Michal Kalecki’s (1899-1970) theoretical contribution elucidates how profits grow throughout cyclical fluctuations and economic crisis when the capitalist class strengthens its power relative to workers. Besides, the Polish economist shows how the evolution of income distribution affects the evolution of aggregate income.
His theory of effective demand focuses on the relationship between spending, prices and income distribution. In his model, the variables of spending (capitalist consumption Ck, investment I and workers’ consumption Cw) are related to economic sectors where firms produce final goods: capitalist consumption goods (DI), investment goods (DII) and workers’ consumption goods (DIII).
Kalecki explains not only the level of total production the decomposition of production in each economic sector in the form of profits (P1, P2 and P3) and wages (W1, W2, W3). His point of departure is an economic matrix based on three economic sectors defined by categories of demand. Key assumptions include: there are two social classes and two categories of income (wages and profits); workers do not save; the economy is closed with no government activity, and no stocks of finished products remain unsold.
Kalecki’s economic matrix
The dynamics of income and employment in D1 and D2 mainly depends on the level of spending of the capitalist class. Given the income distribution in each economic sector, “the capitalists earn what they spend“. However, the aggregate level of the workers’ consumption is subordinated to the consumption and investment decisions of the capitalist class. That is why Kalecki states “the workers spend what they earn”.
Besides, Kalecki’s analysis of the oligopolistic trends in contemporary capitalism sheds light on important distributive issues at the micro level. As Kalecki (1954) says the “relative share of wages in the value added is determined by the degree of monopoly”. The analysis of the role of the markup over prices introduces distributive challenges – not just between capitalists competing for market shares but also between capitalists and workers. Indeed, the evolution of prices depends both on the market power of firms and on the trade unions’ struggles to win higher nominal and real wages.
Observing the performance of current capitalist economies, in which the oligopolistic market forces prevent prices to follow a fall in nominal wages, the reduction of nominal wages (while the mark up remains unchanged) is, in general, not associated with the expansion, but with the decline of employment and income in D3 – that is to say in the production of consumption goods for workers.
In other words, a fall in nominal wages (while the mark up remains unchanged) turns out to reduce the workers’ consumption of goods and the aggregate income.