[Why do capitalists hate full employment? Because it weakens their
power over workers. ]
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POLITICAL ASPECTS OF FULL EMPLOYMENT  
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Michal Kalecki
May 7, 2018
Jacobin
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_ Why do capitalists hate full employment? Because it weakens their
power over workers. _

Unemployed women at a Federal Emergency Relief Administration camp in
Arcola, PA circa July 1934., National Archives and Records
Administration

 

Recent proposals from Bernie Sanders
[[link removed]] and
others for a national job guarantee program have placed full
employment — once a central focus of political debate throughout the
industrialized world — back on the agenda. But full employment is
more than a technical policy question. It touches on the most
sensitive political contradiction in a capitalist society: the balance
of power between labor and capital.

One of the first authors to explore these dynamics was the Polish
economist Michal Kalecki
[[link removed]] in his classic
1943 essay “Political Aspects of Full Employment.” Writing at a
moment when the insights of the new Keynesian economics were just
beginning to penetrate Western political discussion, Kalecki warned
that sustaining full-employment economic policies after the war would
require overcoming formidable political obstacles from capitalists and
their political representatives.

Full employment, Kalecki wrote,

would cause social and political changes which would give a new
impetus to the opposition of the business leaders. The “sack”
would cease to play its role as a disciplinary measure. The social
position of the boss would be undermined, and the self-assurance and
class-consciousness of the working class would grow. . . .
“Discipline in the factories” and “political stability” are
more appreciated than profits by business leaders. Their class
instinct tells them that lasting full employment is unsound from their
point of view, and that unemployment is an integral part of the
“normal” capitalist system.

We present the complete text of Kalecki’s prescient analysis, below.

A  solid majority of economists is now of the opinion that, even in a
capitalist system, full employment
[[link removed]] may
be secured by a government spending program, provided there is in
existence an adequate plan to employ all existing labor power, and
provided adequate supplies of necessary foreign raw materials may be
obtained in exchange for exports.

If the government undertakes public investment (e.g. builds schools,
hospitals, and highways) or subsidizes mass consumption (by family
allowances, reduction of indirect taxation, or subsidies to keep down
the prices of necessities), and if, moreover, this expenditure is
financed by borrowing and not by taxation (which could affect
adversely private investment and consumption), the effective demand
for goods and services may be increased up to a point where full
employment is achieved. Such government expenditure increases
employment, be it noted, not only directly but indirectly as well,
since the higher incomes caused by it result in a secondary increase
in demand for consumer and investment goods.

It may be asked where the public will get the money to lend to the
government if they do not curtail their investment and consumption. To
understand this process it is best, I think, to imagine for a moment
that the government pays its suppliers in government securities. The
suppliers will, in general, not retain these securities but put them
into circulation while buying other goods and services, and so on,
until finally these securities will reach persons or firms which
retain them as interest-yielding assets. In any period of time the
total increase in government securities in the possession (transitory
or final) of persons and firms will be equal to the goods and services
sold to the government. Thus what the economy lends to the government
are goods and services whose production is “financed” by
government securities. In reality the government pays for the
services, not in securities, but in cash, but it simultaneously issues
securities and so drains the cash off; and this is equivalent to the
imaginary process described above.

What happens, however, if the public is unwilling to absorb all the
increase in government securities? It will offer them finally
to banks
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get cash (notes or deposits) in exchange. If the banks accept these
offers, the rate of interest will be maintained. If not, the prices of
securities will fall, which means a rise in the rate of interest, and
this will encourage the public to hold more securities in relation to
deposits. It follows that the rate of interest depends on banking
policy, in particular on that of the central bank. If this policy aims
at maintaining the rate of interest at a certain level, that may be
easily achieved, however large the amount of government borrowing.
Such was and is the position in the present war. In spite of
astronomical budget deficits, the rate of interest has shown no rise
since the beginning of 1940.

It may be objected that government expenditure financed by borrowing
will cause inflation. To this it may be replied that the effective
demand created by the government acts like any other increase in
demand. If labor, plants, and foreign raw materials are in ample
supply, the increase in demand is met by an increase in production.
But if the point of full employment of resources is reached and
effective demand continues to increase, prices will rise so as to
equilibrate the demand for and the supply of goods and services. (In
the state of over-employment of resources such as we witness at
present in the war economy, an inflationary rise in prices has been
avoided only to the extent to which effective demand for consumer
goods has been curtailed by rationing and direct taxation.) It follows
that if the government intervention aims at achieving full employment
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stops short of increasing effective demand over the full employment
mark, there is no need to be afraid of inflation.

The above is a very crude and incomplete statement of the economic
doctrine of full employment. But it is, I think, sufficient to
acquaint the reader with the essence of the doctrine and so enable him
to follow the subsequent discussion of the _political_ problems
involved in the achievement of full employment.

It should be first stated that, although most economists are now
agreed that full employment may be achieved by government spending,
this was by no means the case even in the recent past. Among the
opposers of this doctrine there were (and still are) prominent
so-called “economic experts” closely connected with banking and
industry. This suggests that there is a political background in the
opposition to the full employment doctrine, even though the arguments
advanced are economic. That is not to say that people who advance them
do not believe in their economics, poor though this is. But obstinate
ignorance is usually a manifestation of underlying political motives.

There are, however, even more direct indications that a first-class
political issue is at stake here. In the Great Depression in the
1930s, big business consistently opposed experiments for increasing
employment by government spending in all countries, except Nazi
Germany [[link removed]].
This was to be clearly seen in the USA (opposition to the New Deal),
in France (the Blum experiment
[[link removed]]),
and in Germany before Hitler. The attitude is not easy to explain.
Clearly, higher output and employment benefit not only workers but
entrepreneurs as well, because the latter’s profits rise. And the
policy of full employment outlined above does not encroach upon
profits because it does not involve any additional taxation. The
entrepreneurs in the slump are longing for a boom; why do they not
gladly accept the synthetic boom which the government is able to offer
them? It is this difficult and fascinating question with which we
intend to deal in this article.

The reasons for the opposition of the “industrial leaders” to full
employment achieved by government spending may be subdivided into
three categories: (1) dislike of government interference in the
problem of employment as such; (2) dislike of the direction of
government spending (public investment and subsidizing consumption);
(3) dislike of the social and political changes resulting from
the _maintenance_ of full employment. We shall examine each of these
three categories of objections to the government expansion policy in
detail.

We shall deal first with the reluctance of the “captains of
industry” to accept government intervention in the matter of
employment. Every widening of state activity is looked upon by
business with suspicion, but the creation of employment by government
spending has a special aspect which makes the opposition particularly
intense. Under a laissez-faire system the level of employment depends
to a great extent on the so-called “state of confidence.” If this
deteriorates, private investment declines
[[link removed]],
which results in a fall of output and employment (both directly and
through the secondary effect of the fall in incomes upon consumption
and investment). This gives the capitalists a powerful indirect
control over government policy: everything which may shake the state
of confidence must be carefully avoided because it would cause an
economic crisis. But once the government learns the trick of
increasing employment by its own purchases, this powerful controlling
device loses its effectiveness. Hence budget deficits necessary to
carry out government intervention must be regarded as perilous. The
social function of the doctrine of “sound finance” is to make the
level of employment dependent on the state of confidence.

The dislike of business leaders for a government spending policy grows
even more acute when they come to consider the objects on which the
money would be spent: public investment and subsidizing mass
consumption.

The economic principles of government intervention require that public
investment should be confined to objects which do not compete with the
equipment of private business (e.g. hospitals, schools, highways).
Otherwise the profitability of private investment might be impaired,
and the positive effect of public investment upon employment offset,
by the negative effect of the decline in private investment. This
conception suits the businessmen very well. But the scope for public
investment of this type is rather narrow, and there is a danger that
the government, in pursuing this policy, may eventually be tempted to
nationalize transport or public utilities so as to gain a new sphere
for investment.

One might therefore expect business leaders and their experts to be
more in favor of subsidizing mass consumption (by means of family
allowances, subsidies to keep down the prices of necessities, etc.)
than of public investment; for by subsidizing consumption the
government would not be embarking on any sort of enterprise. In
practice, however, this is not the case. Indeed, subsidizing mass
consumption is much more violently opposed by these experts than
public investment. For here a moral principle of the highest
importance is at stake. The fundamentals of capitalist ethics require
that “you shall earn your bread in sweat” — unless you happen
to have private means
[[link removed]].

We have considered the political reasons for the opposition to the
policy of creating employment by government spending. But even if this
opposition were overcome — as it may well be under the pressure of
the masses — the _maintenance_ of full employment would cause
social and political changes which would give a new impetus to the
opposition of the business leaders. Indeed, under a regime of
permanent full employment, the “sack” would cease to play its role
as a disciplinary measure. The social position of the boss would be
undermined [[link removed]],
and the self-assurance and class-consciousness of the working class
would grow. Strikes for wage increases and improvements in conditions
of work would create political tension. It is true that profits would
be higher under a regime of full employment than they are on average
under laissez-faire, and even the rise in wage rates resulting from
the stronger bargaining power of the workers is less likely to reduce
profits than to increase prices, and thus adversely affects only the
rentier interests. But “discipline in the factories” and
“political stability” are more appreciated than profits by
business leaders. Their class instinct tells them that lasting full
employment is unsound from their point of view, and that unemployment
is an integral part of the “normal” capitalist system.

One of the important functions of fascism, as typified by the Nazi
system
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was to remove capitalist objections to full employment.

The dislike of government spending policy as such is overcome under
fascism by the fact that the state machinery is under the direct
control of a partnership of big business with fascism. The necessity
for the myth of “sound finance,” which served to prevent the
government from offsetting a confidence crisis by spending, is
removed. In a democracy, one does not know what the next government
will be like. Under fascism there is no next government.

The dislike of government spending, whether on public investment or
consumption, is overcome by concentrating government expenditure on
armaments. Finally, “discipline in the factories” and “political
stability” under full employment are maintained by the “new
order,” which ranges from suppression of the trade unions to the
concentration camp. Political pressure replaces the economic pressure
of unemployment.

The fact that armaments are the backbone of the policy of fascist full
employment has a profound influence upon that policy’s economic
character. Large-scale armaments are inseparable from the expansion of
the armed forces and the preparation of plans for a war of conquest.
They also induce competitive rearmament of other countries. This
causes the main aim of spending to shift gradually from full
employment to securing the maximum effect of rearmament. As a result,
employment becomes “over-full.” Not only is unemployment
abolished, but an acute scarcity of labor prevails. Bottlenecks arise
in every sphere, and these must be dealt with by the creation of a
number of controls. Such an economy has many features of a planned
economy, and is sometimes compared, rather ignorantly, with socialism
[[link removed]].
However, this type of planning is bound to appear whenever an economy
sets itself a certain high target of production in a particular
sphere, when it becomes a target economy of which the armament economy
is a special case. An armament economy involves in particular the
curtailment of consumption as compared with that which it could have
been under full employment.

The fascist system starts from the overcoming of unemployment,
develops into an armament economy of scarcity, and ends inevitably in
war.

What will be the practical outcome of the opposition to a policy of
full employment by government spending in a capitalist democracy? We
shall try to answer this question on the basis of the analysis of the
reasons for this opposition given in section II. We argued there that
we may expect the opposition of the leaders of industry on three
planes: (1) opposition on principle to government spending based on a
budget deficit; (2) opposition to this spending being directed either
towards public investment — which may foreshadow the intrusion of
the state into the new spheres of economic activity — or towards
subsidizing mass consumption; (3) opposition to _maintaining_ full
employment and not merely preventing deep and prolonged slumps.

Now it must be recognized that the stage at which “business
leaders” could afford to be opposed to _any_ kind of government
intervention to alleviate a slump is more or less past. Three factors
have contributed to this: (1) very full employment during the present
war; (2) development of the economic doctrine of full employment; (3)
partly as a result of these two factors, the slogan “Unemployment
never again” is now deeply rooted in the consciousness of the
masses. This position is reflected in the recent pronouncements of the
“captains of industry” and their experts. The necessity that
“something must be done in the slump” is agreed; but the fight
continues, firstly, as to _what_ should be done in the slump (i.e.
what should be the direction of government intervention) and secondly,
that it should be done _only_ in the slump (i.e. merely to alleviate
slumps rather than to secure permanent full employment).

In current discussions of these problems there emerges time and again
the conception of counteracting the slump by stimulating private
investment. This may be done by lowering the rate of interest, by the
reduction of income tax, or by subsidizing private investment directly
in this or another form. That such a scheme should be attractive to
business is not surprising. The entrepreneur remains the medium
through which the intervention is conducted. If he does not feel
confidence in the political situation, he will not be bribed into
investment. And the intervention does not involve the government
either in “playing with” (public) investment or “wasting
money” on subsidizing consumption.

It may be shown, however, that the stimulation of private investment
does not provide an adequate method for preventing mass unemployment.
There are two alternatives to be considered here. (1) The rate of
interest or income tax (or both) is reduced sharply in the slump and
increased in the boom. In this case, both the period and the amplitude
of the business cycle will be reduced, but employment not only in the
slump but even in the boom may be far from full, i.e. the average
unemployment may be considerable, although its fluctuations will be
less marked. (2) The rate of interest or income tax is reduced in a
slump but not increased in the subsequent boom. In this case the boom
will last longer, but it must end in a new slump: one reduction in the
rate of interest or income tax does not, of course, eliminate the
forces which cause cyclical fluctuations in a capitalist economy. In
the new slump it will be necessary to reduce the rate of interest or
income tax again and so on. Thus in the not too remote future, the
rate of interest would have to be negative and income tax would have
to be replaced by an income subsidy. The same would arise if it were
attempted to _maintain_ full employment by stimulating private
investment: the rate of interest and income tax would have to be
reduced continuously
[[link removed]].

In addition to this fundamental weakness of combating unemployment by
stimulating private investment, there is a practical difficulty. The
reaction of the entrepreneurs to the measures described is uncertain.
If the downswing is sharp, they may take a very pessimistic view of
the future, and the reduction of the rate of interest or income tax
may then for a long time have little or no effect upon investment, and
thus upon the level of output and employment.

Even those who advocate stimulating private investment to counteract
the slump frequently do not rely on it exclusively, but envisage that
it should be associated with public investment. It looks at present as
if business leaders and their experts (at least some of them) would
tend to accept as a _pis aller_ public investment financed by
borrowing as a means of alleviating slumps. They seem, however, still
to be consistently opposed to creating employment by subsidizing
consumption and to _maintaining_ full employment.

This state of affairs is perhaps symptomatic of the future economic
regime of capitalist democracies. In the slump, either under the
pressure of the masses, or even without it, public investment financed
by borrowing will be undertaken to prevent large-scale unemployment.
But if attempts are made to apply this method in order to maintain the
high level of employment reached in the subsequent boom, strong
opposition by business leaders is likely to be encountered. As has
already been argued, lasting full employment is not at all to their
liking. The workers would “get out of hand” and the “captains of
industry” would be anxious to “teach them a lesson.” Moreover,
the price increase in the upswing is to the disadvantage of small and
big rentiers, and makes them “boom-tired.”

In this situation a powerful alliance is likely to be formed between
big business and rentier interests, and they would probably find more
than one economist to declare that the situation was manifestly
unsound. The pressure of all these forces, and in particular of big
business
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as a rule influential in government departments — would most
probably induce the government to return to the orthodox policy of
cutting down the budget deficit. A slump would follow in which
government spending policy would again come into its own.

This pattern of a political business cycle is not entirely
conjectural; something very similar happened in the USA in 1937–38.
The breakdown of the boom
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the second half of 1937 was actually due to the drastic reduction of
the budget deficit. On the other hand, in the acute slump that
followed the government promptly reverted to a spending policy.

The regime of the political business cycle would be an artificial
restoration of the position as it existed in nineteenth-century
capitalism. Full employment would be reached only at the top of the
boom, but slumps would be relatively mild and short-lived.

Should a progressive be satisfied with a regime of the political
business cycle as described in the preceding section? I think he
should oppose it on two grounds: (1) that it does not assure lasting
full employment; (2) that government intervention is tied to public
investment and does not embrace subsidizing consumption. What the
masses now ask for is not the mitigation of slumps but their total
abolition. Nor should the resulting fuller utilization of resources be
applied to unwanted public investment merely in order to provide work.
The government spending program should be devoted to public investment
only to the extent to which such investment is actually needed. The
rest of government spending necessary to maintain full employment
should be used to subsidize consumption (through family allowances,
old-age pensions, reduction in indirect taxation, and subsidizing
necessities). Opponents of such government spending say that the
government will then have nothing to show for their money. The reply
is that the counterpart of this spending will be the higher standard
of living of the masses. Is not this the purpose of all economic
activity?

“Full employment capitalism” will, of course, have to develop new
social and political institutions which will reflect the increased
power of the working class. If capitalism can adjust itself to full
employment, a fundamental reform will have been incorporated in it. If
not, it will show itself an outmoded system which must be scrapped
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But perhaps the fight for full employment may lead to fascism? Perhaps
capitalism will adjust itself to full employment in this way? This
seems extremely unlikely. Fascism sprang up in Germany against a
background of tremendous unemployment, and maintained itself in power
through securing full employment while capitalist democracy failed to
do so. The fight of the progressive forces for all employment is at
the same time a way of preventing the recurrence of fascism.

_MICHAŁ KALECKI (June 22, 1899 - April 18, 1970) was a
Polish Marxian economist
[[link removed]]. Over the course of
his life, Kalecki worked at the London School of Economics
[[link removed]], University
of Cambridge
[[link removed]], University
of Oxford
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School of Economics
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economic advisor to the governments of Poland
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[[link removed]], Israel
[[link removed]], Mexico
[[link removed]] and India
[[link removed]]. He also served as the deputy
director of the United Nations Economic Department
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New York City._

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* capitalism
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* Employment
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* workers
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* Government Spending
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* Great Depression
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* Nazi Germany
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