messori, m. (1991). financing in kalecki's theory. cambridge journal of economics, 301-313

7/21/2019 Messori, M. (1991). Financing in Kalecki's Theory. Cambridge Journal of Economics, 301-313.

1/13

Cambridge Journal of Economies

1 9 9 1 ,1 5 ,3 0 1-3 1 3

im Kail


2/13

302 M.Messori

rightly stresses that the first meaning of finnnring cannot be identified with previous

savings; and he shows that, under reasonable assumptions, any level of investment

financesitself. However, taking into account the 'technical' side of the money market,

Kalecki overlooks the fact that the capitalist class demands whole prod uction financ ing.

1

Our discussion proceeds as follows. First, we sketch the simplest possible Kaleckian

model w hich includes production bu t not investmentfinancing.Th e crucial assumptions

of this model are that inputs come before outputs and the propensity to consume of the

workersisequalto one(Section1).Then,weexamine Kalecki'sanalysiswhenthe'techni-

cal'sideof the money m arketisleft ou t (Section2).Kalecki's simplifications im ply that the

purc hase of working capital does not need any

financing.

When these simplifications are

eliminated (Section 3) and the 'technical' elements taken into account, capitalists as a

whole require banks'financingn order to carry out their production processes. Kalecki

does not make clear this crucial aspect offinancing(Section

4).

From this perspective, an

outline ofbanks'behaviour shows theroleplayed by the short-term rate of interest in our

Kaleckian model (Section5 ).Finally, we summ arise our results by a critical reference to

the different interpretations suggested by Kre gel, Asimakopulos, and Pa tinkin.

1.

The hypotheses

We assum e a closed economic system in which we neglect the role of government inter -

vention. Th eagentsacting in this system are reduced to three grou ps: th e banking system

composed of a central bank and of commercial banks taken

as

a

whole;

the capitalist class

assimilated to two sets of firms which produce, respectively, a composite investment

good and a composite consumption good; the aggregate of workers which supplies

homogeneous units of labour. The economic process is defined in a single-period

sequen ce, where production takes time. The m oney wage (w) is exogenously determined

and must be advanced before production takes place. The expenditure refers to the

current output; hence it is realised at the end of the period, once production is

completed.

2

The central bank holds a monopoly position in the supply of legal tender. Given the

previous assumptions, legal tender can Sow into the economy only through commercial

banks.

Th us , the amount of legal tender represents

a

corresponding debt

(AT)

of commer-

cial banks with the central bank . It equals the sum total of the banks ' reserves

R),

which

take the form of non intere st-bearing deposits with the central bank, and legal tender held

by the non-bankagents.The central bank exerts an indirect control over bank credit (L)

by means oftwo

instruments:

thedeterm ination of the rate of discount(u)onbanks'debts;

the determination ofaminimum reserveratio(55).T he balance sheet of comm ercial banks

as a whole is:

3

1

Follow ing G raziani (1984), we maintain that the puzzling debate on K eynes's finance motive reveals this

same miimHwtanHinfl A few post-K eyncsian authors emphasise the role of produ ction finanring (for

example, Kaldor, 1982; Moore, 1988). However, their analysis of credit supply as demand-determined is

faulty (see Messori, 1991).

2

Thi s last assumption is unnecessary but simplifies the analysis. In fact, we only need a time-lag b etween

the payment of money wages and workers' demand fox consumption. Under more general hypotheses, this

time-lag can allow for a synchronisation of produc tion.

' In relation to Kalecki's analysis (1933A, p. 37; 1939A, p. 107) we take into account only one kind of

deposit, we leave out the commercial banks' holding and selling of securities, and we neglect open market

operation s. Comm ercial banks pay an interest rate (0 on a gents' deposits and charge an interest rate(r,where

r >i, u)on cred its. We analyse the problems related to interest payments and to banks' control in S ection 5 b ut

we neg lect the q uestion of how firms pay interest on bank credit.


3/13

Finan cing in Kalecki's theory 303

Assets Liabilities

R M

L D

whereR^mD ( 0 < m < 1).

Un til we discuss K alecki's analysis of the 'technical' side of the money market (Section

4), we assum e that non-bank agents do not h old legal tender, so that bank deposits are the

only m edium of exchange and legal tender acts as banks' reserves. In princip le, non-bank

agents may hold bank dep osits before the start of or over the period. He nce banks' aggre-

gate budget constraint,M=R+ (LD), must be replaced with the two equalities R=M

an dL = >.

We assume that, at the end of the period, the workers' propensity to save and the

capitalists' propensity to consume are equal to zero.

1

Thus the total demand for the

composite investment good, produced by one of the two sets of firms, depends only on

the expenditure of the capitalist class, and the total demand for the composite consump-

tion good, produced by the other set of firms, depends only on the expenditure of the

workers. Th e two sets of

irms

ix

the price of the two com posite goods through

a

mark-up

(#, and q^ respectively) determined by their degree of monopoly (cf. Kalecki, 1954,

pp. 12-6 ). Neither set of firms is constrained by the available amoun t of labour units. S o, if

we ne glect the liquidity constraints set by paying money wages in advance, firms can hire

the desired amount of labour units {N

l

and N respectively) in order to realise their

desired output (I and C, respectively).

Th e two sets of firms being price-makers, the amount demanded of the tw o com posite

goods (/

D

and C

D

, respectively) is determined by expenditure. Given the propensities to

consume and investment orders, we assume that both sets of firms realise the expected

amount of sales at the fixed prices. If the time-lag between investment orders and the

corresponding p roduction is neglec ted or if capital under construction is not included in

inventor ies, aggregate inventories will remain constant (cf. K alecki 193 3C, p. 2).

Th e set of firms which p roduce the com posite consumption good receives monetary

proceed s equal to

w(N

x

+

N


4/13

304 M . Messori

pp.

70-71 ), it determines an equal amount of savings at the end of the period. Th e problem

is that

the

demand

for

labour can only be realised through

the

advance

of

money wages.

Thus ,

both setsoffirms must transfer toworkersashare( 1). W ith respect to

our previous single-period sequen ce (cf. Section 3), this means that the production of the

com posite investm ent goo d takes more than one period (cf. Kalecki, 1933C , p. 2). Kalecki

(1939A, pp. 107-10; see also 1933A, pp. 37-40) offers two alternative scenarios to show

that this time-lag b etween investm ent orders and investmen t deliveries makes positive the

amou nt of financing borrowed b y the capitalist class.

(a) T he amount of financing borrowed from th e commercial banks as a wh ole at (r) is

determined by the expenditure to be made for the construction period of the composite

investment good during the interval [(i +1 )r] .At t+ 1 ) this financing is repaid through

a loan of equal amount, which is funded by savings accumulated during [(r+1) r]and

allocated in securities at (r+1);

1

comm ercial banks asawhole grant new financing, equal

in amount to that

at

(i).M oreover, an equivalent amount of savings is accumu lated during

[(t +

2

(t+

1)] and is allocated in securities at (f + 2) . Th ese mechan isms imply that any

increase in investment has only temporary effects on bank credit. Assuming that invest-

ment orders increase at (t+2), the consequent addition to the advances will be met from

the increased accumulation of savings at (t + 3) .

(b) Th e am ount of financing borrowed from the com mercial banks as a who le at (r)

is determined by the expenditure to be made for the entire construction period of the

composite investment good during the interval

[(t+j)

t] (cf. also Kalecki, 1935A, p.

344; 1933B, pp. 83-4). This financing creates a bank deposit called 'investment finance

fund'. In the intervals [(r+1)

t], . . . ,[(.t+f)(t+j

1)],

the expenditures for the con-

struction period of the composite investment good imply corresponding decreases in

the 'investment finance fund' but corresponding increases in savings. Savings feed a

bank deposit called 'intermediate savings fund'. At (t+j), when the construction period

ends, the 'investment finance fund' disappears and the 'intermediate savings fund' is

equal to the amount of initial financing. Kalecki (1939A, p. 109; also 1933A, p. 39) can

thus affirm: 'the loan then floated in order to fund this credit is exactly taken u p by the

accumulated savings'. An increase in investment orders increases the two funds just

mentioned.

Kalecki comes to the co nclusion th at, especially in scenario (b), any increase in invest-

ment leads to a rise in bank credit and, hence, to 'credit inflation'. This effect is

1

K alec M (193 9A ,p.lll)fT U in tains that iccuritietareoffere d b y the banking system to transfer its assets to the

saver*. Ho wev er he adds that it would be possible to assume that savings are ' . . . d evoted partly for the

repayment ofadvances (Airf.,p. 110). In this case,'a part ofthe loans floated is then not taken up by savers but

the banks arepro unto relieved from advances and enabled to take up loans instead'. Given our assum ptions on

banks balance sheets (seep.

302,

n.3 ),we allow for a direct exchange of securities between savers and spenders.


9/13

Finan cing in Kalecki's theory 309

strengthened by two additional elements. The increasing production of the composite

investment good implies an increase in the aggregate output and in the prices of the two

composite goods.

1

In turn, these elements raise the demand for money for transactions,

also defined as money in circulation (cf. K alecki, 1933A , pp. 38-3 9; 1933C p . 13; 1935A,

p. 34 4; 1939A, p. 108). T he last implication is only valid if we rem ove the assumption that

bank deposits

are

the only medium o f exchange (see Se ction 1). The increased deman d for

money in circulation means a rise in the legal tender held by non-bank agents, and a

corresponding decrease in their bank dep osits

as

well

as

in the banks' reserves (cf. K alecki,

1939B,p.46) .

Th e problem is that Kalecki never specifies which agents are, respectively, the spenders

and the savers in scenarios (a) and (b). In our single-per iod sequ ence (cf. S ection 3 ,points

(i)(iv)), the spenders are the set o f firms which advance mon ey w ages to hire the units of

labour necessary for the production of the co mp osite investment good , and the savers are

the set of firms which produce and sell the composite consumption good.

Let u s apply this interpretation to K alecki's analysis. Since the workers' propensity to

consume is equal to one at the end of every period, the producers of the composite

consum ption go od also receive- as monetary proceeds the am ount of mon ey w ages

advanced by the producers of the composite investment good, and accumulate this share

of proceeds as savings while waiting for the end of the investment construction period.

Th ey u se these savings either

to

buy interest-bearing securities issued by the producers of

the com posite investmen t good in order to repay their debts to banks (see scenario (a) and

p.3 08, n. 1), or to feed the 'intermediate savings fund ' (see scenario (b)). T he rise in the

deman d for transaction mon ey is due to th e rise in the amount of m oney w ages advanced

by both sets offirmsand, hence, in the mon ey he ld by the aggregate of workers during the

production of the composite consumption go od.

Th is interpretation allows for the analysis of production financing. H owev er it cannot

justify two aspects of Kalecki's scenarios (a) and

(b):

(i) the set of firms which produ ce the

composite consumption good demand financing only to hire their

additional

units of

labour; (ii) the increases in output and prices determine the rise in the transactions

demand for money. Given that the producers of the composite consum ption good do not

use their previous savings to advance wa ges, our interpretation im plies that both sets of

firms must demand an amount of financing equal to the advance of theirtotalamount of

mon ey w ages; and that the rise in the dem and for transaction money is due to the increase

in these amounts.

2

Moreover, Kalecki (1939A, p. 107) affirms that his scenario (b) is

more general than his scenario (a). But w ithin the limits of Asimako pulos's position (cf.

Section 2), our interpretation im plies that one of

the

two sets of firms behaves irrationally

in scenario (b). The investment producers demand an amount of financing greater than

their current advance of money wages so that they hold bank deposits which bear an

interest rate lower than that on their de bts.

1

Kregel (cf. 1989, pp. 201 -202 ) maintains that Kalecki does not "pl ain why prices increase. This criticism

would apply to our two-sector Kaleckian model where raw materials are not separated from investment

finished goods. H owev er, Kalecki stresses that change s in the prices of the former are determined by changes

in deman d, and changes in the prices of the latter by changes in costs of production. T his allows alink betwee n

increases in output and in prices of any good, being the price ofrawmaterial*a component of the cost of

finished goods (cf. Kalecki, 1954, pp. 11-12; 1939B, pp. 53-54).

2

According to Kregel (19 89, p. 200- 201 ), the increase in the demand for money in circulation dep ends

firstly on the increased incom e of the capitalist class; workers raise their transactions demand for mo ney in

conseq uence o f the increase in prices. This sho ws that Kregel overlooks production finanring and focuses his

attention on payments within the capitalist dass (investm ent finanring)


10/13

310 M. Messori

5. Short-term rates of interest

The flaws in Kalecki's analysis of the 'technical' monetary factors imply some loosely-

defined areas in his determination of the rate of interest also. Kalecki (1933A, p. 41)

acknowledges that the credit supply and the transfers in the aggregate balance sheet of

commercial banks, owing to thefinancingof increased investm ent, raise the interest rate.

Mo reover, he maintains that the securities issued by the set of firms which produce th e

composite investment good or by commercial banks as a whole to fund their previous

credits (see p. 308, n. 1) are placed on the market at rising rates of return (cf. Kalecki,

1938A, pp. 111-113). However, Kalecki (1933C, p. 14; 1935B, pp. 29-30) focuses his

attention ontherelationships betweenthechanges in the d emand for money in circulation

and in th e interest rate: if the banking systemdoesnot support the increase in the demand

for money in circulation which follows from the increase in investm ent, therateof interest

will rise; an d, if substa ntial, this rise can limit economic expansion.

Given Kalecki's analysis of the 'technical' monetary factors, the rationale of these

statements

isobvious.

Kalecki maintains that the sh ort-term

rate

of interest changes more

than die long-term one.

1

Financing the demand for transaction money depends on die

short-te rm rate of interest, whereas

financing

nvestment orders directly(seescenario (b),

Section 4) or indirectly (see scenario (a), Section 4) depends on the long-term rate of

interest. Moreover, Kalecki concentrates on an increased transactions demand for money

probably to stress that this

financing

mplies a fall in ag ents ' banks deposits and in bank s'

reserves (see Kalecki,1939B,pp . 46-47).

2

Ou r re-intcrprctation of the 'technical' monetary factors m akes it meaningless to d is-

tingu ish increases infinancingonthegrounds of increases ini n vestment orintransactions

demand for money. If the produc tion of the composite investment good takes more than

one period (see Section 4), it will be true that the producers of this good must issue new

securities in the financial markets at the end of each period and pay a long-term rate of

interest on them . Nevertheless, this issueisneeded in order to

repay

die bank

financing

of

the advance of money wages in die investment sector at the opening of die corresp onding

period. T his financing, which involves die determination of short-term rates of interest,

also applies to die produ ction of die composite consump tion good.

Hence our concern is only widi Kalecki's determination of die short-term rate of

interest a nd, in particular, w idi his conclusion (1939A, pp. 111-112; 1935B, pp. 29-30)

that die central bankcanavoid(allowfor)risesnfinancingwhich implyrisesn die short-

term interest rate dirough easy (tight) money. We aim to show diat a similar conclusion

will hold ifweinterpret Kalecki'sfinancingas production financing.

In this respect, die amount of money wages is equal to die total amount of bank credit

(L).

L et us assume diat n on-bank agents hold legal tender: during die production of die

comp osite consum ption go od, die aggregate of workers may convert a share ofthewages

in legal tender. This share (/) depends on institutional factors (), taken as given, and on

die level of die interest rate (t;i> 0) paid by die commercial banks as a whole on workers'

deposits:

J=/( ,i)

(5.1)

1

A full d escription of K alecki's theory of the long -term rate of interest is offered in K alecki (195 4, pp.

73-8 8) (see alto: Sawyer, 1985, pp. 96-1 01; Sebastiani, 1985, pp. 107-112) .

1

Krege l (1989 , pp . 201-20 2) argues that Kalecki doei no t give any explanation for 'the question of why an

increase in transactions dem an ds . . . should causeanincrease in the rate of interest'; and that all the reasona ble

explanation s for this last increase do not explain why the increases in investme nt wou ld be stopped .


11/13

Financing in Kalecid s theory 311

where depends

on the

degree

of

competition

for

deposits

and on the

central banks'

discount rate (see n.

3,

this page).

Th us, given the balance sheet constraint[

=

R

+ (L

D)]

and the commercial banks'

minimum ratioofreservestothe agents' deposits R=mD) (see Section 1), during the

production ofthecomposite consumption

good,

bank s' aggregate deposits andthebalance

sheet

are,

respectively, determined by:

1

D= L(l - /) (5.2)

Af

=

m L - ( m - 1 ) / L

0


12/13

312 M. M essori

Conclusions

Fu rthe r investigation offinancinghas shown that Kalecki,inconcentrating on investment

financing, neglects production financing. This result makes it possible to criticise the

different interpretations suggested by Kregel

(1989),

Asimakopulos (1983), and Patinkin

(1982).

Unlike Patinkin, who ascribes to Kalecki the restoration of an ex ante link between

savings and investment, we have proved that Kalecki's equality between investment

and savings results from investment orders and consequent production. Unlike

Asimakopulos, who constrains investment activity owing to a lack of savings and thus

posesatheory of loanable funds,wehave proved that the time -lag for the full operationof

the Keynesian m ultiplierisof no account in Kalecki's financing.

Kregel correctly asserts that these two interpretations lead to a similar m isunderstand-

ing of income distribution and of investment financing in Kalecki's model, even if they

start from the opposite analysis. However, Kregel overlooks that firm s needfinancingo

advance money wages and to carry out their production. Th is leads to the statement that

Kalecki's income distribution does not depend on monetary elements (cf. Kregel, 1989,

p.

193). Inasense,this istruesince theprofit-wage ratioisdetermined by thefirms'mark-

up.H owever, the analysis of production financing stresses that the short-term rates of

interest become a component ofthefirms' production costs. Thu s these rates, as well as

any possible form of credit rationin g, constrain

the level

of activity an d

the

related amo unt

of wages and profits. Moreover, these rates determine the gross profit distribution

between firms and banks.

Bibliography

Asimakopulos, A.

1983.

Kalecki and Keynes onfinance,nvestment and saving,

Cam bridge Journal

of Economics,vol. 7, no.

3-4, September-December

Asimakopulos, A. 1985. T he role of

finance

n Keynes' General Theory,Economic

Notes,

vol. 14,

no .3

Graziani, A.

1984.

T he debate on Keynes'financemotive,Economic

Notes,vol.

13,no. 1

Graziani, A.

1986.

Keynes'financemotive:

a

reply,Economic

Notes,vol.15,

no.1

Graziani, A.

1989.

T he theory of the monetary circuit,Thames Papers in PoliticalEconomy,Spring

Kaldo r, N. 1982.The Scourge

of Monetarism,

Oxford, Oxford University Press

Kalecki, M. 1933A.

Proba Ttorij Konjunktury,

Warezawa, Instytut Badania Konjunktur

Gospodaxczych I Cen

Kalecki, M. 1933B. Proba teorij konjunktury, abridged Italian translation in Chilosi, A. (ed.),

Kalecki,Bologna, II Mulino (1979)

Kalecki, M. 1933Q Outline of a theory of

the

business cycle, in Kalecki, M .,Selected Essays

of the

Dynamics

of

the Capitalist Economy1933-1970,

Cambridge, CU P (1971)

Kalecki, M . 1935 A.Amicrodynamic theory of businesscycle,

Economttrica,

vol.

3,

July

Kalecki, M .1935B.T he mechanism of the business upswing, in Kalecki, M .,

Selected Essays

of the

Dynamics

of

the Capitalist Economy1933-1970,Cambridge, CU P (1971)

Kalecki, M. 1939A.Essays

in the

Theory

of

Economic

Fluctuations,

New York, Russell Russell

(1972)

Kalecki, M.

1939B.

Money and real wages, in Kalecki, M.,Studies in the Theory

of

Business Cycles

1933-39), New York, Kelley (1966)

Kalecki, M. 1954.TheoryofEconomicDynamics,Lo ndon, Allen

Unw in (1965).

Kalecki, M .1967.T he problem of effective dem and

with

Tugan-Baranovsky and

Rosa

Luxemburg,

in Kalecki, M.,

Selected

Essays

of

the Dynamics

of

the Capitalist Economy1933-1970,Cambridg

CUP

Krege l, J. A. 1989. Savings, investment and finance in K alecki's the ory, in Sebattiani, M . (ed.),

Kalecki s RelevanceToday,Lon don, Macmillan


13/13

Fina ncing in Kalecki's theory 313

Messori, M. 1991. Keynes' General Theory and the endogenous money supply, Economique

Appliqui

vol. 44, no. 1

Mo ore, B. J. 1988.Horizontalists and Vtrticalisu. The MacroeconomicsofCredit Money,Cambridge,

C U P

Patinkin, D . 1982 .

Anticipations of the 'General Theory'},

Oxford , Blackwell

Robertson, D . H. 1940. Mr. Keynes and the

rate

of interest, in Robertson, D . H. ,

Essays inMonetary

Theory,

London, Staples

Sawyer, M. 1985.

The Economicsof MichalKaledd

London, Macmillan

Sebastian , M. 19 85.L'equilibriodisottoccupazionenelpensierodiM. Kaledd Roma , La Nuova Italia

Scientifica

To bin, J. 19 82. The commercial banking firm: a simple m odel,Scandinavian Journal of Econom ics,

vol. 84, no. 4, Decem ber

Tsian g, S. C. 1980. Key nes's financ e' demand for liquidity, Robertson's loanable funds theory, and

Friedman's monetarism,Q uarterly Journal of

Economics,

vol. 94, no. 2, May

messori, m. (1991). financing in kalecki's theory. cambridge journal of economics, 301-313

Documents