Introduction to the Theory of Employment

Joan Robinson published Introduction to the Theory of Employment in 1937 as a simplified account of the main principles of Keynes' General Theory. Speaking down to her audience, she prefaces the book by writing "I have done my best to resist the temptation to address my colleagues over the heads of the audience for which this book is properly intended."

The part of the book I focus on here is Robinson's description of the relation between savings and investment. It's a topic at the heart of a lot of debates still ongoing in economics. Robinson explains that 

"Saving depends upon income, and income depends upon the rate at which investment goods are being produced... Saving is equal to investment, because investment leads to a state of affairs in which people want to save. Investment causes incomes to be whatever is required to induce people to save at a rate equal to the rate of investment. The more willing people are to save, the lower is the level of income corresponding to a given rate of investment, and the smaller the increase in income brought about by a given increase in the rate of investment."

However, many mainstream economists disagree with this view (sometimes without realizing it -- we're implicitly taught a view that doesn't make sense when you think about it):

"Some writers appear to disagree with this view. Savings, they say, are devoted to buying securities, and if saving increases there is an increased demand for securities. New securities are issued in order to finance investment, and therefore an increase in saving leads to an increase in investment. This argument sinks at the first step, for, since an individual, by increasing his own savings, reduces the savings of others, he does not add to the rate of saving of the community, and therefore does not add to the demand for securities. But the initial error leads to a further complication. If saving directly caused investment, it would be very difficult to see how unemployment could possibly occur, and such writers, in order to provide an explanation of unemployment, usually fall back on the notion of "hoarding". If an individual saves, they say, and buys securities with his new wealth, investment automatically increases, but if he puts his new wealth into money, that is, hoards it, there is no corresponding investment. But this is simply an error. The saving of the individual is not a cause of investment in either case, and the distinction does not arise... The individual saver has no direct influence on the rate of investment, whether he buys securities or not."

The Second Crisis of Economic Theory

An excerpt from Joan Robinson's 1971 Richard T. Ely keynote address to the American Economic Association. Somehow it seems as relevant today.

"There is no such thing as a normal period of history. Normality is a fiction of economic textbooks. An economist sets up a model which is specified in such a way as to have a normal state. He takes a lot of trouble to prove the existence of normality in his model. The fact that evidently the world does exist is claimed as a strong point for the model. But the world does not exist in a state of normality. If the world of the nineteenth century had been normal, 1914 would not have happened.

"At the time, however, in the postwar scene, normality lay in the past. As far as the economists were concerned, they did not really know very much about that world. They knew what was in their books.

"In their books, a private enterprise economy tends to equilibrium and not only to equilibrium--to an optimum position. Trouble was often caused by politicians who were shortsighted and under the sway of particular interests. If only they would establish free trade, restore the gold standard, keep budgets balanced, and leave the free play of the market forces to establish equilibrium, all would be for the best in the best of all possible worlds. Of course, there were footnotes making cautious reservations. Indeed, in the higher reaches of the profession there was something of the atmosphere of the augurs touching their noses behind the altar. Amongst themselves, they admitted it was not really like that. But their pupils took it all literally. They formed an official opinion deeply influenced by the conception of equilibrium which could be relied upon to establish itself provided that no one tried to interfere.

"The doctrine that there is a natural tendency to maintain equilibrium with full employment could not survive the experience of the complete collapse of the market economy in the thirties.

"Out of this crisis emerged what has become known as the Keynesian revolution. After the war, Keynes became orthodox in his turn. Unfortunately, the Keynesian orthodoxy, as it became established, left out the point. This is not the second crisis. This is still part of the first crisis.

"Consider what was the point of the Keynesian revolution on the plane of theory and on the plane of policy. On the plane of theory, the main point of the General Theory was to break out of the cocoon of equilibrium and consider the nature of life lived in time--the difference between yesterday and tomorrow. Here and now, the past is irrevocable and the future is unknown.

"This was too great a shock. Orthodoxy managed to wind it up in a cocoon again. Keynes had broken down the compartments of "real" and "monetary" theory. He showed that money is a necessary feature of an economy in which the future is uncertain and he showed what part monetary and financial institutions play in the functioning of the "real" economy. Now the compartments have been restored in the division between micro and macro theory."

Kalecki 1943: Political Aspects of Full Employment

In Joan Robinson's 1971 Richard T. Ely lecture to the American Economic Association, she said that "Keynes himself was not very much interested in the theory of value and distribution. Michal Kalecki produced a more coherent version of the General Theory, which brought imperfect competition into the analysis and emphasized the influence of investment on the share of profits. Kalecki's version was in some ways more truly a general theory than Keynes'."

Here are some notes from Kalecki's 1943 paper "Political Aspects of Full Employment" -- a statement of the economic doctrine of full employment. In this paper Kalecki covers employment policy, interest rates, and inflation. He also provides reasons for why "industrial leaders" might be opposed to full employment.

Before my notes (primarily quotes from Kalecki's paper) I should also add that David Andolfatto summarized this paper in a Feb 2020 blog post http://andolfatto.blogspot.com/2020/02/kalecki-on-political-aspects-of-full.html. I like his summary: "The paper starts by taking as given what Kalecki calls the doctrine of full employment. The basic idea is that the private sector, left to its own devices, is prone to Keynesian aggregate demand failures (see here for game-theoretic interpretation). The remedy for these spontaneously-occurring "coordination failures" is a government spending program that acts, or stands ready to act, as private demand begins to falter."

Employment policy

"A solid majority of economists is now of the opinion that, even in a capitalist system, full employment may be secured by a Government spending programme, provided there is in existence adequate plant to employ all existing labour power, and provided adequate supplies of necessary foreign raw materials may be obtained in exchange for exports.

"If the Government undertakes public investment (e.g. builds schools, hospitals, and highways) or subsidises mass consumption (by family allowances, reduction of indirect taxation, or subsidies to keep down the prices of necessities), if, moreover, this expenditure is financed by borrowing and not by taxation (which could affect adversely private investment and consumption), the effective demand for goods and services may be increased up to a point where full employment is achieved."

Interest rates

Where will people get the money to lend to the government without decreasing investment and consumption?

"imagine for a moment that the Government pays its suppliers in Government securities. The suppliers will, in general, not retain these securities but put them into circulation while buying other goods and services, and so on until finally these securities will reach persons or firms which retain them as interest-yielding assets ... In reality the Government pays for the services not in securities but in cash, but it simultaneously issues securities and so drains the cash off; and this is equivalent to the imaginary process described above.

What happens if people don't want to buy all the Government securities?

"It will offer them finally to banks to get cash (notes or deposits) in exchange. If the banks accept these offers, the rate of interest will be maintained. If not, the prices of securities will fall, which means a rise in the rate of interest, and this will encourage the public to hold more securities in relation to deposits. It follows that the rate of interest depends on banking policy, in particular on that of the Central Bank. If this policy aims at maintaining the rate of interest at a certain level that may be easily achieved, however large the amount of Government borrowing. Such was and is the position in the present war. In spite of astronomical budget deficits, the rate of interest has shown no rise since the beginning of 1940."

Inflation

In response to questions about whether Government expenditure financed by borrowing will cause inflation, Kalecki explains the role of resource constraints similar to the way that MMT economists explain them:

"the effective demand created by the Government acts like any other increase in demand. If labour, plant and foreign raw materials are in ample supply, the increase in demand is met by an increase in production. But if the point of full employment of resources is reached and effective demand continues to increase, prices will rise so as to equilibrate the demand for and the supply of goods and services ... if the Government intervention aims at achieving full employment but stops short of increasing effective demand over the full employment mark, there is no need to be afraid of inflation."

Opposition

Kalecki provides three categories of reasons for the opposition of the "industrial leaders" to full employment achieved by Government spending:

1. Dislike of Government interference in the problem of employment as such;
2. Dislike of the direction of Government spending (public investment and subsidising consumption); and
3. Dislike of the social and political changes resulting from the maintenance of full employment.

For 1, Kalecki writes "Every widening of State activity is looked upon by "business" with suspicion, but the creation of employment by Government spending has a special aspect which makes the opposition particularly intense. Under a laisser-faire system the level of employment depends to a great extent on the so-called state of confidence. If this deteriorates, private investment declines, which results in a fall of output and employment (both directly and through the secondary effect of the fall in incomes upon consumption and investment). This gives to 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. But once the Government learns the trick of increasing employment by its own purchases, this powerful controlling device loses its effectiveness. Hence budget deficits necessary to carry out Government intervention must be regarded as perilous. The social function of the doctrine of "sound finance" is to make the level of employment dependent on the "state of confidence."

2 - "The fundamentals of capitalist ethics require that "You shall earn your bread in sweat"--unless you happen to have private means."

3 - "Indeed, under a regime of permanent 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." Ultimately, Kalecki argues that business leaders care more about "discipline in the factories" and "political stability" than profits.

Overall Andolfatto is pretty skeptical of these points. I'm not sure where I land on this, but I'd add that today most students (future industrial leaders) are trained by economists who were trained by economists who took a lot of this as given. We have the issues of network effects, lock-in, and coordination failure locking in a generation of academics who might not be as aware of what they are doing as previous ones. But that's a broad claim and I'm not sure.

Other notes

"The fascist system starts from the overcoming of unemployment, develops into an "armament economy" of scarcity, and ends inevitably in war."

Reducing interest rates or taxes to stimulate private investment in a downturn does not guarantee full employment, even in a resulting boom.

"The rate of interest or income tax is reduced in a slump but not increased in the subsequent boom ... In the new slump it will be necessary to reduce the rate of interest or income tax again and so on. Thus in not too remote a time the rate of interest would have to be negative and income tax would have to be replaced by an income subsidy."