Palley on Kalecki and Keynes

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I am always on the lookout for authors that betray marks of high quality. When I hit on such an author, I am prepared to pay careful attention to him, even if his reasoning may be ideologically/politically unpalatable to me. 

Thomas Palley is one of these authors. He is a very lucid, coherent, and convincing expositor of a certain brand of Post-Keynesian economics. However, I am not sure, I share Thomas Palley's political stance, which seems to me a little too tinged by leftist preconceptions. 

At any rate, it would seem that Palley belongs to that endangered breed of genuinely thoughtful social democratic proponents of government's role in the economy who — thanks to the Left's suicidal dislike of national competences and its perfect complement: neoliberal cosmopolitanism — have lost their most important policy tool: the nation state.

It appears, the rarest species on earth is an economist, who understands the blessings of capitalism, while exposing its defects and seeking remedies with a clear commitment to keeping it in working order. Perhaps with the exception of Keynes, I am still to meet that economist who is intellectually and  psychologically equipped to be thoroughly appreciative of capitalism and profoundly critical of it, at the same time.

Be this as it may, concerning the kind of theory he proposes, Palley argues in a stimulating interview:

I would say we need a bargaining – institutional – sociological theory of distribution that puts power and perception at its core. Obviously these features operate within the context of a particular productive condition – society can’t pay itself more than it produces. And on the other side of that at the level of macroeconomics you need a Keynes-Kalecki theory. Keynes is the theorist of aggregate demand and the failure of the economy to go to full employment, and Kalecki is the theorist who introduces income distribution considerations into the theory of aggregate demand.

MS: Can you put both of them in 3 sentences?

(LAUGHTER)

MS: Or 4 or 5?

TP: How would I describe Keynes? I think Keynes says a very large class of problems in capitalist economies can be understood through the concept of aggregate demand. Unemployment arises when there’s a shortage of aggregate demand and the market system lacks mechanisms to automatically increase aggregate demand to a level at which it will be sufficient to absorb all production at full employment. That means we usually end up with some unemployment. Kalecki has a theory of income distribution based on what is called mark-up pricing. Firms charge a mark-up over their normal unit costs and the mark-up in turn determines the distribution of income between capital and labour. Income distribution then impacts aggregate demand because of different propensities to consume across capitalists and workers – in fact capitalists tend to save more and workers tend to spend more of their income. Consequently, as you shift income distribution from workers to capitalist you reduce spending and cause Keynesian aggregate demand problems. That is our condition now, which is why income distribution matters so much for the current stagnation

MS: Someone may say ‘Ok, sounds good, but both these theories were formulated like… one of them was 80 years ago, the other 75 years ago’. Do they match contemporary conditions?

TP: They both deliver profound enduring insights, though we also certainly need to enhance and elaborate upon them. They’re very clear in their implications for closed national economies like we had in the 1940s, 1950s and even the 1960s. I think their insights endure at both the national and the international level. However, the situation is now more complicated and difficult to manage because of globalization and the mobility of capital, which mean national policy solutions are much more difficult. The problem is that national policies that worked before are much less effective in the current moment. Furthermore, the ability to implement such policies is further weakened by redistribution of the political power. Our tools have gotten weaker in this globalized economy, and so too has the willingness to employ those tools. In fact, those policy tools may be employed in reverse because the corporations and the plutocrats are in charge of the political system.

Read the entire interview at the source.

I think, Palley is wrong in suggesting that worries about inequality suddenly resurfaced with the issuance of Picketty's revelatory best-seller. No one reads that book, but every person on the Left pretends she did or understands what it contains. Whatever the merits or demerits of the tome, it resonates with the widely held very crude and indistinct belief that somehow something is very wrong in our society because of inequality. The religious reading of inequality has a broad following, whose adepts assume that inequality is always bad, sinful, apocalyptic, and that our evil economy runs on it.

Palley, by contrast, narrows the issue of inequality perceptively, and thereby lends it respectable meaning. He does have a point in criticising that productivity and labour income seem to have diverged substantially since the 1980 (see the link below). This gives us a clear concept of inequality, a means of operationalising the term for the purposes of serious empirical research, allowing us to look into a social trend that has great significance.

For more Palley, see here.

Peter H. Lindert — author of the excellent Growing Public. Social Spending and Economic Growth since the Eighteenth Century, and himself not exactly a right-winger — reports in his recent study of inequality, Unequal Gains. American Growth and Inequality since 1700:

American history suggests that inequality is not driven by some fundamental law of capitalist development, but rather by episodic shifts in five basic forces: demography, education policy, trade competition, financial regulation policy, and labour-saving technological change.

The source.