‘There are certain “workers’ friends” who try to persuade the working class to abandon the fight for wages, of course in its own interest. The usual argument used for this purpose is that the increase of wages causes unemployment, and is thus detrimental to the working class as a whole… Our investigation… has shown that a wage increase… tends to reduce the degree of monopoly and thus to raise real wages… If viewed from this standpoint, strikes must have the full sympathy of “workers’ friends”. For a rise in wages tends to reduce the degree of monopoly, and thus to bring our imperfect system nearer to the ideal of free competition. On the other hand it tends to increase the thriftiness of capitalists by causing a relative shift of income from rentiers to corporations. And “workers friends” are usually admirers both of free competition and of thrift as a virtue of the capitalist class.’ Kalecki Essays in the Theory of Economic Fluctuations 1939, p. 91.
Trades unions and their activists have an obvious concern with employment, wages and the conditions of work in individual places of work. To be effective in their unions, activists have to educate themselves, their members and other workers about political economy that shows the relationship between wages, employment, taxation and the education, health and public services that workers can obtain under the provisions of the welfare state. This is necessary because business interests promote the idea that lower wages and poorer conditions of employment are the way to ‘create jobs’, and that the welfare state is unaffordable. Those business interests have the means, through their control of the media and their patronage of the economics profession, to make such ideas the conventional wisdom in our society.
However, learning about political economy is difficult. Night school is hard work and you are most likely to be taught the conventional wisdom promoted by employers. An easier way is to read the more popular works of the sadly dwindling number of economists sympathetic to the labour movement. But perhaps the easiest way is through biography. There are excellent biographies of Marx and other economists sympathetic to the labour movement that summarise the key ideas. These have now been joined by a biography of the Polish economist and socialist Michał Kalecki (1899-1970) .
Kalecki was born in the Polish industrial city of Łódź, where his father owned and ran a small textile factory, that collapsed in the wake of the 1905 Revolution. After school Kalecki briefly studied engineering, before getting involved in business journalism and research on the problems of industrial cartels. He developed a theory of the business cycle in which he showed that employment could not be increased by lowering wages, or through price flexibility. The key to generating economic recovery was to get an increase in investment. However, businessmen will not do this if they do not like the political situation, or dislike government policies, and because full employment makes workers less dependent on their current employers. In one of his most famous observations Kalecki remarked that ‘the social function of the doctrine of “sound finance” is to make the level of employment dependent on the “state of confidence”’ of business leaders. This “state of confidence”, the threat of an ‘investment strike’, becomes a means by which employers veto government policies that they do not like.
Kalecki’s work attracted the interest of John Maynard Keynes, with whom Kalecki worked for a while in Cambridge in 1939. After the War, Kalecki worked for a while at the United Nations, before returning to Poland in 1955. He died in 1970, three years after the group of economists with whom he worked was subjected to a purge of Jews and ‘revisionists’.
The first volume Jan Toporowski’s biography of Kalecki takes him up to his departure from Cambridge. It explains in an accessible way not only Kalecki’s own theories, but also the economics of Keynes. Of particular importance here is their analysis of employment and wages. Both Keynes and Kalecki were absolutely clear that you cannot increase employment through lowering wages, whether money wages, or real wages (the value of wages taking into account changes in prices). Reducing wages cuts purchasing power in the economy. At best, if firms are competing for sales, prices will fall proportionately, and real wages, consumption and employment will remain the same as it was before. More likely, however, imperfect competition will mean that many prices are not reduced and, in that case real wages, consumption and employment will fall. In an ‘open’ economy (that is, one with foreign trade) lower wages are supposed to make exports more competitive. But even here, at best the additional employment in exporting is off-set by lower employment for the home market, where the lower wages result in lower consumption.
This theory (or explanation) of wages is of special relevance today, when wage increases are falling far behind increases in prices, so that real wages are falling in Europe, including the UK, and North America. A key part in this played by the increases in prices of services provided by governments, including transport and public utilities. Many of these services have now been privatised. A key promise of privatisation was that it would secure necessary investment in the privatised companies. But instead of financing the investment through the credit system (banks and the stock market), investments are being financed through higher prices of those services. In this way, investments in infrastructure are being paid for with lower real wages, so that higher employment in investment is off-set by lower employment in those industries providing consumer goods for wage-earners.
In his pre-War writing, Kalecki showed how something similar to this happened in Germany under the Nazis, who invested prodigiously in infrastructure and armaments at the expense of real wages, while crushing the trades unions that might have resisted the deterioration in working conditions. This biography of Kalecki shows how important is the role of trades unions in defending the living standards of working people, and how improvements in wages and working conditions are the key to higher employment and prosperity.