Michael Kalecki, Full Employment, Political Power, and the Labor Share of National Income

Wherein I work out why, a few weeks ago, the name "Kalecki" kept coming up.

Why Is Everybody Talking to Me About Kalecki??

A few weeks ago, a weird thing happened. Three separate people, in three different settings, mentioned the name Michael Kalecki to me. Kalecki was a renowned Polish political economist who not only travelled in Keynesian circles in the 1930s and 40s, but whose work on business cycles and demand shortfalls predated Keynes’ much more influential (and far more comprehensive ) work from that era.

I took this to be a sign, and reread Kalecki’s classic 1943 piece, “Political Aspects of Full Employment,”¹ which, in turn, took me back to John Cassidy’s classic, Capitalism and Its Critics, as the book devotes a chapter to Kalecki (and Paul Sweezy). It that chapter, Cassidy explains Kalecki’s incisive and subtle critique of Keynesianism.

(If you’ve not done so before, be sure to read Kalecki’s essay. There are many who believe that its few pages comprise one of the greatest writings in political economics. Even if some of his predictions therein did not come to pass, as I get into here, I agree. The clarity and power of the writing, along with the seamless merging of technical macroeconomics and political realities is exemplary and far too rare in the work that has followed to this day.)

Having developed some of the same macroeconomic hydraulics as Keynes, most critically the understanding that capitalist economies are prone to painful (for the masses) slumps that can be ameliorated by what we now think of as Keynesian interventions, Kalecki, in the aforementioned essay, explains three reasons why economic elites will resist such policies. He writes: “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.”

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

Reason 1 is that at full employment, workers claim more of the bargaining power that businesses prefer to control themselves. “…once the Government learns the trick of increasing employment by its own purchases, this powerful controlling device loses its effectiveness.”

Therefore—point 2—Kalecki predicts that businesses will oppose public investment and deficit-financed tax cuts or subsidies, as this is the means—“the trick”—by which government takes economic power from private businesses. It might be okay for government to maintain some public infrastructure, “[b]ut the scope of 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 nationalise transport or public utilities so as to gain a new sphere in which to carry out investment.”

Kalecki is arguing here that capitalists fear public investment will encroach on private investment, and the next thing you know, the president will start taking equity shares in private companies, but I’m getting ahead of myself.

What about subsidies to help people get by—what today we might refer to as parts of the “affordability agenda?” You might think business elites would be okay with such spending as it redounds to their benefit (as people will have more income to buy their goods/services). But Kalecki argues they will oppose it, as the “fundamentals of capitalist ethics require that ‘You shall earn your bread in sweat’.”

The third reason Kalecki predicts businesses will oppose full employment is the broadest: if such conditions persist, the fundamental elevation of elites’ position in the economy and society will be threatened. “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.”

Cassidy has an important insight about this position:

At first sight, this passage looked like a straightforward application of Marx’s argument that the presence of a reserve army of unemployed workers is essential to discipline workers and maintain businesses’ profits; but Kalecki was also making a more subtle point. Under a policy regime of high demand and full employment, profits could actually be higher, on average, than were under laissez-faire…But corporate interests would still reject this framework because “discipline in the factories" and "political stability" are more appreciated by the business leaders than profits.”

Was Kalecki Right?

This is powerful thinking. It forms a cogent critique of Keynesianism from the left, filling in critical political-power and class-conflict points that Kalecki (and Sweezy) viewed as missing from the grand theory.

But there are a few quantifiable predictions embedded in the famous essay, and they don’t exactly bear out. Most notably, at least in the American case (the analysis differs in Europe/Scandinavia), we have had periods, even extended periods, of full employment and we’ve certainly had and still have large budget deficits, in bad times, as Keynesian policy dictates, but in good times as well.

To be clear, much of my work in political economy has argued that American economic history is characterized by too many periods of labor-market slack, as the Biden CEA highlighted in this Economic Report of the President chapter (Arin Dube includes the same figure in his excellent book “The Wage Standard”). But, especially in the 19050s and 60s, as well as the last decade (aside from the pandemic shock), those blue sections in the figure below—periods when the unemployment rate was below estimates of the rate at full employment—persist for numerous years, contrary to Kalecki.

It’s also true that the government is embedded in the private economy is many ways, from Dean Baker’s patent analysis, to the fact that back in the day, I could barely walk around the White House without bumping into somebody from private industry hanging around to get a contract, to Biden’s industrial policy, to Trump’s “gimme-some-of-what-you-got” grift every time some CEO steps into the oval office.

Kalecki’s Escape Hatch

However, in his own historical context, writing in the early 1940s, Kalecki saw this coming. His essay contains a critically important “escape hatch,” by which I mean a political arrangement wherein capitalists can quite happily live with full employment and deep government investment and involvement with the private sector. That system is fascism. “One of the important functions of fascism, as typified by the Nazi system, was to remove the capitalist objections to full employment.”

Under fascism, worker bargaining power and unions are “suppressed,” often through state-sanctioned violence.

…"discipline in the factories" and "political stability" under full employment are maintained by the ‘new order,’ which ranges from the suppression of the trade unions to the concentration camp. Political pressure replaces the economic pressure of unemployment.

To my mind, it does not take full-on fascism to achieve some degree of this same effect. Unions and worker-bargaining clout, even at full employment, can be suppressed without violence by failing to punish employers who break labor laws and block unions. Same with my "business in the halls of the White House” examples above, or just look at a “private” firm like Palantir to see the gov’t/business nexus that exists today and has for decades.

You don’t need camps and violence to achieve this alliance of corporate and political power. You can get there by allowing politics and policy to go to the highest bidder, which is a fair description of the current system. And, of course, this dynamic is significantly amped up under Trump, a regime with clear fascist similarities, including state-sanctioned violence and threats to democratic institutions, from the legal system to the electoral system.

Kalecki and the Labor Share

When I think of this nexus and how it can coexist with full employment, a metric comes to mind: labor’s share of income. Evidence of Kalecki’s insights into today’s economy would be a declining labor share even at full or near-full employment. There are different ways to measure this, and I’ll offer two ways here. The most common measure comes from the BLS productivity accounts and shows the labor share, indexed to 100 in 2017, falling since around 2000 and now around an all time low.

The BLS measure includes the imputed wages and hours of proprietors, like a dentist who owns her practice, wherein her income could be seen as wages or profits. So, a simpler approach is just to divide total national compensation by total national income, as shown below, including a smooth trend to filter out the many bips and bops.

The trend decline starts earlier in this figure, around 1990, though there are especially large positive spikes in downturns when national income tanks faster than labor comp. But the level of the labor share is now (and was also in the early 2010s) back to levels that prevailed in the 1950s.

Again, there are data issues in measuring this so-called “factor share,” but I’m not aware of any version that doesn’t look something like what you see above. Here’s Dean Baker coming at a similar point from the other side of the equation: the rising profit share.

And if all that share stuff seems too obscure, we can just look at very recent trends in real net worth from a new paper by the New York Fed. The paper is a nice contribution to the K-shaped spending discussion I wrote about the other day, but in this context, my point is that these disparate trends have occurred over a period of mostly very low unemployment.

Especially in the first two figures, there is some cyclicality to the labor share, meaning it grows as unemployment falls, suggesting worker power is helping to cut a bigger slice of the pie their labors are helping to bake. But the decline towards the end of the figures has occurred even in periods at near full employment, something that wouldn’t surprise Kalecki, given the public/private partnerships described above.

What We Can Learn From Kalecki

None of this contradicts a key point made by myself, Dean, Arin, CEA, Keynes and Kalecki himself: full employment works. It gives workers more clout, thereby boosting their real incomes and living standards. Even if the labor share is declining, full employment has been shown to improve the distribution of compensation within that share.

But there is something important about how capitalist economies work, especially those with few campaign financing guardrails, to be taken from Kalecki’s escape hatch, i.e., his claim that corporate power can live with full employment if it has some degree of integration with or control of politics. In that context, we might see rising working-class wages, but they won’t rise at the rate of productivity growth, which is the technical way of saying their slices will be smaller than their contribution to the pie.

That is not just the political economy of this benighted moment in history. It’s the one that has prevailed for decades in this country. Its implication is that social and economic justice remain a struggle for the political power that creates the opportunity for a fairer distribution of our economy’s prodigious wealth, income, and most importantly, opportunity.

That’s lofty stuff, I grant you, but on the ground, it translates into fighting for higher minimum wages, the Affordability Agenda, guardrails on corporate power, including how AI is deployed, financial market ovesight, much more progressive taxation, fair elections, reproductive choice, immigrant rights, robust anti-poverty programs, along with full employment.

Being reminded of the urgency of this fight must be why fate ordained that I couldn’t turn around that week without somebody mentioning Michael Kalecki to me. And, for that, I thank fate.

1. One Kalecki whisperer that week was Bob Pollin, and old friend and a Distinguished Professor of Econ at UMass, who called it “the best six pages ever written in political economy.”