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Michał Kalecki’s Theory of Distribution
1. Introduction
Michał Kalecki (1899–1970), a Polish economist, developed a theory of income distribution similar to Keynesian economics but with a Marxist influence. His work explained how profits, wages, and investment interact in a capitalist economy. Unlike Keynes, who focused on demand and government intervention, Kalecki emphasized class struggle, monopoly power, and economic cycles.
Key Features of Kalecki’s Distribution Theory:
✔ Income distribution is determined by monopoly power and class conflict.
✔ Capitalists control profits, while workers receive wages.
✔ Investment, not savings, drives economic growth.
✔ Economic cycles result from fluctuations in profits and demand.
2. Kalecki’s Model of Income Distribution
Kalecki’s model divides society into two classes:
1️⃣ Workers – Earn wages (WW) and save very little.
2️⃣ Capitalists – Earn profits (PP) and make all investment decisions.
🔹 (1) Profit Determination Formula
Kalecki’s famous equation states that total profits (PP) depend on investment and capitalists’ consumption: P=I+CcP = I + C_c
Where:
- PP = Total profits
- II = Investment
- CcC_c = Capitalists’ consumption
✔ Key Implication:
- Profits are not determined by savings (like in Kaldor’s model).
- Capitalists earn what they invest—more investment leads to higher profits.
📌 Example:
- If a company spends more on factories, profits increase across the economy.
🔹 (2) Wage and Profit Share in National Income
Kalecki argued that the profit share in GDP depends on monopoly power.
✔ Profit Share Formula: PY=μ1+μ\frac{P}{Y} = \frac{\mu}{1+\mu}
Where:
- μ\mu = Markup (price over cost), determined by monopoly power.
- YY = Total output (GDP).
✔ Key Implication:
- Stronger monopolies increase profit share and reduce wages.
- More competition leads to lower profits and higher wages.
📌 Example:
- Big Tech firms (Google, Apple, Amazon) set high markups, increasing profit share while limiting wage growth.
🔹 (3) Investment-Driven Growth and Business Cycles
✔ Boom Period:
- High investment → High profits → Economic expansion.
✔ Crisis Period: - Low investment → Falling profits → Recession.
📌 Example:
- The 2008 financial crisis followed Kalecki’s pattern—investment dropped, profits fell, and unemployment rose.
✔ Key Lesson:
- Government policies should stabilize investment to prevent recessions.
3. Comparison: Kalecki vs. Other Economists
| Feature | Keynes | Marx | Kaldor | Kalecki |
|---|---|---|---|---|
| Class Conflict | No | Yes | No | Yes |
| Savings Role | Determines investment | Irrelevant | Determines distribution | Profits determine savings |
| Investment Impact | Increases demand | Not central | Increases profit share | Drives profits |
| Profit Share Cause | Demand-side | Surplus value | Savings behavior | Monopoly power |
| Government Role | Demand management | Revolution | Support investment | Control monopoly power |
4. Criticism of Kalecki’s Model
✔ Ignores Financial Markets – Modern economies rely on credit and banking, not just monopoly pricing.
✔ Limited Role of Technology – Assumes profitability depends only on pricing power, ignoring productivity growth.
✔ Assumes Wage Rigidity – In reality, wages can rise with productivity improvements.
📌 Modern Example:
- The rise of inflation and corporate markups (2021-2023) aligns with Kalecki’s monopoly pricing theory.
5. Conclusion
✔ Profits depend on investment and monopoly power, not just savings.
✔ Capitalists earn what they invest, while workers rely on wages.
✔ Economic cycles occur due to fluctuations in investment and demand.
✔ Monopoly power increases profits and reduces wages.