Selected Essays in Kaleckian Economics

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Preface

This collection of essays mainly represents the collaborative efforts of Douglas Mair, Professor Emeritus of Heriot-Watt University in Edinburgh, Scotland and Anthony Laramie, Professor of Economics at Merrimack College in North Andover, Massachusetts. Other co-authors, over the last decade or so, include Jerry Courvisanos, Associate Professor of Innovation and Entrepreneurship at the University of Ballarat, in Victoria, Australia, Hossein S. Kazemi, Professor of Economics at Stonehill College, in North Eastern Massachusetts, and the editor of this volume, Evangelos Charos, Professor of Economics, also at Merrimack College. This collection covers a variety of works, some previously published, and some not, that span a twenty-year period.

The first chapter, “Full Employment: Gift Horse or Trojan Horse?” by Mair and Laramie, was originally published in the Review of Social Economy, Volume LX, No. 4, in 2002, and was presented at Kalecki’s Centenary Conference at the Warsaw School of Economics in 1999. This article recognizes Kalecki’s 1943 essay “Political Aspects of Business Cycles” as a seminal work on political business cycle theory. Mair and Laramie interpret, as Kalecki puts it, business leaders’ opposition to full employment policies as a form of rent seeking, that these oppositions were anticipated in Olsons’s theory of distributional coalitions, and that these distributional coalitions provide the transmission mechanisms (missing in Kalecki’s work) and tensions that generate the political business cycle.

The second chapter, by Mair and Laramie, was first published in the International Review of Applied Economics, Vol. 10, No. 2, in 1996. In this article, Mair and Laramie discuss, using a Kaleckian framework, “The Macroeconomic Effects of Taxation in a Federal Europe.” In this paper, Mair and Laramie explain how fiscal policy—in particular changes in the composition of taxation—could be used to promote full employment in the context of the constraints imposed by Maastricht Treaty, and explain how the economic incidence and effects of taxation vary between national and regional political authorities.

The third chapter, authored by Mair, examines the role of fiscal policy in an independent Scotland. In this chapter, the historical context of fiscal autonomy for Scotland is discussed and the focus is on Scottish control over the corporation income tax. Mair reviews neoclassical tax theory and finds it deficient for the standard assumptions of microfoundations, the market-clearing full employment assumptions, and discusses various strains of the Kaleckian/Post Keynesian alternatives to the problem of understanding the economic incidence of profits taxes. ← 1 | 2 → Mair concludes that the Scottish government’s attempts to reduce the capital tax to accelerate economic growth would likely be frustrated by increases in the income tax rate, and that, given the increased income inequality and rising “financialisation” of income, the relevant fiscal option is capital taxation.

The fourth chapter, “Regional Tax Differentials: A Kaleckian Approach,” by Laramie and Mair, was originally published in Regional Studies, Volume 39, No. 3, in 2005. This article extends the work of Kalecki (1971/1937) and Laramie and Mair (2000) to consider how regional taxation has both local and macroeconomic effects. The various elements of Kaleckian tax incidence and effects are specified. Local tax policies, for example at the state level in the U.S., have macroeconomic effects (including excess burden effects), and these macroeconomic effects are transmitted back to “economic regions” depending upon the disaggregation of (static) distribution factors. As an example, the effects of an increase in the income tax levied by the Scottish Parliament are illustrated. In this paper, “beggar thy neighbor” effects are discussed where local jurisdictions have the incentives to be fiscally conservative, while encouraging “neighbors” to be fiscally liberal, to capture the spillover effects of fiscal stimuli. Two policy implications emerge: First, a federation of independent fiscal authorities will likely race to the bottom and provide an inadequate level of fiscal policy (in the Musgravian sense of inadequate allocative, redistributive and stabilization functions). Second, a federal fiscal authority is needed to account for and prevent this race to the bottom.

Chapter 5, “The Effects of Taxation in a Kaleckian Growth Model,” by Laramie and Mair, was originally published in Metroeconomica, Volume 54, Nos. 2 & 3, in 2003. This article extends Kalecki’s (1971/1968) long-run theory of economic growth to consider the effects of taxation, and is based off an extended version (where the gearing ratio and capacity utilization matter) of Kalecki’s third and final attempt to explain, and, therefore, fine-tune his theory of “economic dynamics.” In particular, Kalecki, as is well known, understood the long-period as consisting of a series of short-periods. In the short-period, investment determines profits, but, through lags, the profits affect investment. The result is both a trend and a cyclical pattern of investment that is co-dependent. The effects of wage and profits taxation on the long-run trend rate of growth depends on a set of empirical questions related to the government budget stance, and the tax shifting assumptions/the distributional effects of taxation. For example, given a balanced budget constraint, an un-shifted profits tax increase: a) accelerates the depreciation of existing capital; b) has no effect on business profits (if workers do not save any of the additional income generated through the balance budget effect); and c) increases the trend level of investment. ← 2 | 3 →

Chapter 6, by Courvisanos, Laramie and Mair, “Tax Policy and Innovation: A Search for Common Ground,” was originally published in Intervention, Volume 6, No. 2, in 2009. In this article, the mainstream and Kaleckian approaches to fiscal policy are contrasted, the role of taxation in affecting economic growth is revisited, the role of taxes on greenhouse emissions, in our Kaleckian approach, is used to illustrate the effects of taxes on the rate of innovations, and we illustrate how taxes interact with a “political innovations cycle” where businesses hold back “best practice” (innovations) capital goods, depending upon relative costs and profit conditions. The article identifies the three fears that capitalists have with respect to innovations (which parallel the fears with respect to full employment): a) loss of economic control, as new entrants into markets are encouraged by innovations; b) loss of policy control, as innovations become distributed through public institutions; and c) loss of workforce control, where innovations are intended to maintain “high union membership structures.”

Chapter 7, “Accounting for Corporate Profits: 1991–2014,” by Laramie and Mair, illustrates how the national income and product accounts, following recent changes to the definitions in the U.S., can be used to “operationalize” Kalecki’s theory of profits. In particular, corporate profits are shown to be largely defined as the sum of gross domestic investment, the government budget deficit, the current account surplus and corporate dividends less the sum of the consumption of fixed capital and personal savings. The behavior of profits and their components is described following the recessions of 1991, 2001 and 2007–2009. The economic expansions of corporate profits following the 1991 and 2001 recessions were largely investment driven (corporate increased almost pro tanto with gross domestic investment). In addition, the government budget deficit acted as a stabilizer on corporate profits. During this time period, no apparent relationship between government budget deficit and the current account deficit is found.

Chapter 8, “Kalecki and Fisher: Income and Capital Taxation,” by Laramie and Mair, is a history of thought exercise. Both Kalecki and Fisher published seminal works in 1937: Fisher – “The Nature of Capital and Income”; Kalecki – “A Theory of Commodity, Income and Capital Taxation”. Fisher and Kalecki both explore the origins of income from capital. Fisher considers the various charges and credits that generate net income flows, and he concludes that income from capital is psychical—like consumer and producer surplus. Fisher concludes that psychical income is best approximated as consumption (in the true theoretical sense of the word), and then considers the advantages of a consumption tax over other taxes, such as income and capital gains taxes, while implicitly assuming that the economic and legal incidences of taxes are identical. Kalecki, on the other hand, saw ← 3 | 4 → the origins of income to capital as business investment and capitalist consumption decisions, while explicitly assuming that the legal and economic incidences (as a “consequence of Mr. Keynes’s General Theory”) could be quite different. Unfortunately for the field of public finance, the Fisherian approach to taxation has dominated public policy discussions, and the dual tax system (where income from capital receives preferential tax treatment) has evolved, contributing to the rise in income inequality, low wages, and excess capacity.

Chapters 9 and 10 are empirical investigations of Kalecki’s theory of investment as modified by Courvisanos (1996). These chapters are co-authored by Charos, Kazemi, Laramie and Mair (CKLM). Courvisanos (1996) incorporated into Kalecki’s theory of investment some of the behavioral elements of Keynes (like the capacity utilization rate, the interest rate, the gearing (leverage) ratio), and he termed the resulting theory of the business cycle the “susceptibility cycle.” Both chapters build upon the idea that new orders have a set of behavioral elements, and that new orders, subject to lags and shocks, determine actual investment expenditures. In Chapter 9, CKLM use the U.S. census data to explain New Orders of Non-Defense Capital Goods in the U.S. in the period 1992 and 2013, using net corporate cash flows, the capacity utilization rate, a sales accelerator, an interest rate spread, a gearing/leverage ratio, the wage share, and national defense’s share of GDP as explanatory variables. The estimated coefficients have anticipated sign and are statistically significant except for the the wage share and the gearing ratio coefficients. In Chapter 10, we repeat the study in Chapter 9, but then use our model to understand the relationship between orders of capital goods and shipments of (expenditures on) capital goods. In understanding the relationship between new orders and shipments of capital goods, we find that shipments and new orders are cointegrated and that new orders and the debt-to-equity ratio are cointegrated. The cointegration of these variables allows us to use a vector error correction model where we show, using quarterly and monthly data, how changes in the debt-to-equity ratio affect changes in the relationship between new orders and shipments of capital goods.

We thank Evangelos Charos, our editor, the editors at P. D. Lang, the various publishers who gave us permission to reprint previously published articles, especially Michelle Dickson, at Routledge, Taylor and Francis.

A. Laramie ← 4 | 5 →

References

Courvisanos, J. 1996. Investment Cycles in Capitalist Economies: A Kaleckian Behavioural Contribution, Cheltenham, Edward Elgar.

Fisher, Irving (1937). “Income in Theory and Income Taxation in Practice.”
Econometrica, 5, 1, 1–55.

Kalecki, Michal (1937). “A Theory of Commodity, Income and Capital Taxation.” The Economic Journal, 47, 187, 444–450.

Laramie, Anthony J., and Mair, Douglas (2000). A Dynamic Theory of Taxation. Edward Elgar.