Kalecki’s “Political Aspects of Full Employment”

In my previous post, it was mentioned in passing that although Kalecki agreed with a “solid majority” of economists that, economically, full employment could be maintained through a government spending program, he argued in his famous 1943 essay, Political Aspects of Full Employment, that political factors would prevent such a policy from being viable under capitalism. He then used this argument to explain what is now known as the ‘political business cycle’. Here, I will just focus on Kalecki’s explanations for political opposition to full employment. Although I don’t necessarily agree with his conclusions on this point, I do think he identifies genuine political obstacles that help to explain resistance to full-employment policies.

In what follows, I provide only a brief outline of Kalecki’s argument along with a few observations. Kalecki’s essay has been frequently cited by critics of the job-guarantee program advocated by leading MMT economists. For this reason, some of the MMTers have responded in considerable depth on the issue. Bill Mitchell, for example, wrote a post back in August last year that explains his position in some detail.

Kalecki observes that capitalists frequently oppose full-employment policies. This is the case even though, as Kalecki’s own analysis of the profit equation shows, budget deficits add positively to aggregate profits. He writes:

The reasons for the opposition of the ‘industrial leaders’ to full employment achieved by government spending may be subdivided into three categories: (i) dislike of government interference in the problem of employment as such; (ii) dislike of the direction of government spending (public investment and subsidizing consumption); (iii) dislike of the social and political changes resulting from the maintenance of full employment. (emphasis in original)

Regarding (i), the capitalist dislike of job creation policies per se, Kalecki notes that in the absence of such policies, output and employment fluctuate with business sentiment and private investment.

This gives the capitalists a powerful indirect control over government policy: everything which may shake the state of confidence must be carefully avoided because it would cause an economic crisis.

In other words, under laissez faire, capitalists can hold government and the rest of society to ransom through their investment decisions. If capitalists dislike the direction things are going – maybe they are not getting their way on tax policy or regulation – they can go on an investment strike. The resulting unemployment will jeopardize the government’s re-election prospects. This threat is no longer credible once responsibility for realizing full employment is taken out of the capitalists’ own hands:

[O]nce the government learns the trick of increasing employment by its own purchases, this powerful controlling device loses its effectiveness.

Therefore, from the perspective of capitalists, such policies need to be discredited:

The social function of the doctrine of ‘sound finance’ is to make the level of employment dependent on the state of confidence.

Regarding (ii), opposition to the direction of government spending, Kalecki argues that capitalists are wary of public investment and loathe subsidies for mass consumption.

Kalecki suggests that capitalists will only tolerate public investment to the extent that it does not compete with private enterprise and threaten profitability. He lists hospitals, schools and highways as examples. He argues that:

[T]he scope for public investment of this type is rather narrow, and there is a danger that the government, in pursuing this policy, may eventually be tempted to nationalize transport or public utilities so as to gain a new sphere of investment.

Of the two claims stated in this passage – “the scope for public investment of this type is rather narrow” and “there is a danger that the government … may … gain a new sphere of investment” – personally I only find the second one convincing. It seems clear that capitalists will resist governments moving into what they consider “their territory”. But I see little basis for asserting that the scope for public investment is narrow, even allowing for a class-interested or ideological decision by government not to encroach on existing private-sector activity. There are all sorts of activities that could be pursued that are not – and are not likely to be – pursued by private enterprise. I think closer to the truth is that capitalists would like to keep the “scope for public investment” narrow and so will oppose attempts by government to broaden social and economic activity on the alleged grounds that there is “no scope” for such public investment.

On this latter point, Kalecki provides what I consider to be an important footnote:

It should be noted here that investment in a nationalized industry can contribute to the solution of the problem of unemployment only if it is undertaken on principles different from those of private enterprise. The government must be satisfied with a lower rate of return than private enterprise, or it must deliberately time its investment so as to mitigate slumps.

This is clearly correct. And this is presumably why capitalists oppose the broadening of economic activity away from what is profitable. They would prefer the government to make additional activities more favorable for capitalists to undertake, through business-friendly policies, corporate welfare, etc., rather than undertake activities itself on terms that are perhaps more favorable to the general population.

However, from the perspective of society as a whole, profitability is frequently not a good basis for determining benefit (or cost). For one thing, profitability of various activities merely reflects the prevailing distribution of income, and this entails inequalities that have no legitimate basis. For another, profitability will be a bad criterion when considering any activity with a public good aspect or involving an externality.

Kalecki turns to the question of whether subsidized consumption, such as family allowances or subsidies for certain goods and services, might be preferred by capitalists. Since workers in aggregate save very little and their consumption expenditure ends up in the hands of the capitalist class as a whole, it might seem that such policies would be viewed more favorably.

In practice, however, this is not the case. Indeed, subsidizing mass consumption is much more violently opposed by these experts than public investment. For here a moral principle of the highest importance is at stake. The fundamentals of capitalist ethics require that ‘you shall earn your bread in sweat’ – unless you happen to have private means.

I doubt the “moral principle” to which Kalecki ironically refers has much to do with anything other than as a propaganda tool along similar lines to “sound finance”. If capitalists thought it was to their benefit, they would hardly be dissuaded by their “moral” scruples. More likely is that subsidizing consumption somewhat weakens the compulsion for workers to sell their labor power to capitalists in exchange for a wage, and if this approach were to be taken much further – e.g. the instituting of a basic income guarantee – this compulsion would be entirely removed.

Kalecki’s most fundamental argument seems to be (iii), which is concerned with the capitalist dislike of the social and political changes brought about by ongoing full employment.

[U]nder a regime of full employment, the ‘sack’ would cease to play its role as a disciplinary measure. The social position of the boss would be undermined, and the self-assurance and class-consciousness of the working class would grow. Strikes for wage increases and improvements in conditions of work would create political tension. It is true that profits would be higher under a regime of full employment than they are on the average under laissez-faire; and even the rise in wage rates resulting from the stronger bargaining power of workers is less likely to reduce profits than to increase prices, and thus adversely affects only the rentier interests. But ‘discipline in the factories’ and ‘political stability’ are more appreciated than profits by business leaders. Their class instinct tells them that lasting full employment is unsound from their point of view, and that unemployment is an integral part of the ‘normal’ capitalist system.

There seems little doubt that capitalists, on the whole, did despise the post-war era of full employment, and worked hard to end it. In an earlier post, I linked to a feature-length documentary (previously discussed at billy blog) that traces the way in which capitalists and capitalist governments in New Zealand deliberately created mass unemployment. The documentary, In a Land of Plenty, traces the quite deliberate and conscious steps that were taken to undermine organized labor, create large-scale unemployment and unleash strong downward pressure on wages. The same process has no doubt occurred in many countries, although New Zealanders seem to have a special talent for neo-liberalism.

Briefly, the strategy involved the following sequence: (i) create mass unemployment through austerity and high interest rates (this was resisted in the earliest worker protests and strikes on the grounds of the right to employment); (ii) argue that the deliberately engineered high unemployment is evidence that wages are excessive and so must be reduced, achieved primarily through the weakening of organized labor (all this based of course on a fallacy of composition); (iii) with wages successfully reduced but unemployment still high, argue that unemployment benefits are too generous relative to wages, creating a disincentive to work (even though the earliest protests were against the lack of jobs); (iv) with jobless benefits cut but unemployment still high, require more draconian eligibility requirements and job search activity tests to increase “job readiness”, etc., with the supposed aim of eradicating unemployment through supply-side measures, but really with the purpose of wearing down benefit recipients to the point of leaving the labor force (relinquishing benefits), provoking them into breaches of their benefit conditions (again causing their benefits to be relinquished), and in extreme cases, knowingly causing mental health problems and suicide (murder, really).

The entire process feeds on itself, with downward pressure on unemployment benefits putting renewed downward pressure on wages (bargaining power of workers is reduced due to the increased cost of losing a job) and none of this helping in the least to eliminate unemployment, the latter being a macroeconomic problem deliberately caused by austerity.

In view of this, I don’t doubt that Kalecki is correct in his identification of various motives for capitalist opposition to full employment. However, just because capitalists don’t like something doesn’t mean we have to let them get their way. There are more of us than them. If we put our collective foot down, we can have full employment, and lots of other stuff as well. Maybe I am just being an optimist, but then, Kalecki was a pessimist, so we’re even.

The point is, what happens is socially contestable, including under capitalism.

At the end of his essay, Kalecki considers the deeper question of whether an ongoing progression towards economic democracy will ultimately undermine capitalism itself. In reflecting on the viability of ongoing full employment under capitalism, he makes the following intriguing remark:

‘Full employment capitalism’ will, of course, have to develop new social and political institutions which will reflect the increased power of the working class. If capitalism can adjust itself to full employment, a fundamental reform will have been incorporated in it. If not, it will show itself an outmoded system which must be scrapped.

This passage seems very insightful in the light of MMT, which does in fact emphasize what I believe to be a “fundamental reform”, even though it has not been widely understood as such: the move, with the breakdown of Bretton Woods, to currency sovereignty in many nations. I have argued here and especially here that flexible exchange-rate fiat currencies open up enormous social possibilities, irrespective of the political persuasion of a given society. A possibility stressed by the leading MMT economists is of course a job guarantee. Equally, there is scope for a basic income guarantee. And many other possibilities could emerge. Much more than under alternative monetary regimes, a flexible exchange-rate fiat currency system is particularly suited to any mix of public/private activity a given society might desire.

Needless to say, the opening up of social possibilities creates both opportunities and dangers. Kalecki’s closing paragraph would still seem timely if written today, given the increasing resort to police-state measures to quell dissent:

But perhaps the fight for full employment may lead to fascism? Perhaps capitalism will adjust itself to full employment in this way? This seems extremely unlikely. Fascism sprang up in Germany against a background of tremendous unemployment, and maintained itself in power through securing full employment while capitalist democracy failed to do so. The fight of the progressive forces for full employment is at the same time a way of preventing the recurrence of fascism. (emphasis in original)

Right now, there is mass unemployment globally. MMT indicates there are many positive ways forward, according to political preference, for those nations with sovereign currencies. There is no reason people who want work should be denied the right to have it. There is no reason for poverty amidst plenty.

Capitalists might not like it. So what?