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A Simple Kaleckian Model

From Michal Kalecki's "The Problem of Financing Economic Development," in Essays on Developing Economies, Harvester Press, 1976.

We have three classes:

   Capitalists (firm owners, whose earnings are firm profits)
   Workers (whose earnings come from selling labor to capitalists)
   Small proprietors (poor peasants, artisans, small shopkeepers, various service providers etc.)

We assume that workers and small proprietors consume their entire incomes.  Thus all saving is done by capitalists, out of profits.

We have two sectors, producing investment goods and consumer goods.  (Investment will include inventory accumulation; for simplicity we will allocate that to the investment goods sector.  This is done so that total consumption is the same as the output of the consumer goods sector, and total investment the same as output of the investment goods sector.)

The basic exchange relations between the two sectors can be seen below.  The model is an extension of the reproduction schemes developed by Marx in Volume II of Capital.

Flow diagram

As the diagram shows, total saving by the consumption goods sector is equal to total consumption by the investment goods sector.

Kalecki notes that "in a sense, investment finances itself.  Indeed, imagine that investment in the course of its execution is financed by banking credit or the liquid reserves of firms; it will be seen that investment as it is carried out creates its counterpart in saving."  As demand for investment goods rises, some of the new savings comes straight from the  investment goods sector, some from higher demand for goods from the consumer goods sector; this greater demand touches off a sort of multiplier process, with the sector re-equilibrating when the new higher savings equals the new higher  demand coming from the investment goods sector.

In other words, there is no financing contraint on investment under these assumptions.  "The real problem is whether this financing of investment does, or does not, create inflationary pressures."  Here the key issue is likely to be the ease of expanding production of consumer goods.

If consumer goods output cannot rise, then prices in that sector will be pushed up and real wages will fall.  The increased profits are what generate the higher savings from that sector.  Workers may in turn demand higher wages, touching off a wage-price spiral.  Certain segments of the consumer goods sector that are important in workers' consumption, especially food, may turn out to be important sources of inflation if output respond sluggishly.  Further issues arise in the ownership of agricultural land.

If consumer goods output rises easily because of excess capacity, then output rises.

Note that though we have not formally introduced the public sector, new public investment if loan-financed will have the same effects as new private investment.  Public investment may become important if private capitalists are unwilling to expand investment.

If the distribution of income shifts toward capitalists in either sector, the result is a slackening of demand for goods because of lower real wages.  This might reduce price pressure to some degree (e.g. on food supplies) .  A key feature of this model is that new capital investment is not limited by existing profits.  Thus a lower profit share, or taxation of profits, does not inhibit growth.

Without going through the formalities, let us note some of the consequences of opening up this kind of model to trade.  First, growth is likely to generate additional demand for both imported consumption and investment goods, as well as any imported inputs needed in wither sector.  If export growth cannot keep pace, balance of payments pressures emerge requiring devaluation, import controls, use of reserves, or borrowing.  The first two may have domestic inflationary consequences.

Borrowing, or capital imports, can help to relieve such inflationary pressures by removing this balance-of-payments constraint.  However at some future point the need to repay the loan may reverse this happy situation.  Even with DFI, the investing firm may decide to take profits out at some future point.

Copyright 1997, 2000 Colin Danby