February 10, 2023 • 37 mins
In the wake of the Great Financial Crisis, the work of John Maynard Keynes experienced a revival, as people sought answers to the problem of sluggish growth. In this cycle, sluggish growth isn't the problem. If anything, you hear business leaders and central bankers talking about the labor market being "too hot," and the need for the unemployment rate to rise. So what explains the current dynamic? And how can we sustain a hot economy without the pain of inflation? Perhaps the work of the lesser-known Polish economist Michał Kalecki holds the answers. Like Keynes, he also viewed the free market as being inherently unstable, but he came to different conclusions about why. He also explored the political economy of full employment and why this condition frustrates business leaders. On this episode, we speak with Jan Toporowski, professor of Economics and Finance at SOAS University of London, about Kalecki's work and how it can help us understand today's economy.
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Speaker 1 (00:10):
Hello, and welcome to another episode of the Odd Lots Podcast.
I'm Joe Wisenthal and I'm Tracy. Tracy, you said something
on a recent episode, and I don't remember which one
it was, um, one of our macro ones, maybe like
Neil and Connor or something like that. This idea is
still that we sort of talk about, like relief at
(00:31):
the idea of labor market soft right, it's kind of perverse.
First of all, thank you so much for listening to
what I say. I really appreciate that. Secondly, I think
what I said is it feels really weird that you
have a central bank, specifically the Federal Reserve, that is
saying basically that they want to push the unemployment right up. Yeah,
and significantly. Right. So we're at round three and a
(00:54):
half percent unemployment right now fifty which sounds great. That
seems unambiguously good, and especially you know, after coming after
years of slow labor market growth. Um, some of the
fears during the worst of the COVID pandemic about how
how much unemployment there is, and yet here we are,
and it's almost always talked about as a problem to
(01:17):
be solved rather than an opportunity to be embraced. Yeah,
there's always concern that you're running an economy too hot
if employment gets too low, But then that just brings
up all these really big picture questions about well, what
is the economy for anyway? Shouldn't we be aiming for
a system that kind of works for everyone where you know,
(01:38):
hopefully the unemployment rate is very very low. But I
guess the risk is and the concern is that you
don't want to run it in such a way that
it starts pushing up prices and you get this unrelenting inflation, right,
and inflation is bad and people, it hurts people, and
people don't like it. But nonetheless, I think people find
it strange that the central bank is part of what
they see as an outcome of optable monetary policy would
(02:01):
put so many, you know, at least another million to
have people out of work. They find it's strange when
weak labor market data often leads to a stock market
railly right, the whole bad news is good news for
stocks perverse. And you know, you think, like, Okay, a
lot of people have jobs, that means a lot of spending,
corporate profits really high, Like do you think these are
(02:21):
like good things? And yet at some level it's like
all of this is bad, and I do and I
think like we shouldn't just jump away from that, like
we shouldn't sort of move on. And of course there's
a room to discuss soft land things and all that,
but some of these route questions I think are still
worth out thinking about, Like why do investors hate full employment? Yeah, yeah,
exactly right. So I'm really excited about our guests. So
(02:44):
one of the one of the economists from the old
days that people sometimes talk about when they're talking about
the political economy of full employment or maximum employment. On
economist named Michael Kalski um has talked about this his
work uh comes up every once in a while. So
we're gonna be speaking to an economist who himself has
(03:05):
studied a lot of Kletzki's work and has done an
own his own work on a lot of these questions,
trying to understand a little bit more about this attention
that full employment, full employment brings. We're gonna be speaking
to a Yan Toparowski, a professor at so Is University
in London, and uh So, Professor Taparowski, thank you so
much for coming on odd lots, Thank you very much
(03:26):
for inviting me. Why don't you tell us a little
bit about your what your your work and your research
and sort of like what what drove you to sort
of focus on some of these topics When I came into, uh,
this kind of work, I actually came across Kalski when
(03:47):
when I was when I first came to study economics.
Now at the time when I actually didn't do my
undergraduate studies in economics, it was more in sociology and
political science, um and what. The first job that I
got was in fund management for the Church of England
(04:07):
for an institution called the August Institutional, the Church Commissioners
for England. And because I had had I had done
one course in introductory economics, they thought, well, he knows
something about it, and they put me into the best
Change Investments department. Now this was in nineteen seventy four.
(04:30):
You're you're obviously too young to remember what happened around
nineteen seventy four, But there was an oil price shock
which in England was rapidly followed by a collapse in
the real estate market, a collapse on the in the
(04:54):
stock market. A couple of brokers brokerage houses went bust,
UH banks started some some of the mark fringe banks
UH went bust, A major bank tottered. The Bank of
England had to call in the senior City of London
(05:17):
figures to try and shore up the position. UH. And
for me, you know, as as a newcomer to all
of this, I thought this was tremendously exciting. But I thought, well,
I need to find out more about it. I need
to study economics. So I went. I registered at Birkbeck College,
(05:40):
part of the University of London, for an MSc in economics. UH.
And I was actually greatly disappointed. Was all my professors
would stand up and say, look, we have this general
equilibrium model at the economy and my my my senior professor,
the senior professor there, a very distinguished American British economist.
(06:06):
I remember standing in class and saying, look at the
economy out there, it's in equilibrium. We know it's in equilibrium.
You know the models say so. And I remember sitting
there thinking, I don't know what world this man lives in.
You know what he was saying. You had no bearing,
(06:28):
should no understanding of what was really going on. I
remember going down into the library and flicking through some
books and coming across a Polish name Kalitsky, and I thought, oh,
I wonder what he has to say about this. I
didn't realize that there was there any distinguished Polish economists.
So I started reading the book and it was his
(06:52):
early essays on the business cycle, and suddenly it all
made sense, uh, And it's continue to make sense since then. Albeit,
I think I take a rather different for you too,
many followers of of me, how Kalitski in a sense
that I'm I have this background in in banking and
(07:16):
finance side. This has always been my approach to the
work of Kalitzski. So I think your your question issues
that you're raising are absolutely fundamental to my understanding of Klitzki,
and I wish they were more fundamental to the understanding
(07:37):
of many, uh, many of my friends and colleagues who
uh you know follow Klitski. Well, yeah, talk to us
then about what it was that you read that made
sense to you. And I'm particularly interested in the relationship
between the business cycle and you know, theoretical equilibrium levels
(08:00):
and full employment as as you kind of just alluded to,
the general equilibrium approach is essentially a static approach. It
tells you what situation will arise where there will be
no further change. Uh. And this actually doesn't happen in
(08:25):
the real world. What you have in the in the
real world is a constant state of flux. And this
is why Kalitzki's approach to economics, focusing on a business
cycle uh, I think, is really much more satisfying than
(08:51):
than the approach, for example, of Kines in the general theory,
which is which was essentially a static approach to a
problem that is fundamentally dynamic. So what don't you explain?
Because when I think of you know, Canes also wrestled
with these topics of why don't why doesn't a market
economy on its own create full employment? Why is investment
(09:16):
inadequate in typical times? Why do we tend to these
periods of stagnation? How did Kollecgi differ from Canes and
these questions? Well, let me start off with what he
agreed with Kane's on and he agreed with Kanes that
capitalism is fundamentally a system that in which the level
(09:43):
of output, the overall level of output, and the overall
level of employment is determined by the level of investment,
the level of business investment. Now, obviously in the in
the post war, post Second World War economy, the government
also has Government spending also has a lot to do
(10:05):
with it. But fundamentally the in the the private sector.
The level of activity in the private sectors really determined
by the level of investment. And the question is what
causes that level of investment to be unstable, much much
more unstable than for example, consumption. Uh and they This
(10:33):
was an answer that in many respects tormented Coltsky throughout
his life. He would put forward various models and then
reflect on them and decide that no, they that they
were wrong. Kane's sort of tried to cover up this
(10:57):
problem by saying, or what it was all due to
animal spirits. It's all due to uncertainty. And the problem
with this is that you know uncertainty and um an
animal spirits are not um measurable in the same way
(11:20):
that for example, steel production is measurable. It's really pushing
the solution onto what cannot be seen and cannot be observed.
And Clitski. Clitki's background was as an engineer, and he
found this deeply, deeply unsatisfactory. Tried to resolve it. Certainly,
(11:47):
he thought that the rate of interest didn't have uh
much impact. He businessman, he thought, were on the whole
much more much more cynical, much more hard bitten than
to be influenced by let's say, ephemeral moods uh and
(12:12):
and temperament. In fact, the way in which corporations are constructed,
that the hierarchical, bureaucratic way in which business corporations are
constructed is is really in order to eliminate the effect
of you know, passions and biases on issues like investment.
(12:39):
In the end, what what critic you thought was really
most importantly it was the issue of capacity utilization. Businesses
will invest if there if they've got customers that cannot
(13:00):
be satisfied from existing production, uh even at full capacity.
And what they will then do is if let's say,
if the restaurant is full and there are still customers
at the door, then the restaurant owner will invest in
more tables more, you know, expanded his premises. So and
(13:27):
he then explained it, interestingly enough in in the form
of a very nice parable. He said in in uh,
in the United States, there are cities which are joined
by more than one railway line, and the effect of
their camp if you have, if they're both operating at
(13:49):
less than full capacity, uh, the effects of competition between
them will be that eventually one of those railway lines
will uh go out of business and you'll end up
in a situation with much less capacity uh and actually
(14:10):
much less employment, much much much less output. So what
is the answer to this problem of under utilization of capacity?
And build a third railway exactly you've read the article, Uh,
it's it's a lovely parable. And then, of course the
(14:34):
first two railway lines will be busy ferrying all the
workers and the steel and required to for building the
third railway line. And then of course you've now got
three railway lines. At the end of this year, you
now have three railway lines. What you do then? And
so he said, well, the answer is you build a
(14:55):
fourth railway line and then problem and ye and he said, well,
you know, all this sounds paradoxical, and but he said, well,
it's the system that's paradoxical. And the reason why it's
paradoxical is that it's a system that depends on the
level of investment. And what's critical about the level of
(15:17):
investment is that it's the level of investment that, according
to Kalitsky but also Kines uh determines how much profits
businesses will make. Businesses invest a lot, they will make
a lot of in profits. If they don't invest so much,
(15:41):
then it's uh, it doesn't you You you have this
problem of excess capacity, uh, discouraging economic activity, discouraging investment.
(16:14):
So my understanding of Knes is that, you know, Canes
also wrote a lot about the business cycle and believed
that the business cycle could be managed in one way
or another through monetary policy or smoothed in some way.
What does Kletski say about managing the business cycles or
(16:34):
investment given its importance in the cycle. Well, Kletski thought
that managing the economy by trying to influence the level
of investment, it's really a fool's game because you, uh,
for example, you may lower the rate of interest or
lower the rate of taxation. Uh, you know, give additional
(16:57):
tax allowances, and uh then you find that, okay, business
takes it takes up a certain amount of investment, does
some investment, and then requires further tax cuts, further cuts
in the rate of interest in order to invest further.
(17:21):
And it really, um, it really doesn't make sense. It
doesn't make It didn't make sense for Kalitzky because the
purpose of investment shouldn't be to maintain full employment. There
are other instruments for doing this. Uh, the purpose of
(17:42):
investment should be to provide the capacity for the amount
of consumption that is required in the economy. That you know,
that's that's how a rational economy would operate. So this
again was a small difference between Canes and Kaletski. Canes
wanted UH investment to be the leader. Kaletski argued that
(18:10):
in fact, you can create the equivalent of an investment
boom through fiscal stimulus. It has the same effect of
expanding profits and in particularly using the fiscal stimulus to
provide additional public goods and public services which would be
(18:32):
provided free. So this gets around the problem of raising wages.
You can increase real wages by providing free public goods.
And then, of course the other way is to redistribute
income from hiring incomes to lower incomes again by by
(18:55):
various transfer payments. So to bring it up to today,
and I don't know if we have full employment because
I'm not even I'm not even sure what that means.
But we have very low unemployment, the lowest in fifty years. Um.
Some might say, okay, that's close to full employment, but
that's a separate debate. But people there's like this, it's
it repels people. It's ah, there's it's almost like there's
(19:18):
like these white blood cells of the economy and it's
like the Fed is coming in, it wants to raise rates.
It talks about how the optimal situation would be at
least a one percent increase, one and a half billion
people laid off. You have investors who gets sort of
a sense of relief every time the labor market data
comes in week. Why is there this discomfort in a
state of the economy which, on paper you think lots
(19:41):
of spending good, lots of reason to invest do capex good,
that's everyone's investment to someone else's income. Why is there
this sort of like rebellion against that? Can let's keep
put it in A argued that it's it's purely political. Um.
He said that this he argued his faith in his
(20:02):
famous article, uh, political aspects of full Employment, which I
would recommend to anyone who doesn't know much Klitzki is
very very easy to read. It. Not a single equation,
but he oughta good he argued. There, but you know,
there's no doubt that full employment is more rational for
(20:26):
the system as a whole. It's more rational. Profits are higher,
employment is higher. Everything is better if you have full employment. However,
full employment strikes at the heart of another feature of capitalism,
(20:47):
which is the question of labor discipline. If you have
a state of full employment, then uh, it's very It
becomes difficult to discipline workers in the factory or in
the office. If if a worker can leave his or
(21:09):
her place of employment and immediately get another one, then
where is the labor discipline? It's about control. It's it's
really about the control of labor. And Keletski argued that
in in what would tend to happen is that in
(21:29):
a state of m full employment you would get a
political coalition UH, put together by major employers, UH, the
people in finance UH, central bank, central bankers, all of
(21:53):
whom would argue that the situation is somehow manifestly unsound.
Will unsound in what way? Well? Inflation? And sure enough,
you know we we have had inflation, but we also
know at the moment that inflation is coming down quite rapidly.
(22:17):
As well, because so much of the current inflation was
simply an energy market adjustment two sanctions on on Russian energy.
Uh So it's a kind of future inflation because the
(22:38):
future is unknown, and it's very very easy to to say, oh, well,
you know, things may appear okay at the moment, but
we know we have these these and these economists with
all these models showing that there's some terrifying inflation around.
This kind of reminds me of the debate over work
(23:01):
from home, which is, you know, post pandemic UM, people
started working from home and there didn't seem to be
much of a hit on productivity, and a lot of
companies still met whatever their internal benchmarks are. So then
you had a lot of bosses who started talking about
a degradation of corporate culture and how you know it's
(23:22):
bad people are working from home. They might be doing
okay um on a pure numbers basis, but in the
long run it's going to impact the company by hitting culture.
Uh yeah. Can you maybe connect more of what we've
seen over the past year or two to Colletski's ideas,
Do you think the post pandemic maybe shift um towards
(23:42):
worker power has vindicated some of his ideas. I think
it has um it's it's it's vindicated a lot of
these ideas because it's actually weakened, uh, the the the
power of many businesses who uh, particularly businesses in uh
(24:09):
in activities retail, hospitality, UH, these kind of these kinds
of activities which transport even which I just saw that
their markets shrinking, shrink shrinking quite drastically. The the what
(24:34):
then happened, however, was that the speed of the recovery
as uh you know, lockdown was removed. I think a
lot of those businesses took advantage of that situation to
start raising their price And my view is that they
were raising their prices because many of them had got
(24:59):
seriously into debt, many of them had got had found
their political position weakened. They had to go knocking at
the door of uh of governments asking for loans, asking
for tax free bates, various other uh you know, public subsidies.
(25:25):
Governments had responded by insisting on on no layoffs. UH.
This kind of thing put UH companies, particular corporations into
a difficult bind, and a lot of them got out
(25:45):
of this by borrowing at record low rates in trust
and then seeking to recover that borrowing by raising raising
their prices. So you have my my explanation of the
inflation is would be twofold. One is that you have
(26:10):
this energy costs, which is a temporary phenomenon. But the
other one is really the what Richard Coup referred to
as it is a type of balance sheet effect where
firms are trying to clear off debt by by raising
(26:35):
prices and I think doing it. Uh, they were doing
quite successfully. But that then feeds into a narrative that
the uh, that all this is the consequence of full employment,
and therefore, uh, you know, must be it must show
(26:55):
that the state of full employment is is financially unsound.
It isn't, of course, because the the the inflation has
very little to do with with what's happening in the
labor market. Wage increases have lagged lagged price increases. UH.
(27:20):
Unions and workers in general have a much weak have
a match weaker position in the labor market. Um to
some degree, actually individual workers are benefiting from labor shortages,
but in terms of organization, in terms of powering in
(27:45):
what politically called the power in the factories, workers still
remain weak because worker worker organizations are weak. So we
(28:12):
just have a couple of minutes left. But I just
want to on the inflation question. A term that you
hear political activists sometimes in the US probably around the world,
like greed inflation, And I'm curious whether you think that's
a useful frame. It kind of doesn't sound like it
listening that, of course, there are opportunistic situations and that
(28:35):
for balance sheet reasons, corporations feel the impulse to uh
to raise prices, But like greed kind of seems like
one of these things that's kind of immeasurable. I'm curious,
like in your perspective or collect keys perspective, like, is
that a useful analytical mode Perstally, I wouldn't use the word, uh,
(28:57):
the term greed because it seems to be a kind
of moralizing the fact that it's it's business practice to
get the best possible price, uh for for your output.
I think there is a there is a sense in which,
(29:18):
if you have excess capacity, uh, the excess capacity may,
under certain circumstances, um cause a business to um not
to raise prices to moderate greed. But on the whole,
(29:43):
I think business decisions are not made on a kind
of moral issue. You try to get the best out
of the market. That's uh, it's it's the nature of
the system. So one thing that I always like to
ask economists who have written biographies of other econom miss
or who have studied their work, is is there any
(30:03):
area in which you disagree with COLLECTI or think that maybe,
you know, maybe he got it wrong, or maybe this
particular theory could be improved or expounded upon. Yes, I
think actually he well, he I think his political judgment,
uh sometimes was when when when to skew for it?
(30:30):
I mean, if I can give a particular example from
from the United States, he thought that the student movement
against the Vietnam War or you know, was headed for failure. Uh.
(30:51):
And I think this was this was a misjudgment. He
thought that American capitalism would it would be divided between
the international capitals and American multinationals would be much more
(31:16):
sensitive to the way in which America's perceived abroad, and uh,
the domestic or business American businesses that only operating within
the United States, who would be you know, maybe much
(31:36):
more bullish. I'm not sure that this is a distinction
that that works quite well in the United States. I
think I wished he I regret that he didn't write
more about money, uh and finance, because I think he
(32:00):
um in this way he um uh. It's it's too
easy to dismiss his ideas as being characteristic of the
long period between nine and let's say, the nineties seventies,
(32:25):
when you know, really the stock market and finance were
not terribly important and could and we're in a fact
dependent on on state support. M I think that they
the situation now it's rather it's rather different and really
(32:52):
needs um needs more working on. So I think this
would be um kind of my my, my regret and
my criticism. Plus the fact that I think he his um.
He was a he was an engineer, and a feature
(33:14):
of the type of economics of his time was that
you had to you want success in profession by putting
forward in a neat mathematical model. Now he knew that
this was this wasn't enough. You had to have some
kind of roots in the way in which the system operated.
(33:38):
But uh, you know, he tended to believe that once
he'd once he'd put forward the equation and that was enough.
And I don't think it was Jean Taparowski I'm afraid
rut of time, but that was a fantastic Really appreciate
(34:00):
you coming on. And I feel like perhaps, you know,
Kine sort of got this revival after the Great Financial Crisis,
and it feels like with collects thoughts right now is
people wrestle with some of this thing. More people are
going to be discovering him. So appreciate you coming out
odd lots. Thank you, Thank you very much for this opportunity, Tracy.
(34:32):
I really enjoyed that. It does feel like, um, well,
I mean there's a lot there. The political aspects of
the question you brought about working from home, the sort
of rebellion against worker autonomy, worker power, what happens when
it's really easy, potentially to find another job. I think
it's like, for one thing, that's like a pretty important
(34:53):
idea right now. Absolutely. I also thought the question of
why so if you argue that, you know, private sector
activity is dependent on the level of investment, but then
why why does the level of investment change? Why is
it more unstable that than consumption. That is a question
that comes up all the time here on all plots,
(35:14):
right like why do these business cycles exist? Why do
firms seem to you know, potentially overreact to slow periods
and then overreact to um more active periods. I don't know,
like I think it's still open to debate, but it
was definitely interesting to hear Coletsky's ideas on that. Yeah,
and this idea that like and you know, um change
(35:36):
like is UM pointing out like animal spirits uncertainty Like
these are like it's like vibes, you know, like there's
I think vibes are important, but also like they're a
little bit unsatisfying to choose capacity utilization over vibes. Yea, yeah,
I mean why do vibes change? Right? That's like if
you're if you sort of like lean too heavily into
the vibes theory of economic cycles, then you have then
(35:59):
you're just moved onto the question of like well why
do vibes change? And so some of these questions about
like capacity utilization, I do think they're helpful. I love
like I love the railroad example of like, Okay, the
problem is just keep building railroads, which you will maintain
like full demand. Then you'll end up with a hundred railroads.
And this idea like this is the sort of like
contradiction of the system is very As a regular user
(36:21):
of amtrack, I say, build all the railroad build build
them all. Now I am open to any and every
possible explanation, um or I should say policy suggestion for
smoothing business cycles, and this was a fascinating one. Absolutely
All right, shall we leave it there? Let's leave it there.
This has been another episode of the All Thoughts podcast.
I'm Tracy Alloway. You can follow me on Twitter at
(36:42):
Tracy Alloway and I'm Joe Why Isn't Thal? You can
follow me on Twitter at the Stalwart, follow our producer
Carmen Rodriguez at Carmen Arman and Dash Bennett at Dashbot.
And check out all of our podcasts at Bloomberg under
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(37:02):
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sign up. Thanks for listening.
Hello, and welcome to another episode of the Odd Lots Podcast.
I'm Joe Wisenthal and I'm Tracy. Tracy, you said something
on a recent episode, and I don't remember which one
it was, um, one of our macro ones, maybe like
Neil and Connor or something like that. This idea is
still that we sort of talk about, like relief at
(00:31):
the idea of labor market soft right, it's kind of perverse.
First of all, thank you so much for listening to
what I say. I really appreciate that. Secondly, I think
what I said is it feels really weird that you
have a central bank, specifically the Federal Reserve, that is
saying basically that they want to push the unemployment right up. Yeah,
and significantly. Right. So we're at round three and a
(00:54):
half percent unemployment right now fifty which sounds great. That
seems unambiguously good, and especially you know, after coming after
years of slow labor market growth. Um, some of the
fears during the worst of the COVID pandemic about how
how much unemployment there is, and yet here we are,
and it's almost always talked about as a problem to
(01:17):
be solved rather than an opportunity to be embraced. Yeah,
there's always concern that you're running an economy too hot
if employment gets too low, But then that just brings
up all these really big picture questions about well, what
is the economy for anyway? Shouldn't we be aiming for
a system that kind of works for everyone where you know,
(01:38):
hopefully the unemployment rate is very very low. But I
guess the risk is and the concern is that you
don't want to run it in such a way that
it starts pushing up prices and you get this unrelenting inflation, right,
and inflation is bad and people, it hurts people, and
people don't like it. But nonetheless, I think people find
it strange that the central bank is part of what
they see as an outcome of optable monetary policy would
(02:01):
put so many, you know, at least another million to
have people out of work. They find it's strange when
weak labor market data often leads to a stock market
railly right, the whole bad news is good news for
stocks perverse. And you know, you think, like, Okay, a
lot of people have jobs, that means a lot of spending,
corporate profits really high, Like do you think these are
(02:21):
like good things? And yet at some level it's like
all of this is bad, and I do and I
think like we shouldn't just jump away from that, like
we shouldn't sort of move on. And of course there's
a room to discuss soft land things and all that,
but some of these route questions I think are still
worth out thinking about, Like why do investors hate full employment? Yeah, yeah,
exactly right. So I'm really excited about our guests. So
(02:44):
one of the one of the economists from the old
days that people sometimes talk about when they're talking about
the political economy of full employment or maximum employment. On
economist named Michael Kalski um has talked about this his
work uh comes up every once in a while. So
we're gonna be speaking to an economist who himself has
(03:05):
studied a lot of Kletzki's work and has done an
own his own work on a lot of these questions,
trying to understand a little bit more about this attention
that full employment, full employment brings. We're gonna be speaking
to a Yan Toparowski, a professor at so Is University
in London, and uh So, Professor Taparowski, thank you so
much for coming on odd lots, Thank you very much
(03:26):
for inviting me. Why don't you tell us a little
bit about your what your your work and your research
and sort of like what what drove you to sort
of focus on some of these topics When I came into, uh,
this kind of work, I actually came across Kalski when
(03:47):
when I was when I first came to study economics.
Now at the time when I actually didn't do my
undergraduate studies in economics, it was more in sociology and
political science, um and what. The first job that I
got was in fund management for the Church of England
(04:07):
for an institution called the August Institutional, the Church Commissioners
for England. And because I had had I had done
one course in introductory economics, they thought, well, he knows
something about it, and they put me into the best
Change Investments department. Now this was in nineteen seventy four.
(04:30):
You're you're obviously too young to remember what happened around
nineteen seventy four, But there was an oil price shock
which in England was rapidly followed by a collapse in
the real estate market, a collapse on the in the
(04:54):
stock market. A couple of brokers brokerage houses went bust,
UH banks started some some of the mark fringe banks
UH went bust, A major bank tottered. The Bank of
England had to call in the senior City of London
(05:17):
figures to try and shore up the position. UH. And
for me, you know, as as a newcomer to all
of this, I thought this was tremendously exciting. But I thought, well,
I need to find out more about it. I need
to study economics. So I went. I registered at Birkbeck College,
(05:40):
part of the University of London, for an MSc in economics. UH.
And I was actually greatly disappointed. Was all my professors
would stand up and say, look, we have this general
equilibrium model at the economy and my my my senior professor,
the senior professor there, a very distinguished American British economist.
(06:06):
I remember standing in class and saying, look at the
economy out there, it's in equilibrium. We know it's in equilibrium.
You know the models say so. And I remember sitting
there thinking, I don't know what world this man lives in.
You know what he was saying. You had no bearing,
(06:28):
should no understanding of what was really going on. I
remember going down into the library and flicking through some
books and coming across a Polish name Kalitsky, and I thought, oh,
I wonder what he has to say about this. I
didn't realize that there was there any distinguished Polish economists.
So I started reading the book and it was his
(06:52):
early essays on the business cycle, and suddenly it all
made sense, uh, And it's continue to make sense since then. Albeit,
I think I take a rather different for you too,
many followers of of me, how Kalitski in a sense
that I'm I have this background in in banking and
(07:16):
finance side. This has always been my approach to the
work of Kalitzski. So I think your your question issues
that you're raising are absolutely fundamental to my understanding of Klitzki,
and I wish they were more fundamental to the understanding
(07:37):
of many, uh, many of my friends and colleagues who
uh you know follow Klitski. Well, yeah, talk to us
then about what it was that you read that made
sense to you. And I'm particularly interested in the relationship
between the business cycle and you know, theoretical equilibrium levels
(08:00):
and full employment as as you kind of just alluded to,
the general equilibrium approach is essentially a static approach. It
tells you what situation will arise where there will be
no further change. Uh. And this actually doesn't happen in
(08:25):
the real world. What you have in the in the
real world is a constant state of flux. And this
is why Kalitzki's approach to economics, focusing on a business
cycle uh, I think, is really much more satisfying than
(08:51):
than the approach, for example, of Kines in the general theory,
which is which was essentially a static approach to a
problem that is fundamentally dynamic. So what don't you explain?
Because when I think of you know, Canes also wrestled
with these topics of why don't why doesn't a market
economy on its own create full employment? Why is investment
(09:16):
inadequate in typical times? Why do we tend to these
periods of stagnation? How did Kollecgi differ from Canes and
these questions? Well, let me start off with what he
agreed with Kane's on and he agreed with Kanes that
capitalism is fundamentally a system that in which the level
(09:43):
of output, the overall level of output, and the overall
level of employment is determined by the level of investment,
the level of business investment. Now, obviously in the in
the post war, post Second World War economy, the government
also has Government spending also has a lot to do
(10:05):
with it. But fundamentally the in the the private sector.
The level of activity in the private sectors really determined
by the level of investment. And the question is what
causes that level of investment to be unstable, much much
more unstable than for example, consumption. Uh and they This
(10:33):
was an answer that in many respects tormented Coltsky throughout
his life. He would put forward various models and then
reflect on them and decide that no, they that they
were wrong. Kane's sort of tried to cover up this
(10:57):
problem by saying, or what it was all due to
animal spirits. It's all due to uncertainty. And the problem
with this is that you know uncertainty and um an
animal spirits are not um measurable in the same way
(11:20):
that for example, steel production is measurable. It's really pushing
the solution onto what cannot be seen and cannot be observed.
And Clitski. Clitki's background was as an engineer, and he
found this deeply, deeply unsatisfactory. Tried to resolve it. Certainly,
(11:47):
he thought that the rate of interest didn't have uh
much impact. He businessman, he thought, were on the whole
much more much more cynical, much more hard bitten than
to be influenced by let's say, ephemeral moods uh and
(12:12):
and temperament. In fact, the way in which corporations are constructed,
that the hierarchical, bureaucratic way in which business corporations are
constructed is is really in order to eliminate the effect
of you know, passions and biases on issues like investment.
(12:39):
In the end, what what critic you thought was really
most importantly it was the issue of capacity utilization. Businesses
will invest if there if they've got customers that cannot
(13:00):
be satisfied from existing production, uh even at full capacity.
And what they will then do is if let's say,
if the restaurant is full and there are still customers
at the door, then the restaurant owner will invest in
more tables more, you know, expanded his premises. So and
(13:27):
he then explained it, interestingly enough in in the form
of a very nice parable. He said in in uh,
in the United States, there are cities which are joined
by more than one railway line, and the effect of
their camp if you have, if they're both operating at
(13:49):
less than full capacity, uh, the effects of competition between
them will be that eventually one of those railway lines
will uh go out of business and you'll end up
in a situation with much less capacity uh and actually
(14:10):
much less employment, much much much less output. So what
is the answer to this problem of under utilization of capacity?
And build a third railway exactly you've read the article, Uh,
it's it's a lovely parable. And then, of course the
(14:34):
first two railway lines will be busy ferrying all the
workers and the steel and required to for building the
third railway line. And then of course you've now got
three railway lines. At the end of this year, you
now have three railway lines. What you do then? And
so he said, well, the answer is you build a
(14:55):
fourth railway line and then problem and ye and he said, well,
you know, all this sounds paradoxical, and but he said, well,
it's the system that's paradoxical. And the reason why it's
paradoxical is that it's a system that depends on the
level of investment. And what's critical about the level of
(15:17):
investment is that it's the level of investment that, according
to Kalitsky but also Kines uh determines how much profits
businesses will make. Businesses invest a lot, they will make
a lot of in profits. If they don't invest so much,
(15:41):
then it's uh, it doesn't you You you have this
problem of excess capacity, uh, discouraging economic activity, discouraging investment.
(16:14):
So my understanding of Knes is that, you know, Canes
also wrote a lot about the business cycle and believed
that the business cycle could be managed in one way
or another through monetary policy or smoothed in some way.
What does Kletski say about managing the business cycles or
(16:34):
investment given its importance in the cycle. Well, Kletski thought
that managing the economy by trying to influence the level
of investment, it's really a fool's game because you, uh,
for example, you may lower the rate of interest or
lower the rate of taxation. Uh, you know, give additional
(16:57):
tax allowances, and uh then you find that, okay, business
takes it takes up a certain amount of investment, does
some investment, and then requires further tax cuts, further cuts
in the rate of interest in order to invest further.
(17:21):
And it really, um, it really doesn't make sense. It
doesn't make It didn't make sense for Kalitzky because the
purpose of investment shouldn't be to maintain full employment. There
are other instruments for doing this. Uh, the purpose of
(17:42):
investment should be to provide the capacity for the amount
of consumption that is required in the economy. That you know,
that's that's how a rational economy would operate. So this
again was a small difference between Canes and Kaletski. Canes
wanted UH investment to be the leader. Kaletski argued that
(18:10):
in fact, you can create the equivalent of an investment
boom through fiscal stimulus. It has the same effect of
expanding profits and in particularly using the fiscal stimulus to
provide additional public goods and public services which would be
(18:32):
provided free. So this gets around the problem of raising wages.
You can increase real wages by providing free public goods.
And then, of course the other way is to redistribute
income from hiring incomes to lower incomes again by by
(18:55):
various transfer payments. So to bring it up to today,
and I don't know if we have full employment because
I'm not even I'm not even sure what that means.
But we have very low unemployment, the lowest in fifty years. Um.
Some might say, okay, that's close to full employment, but
that's a separate debate. But people there's like this, it's
it repels people. It's ah, there's it's almost like there's
(19:18):
like these white blood cells of the economy and it's
like the Fed is coming in, it wants to raise rates.
It talks about how the optimal situation would be at
least a one percent increase, one and a half billion
people laid off. You have investors who gets sort of
a sense of relief every time the labor market data
comes in week. Why is there this discomfort in a
state of the economy which, on paper you think lots
(19:41):
of spending good, lots of reason to invest do capex good,
that's everyone's investment to someone else's income. Why is there
this sort of like rebellion against that? Can let's keep
put it in A argued that it's it's purely political. Um.
He said that this he argued his faith in his
(20:02):
famous article, uh, political aspects of full Employment, which I
would recommend to anyone who doesn't know much Klitzki is
very very easy to read. It. Not a single equation,
but he oughta good he argued. There, but you know,
there's no doubt that full employment is more rational for
(20:26):
the system as a whole. It's more rational. Profits are higher,
employment is higher. Everything is better if you have full employment. However,
full employment strikes at the heart of another feature of capitalism,
(20:47):
which is the question of labor discipline. If you have
a state of full employment, then uh, it's very It
becomes difficult to discipline workers in the factory or in
the office. If if a worker can leave his or
(21:09):
her place of employment and immediately get another one, then
where is the labor discipline? It's about control. It's it's
really about the control of labor. And Keletski argued that
in in what would tend to happen is that in
(21:29):
a state of m full employment you would get a
political coalition UH, put together by major employers, UH, the
people in finance UH, central bank, central bankers, all of
(21:53):
whom would argue that the situation is somehow manifestly unsound.
Will unsound in what way? Well? Inflation? And sure enough,
you know we we have had inflation, but we also
know at the moment that inflation is coming down quite rapidly.
(22:17):
As well, because so much of the current inflation was
simply an energy market adjustment two sanctions on on Russian energy.
Uh So it's a kind of future inflation because the
(22:38):
future is unknown, and it's very very easy to to say, oh, well,
you know, things may appear okay at the moment, but
we know we have these these and these economists with
all these models showing that there's some terrifying inflation around.
This kind of reminds me of the debate over work
(23:01):
from home, which is, you know, post pandemic UM, people
started working from home and there didn't seem to be
much of a hit on productivity, and a lot of
companies still met whatever their internal benchmarks are. So then
you had a lot of bosses who started talking about
a degradation of corporate culture and how you know it's
(23:22):
bad people are working from home. They might be doing
okay um on a pure numbers basis, but in the
long run it's going to impact the company by hitting culture.
Uh yeah. Can you maybe connect more of what we've
seen over the past year or two to Colletski's ideas,
Do you think the post pandemic maybe shift um towards
(23:42):
worker power has vindicated some of his ideas. I think
it has um it's it's it's vindicated a lot of
these ideas because it's actually weakened, uh, the the the
power of many businesses who uh, particularly businesses in uh
(24:09):
in activities retail, hospitality, UH, these kind of these kinds
of activities which transport even which I just saw that
their markets shrinking, shrink shrinking quite drastically. The the what
(24:34):
then happened, however, was that the speed of the recovery
as uh you know, lockdown was removed. I think a
lot of those businesses took advantage of that situation to
start raising their price And my view is that they
were raising their prices because many of them had got
(24:59):
seriously into debt, many of them had got had found
their political position weakened. They had to go knocking at
the door of uh of governments asking for loans, asking
for tax free bates, various other uh you know, public subsidies.
(25:25):
Governments had responded by insisting on on no layoffs. UH.
This kind of thing put UH companies, particular corporations into
a difficult bind, and a lot of them got out
(25:45):
of this by borrowing at record low rates in trust
and then seeking to recover that borrowing by raising raising
their prices. So you have my my explanation of the
inflation is would be twofold. One is that you have
(26:10):
this energy costs, which is a temporary phenomenon. But the
other one is really the what Richard Coup referred to
as it is a type of balance sheet effect where
firms are trying to clear off debt by by raising
(26:35):
prices and I think doing it. Uh, they were doing
quite successfully. But that then feeds into a narrative that
the uh, that all this is the consequence of full employment,
and therefore, uh, you know, must be it must show
(26:55):
that the state of full employment is is financially unsound.
It isn't, of course, because the the the inflation has
very little to do with with what's happening in the
labor market. Wage increases have lagged lagged price increases. UH.
(27:20):
Unions and workers in general have a much weak have
a match weaker position in the labor market. Um to
some degree, actually individual workers are benefiting from labor shortages,
but in terms of organization, in terms of powering in
(27:45):
what politically called the power in the factories, workers still
remain weak because worker worker organizations are weak. So we
(28:12):
just have a couple of minutes left. But I just
want to on the inflation question. A term that you
hear political activists sometimes in the US probably around the world,
like greed inflation, And I'm curious whether you think that's
a useful frame. It kind of doesn't sound like it
listening that, of course, there are opportunistic situations and that
(28:35):
for balance sheet reasons, corporations feel the impulse to uh
to raise prices, But like greed kind of seems like
one of these things that's kind of immeasurable. I'm curious,
like in your perspective or collect keys perspective, like, is
that a useful analytical mode Perstally, I wouldn't use the word, uh,
(28:57):
the term greed because it seems to be a kind
of moralizing the fact that it's it's business practice to
get the best possible price, uh for for your output.
I think there is a there is a sense in which,
(29:18):
if you have excess capacity, uh, the excess capacity may,
under certain circumstances, um cause a business to um not
to raise prices to moderate greed. But on the whole,
(29:43):
I think business decisions are not made on a kind
of moral issue. You try to get the best out
of the market. That's uh, it's it's the nature of
the system. So one thing that I always like to
ask economists who have written biographies of other econom miss
or who have studied their work, is is there any
(30:03):
area in which you disagree with COLLECTI or think that maybe,
you know, maybe he got it wrong, or maybe this
particular theory could be improved or expounded upon. Yes, I
think actually he well, he I think his political judgment,
uh sometimes was when when when to skew for it?
(30:30):
I mean, if I can give a particular example from
from the United States, he thought that the student movement
against the Vietnam War or you know, was headed for failure. Uh.
(30:51):
And I think this was this was a misjudgment. He
thought that American capitalism would it would be divided between
the international capitals and American multinationals would be much more
(31:16):
sensitive to the way in which America's perceived abroad, and uh,
the domestic or business American businesses that only operating within
the United States, who would be you know, maybe much
(31:36):
more bullish. I'm not sure that this is a distinction
that that works quite well in the United States. I
think I wished he I regret that he didn't write
more about money, uh and finance, because I think he
(32:00):
um in this way he um uh. It's it's too
easy to dismiss his ideas as being characteristic of the
long period between nine and let's say, the nineties seventies,
(32:25):
when you know, really the stock market and finance were
not terribly important and could and we're in a fact
dependent on on state support. M I think that they
the situation now it's rather it's rather different and really
(32:52):
needs um needs more working on. So I think this
would be um kind of my my, my regret and
my criticism. Plus the fact that I think he his um.
He was a he was an engineer, and a feature
(33:14):
of the type of economics of his time was that
you had to you want success in profession by putting
forward in a neat mathematical model. Now he knew that
this was this wasn't enough. You had to have some
kind of roots in the way in which the system operated.
(33:38):
But uh, you know, he tended to believe that once
he'd once he'd put forward the equation and that was enough.
And I don't think it was Jean Taparowski I'm afraid
rut of time, but that was a fantastic Really appreciate
(34:00):
you coming on. And I feel like perhaps, you know,
Kine sort of got this revival after the Great Financial Crisis,
and it feels like with collects thoughts right now is
people wrestle with some of this thing. More people are
going to be discovering him. So appreciate you coming out
odd lots. Thank you, Thank you very much for this opportunity, Tracy.
(34:32):
I really enjoyed that. It does feel like, um, well,
I mean there's a lot there. The political aspects of
the question you brought about working from home, the sort
of rebellion against worker autonomy, worker power, what happens when
it's really easy, potentially to find another job. I think
it's like, for one thing, that's like a pretty important
(34:53):
idea right now. Absolutely. I also thought the question of
why so if you argue that, you know, private sector
activity is dependent on the level of investment, but then
why why does the level of investment change? Why is
it more unstable that than consumption. That is a question
that comes up all the time here on all plots,
(35:14):
right like why do these business cycles exist? Why do
firms seem to you know, potentially overreact to slow periods
and then overreact to um more active periods. I don't know,
like I think it's still open to debate, but it
was definitely interesting to hear Coletsky's ideas on that. Yeah,
and this idea that like and you know, um change
(35:36):
like is UM pointing out like animal spirits uncertainty Like
these are like it's like vibes, you know, like there's
I think vibes are important, but also like they're a
little bit unsatisfying to choose capacity utilization over vibes. Yea, yeah,
I mean why do vibes change? Right? That's like if
you're if you sort of like lean too heavily into
the vibes theory of economic cycles, then you have then
(35:59):
you're just moved onto the question of like well why
do vibes change? And so some of these questions about
like capacity utilization, I do think they're helpful. I love
like I love the railroad example of like, Okay, the
problem is just keep building railroads, which you will maintain
like full demand. Then you'll end up with a hundred railroads.
And this idea like this is the sort of like
contradiction of the system is very As a regular user
(36:21):
of amtrack, I say, build all the railroad build build
them all. Now I am open to any and every
possible explanation, um or I should say policy suggestion for
smoothing business cycles, and this was a fascinating one. Absolutely
All right, shall we leave it there? Let's leave it there.
This has been another episode of the All Thoughts podcast.
I'm Tracy Alloway. You can follow me on Twitter at
(36:42):
Tracy Alloway and I'm Joe Why Isn't Thal? You can
follow me on Twitter at the Stalwart, follow our producer
Carmen Rodriguez at Carmen Arman and Dash Bennett at Dashbot.
And check out all of our podcasts at Bloomberg under
the handle at podcasts, and for more odd Lots content,
go to blue berg dot com slash odd Lots, where
(37:02):
you can see the transcripts we blog. We have a
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sign up. Thanks for listening.
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Joe Weisenthal
Tracy Alloway
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