Friday, August 13, 2010

Modern Monetary Theory Blogger on Kalecki (1943)

I've only had a chance to skim it, but Bill Mitchell provides a very comprehensive post on Michal Kalecki's paper "The Political Aspects of Full Employment". A lot of it goes over job guarantee/employer of last resort sort of stuff which is obviously not my particular flavor of Keynesianism - it's also not something I know too much about. I think this is an interesting paper because it and the literature that has been built up around it is essentially Public Choice Theory, at least in the sense that it concerns itself with business reaction to government policy, government incentives to respond to or provide for business, etc.. It doesn't draw all the same conclusions that the Public Choice crowd at GMU might draw (which might explain why they have this odd little view that nobody else was paying attention to the incentives faced by government), but it considers the problem with respect to full employment policy.

This quote from Kalecki also jumped off the page:

"In spite of astronomical budget deficits, the rate of interest has shown no rise since the beginning of 1940."

Yup - a sharp increase in money demand in a depressed economy will tend to do that. In fact I think I saw something along those lines recently...

Mitchell also talks about Kalecki's familiarity with Marx's work on effective demand. I was recently surprised myself to see what a large role effective demand played in a presentation by a modern Marxist. Does anyone know more about this? It clearly wasn't the crux of Marxism, but what did he say about it exactly? It appears this is all in the Theory of Surplus Value, which I believe I have a copy of somewhere.


  1. Interest rates (on government debt) showed no rise because the Fed was required to keep a 0.35% cap on t-bill rates and a 2.5% ceiling on bond rate beginning in early 1942. In other words, the Fed bought most of the government's debt thereby subsidizing its price and holding down rates. I think that is why Kalecki says earlier in the paragraph that... "It follows that the rate of interest depends on banking policy, in particular on that of the central bank."

  2. Aer you suggesting that interest rates on government debt are low because of what the Fed is doing right now? You seem to know more about this than me (I saw your website - very cool poster), but that sounds a little odd.

  3. Glad you liked the poster.

    I would say the main reason for today's low rates on gov bonds is the public's desire for safety and liquidity.

    That's not to say that Fed purchases are not having some effect on certain rates, but more in the agency market. Yields on Fannie and Freddie MBS are probably significantly below what they would be without all the Fed buying.

  4. What - Fannie and Freddie are a suspect investmnet?!!?!?!? I'm shocked.


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