E Kalecki's End Of The Business Cycle; Bond Wars

Michal Kalecki was a distinguished Polish economist who discovered insights into functioning of capitalism and the business cycle. He understood that full employment was anathema to the capitalist system, and that allowing a certain level of unemployment was key to preservation of the capitalist class. This is, of course, why I have warned that the greatest job of the Fed is to prune wages, and slow the economy as full employment approaches.

From Kalecki's point of view, capitalists want to limit government spending except for armaments, which benefit the class. Recent tax cuts have shown that the Republicans, especially, have bloated armament spending while destabilizing the stock and bond markets with  volatility, and with tax breaks that cannot easily be paid back. This instability could hasten the demise of the current business cycle. More on the bond wars at the end of this article.

Professor Kalecki contributed many ideas to the field of economics, but certainly the concept of investment as being the cause of savings for the capitalist class was central to his thinking. Of course, modifications have been made to his first equations, as workers now save some money, have 401k's and access to stocks and bonds, in a greater degree than in the past. But his conclusions are still very important, especially regarding business investment and the end of the business cycle.

For the Polish economist, investment drove the business cycle. Lower investment meant an end to the business cycle. Without investment, there are no savings. Of course, the power of big business in more modern times has also caused that concept to be modified.

For example, Marc Chandler points out that the trade gap is widening. Exports are up, but not as much as imports. And this may be caused by firms that simply do not want to invest in the means of production. Marc, who is a frequent contributor to Talkmarkets, says about the McKinsey Global Institute (MGI) Report:

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Wendell Brown 2 years ago Member's comment

Why do you think companies don't want to invest - greed? complacency? fear?

Gary Anderson 2 years ago Author's comment

That is a very good question, Wendell. Could be greed, due to profits,being good. Could be complacency, because of the stability of profits. Could be fear, due to the weakness of labor and other factors. If anyone is more qualified to answer this question than I am, please comment.

Norman Mogil 2 years ago Contributor's comment

If I might chime in here. Companies do not invest because the marginal rate of return on investment has been falling for many years. Demand, despite all that is said about robust the U.S. economy is, remains tepid. Growing at 2.5-3% a year does not put any pressure on productive capacity in the US. On the supply side, production can increase without more capital investment --still room to produce more. at zero marginal cost And, of course, Asia more modern and lower cost production facilities than US manufacturers.

Gary Anderson 2 years ago Author's comment

Thanks Prof. As I said in the article, Kalecki's views are modified somewhat by the new reality. But, factories are old. Equipment is aging. Perhaps with better factories the return on investment could improve. Spending by consumers with easy credit, on increased imports, seems unsustainable. Asian efficiency is a real issue. But Asia depends on the uS consumer.