Kalecki principle

The book is thus a series of steps, from the multiplier and its role in the reproduction schema in Chapter 2 to the Kalecki principle in Chapter 3 and a detailed consideration of the circuit of money in Chapter 4. Having built up a macro monetary model of the reproduction schema, in which both money and aggregate demand are featured, Chapter 5 derives the Domar growth model from these analytical foundations. The relevance of this growth model to Marxian theories of crisis is explored and further developed in Chapter 6. 

As part of this assessment, the structure of the scalar multiplier framework is further developed, together with the relationship between the Kalecki principle and Marx s value categories. 

Cartelier (1996 217) has linked this so-called Kalecki principle, that capitalists earn what they spend, to the circulation of money. As a result of their ability to initiate circulation entrepreneurs, as a whole, more or less have the power to determine their income. Moreover, he argues, the Kalecki principle does not contradict the Classical view which makes profit equal to the value of surplus. ... 

Key passages in Marx s writings that demonstrate the role of the Kalecki principle in relation to the circulation of money are in chapter 17 of Capital, volume 2 (see Sardoni 1989 211). Starting with the case of simple reproduction, Marx considers the circulation of money using the example of an individual capitalist. During the first year he advances a money capital of 5,000, let us say, in payment for means of production ( 4,000) and for... 

Under expanded reproduction, surplus value is clearly realized by capital investment and capitalists consumption. Hence for Sardoni (1989 214), Capitalists profits therefore now depend on their consumption and investment expenditure, just as in Kalecki s analysis. There is strong evidence for the Kalecki principle, that capitalists earn what they spend, operating in Marx s analysis of expanded reproduction. 

Whichever interpretation is correct, Kalecki s silence on the labour theory of value leaves open the theoretical possibility that its relevance can be fruitfully explored. To relate Kalecki s model of reproduction to Marx s theory, a reconfiguration is required of the definition of profits. The problem, as we have seen, is that Kalecki s model requires a gross definition of profits that is different from Marx s category of surplus value. The Kalecki principle has not been precisely demonstrated in the context of Marx s reproduction schema, in which surplus value is the key category of analysis. 

To apply the Kalecki principle directly to Marx s schema, attention can be focused on an important difference between Marx and Kalecki about the way in which investment is specified. Whereas for Kalecki investment is associated specifically with the capital-goods producing department, for... 

Although Sardoni (1989 211) mentions these different specifications of investment in his comparison of Marx and Kalecki, he does not highlight their importance. To demonstrate the importance of this difference, the Leontief input-output framework can again be used to model the final demand of each department of production such that investment demand cuts across departments. This Leontief interpretation of the reproduction schema allows Marx s categories to be retained alongside the Kalecki principle. 

It should also be emphasized that this adaptation of the Kalecki system represents an interpretation of the reproduction schema that is consistent with Marx s system. As Lee (1998) has argued, Kalecki has a restrictive production model in which each department is vertically integrated, producing its own raw materials. In contrast, Marx assumes that raw materials are a part of constant capital, produced in the first department and circulated to other departments. A failure to fully take into account connections between industries leaves the Kalecki system vulnerable to a SrafFian critique. Steedman (1992), for example, has lambasted the Kaleckian price system for the absence of multisectoral relationships. By establishing the Kalecki principle in an input-output context, an interpretation of the reproduction schema is possible in which linkages between industries are taken seriously. 

Where money is considered, its role in this Sraffian interpretation of Marx is limited. For Saad-Filho (2002 24), As the analysis is primarily concerned with the relationship between the value and price systems, money has no autonomous role and, when considered at all, it is merely a numeraire. A key defence of Marx s theory, against the Sraffian critique, is to argue that the Srafffians do not take money seriously. An alternative strand of value theory that corrects this mistake is the value-form tradition, which emphasised the importance of money for value analysis, because value only appears in and through price (ibid. 27). As a way of testing the possibility that money can be taken seriously in the input-output approach, it can be explored how the preceding analysis of the Kalecki principle can be reconciled with the value-form approach. 

As a contribution to this debate, it could be argued that the earlier derivation of the Kalecki principle provides a way of conserving both the labour embodied concept and the value-form. This is very straightforward, on the assumption of volumes 1 and 2 of Capital, that prices and values are equivalent. With p the vector of money prices and v the vector of embodied labour values,... 

What is more, these equally valid ways of defining value are consistent with a macroeconomic interpretation of the autonomous role of money. Since under the Kalecki principle capitalists earn what they spend, the social validation of the market, led by capitalist investment and consumption, is the starting point for economic activity. Commodities are only produced, labour is only employed, if capitalists cast into circulation the money required for sales to be realized - for labour embodied in commodities to become socially necessary. Since money, with its specific role in a capitalist economy, is so central to the Kalecki principle, a possible synthesis can be suggested with the value-form approach without, that is, compromising the use of a Leontief/Keynesian multiplier framework together with embodied labour categories. 

What sets this circuit approach apart is its institutionally relevant analysis of the relationship between banks, firms and workers. A model of the circuit of money is developed in which prime importance is placed upon the role of banks in financing industrial activities. Central to this approach is an application of the Kalecki principle, that capitalists earn what they spend the question being how an injection of money can circulate around the economy and return back to the capitalists. Moreover, how is this circuit of money intertwined with the activities of industrial sectors And how much money is required for the circuit to be complete Marx s reproduction schema provides a natural starting point for addressing these questions. 

For Nell, this approach closely resembles the first of Marx s solutions in Capital, volume 2, to the problem of establishing where the money comes from to service the gap between the amount advanced by capitalists and the amount M they receive as income.2 As we saw in Chapter 3, Marx addresses this issue by positing that capitalists advance the amount M -M in addition to M. Under the Kalecki Principle, M —M is the amount of money cast into circulation by capitalists in order to realize profits. Ignoring for simplicity the role of capitalist consumption, this amount is required to purchase additional quantities of capital. Hence, capitalists advance the whole of M. On this view, theoretically, it is correct to speak of M becoming M, but in practice there is no initial sum of money, M, followed later by a larger sum, M there is only M (ibid. 207). In the single swap approach this advance of money is sufficient to fund total income in one run of the monetary circuit. 

The starting point for the circulation of money, under the auspices of the Kalecki principle, is the expenditure outlays of the capitalist class. In Table 4.5, the composition of these expenditures is made up of money outlays on capitalist consumption ( ) and new constant and variable capital (dC and dV). Outlays are made by capitalists in each department of production. For example, the capitalists in Department 1 spend 400 units on new constant capital, 100 units on new variable capital and 500 units on capitalist consumption. The outlays on the products of both departments are collected in the final row as total outlays, which sum to 1,750. Depending upon what is purchased, each outlay is also a receipt. Department 1 s purchase of 100 consumer goods from Department 2, for example, is a receipt for Department 2. The final column of Table 4.5 collects these receipts, which make up 1,750. The capitalist class outlays 1,750 in total, which returns to it as 1,750 in receipts. 

It is clear from this example that the Kalecki principle holds, with the capitalist class earning what it spends. But this is only part of the story the capitalists may earn the money cast into circulation as their own income, but there is much more income to be generated from this initial injection. Using Table 4.3 c, a multiplier process can be examined in which the level of income is expanded in a series of circuits. 

Luxemburg therefore identifies the Kalecki principle in Marx s reproduction schema if the capitalists themselves have set in motion all the money which circulates in society, they must also advance the money needed for the realization of their own surplus value (ibid. 98). Under simple reproduction, this money is earned from the extraction of surplus value in previous periods, but in the current period of production capitalists clearly earn what they spend (the Kalecki principle). So long as there is sufficient money cast into circulation for capitalist consumption, together with the mechanism of mutual exchange, all goods are sold in the market place. Under simple reproduction, as summarized by Howard and King (1989 107), There is no deficiency in the demand for either department s output, and no reason why production should not continue at this level in later periods. ... 

This equation shows clearly how the Kalecki principle works, with profits determined by capitalist expenditures. Since capitalists can only choose what they spend and not what they earn, they as a class determine by their expenditure their profits and in consequence the aggregate production (Kalecki 1991a 25). 

To explore how the Kalecki principle can be applied to Grossmann s numerical simulation, we can first show how equation (7.1) relates to Table 7.1. In year 1, total profits of 100,000 consist of 75,000 units of capitalist consumption together with 20,000 constant capital and 5,000 variable capital 25,000 units of investment in total. Hence the identity... 

Applying the Kalecki principle and these empirical assumptions to the Grossmann table, a new simulation of expanded reproduction is presented in Table 7.2. As shown in Chapter 3, the Kalecki multiplier relationship (see equation 3.8) can be derived by substituting (7.3) into (7.1) ... 

A different reading of Capital, volume 3, can be suggested, in which questions of realization are the main focus of analysis (see Rosenthal 1999). Thus far, in applying the Kalecki principle to Marx s circulation of money, we have assumed that monetary outlays take place, funding the purchase of all capital and consumption requirements. However, as capital expands, the volume of profits accumulates to such an extent that stringent demands are placed upon the economic system in terms of the amount of money that has to be cast into circulation for realization of these profits. Marx places realization problems at the centre of his analysis of the falling rate of profit. 

Although it is traditional in Marxian frameworks for capitalists to initiate the circulation of money with an advance of constant and variable capital, our previous discussion, in Chapter 4, showed that there are a number of ways in which the circulation of money can be modelled. In the single swap approach all of income is advanced in the Franco-Italian circuit approach only the wage bill is advanced in Nell s mutual exchange approach only wages in the capital goods sector are advanced. Our contribution has been to suggest, under the Kalecki principle (first introduced in Chapter 3), that capitalists advance an amount of money sufficient to realize their profits. This model is predicated on the definition of investment as accumulation of constant and variable capital. 

This multiplier further establishes the consistency between the Kalecki principle, that capitalists earn what they spend, and Marx s theory of surplus value. Since in (8.11)/= u + /, it follows that... 

Trigg, A.B. (2002) Surplus value and the Kalecki principle in Marx s reproduction schema , History of Economics Review, 35 104-14. Trigg, A.B. (2002) Surplus value and the Keynesian multiplier , Review of Radical Political Economics, 34(1) 55-65. 

See Chapter 4 for a detailed discussion on the roles played by mutual exchange and the Kalecki principle in Capital, volume 2. 

Following the interpretation of the Kalecki principle in Chapter 3, profits and investment are defined in net terms. This approach is consistent with Marx s category of surplus value, in contrast to the gross definition of profits adopted by Kalecki. 

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