Capitalism-and-Its-Critics-A-History-From-the

Sweezy, in The Theory of Capitalist Development, hewed much closer to Marx than to Schumpeter, focusing on the pathologies and contradictions of industrial capitalism: exploitation, monopoly, imperialism, and instability. In discussing the potential for Keynesian demand management to stabilize the capitalist economy, he reurned to another tenet of Marxian analysis: the subjugation of the political system to business interests. Echoing The Communist Manifesto, he wrote: “[T]he state in capitalist society had always been first and foremost the guarantor of capitalist property relations. In this capacity it has been unmistakably the instrument of capitalist class rule…”20

Building on this observation, Sweezy returned to his observation that the fundamental weakness of Keynesianism was its unspoken assumption that a democratic government could rise above class interests to impose order and rationality on the economy. Having laid down this marker, he qualified it, noting that the captive relationship between the state and the capitalist class had evolved in an era when there had been “relatively unlimited opportunities for capital to expand.”21 In an era where investment opportunities were more limited, and capitalists had demonstrated an inability to keep up the level of investment sufficiently to maintain a low level of unemployment, it was at least conceivable that the “norms of state policy” could shift somewhat, Sweezy acknowledged. But he insisted that this shift could proceed only up to the point at which managing the economy in the public interest came into conflict with capitalists’ drive to accumulate capital and expand their profits.

Going beyond this point would require a mass workers’ party taking power and eliminating capitalists and their representatives from any role in policymaking, Sweezy said. In the short term, this wasn’t a realistic prospect, he said: “In the sober world of reality, capital holds the strategic positions. Money, social prestige, the bureaucracy, and the armed forces of the state, the channels of public communication—all these are controlled by capital, and they are being and will continue to be used to the utmost to maintain the position of capital.”22 Given this stranglehold, there was little prospect of lasting changes in policy. Should any serious threat emerge, the capitalists would buy off reformist leaders, and media propaganda would keep the masses in check. “The outcome is not the reform of capitalism, but the bankruptcy of reform,” Sweezy concluded. “This is neither an accident nor a sign of the immorality of human nature; it is a law of capitalist politics.”23

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Sweezy wasn’t the only left-leaning economist to question the political foundations of Keynesianism. In an October 1943 article in Political Quarterly, a British journal, Michał Kalecki, a Polish theorist who had moved to England during the 1930s, put forward an argument that complemented Sweezy’s. Kalecki’s piece was titled “Political Aspects of Full Employment.” It argued that business leaders would eventually turn against a Keynesian policy regime out fear that low unemployment rates would deprive them of the ability to discipline their workers and control wages. “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,” Kalecki wrote.24

For a long time, the Pole was a neglected figure of twentieth-century economics. He was born into an assimilated Polish Jewish family on June 22, 1899, in the city of Łódź. According to Jan Toporowski, the author of a deeply researched two-volume biography of Kalecki that filled in many gaps about his life, his father, Abram, owned a wool-spinning mill. The family had a handsome house and a housekeeper, but it was far from untroubled. When Kalecki was ten, his mother, Klara, left. And after the 1905 revolution, his father’s business ran into financial trouble.25 In 1917 Kalecki enrolled at Warsaw Polytechnic to study civil engineering. After doing his military service in the army of the newly independent Polish state, he switched to the Polytechnic of Gdánsk. When his father ran into financial difficulties, he left college without completing his degree. Subsequently, he worked as an accountant and an economics writer. A gifted mathematician and a committed socialist (but not a Leninist), he had gotten interested in economic theory after reading the writings of Rosa Luxemburg and Mikhail Tugan-Baranovsky, the Ukrainian economist who had taught the young Kondratiev. Kalecki also studied Marx. In 1929 he took a job at the Institute of Research on Business Cycles and Prices in Warsaw.

For the next several years, Kalecki wrote commentaries on the Great Depression. He also did theoretical work, and in 1933 he published a paper about business cycles that, in the subsequent judgment of the aforementioned Lawrence Klein, the American Keynesian, contained “everything of importance in the Keynesian system.”26 Other economists have disputed this assessment. There’s no doubt, though, that Kalecki’s paper was highly original. (In 1935, an English version of it appeared in the journal Econometrica.)27 Framed in terms of economy-wide aggregates, it combined distributional concepts that could be traced to Marx with a multiplier mechanism that related the level of production to the amount of capital expenditure by businesses. For theoretical purposes, Kalecki divided the economy into two groups: workers who consume all their wages and have no savings; and capitalists who spend some of their incomes on consumer goods and save the rest. In this setup, capital investment by firms is the driving force of the economy. Using some fairly forbidding mathematics, Kalecki showed how changes in the volume of investment give rise to a series of business cycles, each consisting of a period of prosperity followed by a depression.

Some of Kalecki’s analysis certainly anticipated parts of The General Theory. This was particularly true of his multiplier mechanism, in which increments to capital investment filtered through the economy generating second-round effects that also raised output. Some admirers of Kalecki’s work have argued that his paper was more advanced than Keynes’s analysis because it was explicitly dynamic. The equations representing orders for capital equipment, such as factory machinery, and the delivery of this equipment featured time lags, and it was the interaction of these lags that generated economic cycles. By contrast, Keynes largely relied on the Marshallian methodology of comparative statics, which involved comparing different points at which the economy might come to rest without explaining mathematically how it moves from one to another.

It’s also true, however, that The General Theory was more comprehensive than Kalecki’s 1933 paper, which didn’t explicitly incorporate the labor market or the government sector. Ultimately, perhaps, comparing the two approaches isn’t very fruitful, because Kalecki and

Keynes had different goals. Working in the Marxian tradition, Kalecki was trying to demonstrate how a bare-bones capitalist economy driven by capital accumulation would alternate between periods of expansion and contraction. Keynes wanted to show how the economy could get stuck in a slump, with its powers of recuperation failing it, and how the government could revive it by increasing public spending. Both economists succeeded in their goals. But Keynes’s General Theory had more immediate policy implications than Kalecki’s paper, and he was already far more famous when it was published.

When Kalecki read The General Theory, he realized that his own theoretical work would likely be overshadowed. It did help him obtain a traveling fellowship from the Rockefeller Foundation, which in 1936 he used to visit Sweden and then Britain. After spending some time at the London School of Economics, he gravitated to Cambridge, where he struck up friendships with some of the younger economists associated with Keynes, including Joan and Austin Robinson, Richard Kahn, and Piero Sraffa. They were a close-knit group, not necessarily welcoming to outsiders. Kalecki’s obvious smarts helped him fit in. Joan Robinson would later describe him as a “strange visitor who was not only already familiar with our brand-new theories, but had even invented some of our private jokes.”28 Robinson’s husband, Austin, recounted that Kalecki “could talk English of a sort, and he shouted at the top of his voice.”29 Kalecki also met Keynes and submitted articles to The Economic Journal, which Keynes edited from upon high. Although the two never became close, Keynes appears to have recognized that Kalecki possessed a penetrating mind and formidable mathematical skills. At one point, according to the English economist Malcolm Sawyer, who wrote a valuable survey of Kalecki’s work, Keynes tried to secure a research post for him in Cambridge, but the effort fell through.30

In 1940, Kalecki moved to Oxford, where he had been offered a job at the university’s Institute of Statistics, which provided regular commentary on the British economy. As a consequence of conscription and heavy spending on armaments, the unemployment rate had fallen to about 3 percent, and Keynes had identified the emergence of an “inflationary gap” between aggregate demand and aggregate supply. To reduce spending power and close this gap, he called on the government to impose income taxes on workers whose wages had previously been excluded from the tax system. Trade unions and Labour MPs depicted Keynes’s plan as an effort to finance the war on the back of the working class. Kalecki didn’t like it, either. He believed it was inequitable and based on an incorrect view of inflation. Although he acknowledged that an inflationary wage-price spiral could develop as workers sought to catch up with rising prices, he insisted that the main driving force of inflation was businesses raising their prices faster than their costs were rising, to boost their profits.31 In a June 1941 article in the Oxford Bulletin of Statistics, he wrote: “The only fair and efficient way to stop the inflationary tendencies is some type of comprehensive rationing.”32

In this policy debate, Kalecki eventually emerged as the winner on points. As the war continued and inflationary pressures increased, the government introduced tax increases and rationing. To obtain the daily necessities of life, the British population were assigned coupon books. Ordinary workers saw their wages taxed, but the tax rates on the highest earners and business were much higher. The government raised the top rate of income tax to 97.5 percent and brought in an excess profits tax of 60 percent. Keynes accepted these punitive policies as a wartime necessity; Kalecki welcomed them. He was equally enthusiastic about the 1942 Beveridge Report on social insurance, drafted by the liberal economist William Beveridge, which called for the provision of universal benefits, including payments to the sick and unemployed, old-age pensions, and child allowances. In a commentary on the Beveridge plan, Kalecki said these types of programs would serve the dual purpose of raising living standards and boosting aggregate demand to ensure full employment. He dismissed objections that enacting the plan would raise businesses’ costs and provide disincentives to work for low-wage workers. If the latter problem emerged, he noted, the solution was simple: raise wages.33

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Based on his own theorizing and that of other Keynesians, Kalecki believed it was technically feasible for governments of capitalist countries to achieve full employment by altering monetary and fiscal policy. Like Sweezy, his doubts about Keynesianism revolved around its social and political foundations. In a 1942 lecture to the Marshall Society in Cambridge, Kalecki discussed some of these doubts, and the following year he turned his verbal presentation into the article for Political Quarterly that was mentioned earlier. It began with a brief synopsis of the Keynesian approach to policymaking: “The effective demand created by the government acts like any other increase in demand. If labour, plants, and foreign raw materials are in ample supply, the increase in demand is met by an increase in production.” As long as the effort to reduce unemployment “stops short of increasing effective demand over the full employment mark, there is no need to be afraid of inflation.”34

The real constraint on pursuing policies aimed at full employment wasn’t rising inflation, Kalecki argued. It was resistance on the part of big business. Even during the depths of the Great Depression, he pointed out, major corporations had opposed efforts to counter mass joblessness by raising government spending everywhere except in Germany. And Germany was a special case, Kalecki said, because German big businesses had entered a “partnership” with the Nazi regime, which pursued full employment as a goal but also suppressed labor unions. “One of the important functions of fascism,” he wrote, “as typified by the Nazi system, was to remove capitalist objections to full employment.”35 In other countries, he reminded his readers, business leaders had opposed expansionary fiscal policies even though these policies could well have boosted the demand for their firms’ products. How could this self-defeating attitude be explained?

Kalecki provided three possible explanations. The first one was that businesses feared that if the government maintained full employment, their political power would be greatly reduced. In an unmanaged capitalist system, the level of employment depends to a great extent on the level of business confidence, Kalecki noted. If this confidence vanishes, firms cut back on capital investment, which can lead to a fall in output and employment: i.e., a recession. “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.”36 However, Kalecki went on, “once the government learns the trick of increasing employment by its own purchases, this powerful controlling device loses its effectiveness.” To avoid this outcome, businesses responded to any effort to raise aggregate demand by stressing and exaggerating the dangers of running a budget deficit. “The social function of the doctrine of ‘sound finance’ is to make the level of employment dependent on the state of confidence,” Kalecki noted caustically.

He also said that capitalists were worried about governments encroaching on areas previously reserved for private enterprise. Even if policymakers initially directed additional public expenditures to things like healthcare, education, and roadbuilding, where municipalities and other nonprofit concerns had long played a prominent role, business leaders wouldn’t believe things would stop there. “The scope for public investment of this type is rather narrow,” Kalecki wrote, “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 for investment.”37

The third and most important reason that business leaders staunchly oppose full employment policies, Kalecki argued, is because they don’t want to lose control of the workplace. In an economy where jobs were plentiful and workers were able to find employment easily, fear of being laid off “would cease to play its role as disciplinary measure,” he noted. “The social position of the boss would be undermined, and the selfassurance and class-consciousness of the working class would grow. Strikes for wage increases and improvements in conditions of work would create political tension.”38 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 they were under laissez-faire, he noted. But corporate interests would still reject this framework because “‘discipline in the factories’ and ‘political stability’ are more appreciated than profits by business leaders.”39

This argument illustrates how Kalecki, like Keynes, believed that economic reasoning couldn’t be entirely reduced to dollars and cents: psychological and political factors were also important. Given all the concerns that business interests had about full employment undermining their economic prerogatives, political power, and control of their factories,

Kalecki argued, any effort to maintain it for a lengthy period was sure to run into a backlash. “In the slump, either under the pressure of the masses, or even without it, public investment financed by borrowing will be undertaken to prevent large-scale unemployment,” Kalecki wrote.

But if attempts are made to apply this method in order to maintain the high level of employment reached in the subsequent boom, strong opposition by “business leaders” is likely to be encountered  … A powerful alliance is likely to be formed between big business and rentier interests, and they would probably find more than one economist to declare that the situation was manifestly unsound. The pressure of all these forces, and in particular of big business … would most probably induce the government to return to the orthodox policy of cutting down the budget deficit.40

The Keynesian medicine would be abandoned, but things wouldn’t end there, Kalecki pointed out. As the government reduced spending, aggregate demand would fall back, firms would start laying off workers, and the economy would plunge into a recession. But then, as the unemployment rate rose, there would be growing public demands for ameliorative action, creating a new political environment “in which government spending policy would again come into its own.”41 Keynesian measures to boost growth and employment would be adopted once more, and the recession would come to an end. But this policy stance wouldn’t be permanent, either. At some point, big business’s opposition to full employment, and demands for a return to fiscal rectitude, would prompt policymakers to reverse course again and slam on the brakes. In short, the economy would be subject to a “political business cycle.” Kalecki said this theory was “not entirely conjectural. Something very similar happened in the United States in 1937–38.”42 Looking forward, he suggested that these sorts of cycles could become commonplace: “The regime of the political business cycle would be an artificial restoration of the position as it existed in nineteenth-century capitalism. Full employment would be reached only at the top of the boom, but slumps would be relatively mild and short-lived.”43

The Political Quarterly article didn’t attract very much attention when it was published, but some readers appreciated the arguments it made. “I have just read with much sympathy and interest your article on Political

Aspects of Full Employment in PI. Q. An exceedingly good article and very acute,” Keynes said in a handwritten note to Kalecki dated December 20, 1943.44 Doubtless the recipient was grateful for the letter, but he remained frustrated at his inability to get a full-time teaching post in England. In 1945 he resigned from the Oxford Institute of Statistics and moved to Paris, then to Montreal, where he worked for the International Labour Organization. In 1946 he got a more prestigious job, becoming deputy director of a section of the economics division at the newly founded United Nations in New York. For almost a decade, he lived in the United States, worked on the UN’s annual World Economic Reports, and continued his own theoretical research.

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Sweezy was also a public official for a time. During the Second World War, he was an economic researcher at the Office of Strategic Services (OSS), the forerunner to the CIA, in Washington, DC. When the war ended, he hoped to return to Harvard. After being passed over for a tenured job, he resigned his teaching post and became a full-time writer, journalist, and activist. In 1949 he cofounded Monthly Review, an independent socialist magazine published in New York. The first issue contained an article by Albert Einstein entitled “Why Socialism?” and an essay on recent developments in American capitalism by Sweezy, which made two arguments that would feature prominently in leftist critiques of the so-called Golden Age: “(1) that without the support provided by enormous expenditures on imperialist and militaristic ventures, American capitalism would quickly sink into a morass of chronic depression and mass unemployment; and (2) that American capitalism is coming increasingly under the domination of a few giant corporations which in turn are owned and controlled by a handful of extremely rich capitalists.”45

US defense spending was certainly rising. During the ensuing two decades, as a consequence of the Cold War with the Soviet Union and the hot wars in Korea and Vietnam, it would rise a lot further. As Sweezy pointed out in his ongoing commentaries in Monthly Review, military spending boosted aggregate demand in the US economy. So did the construction of interstate highways and other roads, which created a carbased suburban society. In 1945 there were already about 30 million passenger cars and commercial vehicles on America’s roads. By 1970, the figure had risen to more than 100 million.46 As new suburbs proliferated around major US cities, middle-class Americans furnished their new homes with the latest consumer appliances, such as washing machines, air conditioners, and record players. Similar developments took place in Europe, where American multinationals like Ford, General Motors, and General Electric built factories to supply local markets. With household incomes rising and domestic and global markets expanding, the postwar partnership between the public and private sectors appeared to be thriving.

As the postwar expansion continued, it was buttressed by a growing political consensus. In Britain, the Conservative governments that were in power from 1951 to 1964 left in place most of the Attlee government’s reforms. Even in the United States, similarly, some conservative politicians recognized that the New Deal policies were too popular to be overturned. In his 1956 reelection campaign, the Republican president Dwight Eisenhower ran on a platform that promised to balance the federal budget but also pointed to his record of expanding Social Security and unemployment insurance, raising the federal minimum wage, encouraging collective bargaining between workers and employers, and creating the Department of Health, Education, and Welfare, the first new federal department in forty years. 47

Over time, many businesses and business groups also came to accept the postwar settlement. As long as demand for their products remained strong and productivity growth outpaced increases in wages, Keynesianism was consistent with higher corporate earnings. Between 1950 and 1965, US corporate profits doubled in dollar terms,48 and the share of corporate profits in US gross domestic income rose from 5.7 percent to 7.4 percent.49 In Britain between 1948 and 1965, annual gross corporate profits rose from £2 billion to £7.6 billion.50

On the face of things, these developments seemed to have belied the skepticism of Sweezy and Kalecki. In his 1943 article, Kalecki had written, “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.”51 By the end of the 1950s, the adjustment of capitalism seemed to be going relatively smoothly, at least in the Western world. Kalecki was no longer there to witness it personally. In 1954 he resigned from the United Nations and returned to Poland, which was now under Communist rule and part of the Eastern Bloc. He stayed there until his death in 1970.