, which also means that indeed capitalists do tend to determine profits in
order to determine wages. How this works if it works at all is not altogether clear and I
understand that Kalecki gave up on the monopoly (e.g. mark-up) theory of distribution, but I am
not an expert on his thought so I rely on secondary sources for that.